What is Income-tax: Basic concepts; Residential

tatus and tax incidence; Exempted incomes;

Agricultural income; Computation of taxable
income under various heads; Deductions from
Gross total income; Assessment of Individuals;
Clubbing of incomes?

Income-tax

Brief history income tax in india In India ,this tax was introduced for
the first time in 1860,by Sir James Wilson in order to meet the
losses sustained by the Government on account of the Military Mutiny
of 1857.Thereafter ,several amendments were made in it from time
to time. In 1886,a separate Income tax act was passed.

This act remained in force up to, with various amendments from

time to time. In 1918, a new income tax was passed and again it
was replaced by another new act which was passed in 1922.This
Act remained in force up to the assessment year 1961-62 with
numerous amendments.

The Income Tax Act 1961 has been brought into force with 1 April
1962.It applies to the whole of India and Sikkim(including Jammu
and Kashmir).Since 1962 several amendments of far-reaching
nature have been made in the Income Tax Act by the Union Budget
every year. Income tax Annual charge levied on both earned
income (wages, salaries, commission) and unearned income
(dividends, interest, rents). In addition to financing a government's
operations, progressive income taxation is designed to distribute
wealth more evenly in a population and to serve as automatic fiscal
stabilizer to cushion the effects of economic cycles. Its two basic types
are

(1) Personal income tax, levied on incomes of individuals,

households, partnerships, and sole-proprietorships; and
(2) Corporation income tax, levied on profits (net earnings) of
incorporated firms. However, presence of tax loopholes (whose
number increases in direct proportion to the complexity of tax code)
may allow some wealthy persons to escape higher taxes without
violating the letter of the tax laws.
jagannath ramanuj das v/s state of orissa AIR 1954 supreme court
held “a tax is undoubtly in nature of a compulsory exaction of money
by public authority for public purpose”

Important concepts in income tax Income:

Income is money that an individual or business receives in

exchange for providing a good or service or through investing
capital under section 2 (24) "income" includes—
(i) profits and gains;
(ii) dividend;
(iii) the value of any perquisite or profit in lieu of salary taxable
under clauses (2) and (3) of section 17;
(iv) the value of any benefit or perquisite, whether convertible into
money or not, obtained from a company either by a director or by a
person who has a substantial interest in the company, or by a
relative of the director or such person, and any sum paid by any
such company in respect of any obligation which, but for such
payment, would have been payable by the director or other person
aforesaid;
(v) any sum chargeable to income-tax under clauses (ii) and (iii) of
section 28 or section 41 or section 59;
(vi) any capital gains chargeable under section 45;
(vii) the profits and gains of any business of insurance carried on by
a mutual insurance company or by a co-operative society,
computed in accordance with section 44 or any surplus taken to be
such profits and gains by virtue of provisions contained in the First
Schedule; In commissioner of income-tax v/s shaw wallace and
company 1923 Sir george lowndes defined income as follows
“Income, in this Act connotes a periodical monetary return " coming
in" with some sort of regularity, or expected regularity, from definite
sources.

The source is not necessarily one which is expected to be

continuously productive, but it must be one whose object is the
production of a definite return, excluding anything in the nature of a
mere windfall.”

Residential status and tax incidence

The Income Tax Act, 1961, (Act) to consolidate and amend the law
relating to income tax. However, not everyone is liable to pay taxes
on income under the Act. The Act makes certain exceptions and
exempts certain kind and extent of income from taxation. As per
Section 2(3 1) of the Act, defines the term “Person” for whom we will
assess the income.
Further, those who are liable to pay tax and whose incomes are
assessed under the Act are known as “Assessees” and the same
has been defined under section 2(7) of the Act. Also for determining
the tax liability of the Assessees, the same has been further
categorise on the basis of Residential Status.
Residential status is a term coined under Income Tax Act, 1961,
and has nothing to do with nationality or domicile of a person. An
Indian, who is a citizen of India can be non-resident for Income-tax
purposes, whereas an American who is a citizen of America can be
resident of India for Income-tax purposes, as per the Income Tax
Act, 1961. Residential status of a person depends upon the
territorial connections of the person with this country, i.e., for how
many days he has physically stayed in India in any particular Financial
Year.

Further it is to be note that the residential status of different types of

persons viz an individual, a firm, a company etc is determined
differently. In this article, we have discussed about how the residential
status of an individual taxpayer can be determined for the Previous
Year i.e 2019-2020 or Assessment Year 2020-2021.

Determining the Residential Status of an Individual

Under the Act, Residential Status of an individual is either Resident of

India or Non-Resident of India. The first thing that needs to be kept
in mind is that the residential status is determined with respect to the
previous financial year – hence, an individual may be a
resident in one year and a non-resident in the next year.
As per Section 6(a) of the Act which mandates that an individual is
said to be resident of India in any previous year, if he satisfy any of
the following primary conditions, otherwise the person become Non-
Resident of India, if an individual-

i. Is in India in previous year for 182 days or more; or

ii. Is in India in previous year for 60 days or more and 365 days or
more in the immediate 4 preceding Financial Year.

Further Act provides certain exemption to following persons to comply

only clause (i) to become resident in India:
a. Citizen of India who leaves India for taking up employment
outside India;
b. Indian Citizen who leaves India as a member of the crew of
Indian Ship;
c. Citizen of India or to a person of Indian origin who visit India ;
Further, Clause (a) of Section 6 of the Act, a Resident of India can
be termed as Resident-Ordinary Resident of India, if an individual
satisfy all the following two conditions, otherwise he can be termed
as Resident-Not Ordinary Resident of India, if

i. An individual is a resident in India for 2 years out of 10 previous

years preceding current financial year; and
ii. An individual is in India for 730 days or more in 7 previous years
preceding current financial year.

Amendment have also been made vide Finance Act, 2020, From
F.Y. 2020-21, a citizen of India or a person of Indian origin who leaves
India for employment outside India during the year will be a
resident and ordinarily resident if he stays in India for an aggregate
period of 182 days or more. However, this condition will apply only if
his total income (other than foreign sources) exceeds Rs 15 lakhs.
The Finance Act, 2020, has also introduced the concept of
“Deemed Resident” whereby all such citizen of India who are not
taxable in any other country by reason of residence or domicile or
any other criteria of similar nature and such individuals have income
exceeding Rs. 15 lakhs from sources in India and from business
controlled from India or Profession set up in India. With effect From
F.Y. 2020-202 1 deemed resident will be a resident and ordinarily
resident in India.

Tax Incidence in India

A Resident Ordinary Resident is subject to tax on his global income

in India. Resident Not Ordinary Resident and Non-Residents are
generally subject to tax in India only in respect of India source income
that is, income received, accruing or arising in India or deemed to be
received, accrued or arisen in India.

Salary received in India or for services provided in India, rental income

from a house property in India, capital gains on sale of assets in
India — be it shares or house property, income from fixed deposits or
savings bank account in India are instances of income which would
be taxed in the hands of not just tax residents of India, but also
Resident Not Ordinary Resident and Non-Residents.

In order to enjoy tax benefits through Non-Resident Status, individuals

visiting India on a business trip should not stay for more
than 181 days during one previous business year and their total
stay in the previous four years should not exceed more than 364
days.

If individuals, having been in India for more than 365 days during
four years preceding the relevant previous year, and stay for more
than 60 days in the previous year, they should plan their visit to
India in such a manner that their total stay in India falls under two
previous years. Such persons can come to India any time in the first
week of February and stay till May 29.

Any income earned which is not subject to income tax is called exempt
income. As per Section 10 of the Income Tax Act, 1961, there are
certain types of income which will be subjected to income tax within
a financial year, provided they meet certain guidelines and
conditions.

Types of Exempt Income

Following are the types of income that are exempt from tax-
1. House Rent Allowance.
2. Allowance on transportation, children’s education, subsidy on
hostel fee.
3. Exemption on Housing Loan.
4. Income defined as per Section 10, Section 54 of the Income
Tax Act, 1961.
5. Leave and Travel Allowance.
Income Exempt from Tax as per Section 10

Mentioned below is the list of income exempt from tax specific

to Section 10:
1. Agriculture Income [Section 10(1)]
2. Amount received out of family income, Hindu Undivided Family
(H.U.F.) [Section 10(2)]
3. Share of profit, [Section 10(2A)]
4. Interest paid to Non-Resident [Section 10(4)(i)]
5. Interest to Non-Resident on Non-Resident (External) Account
[Section 10(4)(ii)]
6. Interest paid to a person of Indian Origin and who is Non-
Resident [Section 10(4 B)]
7. Leave Travel Concession or Assistance [Section 10(5)]
8. Remuneration or Salary received by an individual who is not a
citizen of India [Section 10(6)] a. Remuneration [U/s 10(6)(ii)]
b. Remuneration received as an employee of foreign
enterprise [U/s 10(6)(vi)] c. Employment on a foreign ship [U/s
10(6)(viii)] d. Remuneration received by an employee of
foreign government [U/s 10(6)(xi)]
9. Tax paid by Government or Indian concern on Income of a
Foreign Company [Section 10(6A), (6B), (6BB) and (6C)]
10. Perquisites/Allowances paid by Government to its
Employees serving outside India [Section 10(7)]
11. Employees of Foreign Countries working in India under
Cooperative Technical Assistance Programme [Section 10(8)]
12. Income of a Consultant [Section 10(8A)]
13. Income of Employees of Consultant [Section 10(8B)]
14. Income of any member of the family of individuals
working in India under cooperative technical assistance
programmes [Section 10(9)]
15. Gratuity [Section 10(10)] a. Gratuity received by
Government servants [Section 10(10)(i)] b. Gratuity Received
by a Non-Government Employee covered by Payment of
Gratuity Act, 1972 [Section 10(10)(ii)]
16. Commuted value of Pension Received [Section 10(10A)]
17. Amount received as Leave Encashment on Retirement
[Section 10(10AA)]
18. Retrenchment Compensation received by Workmen
[Section 10(10B)]
19. Payment received under Bhopal Gas Leak Disaster
(Processing of Claims) Act 1985 [Section 10 (10BB)]
20. Compensation received in case of any disaster [Section
10(10BC) ]
21. Relation between residential status and incidence of
tax [Section 5]
22. Under the Act, incidence of tax on a taxpayer depends on
his residential status and also on the place and time of accrual
of receipt of income:
23. Indian Income and foreign income
24. Indian Income: Any of the following three is an Indian
income:
25. i) If income is received (or deemed to be received) in
India during the previous year and at the same time it accrues
(or arises or is deemed to accrue or arise) in India during the
previous year;
26. ii) If income is received (or deemed to be received) in
India during the previous year but it accrues (or arises) outside
India during the previous year;
27. iii) If income is received outside India during the previous
year but it accrues (or arises or is deemed to accrue or arise)
in India during the previous year;
28. Foreign income: If the following conditions are satisfied,
then such income is foreign income:
 29. i) Income is not received (or not deemed to be received)
in India; and
30. ii) Income does not accrue or arise (or does not deemed
to accrue or arise) in India.

Agricultural income

As per section 2(1A), agricultural income generally means:

(a) Any rent or revenue derived from land which is situated in India
and is used for agricultural purposes.
(b) Any income derived from such land by agriculture operations
including processing of agricultural produce so as to render it fit for
the market or sale of such produce.
(c) Any income attributable to a farm house subject to satisfaction of
certain conditionsspecified in this regard in section 2(1A). Any income
derived from saplings or seedlings grown in a nursery shall be
deemed to be agricultural income.
Mustafa Ali Khan v/s CIT 1948 :Held, rent of agricultural land received
from subtenant by mortgage in possession is agricultural income
CIT V/s cidanbaran pillai(1970):
Held ,share of profit of a partner from firmengaged in agricultural
operation is agricultural income following is not agricultural income
a) Income from poultery farming.
(b) Income from bee hiving.
(c) Income from sale of spontaneously grown trees.
(d) Income from dairy farming.
(e) Purchase of standing crop.
(f) Dividend paid by a company out of its agriculture income.
(g) Income of salt produced by flooding the land with sea water.
(h) Royalty income from mines.
(i) Income from butter and cheese making.
(j) Receipts from TV serial shooting in farm house is not agriculture
income.

Certain points to be remembered;

(a) Agricultural income is considered for rate purpose while
computing tax of Individual/HUF/AOP/BOI/Artificial Judicial Person.
(b) Losses from agricultural operations could be carried forward and
set off with agricultural income of next eight assessment years.
(c) Agriculture income is computed same as business income.

Taxation of agricultural income

As discussed above, agricultural income is exempt from income tax.
However, the Income-tax Act has laid down a method to indirectly
tax such income. This method or concept may be called as the
partial integration of agricultural income with non-agricultural
income. It aims at taxing the non-agricultural income at higher rates
of tax.

Applicability: Individuals, HUFs, AOPs, BOIs and artificial juridical

persons have to compulsorily calculate their taxable income using
this method. Thus Company, firm/LLP, co-operative society and
local authority are excluded from using this method.

Conditions: This method is applicable when the following

conditions are met:
Net agricultural income is greater than Rs. 5,000 during the year;
and
Non-agricultural income is:
Greater than Rs. 2,50,000 for individuals below 60 years of age and
all other applicable persons
Greater than Rs. 3,00,000 for individuals between 60 – 80 years of
age
Greater than Rs. 5,00,000 for individuals above 80 years of age
In simple terms, the non-agricultural income should be greater than
the maximum amount not chargeable to tax (as per the slab rates).

Computation of taxable income under various heads

Section 14 of the income tax lays down that there can be various
modes of income for a person. These modes are classified into 5
broadheads for the purposes of computation and determination of
total income and tax rates apply thereafter.

The 5 main heads of incomes are-

1. Income from salary
2. Income from house property
3. Capital gains
4. Profit and gains from business and profession
5. Income from other sources

Income from salary

Section 15 of the act lays down the conditions under which an
income falls under the head of ‘salaries.’
1. Any remuneration is due from the employer to any former
employee(assessee) for the due course of his employment in
the previous year, whether paid or not.
 2. Salary paid to an employee by the employer or former
employer in the previous year even though it was not due to him.
3. Salary paid to an employee by the employer or former
employer in the previous year which was not charged under
income tax in any other previous years.
The key element of this head is that it mandates a relationship
between employer and employee. If an employer-employee
relationship is not there, the income will not be accessible under the
head of salaries.
Section 17 of the Act has mentioned the term ‘salary’, which
included-
1. Wages;
2. Any annuity or pension;
3. Any gratuity;
4. Any charges, commissions, perquisites or benefits in lieu of or
notwithstanding any compensation or wages;
5. any advance of salary;
6. Any payment received by a worker in regard to any time of
leave not benefited by him;
7. The yearly accumulation to the balance at the employee
partaking in a perceived Provident Fund, to the degree to
which it is chargeable to assess under Rule 6 of Part A of the
fourth schedule;
8. The total of all wholes that are included in the transferred
parity as alluded to in sub-rule 2 of Rule 11 of PartA of the Fourth
schedule of an employee partaking in a perceived Provident
Fund, to the degree to which it is chargeable to
assess under sub-rule 4 thereof; and
 9. The contribution made by the Central Government or any other
employer in the previous year, to the account of an employee
under a pension scheme, referred to in Section 80CCD

Allowances
The employer pays allowances to his employees in order to fulfill his
personal expenses. Allowances can be fully taxable or partly
taxable. Partly taxable allowances include house rent allowance
and special allowances under section 10(14) (i)&(ii).
Fully taxable allowances are:
Dearness Allowance
Overtime allowance
Fixed Medical Allowance
Tiffin Allowance
Servant Allowance
Non-practicing Allowance
Hill Allowance
Warden and Proctor Allowance
Deputation Allowance

Perquisites
In addition to their salary, the employees are often given some other
benefits which may or may not be in cash form. For example, rent-
free accommodation or car given by the employer to the employee.
Reimbursement of bills is not a perquisite. Perquisites are only
given during the continuance of employment.
Taxable perquisites include
Rent free accommodation
Interest free loans
Movable assets
 Educational expenses
Insurance premium paid on behalf of employees
Exempted perquisites include:
Medical benefits
Leave travel concession
Health Insurance Premium
Car, laptop etc. for personal use.
Staff Welfare Scheme

Profits in Lieu of Salary

Section 17(3) gives a comprehensive meaning of profits in lieu of
salary. Any payment due or accrued to be paid to the employee by
the employer. Payment to be valid under section 17(3), there are
two essential features-
There must be compensation received by an assessee from
his employer or former employer;
It is received at or in connection with the termination of his
employment or adjustment of terms and conditions.
‘Profit in lieu of Salary’ is taxable on ‘due’ or ‘receipt’ basis. Payment
from unrecognized provident or superannuation fund is taxable as
“profit in lieu of salary” if that balance consists employer’s
contribution or interest on an employer’s contribution.
Exceptions to section 17(3) (exempted under section 10)
Death cum retirement gratuity;
House rent allowances;
Commuted value of pension;
Retrenchment pay received by an employee;
Payment received from a statutory provident fund or
recognized provident fund;
Any payment from an approved superannuation fund;
 Payment from the recognized provident fund.

Computation of income tax on salary

Let’s take an example –
1. An individual, let’s say, Mr. A, receives the following pay –
Basic salary – Rs. 2,50,000 per annum; Dearness
Allowance – Rs. 10,000 per annum;
Entertainment Allowance – Rs. 3,000 per annum;
Professional Tax – Rs. 1,500 per annum;
then how much amount will be taxable from his salary?
Ans. Find out total gross salary = basic salary + Dearness
Allowance + Entertainment Allowance, i.e., 2,50,000 + 10,000 +
3,000 = 2,63,000.
As per deduction under section 16(iii) = 2,63,000 – 1500 =
Rs. 2,61,500
Income tax rate on income Rs. 2,61,500 is 5%, which will be
equal to Rs. 13,075 and this much amount will be taxable.
Income from house property
The total net assessable estimation of property, comprising of any
buildings/lands/flats belonging to the assessee, when assessee is
the owner apart from the property which is under the use for any
business or profession undertaken by him, the proceeds of which
are taxable under the income tax act, falls under the ambit of
income from house property. (section 22)

The income from house property includes lease-hold and deemed

ownership.
The income from house property is taxable after considering the
deductions under Section 24 of the act. In the case of repairing and
maintenance of the property, thirty percent of the Net Annual Value
is deductible. This deduction is not allowed on a self-occupied
property.
For the purpose of computation of income from house property,
house properties are divided into three categories. House property
which :
1. Were let out during the whole previous year
2. Were partly vacant but partly let out.
3. Let out for some time and then used for personal residence.

Deemed ownership-
Section 27 provides that certain persons are not legal owners of a
property but are still considered to be deemed owners under certain
conditions.
Condition 1 – Transfer of property to a child or spouse, without
consideration.
Condition 2 – Holder of an impartible estate is deemed to be the owner
of the entire estate.
Condition 3 – Members of a co-operative society or company or
association of person
Condition 4 – Person in possession of a property on lease for more
than 12 years as per Section 269UA(f).

Co-owners of a property – Section 26

If there are two or more owners of a property and if the share of co-
owners is determinate, the income generated from such property is
calculated as income from one property and it is divided amongst
co-owners. They are entitled to relief under section 23.
Unrealized rent (rent not paid by the tenant for some reason)
The unrealized rent is not included while calculation of net annual
value. If the rent is received in the subsequent years, then the amount
will be added to the income from house property of that particular year.

Set-off and carry forward of losses

Under Section 70 of the Income Tax Act, if a person has incurred
losses from house property, he is allowed to set them off from the
income of any other house property.
Section 71 of the Act lays down the provision of setting off the
losses from house property from any other heads of Incomes but
not casual income (income which might not arise again)

The unadjusted losses are allowed to be carried forward for a

maximum period of 8 years starting from the year succeeding to the
year in which loss has occurred. In the subsequent years, the set-off
is allowed only from the head ‘Income from House Property’.
The amount of losses that can be set-off on the house property from
other income heads is restricted to Rs 2 lakh either house is a self-
occupied or let out property.

Computation of Income from House Property

Step 1 – deduct the municipal taxes paid during the year from the
Gross Annual Value, which will be Net Annual Value.
Step 2 – deduct the amount under section 24(a) and under section
24(b) for which deduction is provided.
Example –
An individual, let’s say Mr. X owned three properties and give it on
rent. What will the Gross Annual Value of all the Properties? Details
of the properties provided below-

Particulars Property Property Property

1 2 3

Municipal Rent 7,50,000 7,50,000 2,00,000

Fair Rent 2,00,000 2,00,000 7,50,000

Standard Rent – 80,000 9,00,000

Amount at Step
8,00,000 50,000 8,50,000
1
Unrealised
1,00,000 NIL 50,000
Rent

Ans : Step 1: reasonable expected rent, higher values of municipal

rent or fair rent.

Particulars Property Property Property

1 2 3

Municipal Rent 7,50,000 7,50,000 2,00,000

Fair Rent 2,00,000 2,00,000 7,50,000

Standard Rent 80,000 9,00,000

Amount at
7,50,000 80,000 7,50,000
Step 1

Step 2: deduct unrealised rent (e.g. 8,00,000-1,00,000)

Particulars Property Property Property

1 2 3

Amount at step
7,00,000 50,000 8,00,000
2

Step 3: higher values computed from step 1 and step 2 will be

Gross Annual Income.

Particulars Property Property Property

1 2 3

Amount at step
7,50,000 80,000 7,50,000
1
Amount at step
7,00,000 50,000 8,00,000
2
Amount at step
7,50,000 80,000 8,00,000
3

Income from capital gains

Any profit or gain emerging from the exchange of capital assets held
as investments are chargeable under the head capital gains. The
gain can be because of short-and long term gains. A capital gain
emerges just when a capital asset is transferred. This implies if the
asset moved is certainly not a capital asset; it won’t fall under the
head of capital gains. Profits or gains emerging in the previous year in
which the transfer occurred will be considered as income of the
previous year and chargeable to IT under the head Capital Gains
and indexation will apply, if applicable.
To fall under the ambit of income from capital gains, there must be –
1. A capital asset
2. Which is transferred by the assessee
3. The transfer has taken place during the final year
4. Gain or loss has arisen from it

Capital assets include all kinds of properties whether tangible or

intangible, movable or unmovable, which are owned by the
assessee, may or may not be for business and professional purposes.

Capital assets do not include assets like stock in trade, goods of used
personal effects, agricultural land, etc.
Capital gains are of two types

1. Short term capital assets – those assets held by an assessee

for at most 36 months, immediately prior to its date of transfer.
ITO v. Narayana K Shah 2000 74 ITD 419 Mum.
In this case Court held that where the assessee held certain shares in
a company by virtue of which a right of occupancy in a flat is conferred
on him, these shares cannot be treated as a ‘share’ mentioned
in proviso to section 2(42A) and as such where such shares are sold
after being held for a period of fewer than 36
months, gain arising therefrom is to be treated as short-term capital
gain.

2. Long term capital assets – those assets held by an assessee

for more than 36 months. Long-term capital gains are generally
taxable at a lower rate.

There are some cases where long term capital assets do not require
a term of 36 months, assets held for more than 12 months is valid
for long term capital assets. Those conditions are –
1. Listed Equity or preference shares;
2. Securities listed in a recognized stock exchange, like
debentures, security exchange;
3. Units of UTI;
4. Units of Mutual Funds;
5. Zero coupon bond;
6. Unlisted equity or preferential shares;
7. Units of equity oriented fund.

Tax on long-term capital assets is 20 percent.

Exemptions under section 54 :
Exemptions in regards to the transfer of a long-term capital asset, only
when the assessee is an individual or a Hindu Undivided Family.
A capital gain arises from the transfer of residential property,
where the assessee has purchased another house property
within a period of one year before or two years after the date of
transfer or transfer took place within a period of three years after the
date of construction.
The amount of exemption available will be whichever is lesser of
capital gains and the cost of the new house.
Computation of Capital Gains

Long-term Capital Gain-

Problem – Mr. Shah has a gross total income of Rs. 4,00,000 and
has invested Rs. 1,50,000 in tax-saving instruments. After applying all
the deductions total taxable income would be Rs. 2,00,000. And
exemption tax limit as per the income tax slab is Rs.2,50,000. By
the sale of gold, he has a long-term capital gain of Rs. 5,00,000.

Solution- total taxable income = 2,00,000, which is less than

2,50,000;
Long-term capital gain @ 20% = 4,50,000 (difference between
exemption tax limit and actual taxable income) = 10,000
This much mount can be save from tax.
Tax rates are the same for short-term capital gain.
Income from Profit and Gain from business and profession
Business and Profession has been defined under Section 2(13) and
Section 2(36) respectively.

Business. It includes any trade, commerce or manufacture or any

adventure or concern in the nature of trade, commerce, or
manufacture.

Profession. “Profession” includes vocation.

Section 28 of the Income Tax Act covers the “Profits and gains of
Business or Profession”, and there is following income which shall
be chargeable under the head “Profits and Gains of Business or
Profession” :

1. Profits and Gains of any business or profession;

 2. Any compensation or other payments due to or received by
any person specified in section 28(ii), who is managing the whole
affairs of an Indian Company or other than an Indian company
at the termination of his management;
3. Pay determined by a trade, professional or comparable
association from explicit services performed for its members;
4. Benefit on sale of import entitlement license, incentive by way
of cash compensatory support and drawback of duty;
5. Any benefit on an exchange of the Duty Entitlement Pass Book
Scheme;
6. Any benefit on the exchange of the Duty-Free Replenishment
Certificate;
7. The estimation of any benefit or perquisite, regardless of
whether convertible into money or not, emerging from
business or the activity of a profession;
8. Any interest, pay, reward, commission or compensation
received by a partner of a firm from such firm;
9. Any amount received under a Keyman insurance policy
including Bonus;
10. Income from speculative transactions;
11. Any total received in real money or kind, by virtue of any
capital asset being devasted, destroyed, discarded or
transferred, if the exhaustive expenditure on such capital asset
has been permitted as a deduction under section 35AD.

Deduction under the heads of “Profits and Gains from Business or

Profession” has been mentioned under Section 30 to 37.
Section 30. A deduction shall be permitted if the lease, rates,
taxes, fixes, and insurance for premises used for the purpose
of business or profession.
Section 31. A deduction shall be permitted on the repairs and
insurance of apparatus, plant or furniture used for the
purposes of business or profession and the sum paid on the
present repairs shall not include any expenditure in the nature of
capital expenditure.
Section 32. Deterioration of buildings, hardware, plants or
furniture, being tangible assets, know-how, licenses,
copyrights, trademarks, patents, establishment or some other
business or business privileges of comparative nature, being
intangible assets owned, completely or somewhat, by the
assessee for the purposes of the business or professions.
Section 32AC. Deduction in respect of investment in new plant
or hardware where the organization being an assessee occupied
in business assembling or production of any article or thing after
31st March 2013 or if any new asset procured or installed by
the assessee is sold within five years of its establishment etc.
Section 33AB. where an assessee carrying on business of
developing and assembling tea or coffee or rubber in India
has, before the expiry of six months from the end of the previous
year or before the due date of furnishing the return of his income,
kept in a record affirmed by the Tea Board or Coffee Board or
rubber Board or Central Government and should be audited by
an accountant.
Section 33ABA. Any amount or amounts in an account
deposited with the State Bank of India by an assessee who is
carrying on business consisting of the prospecting for, or
extraction or generation of petroleum or natural gas or both in
India and consented to an arrangement with the Central
Government for such business and that account must be audited
by an accountant.
Section 33AC. Carrying on the business of the ship by the
government organization or public company, deduction shall
be permitted not surpassing 50% of benefits derived from the
business of operation of a ship.
Section 35. If any expenditure laid out or expanded on
scientific research related to the business, deduction shall be
permitted but the organization has to enter in concurrence with
the prescribed authority for co-operation in such a research
and development facility and satisfies such conditions as to
support the maintenance of accounts and audit.
Section 35ABB. Expenditure for obtaining the license for
media transmission services before the commencement of the
business or thereafter at any time during the previous year and
for which installment has really been made for acquiring the
license.
Section 35AC. Where an assessee incurs any expenditure by
method for an installment of any amount to public sector
company or a local authority or to an affiliation or
establishment endorsed by the National Committee for
carrying out any qualified venture or plan.
Section 35AD. A deduction shall be allowed in the case of
capital expenditure incurred, wholly or exclusively, for the
purpose of specified business.
Section 35CCA. Expenditure by method for installment to
affiliations and establishment for carrying out rural
development Programmes.
Section 35CCC. Expenditure incurred on any agricultural
extension project notified by the Board then deduction shall be
allowed on the sum equal to one and one-half times of
expenditure.
Section 35CCD. When an organization causes expenditure on
any ability advancement program advised by the Board then
the sum shall be allowed for the deduction of a total equivalent
to one and one-half times of expenditure.
Section 35D. Amortisation of certain preliminary expenses.
Section 35E. Deduction for expenditure on prospecting for, or
extraction or production of certain minerals, for which
deduction shall be allowed to the one-tenth of the amount of
such expenditure.
Section 36. Other deductions are-
under section 36 (1)(i), the amount of any premium paid in
regard to insurance against the danger of harm or annihilation of
stocks or stores utilized for the purposes of the business or
profession.
under section 36 (1)(ib), the amount of any premium paid by
any mode of payment other than cash by an assessee as an
employer towards the health of the employee.
under section 36 (1)(ii), any sum paid to an employee as
bonus or commission for the services he rendered
under section 36 (1)(iii), the amount of the interest paid in
respect of capital borrowed for the purpose of business or
profession.
under section 36 (1)(iiia) the pro rata amount of discount on a
zero coupon bond having regard to the period of life of such
bond calculated in the manner as may be prescribed.
 under section 36 (1)(iv) employer’s contribution to recognized
provident fund an approved superannuation fund.
under section 36 (1)(iva) employer’s contribution to the notified
pension scheme.
under section 36 (1)(v) contribution towards approved gratuity
fund.
under section 36 (1)(va) employee’s contribution towards staff
welfare scheme.
under section 36 (1)(vi) write off allowance for animals which
are used for the purpose of business or profession and have died
or turned out to be for all time futile.
under section 36 (1)(vii) bad debt amount incidental to the
business or profession of the assessee must have been
written off in the books of account of the assessee.
under section 36 (1)(viia) provisions for bad and doubtful debts
relating to rural branches of commercial banks.
under section 36 (1)(viii) transfer to the special reserve.
under section 36 (1)(ix) family planning expenditure.
under section 36 (1)(x) contribution towards exchange risk
administration fund.
under section 36 (1)(xii) revenue expenditure incurred by
entities established under any Central, State or Provincial Act.
under section 36 (1)(xiv) contribution to credit guarantee trust
fund.
under section 36 (1)(xvi) Commodities Transaction Tax.
Section 37 (2B). The expenditure acquired by an assessee on
a commercial in any gift, leaflet, tract, handout or something
like that, published by a political party, is not deductible.
Computation of income under the heads of “Profits & Gains of
Business or Profession”
The amount of net profit is Rs. 4,00,000 of M/s D Ltd. and other
information provided are:
Advance income tax debited to profit and loss account = Rs. 30000
Printing of brochures of a political party = Rs. 5000
The amount that has not to deposit till the date of filing of return =
Rs. 50,000
What can be the taxable income of M/s D Ltd.?

Particulars
Amount

Net Profit 4,00,000

Amount of advance income tax 30000

Expenses incurred for political parties 5000

An amount that has not to deposit 50000

 Net taxable income 4,85,000

Income from other sources

All sorts of incomes that are not covered in the above-mentioned
heads are covered and chargeable under this head. Income from
other sources is laid down in section 56 of the act.
A few of these are :
1. Dividend under section 2(22);
2. Winning from lotteries, horse races, crossword puzzles, and
other games;
3. Contribution received by the employer as an assessee from
his work towards the Staff Welfare Scheme;
4. Interest on debentures, government securities/bonds;
5. Where the assessee let on contract apparatus, plant or
furniture belonging to him and furthermore buildings, pay from
this is assessable as salary from other sources if it is not
taxable under the head of “profits & gains of business or
profession”;
6. Sum received under Keyman insurance policy including
reward;
7. Salary from hardware, plant or furniture belonging to the
assessee.
Gifts that cannot be charged:
1. Gifts received from any relative
2. Gifts received on the occasion of marriage
3. Gifts are given by the local authority
4. Gifts received in the form of inheritance
 5. Gifts received from any funds, institutions, hospitals, etc.
Deductions applicable on income from other sources – section 56
and 57

Nature of Deductions
S.No. Sections
Income Allowed
Any reasonable
amount paid by
method for
commission or
compensation to a
banker or some
Dividend or
other individual for
1 57(i) interest on
the purpose of
securities
realizing dividend
(other than
dividends referred
to in section 115-
O) or interest on
securities
Employees
contribution to If employees’
PF. contribution is
superannuation credited to their
2 57(ia) fund, ESI fund or account in the
any other fund set relevant fund on or
up for the welfare before the due
of such date
employees
 Rental income Lease, rates,
letting of plant, charges, repairs,
3 57(ii) machinery, insurance, and
furniture or devaluation, and
building so on.
1/3rd of family
pension subject to
4 57(iia) Family pension
a maximum of Rs.
15,000.
Any other
expenditure (not
being capital
expenditure)
5 57(iii) Any other income
expended
completely and
solely for earning
such income
Interest on
50% of such
compensation or
6 57(iv) interest (subject to
enhanced
certain conditions)
compensation
Income from the
All expenditure
activity of owning
7 58(4) relating to such
and maintaining
activity.
race horses

Computation of Income from Other Sources

Computation of income from other sources can be done in two
ways;
1. If income is one-time income or casual income then 30% tax is
imposed on the total income.
2. If income is from any other method, then the tax shall be
applicable in accordance with the tax slab.
Example-
A person gets Family pension = Rs. 30,000 (exemption on this is
33.33% or 1500);33.33% of Rs. 30,000 = Rs. 9,999, this amount is
less than 1500. So the taxable income is 30,000 – 9,999 =
20,001.Rs. 20,001 is taxable as income from other sources.

Deductions from Gross total income

Deduction from Gross Total Income There are deductions

prescribed from gross total income. The allowable deductions in cases
of an individual are deductions under section 80C, 80CCC,
80CCD, 80D, 80DD, 80DDB, 80E, 80G, 80GG, 80GGA, 80GGC,
80IA, 80IAB, 80IB, 80IC, 80ID, 80IE, 80JJA, 80QQB, 80RRB and
80U. These deductions are allowable subject to satisfaction of the
conditions prescribed in the relevant section.
 · S,ectio,,it80IDedu.ction.S:
oi< I I ,_ I· -

••

Deductions from the Gross Total Income of Individuals and

Hindu Undivided Family Chapter VI -A
Sections 80C to 80U of the Income Tax Act specifies the deductions
to be made from the gross total income of an assesses. Gross total
Income means the total income, under all the five heads of Income
i.e.
Salary Income
Income from House Property
Profit and gain of Business or Profession Income
Capital Gains and

Income from Other Sources

The gross total income is to be arrived at before allowing any
deduction under Chapter VI A and after setting of unabsorbed
losses, depreciations, etc of the earlier years. While deductions u/s
80C to 80GGC are in respect of certain payments made by the
assesseee, while the deductions u/s 80IA to 80RRB & 80TTA are
in respect of certain incomes.

It may be noted that the aggregate amount of the deductions

under chapter VI-A should not, in any case exceed the gross
total income.
DEDUCTIONS IN RESPECT OF CERTAIN PAYMENTS:
Section 80C
Sections 80C(1) provides that the assesses being an individual or
a HUF, will be allowed a deduction from gross total income of an
amount not exceeding RS.1,50,000, in respected of amount paid or
deposited in the previous year.
Section 80C(2) provides that following sum paid or deposited by an
individual or HUF, at any time during the previous year, qualifies for
deductions u/s80C(1)

1. Life Insurance Premium Paid:

(a) Life Insurance Premium paid by an individual on his/her life or on
life of his /her spouse or on life of any child (including adult child
and a married daughter. Vide circular no 574 dated
22.08.1990 185ITR (St.) 31) of such individual; and
(b) by a Hindu undivided Family, on life of any member of the family
Please remember that amount of any premium on an insurance
policy issued on or before 31.03.2012, eligible for deduction is
limited to 20% 0f the actual capital sum assured, i.e. premium paid
in excess of 20% will not qualify for the deduction.
Likewise policy issued on or after 1st April 2012 eligible amount of
deduction will be 10% of the capital sum assured.
Illustration: Mr. A has taken an insurance policy of Rs. 10,00,000 10
years and paid premium of Rs. 1,20,000 every year will get
deduction of Rs. 1,00,000 only being 10% of the sum assured.

2. Payment for deferred annuity.

Payment made by and individual, on his her life or on life of his/her
spouse or life of any child including adult children and a married
daughter, of such individual, under contract for a deferred annuity.
3. Contribution made by an individual to any provident fund to
which the Provident Fund Act, 1925 applies,
4. Contribution to Public Provident Fund Scheme,1968 in an
account standing in the name of individual, the wife or husband and
any child of such individual.
5. Contribution made by an employee to a recognized provident
fund,
6. Contribution by an employee to an approved superannuation
fund.
7. Subscription to any such security of Central Government or
any such deposit scheme as may be notified.
8. Subscription to any such saving certificate of the Government
Saving Certificate Act 1959 as may be notified.
9. Contribution made, in the name of any person mentioned below,
for participation in the Unit-Linked Insurance Plan 1971
(a) in the case of an individual, the wife or husband and any child of
such individual
(b) in the case of an HUF, any member there of
10. Contribution made in the name of any person mentioned below
for participation in the Unit Linked Insurance Plan of the L.I.C.

Mutual Fund
11. Payment made to effect or to keep in force a notified
deferred annuity plan of LIC (like New Jeevan Dhara, New
Jeevan Dhara 1, New Jeevan Akshay, New Jeevan Akshay – I,
New Jeevan Akshay II, III plan or
Any other insurer i.e. Annuity Plan of ICICI Prudential Life insurance
Co, Plan of Tata AIG Ltd., and approved Tata AIG Retire Annuity
Plan,
12. Subscription to any units of Mutual Fund,
13. Contribution by an individual to notified Pension Fund set up
by any mutual fund, Reliance Retirement Fund, HDFC Retirement
Saving Fund,
14. Subscription to notified Deposit scheme of the National Housing
Bank i.e. Home loan account scheme, a contribution to notified
pension fund set up by the National Housing Bank,
15. Any sum paid by an individual as a Tuition Fees ( excluding
any payment toward any development fees, donation or payment of
similar nature of any two children
16. Payment for the purpose of purchase or construction of

residential house property This will include any installment or part

payment of the amount due under any self financing or other
scheme of any development authority / housing board/ other similar
authority or to any assesses from
a. Central/ State Government or
b. Any bank including a co operative bank
c. Life Insurance Corporation of India,
d. National Housing Bank
e. Any public limited company or co operative society engaged in
the business of financing the construction of houses
f. The assessee’s employer
17. Subscription to equity shares or debentures forming part

of any eligible issue of capital approved by the board on an

application made by such public company
18. Subscription to any units of any mutual fund referred to in
Section 10(23D) and approved by the board
19. Any sum deposited in accordance with notified scheme of
term deposit for a fixed period of not less then 5 years with a
schedule bank
20. Deposit in an account under the Senior Citizens Savings
Scheme Rules 2004
21. Deposit as 5 year time deposit in an account under the Post
Office Time Deposit Rules 1981.

DEDUCTION IN RESPECT OF CONTRIBUTION TO CERTAIN

PENSION FUNDS
Section 80CCC
Under this section deduction is available to only individual. The
assesses has in the previous year paid or deposited any
amount out of his income chargeable tax, to effect or keep in
force contract for any annuity plan of Life Insurance Corporation of
India or any other insurer for receiving pension.Any amount
standing to the credit of the assesses in a fund is received by him
on account of the surrender of the plan or in part or as pension
received from plan shall be deemed to be the income of assesses
However commuted amount received as pension on maturity is
exempt.
Deduction permissible Rs. 1,50,000

DEDUCTION IN RESPECT OF CONTRIBUTION TO PENSION

SCHEME OF CENTRAL GOVERNMENT
Section 80CCD
Any person being an individual, employed by the Central
Government or any other employee or any other individual
deposited any amount in his account under a pension scheme will
get deduction of Rs. 50,000 over and above of Rs. 1,50,000
aggregate amount of Section 80C, 80CCC & 80CCD(1)

DEDUCTION IN RESPECT OF HEALTH INSURANCE PREMIUM

Section 80D
Any person being individual or a Hindu Undivided Family have paid
on account of preventive health check-up other than cash, in the
previous year out of his income chargeable to tax, for health check-
up of assesses, his family ( spouse or depended children) or
parents, will get deduction from his gross total income as under.
For individual below the age of 60 years
Rs. 25,000
For senior citizen above the age of 60 years
Rs. 30,000
From Assessment Year 2019-20 for senior citizen
Rs. 50,000
In the case of an individual payment for preventive health check-up
Rs. 5,000
Deduction in respect of maintenance including medical
treatment of a dependant who is a person with disability
Section 80DD
The assesses is either individual or HUF and is a resident in India
incurred any expenditure for the medical treatment , training and
rehabilitation of a dependant being a person with disability, paid or
deposited any amount under a scheme framed in this behalf,
deduction of Rs. 75,000 subject to the production of certificate
issued by the medical authority.

Deduction in respect of medical treatment etc.

Section 80DDB
The assesses is either an individual or HUF and is a resident of
India actually incurred any expenditure during the previous year for
the medical treatment of specified disease or ailment prescribed in
rule 11DD(1), of the Income Tax Rules, for himself or a dependant
or for the member of HUF will get deduction as under:
Below the age of 60
years Rs. 40,000
Above the age of 60 years but below 80
years Rs. 60,000
Above the age of 80 years very senior
citizen Rs. 80,000

Deduction in respect of interest on loan taken for higher

education
Section 80E
Any individual has paid any amount in the previous year, out of his
income chargeable to tax, by way of interest on loan ( not
repayment of loan) taken by him from any financial institutions,
bank or any approved charitable institutions for the purpose of
pursuing his higher education or also for the purpose of higher
education of his relative, the deduction will be allowed 100% of the
interest paid on loan taken without any monetary limit. Such deduction
is allowable from gross total income of the initial assessment year and
for 7 successive assessment years or until
the interest on such loan is paid by him in full whichever is earlier.
Deduction in respect of interest on loan taken for residential
house property
Section 80EE
Any individual, who has taken a loan from financial institution for the
purpose of acquisition of residential property during financial year
2016-17, and the amount of loan sanction does not exceed Rs.
35,00,000 and the value of property does not exceed Rs.50,00,000
and individual does not own any residential house property on the
date of sanction of the loan, the assesses will get deduction of
maximum Rs. 50,000 for the assessment years 2017-18 to 2019-20.

Deduction in respect of donation to certain funds, charitable

institutions etc,
Section 80 G
Deduction under this section is broadly classified in to four
categories:
A. Donations on which 100% deduction is allowed without any
qualifying limit
B. Donations on which 50% deduction is allowed without qualifying
limit
C. Donations on which 100% deduction is allowed subject to
qualifying limit
D. Donations on which 50% deduction is allowed subject to
qualifying limit.

A. Donations on which 100% deduction is allowed without any

qualifying limit
01. National Defense Fund set up by the Central Government
02. Prime Minister’s National Relief Fund
03. Prime Minister’s Armenia Earthquake Relief Fund
04. Africa (Public Contributions – India)Fund
05. National Children’s Fund
06. National Foundation for Communal Harmony
07. A University or any educational institution of national eminence
as may be approved by the prescribed authority in this behalf
08. Any fund set up by the State Government of Gujarat exclusively
for providing relief to the victims of earthquake in Gujarat
09. Jilla Saksarta Samiti
10. National or State Blood Transfusion Council
11. Any fund set up by State Government to provide medical relief
to the poor
12. Any Army, Naval and Air Force Central Welfare Fund
13. National Illness Assistance Fund
14. Chief Minister’s Relief Fund
15. National Sports Fund
16. National Cultural Fund
17. Fund for Technology Development
18. National Trust for Welfare of different persons
19. Swachh Bharat Kosh set up by Central Government
20. Clean Ganga Fund set up by Central Government
21. National Fund for Control of Drug Abuse constituted under
Narcotic Drugs Act

B. Donations on which 50% deduction is allowed without

qualifying limit
01. Jawaharlal Nehru Memorial Fund
02. Prime Minister’s Drought Relief Fund
03. National Children’s Fund
04. Indira Gandhi Memorial Trust
05. Rajiv Gandhi Foundation
06. Donations for repairs/renovation of notified places of worship
07. World Vision India

C. Donations on which 100% deduction is allowed subject to

qualifying limit
01. Fund to be utilized for the purpose of promoting family planning
02. Any sum paid by the assesses, being a Company to the Indian

Olympic Association
03. Development of infrastructure for sports and games
04. The sponsorship of sports and games, in India

D. Donations on which 50% deduction is allowed subject to

qualifying limit
01. Donations to govt./local authority for charitable purposes
02. Authority / corporation having income exempt under erstwhile
section or Section 10(26BB)
03. Any other fund or any institution to which this section applies
04. Donations for the renovation or repair of any such temple,
mosque, gurudwara, church or other place as is notified by Central
Government

Calculation of Qualifying Limit:

Qualifying Limit u/s 80G is 10% of adjusted gross total income.
Calculation of Gross Total Income:
01. Gross Total Income
02. Less: Amount deductible u/s 80C to 80U but not u/s 80G
03. Less : Exempt Income
Deduction in respect of rent paid
Section 80GG
In computing the total income of an assesses, not being an
assesses having any income falling with in clause (13A) of Section
10(i.e. getting HRA), there shall be deducted any expenditure
incurred by him which shall be lower of following:
5,000 per month
25% of adjusted total income
Actual rent(-) 10% of adjusted total income

Provided that nothing in this section shall apply to an assesses

in any case where any residential accommodation is
Owned by the assesses or by his/her spouse or minor
child or, where such assesses is a member of HUF, by such
family at the place where he ordinarily resides, or performs
duties of his office or employment or carries on his business or
profession; or
Owned by the assesses at any other place, being
accommodation in the occupation of the assesses, the value of
which is to be determined under clause(a) of subsection (2) or,
as the case may be, clause (a) of subsection (4) of section 23.

Deduction in respect of certain donations for scientific

research or rural development
Section 80GGA
Under this section deduction is allowed to any person whose Gross
Total Income does not include income from Profit and Gain from
Business or Profession.
Deduction is allowed for contribution made for following:
 For scientific research or statistical research as allowed to a
business person u/s 35
For rural development for which business person will get
deduction u/s 35CCA

No deduction shall be allowed if contribution is made for

amount exceeding Rs.10,000 in cash

Deduction in respect of contributions given by companies to

political parties
Section 80 GGB
During the year any Indian Company has given donation to any
political party registered under section 29A of the Representation of
the People Act 1951 are eligible for deduction under this section. If the
donation has been given in CASH, no deduction will be allowed.

Deduction in respect of contribution given by any person to

political parties.
Section 80GGC
In computing total income of an assesses, being any person,(
except local authority and every artificial juridical
person, wholly or partly funded by the Government) there shall be
deducted any amount of contribution made by him, in the previous
year, to a political party or an electoral trust:
Provided that no deduction shall be allowed under this section
in respect of sum contributed by way of cash.
“Political Party” means a political party registered/s 29A of the

Representation of the People Act, 1951.

Deduction in respect of royalty income of authors of certain
books other than text books.
Section 80QQB
Any individual, being resident of India and an author, received any
income out of exercise his profession, as royalty or copy right fees
will get deduction up to Rs. 3,00,000/ subject to certain conditions.

Deduction in respect of royalty on patentee

Section 80RRB
Any individual, being resident of India being a patentee, received
any income by way of royalty on a patent registered after 31st
March, 2003, will get deduction up to Rs.3,00,000/ subject to certain
conditions.

Deduction in respect of interest on deposits in savings bank

account
Section 80TTA
The gross total income of an Individual or HUF includes any income
by way of interest on deposit in savings bank account, deduction of
Rs.10,000 is permissible under this section.

Deduction in respect of Senior Citizen interest on deposits in

savings bank account
Section 80TTB
The gross total income of Senior Citizen includes any income by
way of interest on deposit with savings bank account, deduction of
Rs. 50,000 is permissible under this section introduced from Asst.
Yr. 2019-20

Deduction in the case of a person with disability

Section 80U
Any individual being resident in India is certified by the Medical
Authority in the prescribe form about the disability is entitled for the
following deductions from his gross total income.
Rs. 75,000/ and if severs disability find Rs. 1,25,000

Assessment of Individuals

Assessee
An assessee is a taxpayer means a person who under the income
tax act is subject to pay taxes or any other sum of
money, as defined under section 2 (7) of the Act. The expression
‘any other sum of money’ includes other such
obligations payable, for instance fine, interest, penalty and other tax
etc.

Assessment Year
“Assessment Year” means the year in which income of the previous
year of an assessee is taxed. The timed lap of
assessment year is of twelve months beginning from the 1st April
every year. The period starts from 1st April of one
year and ending on 31st March of next year. Broadly, assessment
year is defined under section 2 (9) of the Act.

Previous Year
Income earned during the year is taxable in the next year. The
definition of “Previous Year” is given under section 3
of the Act. Previous Year is the year in which income is earned.
Previous year is the financial year immediately
preceding the relevant assessment year. From 1989-90 onwards,
every taxpayer is obliged to follow financial year
(i.e., April 1st of one year to March 31st of next year) as the
previous year.
For a newly set up business or profession, the first previous year
will start from the day from which that business or
profession has commenced, but the period of ending will remains
same (i.e., 31st March).
Illustration 1: X set up business on July 20, 2016. What is the
previous year for the assessment year 2017-18?
Solution: Previous year for the assessment year 2017-18 is the
period commencing from the date of setting up of
business/ profession (i.e., July 20, 2016) and ending on March 31,
2017.

Every assessee, who earns income beyond the basic exemption

limit in a Financial Year (FY), must file a statement containing
details of his income, deductions, and other related information.
This is called the Income Tax Return (ITR). Once you as a taxpayer
file the income returns, the Income Tax Department will process it.
There are occasions where, based on set parameters by the Central
Board of Direct Taxes (CBDT), the return of an assessee gets
picked for an assessment.

The various forms of assessment are as follows:

1. Self Assessment
2. Summary Assessment
3. Regular Assessment
4. Best Judgement Assessment
5. Income Escaping Assessment
1. Self Assessment

The assessee himself determines the income tax payable. The tax
department has made available various forms for filing income tax
return. The assessee consolidates his income from various sources
and adjusts the same against losses or deductions or various
exemptions if any, available to him during the year. The total income
of the assessee is then arrived at. The assessee reduces the TDS
and Advance Tax from that amount to determine the tax payable on
such income. Tax, if still payable by him, is called self assessment tax
and must be paid by him before he files his return of income. This
process is known as Self Assessment.

2. Summary Assessment
It is a type of assessment carried out without any human
intervention. In this type of assessment, the information submitted
by the assessee in his return of income is cross-checked against
the information that the income tax department has access to. In the
process, the reasonableness and correctness of the return are verified
by the department.

The return gets processed online, and adjustment for arithmetical

errors, incorrect claims, and disallowances are automatically done.
Example, credit for TDS claimed by the taxpayer is found to be higher
than what is available against his PAN as per department records.
Making an adjustment in this regard can increase the tax liability of
the taxpayer.

After making the aforementioned adjustments, if the assessee is

required to pay tax, he will be sent an intimation under Section
143(1). The assessee must respond to this intimation accordingly.
Here you can read a more detailed article on Section
143(1).

3. Regular Assessment
The income tax department authorizes the Assessing Officer or
Income Tax authority, not below the rank of an income tax officer, to
conduct this assessment. The purpose is to ensure that the
assessee has neither understated his income or overstated any
expense or loss or underpaid any tax.
The CBDT has set certain parameters based on which a taxpayer’s
case gets picked for a scrutiny assessment.
a. If an assessee is subject to a scrutiny assessment, the
Department will send a notice well in advance. However, such
notice cannot be served after the expiry of 6 months from the end of
the Financial year, in which return is filed.

b. The assessee will be asked to produce the books of accounts,

and other evidence to validate the income he has stated in his
return. After verifying all the details available, the assessing officer
passes an order either confirming the return of income filed or
makes additions. This raises an income tax demand, which the
assessee must respond to accordingly.

4. Best Judgement Assessment

This assessment gets invoked in the following scenarios:
a. If the assessee fails to respond to a notice issued by the department
instructs him to produce certain information or books of
accounts
b. If he/she fails to comply with a Special Audit ordered by the
Income tax authorities
c. The assessee fails to file the return within due date or such
extended time limit as allowed by the CBDT
d. The assessee fails to comply with the terms as contained in the
notice issued under Summary Assessment
After providing an opportunity to hear the assessee’s argument, the
assessing officer passes an order based on all the relevant
materials and evidence available to him. This is known as Best
Judgement Assessment.

5. Income Escaping Assessment

When the assessing officer has sufficient reasons to believe that
any taxable income has escaped assessment, he has the authority
to assess or reassess the assessee’s income. The time limit for
issuing a notice to reopen an assessment is 4 years from the end of
the relevant assessment Year. Some scenarios where
reassessment gets triggered are given below.
a. The assessee has taxable income but has not yet filed his return.
b. The assessee, after filing the income tax return, is found to have
either understated his income or claimed excess allowances or
deductions.
c. The assessee has failed to furnish reports on international
transactions, where he is required to do so.
Assessment could close quickly for some taxpayers, while it could
prove to be quite gruelling for others. If you are not comfortable
dealing with income tax officers, it is suggested that you take the
help of a Chartered Accountant to help you with your case.

Status of Income Tax in Other Countries

Income Tax in Australia

Income Tax is the most significant and prime source of revenue for
the government of Australia within the Australian taxation system. It
consists of three main pillars i.e., personal earnings, business
earnings, and capital gains.
The progressive approach of the tax system is being followed up by
Australia, which means that the more you earn, the more tax you
need to pay. The tax is imposed by the federal government on the
taxable income of individuals and corporations.

Income Tax in America

The progressive approach of the tax system is being followed up by
the United States of America, which means that the more you earn,
the more tax you need to pay. The Internal Revenue Service (IRS)
in the USA is responsible forlevy and collection of income tax. The
United States tax system is set up on both a federal and state level.
Both are altogether separate and each has its own authority to charge
taxes. The federal government does not possess any right to interfere
with the state taxation. Each state has its own tax system and different
from the other states. The U.S. taxsystem is quite complex in nature.

Income Tax in China

All individuals working in China either Chinese or foreigner are
required to pay ‘Individual Income Tax (IIT) on their earnings. IIT is
a complicated tax framework. It is a residence – based tax. In order
to determine that whether a person is liable to individual income tax,
and the extent to which he or she is liable, are a) whether the
person is living in China;
b) in case a person is expatriate, in that case, how long that person
is living in China;
c) the source of the income; and
d) who bears the salary cost for this person.

Income Tax in the United Kingdom

Taxes are levied according to the payer’s ability to pay- higher
income persons are assumed to be able to pay at higher rates. The
major taxes include income taxes, property taxes, capital gains, UK
inheritance taxes, and Value Added Taxes. Taxes are the main
source of revenue for the government.

Types of Taxes
Taxes are levied by the government on the taxpayer. Taxes are
broadly divided into two parts namely, Direct Tax andIndirect Tax.
Direct Tax is levied directly on the income of the person. Income
Tax and Wealth Tax are the part ofDirect Tax. Whereas, in indirect
taxes, the person who pays the tax, shifts the burden to the person
who consumes thegoods or services. Before 2017 the Indirect Tax
comprises of various taxes and duties like Service Tax, Sales Tax,
Value Added Tax, Customs Duty, Excise Duty and etc. From July
1st, 2017 all such Indirect Taxes are submerged in
one tax law which was named as ‘The Goods and Services Tax Act,
2017”.

Basic Concept of Income Tax Act

“Income Tax is levied on the total income of the previous year of
every person”. To understand the basic concept. It is very important
to know the various other concepts.
Concept of Income
In common parlance, Income is known as a regular periodic return
to a person from his activities. However, the Income has broader
classified in Income Tax law. The Income Tax Act, even take
consideration of income which has not arisen regularly and
periodically. For instance, winning from lotteries, crossword puzzles,
income from winning of shows is also subject to tax as per income tax.

The Income includes income from:

Cash or Kind
Income in terms of Cash is not the only way to receive income, it
can also be received in terms of a kind. The calculation of income
from kind is subject to different treatments in both Direct and
Indirect Tax. When the income is received in kind, its valuation will
be made.

Legal or Illegal Income

A man of ordinary prudence may think that the illegal income may
not be falling under the concept of income, but income tax does not
make any distinction between the income received from a legal or
illegal source. In CIT v. Piara Singh the Supreme Court held that the
loss of business of smuggling shall be allowed for deduction under
Income Tax. The rationale behind the decision was that the smuggling
activity is also regarded as a business. Therefore, the confiscation of
currency notes employed in smuggling activity is a loss which arises
directly from the carrying on of the business.

Temporary or Permanent
As per Income Tax Act, there is no distinction in computing income
whether nature is temporary or permanent.
Receipt basis or Accrual basis

Income arises either on receipt basis or accrual basis. It may accrue

to a taxpayer without its actual receipt. The income in some cases is
deemed to accrue or arise to a person without its actual accrual or
receipt. Income accrues where the right to receive arises.
Gifts
Gifts up to Rs. 50,000 received in Cash do not constitute tax liability.
Gifts in kind having the fair value maximum up to Rs. 50,000 is not
liable to tax. However, the whole amount will be taxed if the value
exceeds the prescribed limit.

Moreover, the treatment of valuation of the gift is different in the

different situation especially gifts received on occasion of marriage.
Lump sum or Instalments
Income Tax does not make any distinction in computing income,
whether it receive in lump sum or instalment.
Moreover, the income is defined in Section 2(24) of the Act.

There are many occasions when you might have to club income of
someone else with your income. If you are planning to transfer any
of your assets/income to another person as a means of tax planning
to avoid the income getting taxed in your hands, hold on. Such
transfers could result in attraction of clubbing provisions. under the
Indian income tax laws.
Even genuine gifts extended to your kith and kin could have these
income tax implications. It would help you immensely if you get
some insights on the clubbing provisions under the Indian Income
Tax Law. Hence, let us understand these provisions a little more in
detail.

Clubbing of income

As the term suggests, clubbing of income means adding or

including the income of another person (mostly family members) to
one’s own income. This is allowed under Section 64 of the IT Act.
However, certain restrictions pertaining to specified person(s) and
specified scenarios are mandated to discourage this practice.

Specified persons to club income

Income of any and every person cannot be clubbed on a random
basis while computing total income of an individual and also not all
income of specified person can be clubbed. As per Section 64,
there are only certain specified income of specified persons which
can be clubbed while computing total income of an individual.
Specified scenarios when you can club income?

Article explains Provisions related to Clubbing of Income with relevant

FAQs explaining Clubbing in the case of Section 60- Transfer of
Income without transfer of Assets, Section 61- Revocable
transfer of Assets, Section 64(1)(ii)- Salary, Commission, Fees or
remuneration paid to spouse from a concern in which an individual
has a substantial* interest, Section 64(1)(iv)- Income from assets
transferred directly or indirectly to the spouse without adequate
consideration, Section 64(1)(vi)- Income from the assets transferred to
son’s wife, Section 64(1)(vii),(viii)- Transfer of assets by an individual
to a person or AOP for the immediate or deferred
benefit of his:(vii) – Spouse (viii) – Son’s wife, Section 64(1A)-
Income of a minor child [Child includes step child, adopted child and
minor married daughter] And Section 64(2)- Income of HUF from
property converted by the individual into HUF property.

Clubbing of income means Income of other person in

cluded in assessee’s total income, for example: Income of
husband which is shown to be the income of his wife is clubbed in
the income of Husband and is taxable in the hands of the husband.
Under the Income Tax Act a person has to pay taxes on his
income.

A person cannot transfer his income or an asset which is his one of

source of his income to some other person or in other words we can
say that a person cannot divert his income to any other person and
says that it is not his income. If he do so the income shown to be
earned by any other person is included in the assessee’s total
income and the assessee has to pay tax on it.
Clubbing of Income under Income Tax Act, 1961 -Section 60 to 64
Income of Minor Beneficiaries can be Clubbed to Income of Parents

Chart Explaining Income Tax Provisions related to Clubbing of

income

Section Nature Clubbed In Conditio Relevant

Of The ns/ Referenc
Trans Hands Of Exceptio e
action ns
Section Transf Transferor who Irrespecti 1. Income
60 er of transfers the ve of: for the
Incom income. 1. purpose
e Whether of
withou such Section
t transfer 64
transf is includes
er of revocable losses.
Asset or not. 2. [P.
s. Whether Doriswa
the my
transfer Chetty
is 183 ITR
effected 559 (SC)]
before or [also see
after the Expl. (2)
commenc to
ement of Section
IT Act. 64]
2.
Section
60 does
not apply
if corpus
itself is
transferre
d.
[Grandhi
 Narayana
Rao 173
ITR 593
(AP)]

Section Revoc Transferor who Clubbing Transfer

61 able transfers the not held as
transf Assets. applicabl revocable
er of e if: 1. If there
Asset 1. Trust/ is
s. transfer provision
irrevocabl to re-
e during transfer
the directly or
lifetime of indirectly
beneficiar whole/par
ies/ t of
transfere income/a
e or sset to
2. transferor
Transfer ;
made 2. If there
prior to 1- is a right
4-1961 to
and not reassume
revocable power,
for a directly or
period of indirectly,
6 years. the
Provided transfer is
the held
transferor revocable
derives and
no direct actual
or exercise
indirect is not
benefit necessar
from y.
such [S.
income in Raghbir
either Singh 57
case. ITR 408
(SC)]
3. Where
no
absolute
right is
given to
transfere
e and
asset
can
revert to
transferor
in
prescribe
 d
circumsta
nces,
transfer is
held
revocable
.
[Jyotendr
asinhji vs.
S. I.
Tripathi
201 ITR
611 (SC)]

Section Salary Spouse whose Clubbing 1. The

64(1)(ii) , total income not relationsh
Comm (excluding applicabl ip of
ission, income to be e if: husband
Fees clubbed) is Spouse and wife
or greater. possesse must
remun s subsist at
eratio technical the time
n paid or of accrual
to professio of the
spous nal income.
e from qualificati [Philip
a on and John
conce remunera Plasket
 rn in tion is Thomas
which solely 49 ITR 97
an attributab (SC)]
individ le to 2. Income
ual applicatio other
has a n of that than
substa knowledg salary,
ntial* e/ commissi
intere qualificati on, fees
st. on. or
remune-
ration is
not
clubbed
under
this
clause

Section Incom Individual Clubbing 1. Income

64(1)(iv) e from transferring the not earned
assets asset. applicabl out of
transf e if, The Income
erred assets arising
directl are from
y or transferre transferre
indire d; d assets
ctly to 1. With not liable
the an for
spous agreeme clubbed.
e nt to live [M.S.S.
withou apart. Rajan
t 2. Before 252 ITR
dequ marriage. 126
ate 3. Income (Mad)]2.
consid earned Cash
eratio when gifted to
n. relation spouse
does not and
exist. he/she
4. By invests to
Karta of earn
HUF interest.
gifting co- [Mohini
parcenar Thaper
y vs.
property CIT 83
to his ITR 208
wife. (SC)]3.
L. Hirday Capital
Narain gain on
vs. ITO sale of
78 ITR property
26 (SC) which
5. was
Property received
without
 acquired considera
out of pin tion from
money. spouse
[R.B.N.J. [Sevential
Naidu vs. M. Sheth
CIT 29 vs. CIT
ITR 194 68 ITR
(Nag.)] 503
(SC)]4.
Transacti
on must
be real.
[O.N.
Mohindro
o 99 ITR
583
(Delhi)]

Section Incom Individual Condition Cross

64(1)(vi) e from transferring the : The transfers
the Asset. transfer are also
assets should be covered
transf without [C.M.Kot
erred adequate hari 49
to considera ITR 107
son’s tion. (SC)]
wife.
Section Transf Individual Condition 1.
64(1)(vii er of transferring the : Transfero
),(viii) assets Asset. 1. The r need
by an transfer not
individ should be necessari
ual to without ly have
a adequate taxable
perso considera income of
n or tion. his own.
AOP [P.
for the Muruges
immed an 245
iate or ITR 301
deferr (Mad)]2.
ed Wife
benefi means
t of legally
his: wedded
(vii) – wife.
Spous [Executor
e. s of the
(viii) – will of
Son’s T.V.
wife. Krishna
Iyer 38
ITR 144
(Ker)]
Section Incom 1. If the Clubbing not 1. Income out o
64(1A) e of a marriag applicable f property
minor e for:— transferred
child subsist 1. Income of for no
[Child s, in the a minor child consideration
includ hands suffering any married
es of the disability daughter,
step parent specified u/s. be
child, whose 80U. clubbed
adopt total 2. Income on hands. [Section
ed income account of 27]2. The
child is manual work parent
and greater; done by the in
minor or; minor child. whose
marrie 2. If the 3. Income on the
d marriag account of minor’s
daugh e does any activity clubbed
ter]. not involving is
subsist, application entitled
in the of skills, exemption
hands talent or up
of the specialized to
person knowledge per child. [Section
who and 10(32)]
maintai experience.
ns the
minor
child.
3.
Income
once
include
d in the
total
income
of
either
of
parents
, it shall
continu
e to be
include
d in the
hands
of some
parent
in the
subseq
uent
year
unless
AO is
satisfie
d that it
is
necess ary to
do so
(after giving that parent opportu
nity of
being
heard)

Section Incom Income is Clubbing Fiction

64(2) e of included in the applicabl under this
HUF hands of e even if: section
from individual & The must
proper not in the converte be
ty hands of HUF. d extended
conve property to
rted is computati
by the subseque on of
individ ntly income
ual partitione also.
into d; income [M.K.
HUF derived Kuppuraj
proper by the 127 ITR
ty. spouse 447
from (Mad)]
 such
converte
d
property
will be
taxable in
the
hands
of
individual
.

* An individual shall deemed to have substantial interest in a

concern for the purpose of Section 64(1)(ii)

IF THE CONCERN IS A IF THE CONCERN IS OTHER

COMPANY THAN A COMPANY

Person’s beneficial Person either himself or jointly

shareholding should not be with his relatives is entitled in
less than 20% of voting power aggregate to not less than 20% of
either individually or jointly with the profits of such concern, at any
relatives at any time during the time during the previous year.
Previous Year. (Shares with
fixed rate of dividend shall not
be considered)
Note :The clubbed income retains the same head under which it is
earned.

What is Double Taxation Avoidance Agreement (DTAA)?

The Double Taxation Avoidance Agreement or DTAA is a tax treaty

signed between India and another country ( or any two/multiple
countries) so that taxpayers can avoid paying double taxes on their
income earned from the source country as well as the residence
country. At present, India has double tax avoidance treaties with more
than 80 countries around the world.

The need for DTAA arises out of the imbalance in tax collection on
global income of individuals. If a person aims to do business in a
foreign country, he/she may end up paying income taxes in both
cases, i.e. the country where the income is earned and the country
where the individual holds his/her citizenship or residence. For
instance, if you are moving to a different country from India while
leaving income sources such as interest from deposits in here, you
will be charged interest by both India and the country of your current
residence as per your consolidated global earnings. Such a
scenario can have you pay twice the tax over the same income.
This is where the DTAA becomes useful for taxpayers.

Benefits of DTAA
There are lots of benefits associated with DTAA for taxpayers. The
basic benefit includes not having to pay double taxes on the same
income. Apart from this,
Lower Withholding Tax (Tax Deduction at Source or TDS)
 Tax credits
Exemption from taxes
The primary idea behind DTAA agreements with various countries is
to minimize the opportunity for tax evasion for tax payers in either or
both of the countries between which the bilateral/multilateral DTAA
agreement have been signed.

Lower withholding tax is a plus for taxpayers as they can pay lower
TDS on their interest, royalty or dividend incomes in India, while some
agreements provide for tax credits in the source or country of
operations so that taxpayers don’t pay the same tax twice. In some
cases, such as agreements with Mauritius, Cyprus, Singapore,
Egypt etc. capital gains tax is exempted which can be a boon to
taxpayers as they can use the DTAA agreement to minimize taxes.

DTAA Rates
The rates and rules of DTAA vary from country to country
depending on the particular signed between both parties. TDS
rates on interests earned for most countries is either 10% or 15%,
though rates range from 7.50% to 15%. List of DTAA rates for
particular countries is given in the next section.

Double Taxation Avoidance Agreement Country List

A total of 85 countries currently have DTAA agreements with India.
The following countries having Double Taxation Avoidance
Agreement with India. TDS rates on interests are listed below.
(Listed alphabetically) The need for DTAA arises out of the
imbalance in tax collection on global income of individuals. If a person
aims to do business in a foreign country, he/she may end up
paying income taxes in both cases, i.e. the country where the
income is earned and the country where the individual holds his/her
citizenship or residence. For instance, if you are moving to a
different country from India while leaving income sources such as
interest from deposits in here, you will be charged interest by both
India and the country of your current residence as per your
consolidated global earnings. Such a scenario can have you pay twice
the tax over the same income. This is where the DTAA becomes
useful for taxpayers.

Benefits of DTAA
There are lots of benefits associated with DTAA for taxpayers. The
basic benefit includes not having to pay double taxes on the same
income. Apart from this,
Lower Withholding Tax (Tax Deduction at Source or TDS)
Tax credits
Exemption from taxes
The primary idea behind DTAA agreements with various countries is
to minimize the opportunity for tax evasion for tax payers in either or
both of the countries between which the bilateral/multilateral DTAA
agreement have been signed.

Lower withholding tax is a plus for taxpayers as they can pay lower
TDS on their interest, royalty or dividend incomes in India, while some
agreements provide for tax credits in the source or country of
operations so that taxpayers don’t pay the same tax twice. In some
cases, such as agreements with Mauritius, Cyprus, Singapore,
Egypt etc. capital gains tax is exempted which can be a boon to
taxpayers as they can use the DTAA agreement to minimize taxes.

DTAA Rates
The rates and rules of DTAA vary from country to country
depending on the particular signed between both parties. TDS
rates on interests earned for most countries is either 10% or 15%,
though rates range from 7.50% to 15%. List of DTAA rates for
particular countries is given in the next section.
Double Taxation Avoidance Agreement Country List
A total of 85 countries currently have DTAA agreements with India.
The following countries having Double Taxation Avoidance
Agreement with India. TDS rates on interests are listed below.
(Listed alphabetically)
What is International Taxation: Double taxation
and its avoidance mechanism; Transfer pricing?

International Taxation: Double taxation and its avoidance

mechanism; Transfer pricing

International taxation is the study or determination of tax on a

person or business subject to the tax laws of different countries or
the international aspects of an individual country’s tax laws as the
case may be.
For detailed study of this topic we have to understand the tax
provisions already prevailing in India:
1) Indian income tax provisions related to Non Residents:
Residential status of a person describes the taxability of that person
in a county but in the case of Non-resident only that Income which is
received or deemed to have been received in India by or on his
behalf and income that accrues or arises or is deemed to accrue or
arising in India is Taxable in India.

Section 9 of the Income Tax Act, 1961 also envisages

certain deeming provisions.
As per the deeming provisions following Incomes will be deemed to
accrue or arise in India, even though they may actually accrue or
arise out of India :-
 1. Income from Business Connection in India.
2. Income from any Property, Asset or Source of Income in India.
3. Capital Gains from transfer of any Capital Asset situated in
India.
4. Income from Salary earned in India – i.e. if Service is rendered
in India. Where a rest period which is preceded or succeeded by
services rendered in India forms part of the service contract of
employment, the same shall be considered to be income earned
in India.
5. Income from salary (other than perquisite &/or allowance ) paid
by Government of India to an Indian Citizen of India even though
the service is rendered out of India.
6. Dividend paid by Indian Company outside India.
7. Income by way of Interest in some situations.
8. Income by way of Royalty in some situations.
9. Income by way of Fees for Technical Services in some
situations.

2) NRI Tax Exemption

NRI’s are taxed as per income tax slabs applicable to resident
Indians below the age of 60 years irrespective of the age criteria of
non resident indian. Simply means that if the NRI is above the age
of 60 years still he will be taxed a per tax rate applicable to resident
indian who is below the age of 60 years.

But, in the following two cases NRIs need not to file tax return:
If taxable income consists of only investment income or long
term capital gains.
When the tax has already been deducted at source, on such
income.
 Bes ides the abov e benefits , NRI’s ar e als o gr anted w ith
s om e tax
free incomes which are notified by Income Tax department as
follows:

Interest earned on Saving Certificates etc.

Interest earned on Non Resident (Non Repatriable) [NRNR]
Deposit.
** Note – w.e.f. 1st April,2002 banks cannot accept fresh nor renew
NRNR deposits. Upon maturity Interest on NRNR deposits and
principal amount can be transferred to Non Resident (External) [ NRE]
account at the option of account holder.
Interest earned on Foreign Currency Non Resident (Bank)
[FCNR(B)] Deposit which technically is exempt under Section
10(4)(ii) too being covered by the definition of an NRE deposit
under the FERA 1973 in case of a ” Non Resident ” or
“Resident but Not Ordinarily Resident” as per the provisions of
Income Tax Act, 1961.
Interest earned on Foreign Currency Non Resident (Bank)
[FCNR(B)] Deposit continued until maturity by a Non Resident
Indian (NRI) who has returned to India for taking up employment
, business, vocation i.e. for permanent settlement provided he
is a ” Non Resident ” or “Resident but Not Ordinarily
Resident” as per the provisions of Income Tax Act,
1961. Overseas income of NRIs.
Dividend income from Indian Public/Private Company, Indian
Mutual Fund and from Unit Trust of India is exempt from tax in
India at par with residents.
Long-term capital gains arising on transfer of equity shares
traded on recognized Stock Exchange and units of equity
 schemes of Mutual Fund is exempt from tax at par with residents,
provided Security transaction tax is paid.
Remuneration or fee received by non-resident / non-citizen /
citizen but not ordinarily resident ‘consultants’, for rending
technical consultancy in India under approved programme
including remuneration of their employees, and income of their
family members which accrue or arise outside India.
Interest on notified bonds.

Tax Deducted at Source (TDS) provisions related to NRI’s:

3) TDS provisions
Finance Act, 2008 inserted a new sub section (6) to section 195
effective from April 1, 2008, which requires the person responsible
for making payment to a non-resident to furnish information relating to
such payments in forms to be prescribed.
The Central Board of Direct Taxes (“CBDT”) has prescribed a new
rule 37BB in the Income Tax Rules, 1962 (“the rules”)
prescribing Form 15CA and Form 15CB to be filed in relation to
remittances to non-residents under section 195(6) of the Income
Tax Act, 1961 (“the Act”).

The process that will have to be followed, before any remittance can
be made, is as under:
Step 1 : Obtain a certificate from a Chartered Accountant in Form
No 15CB
Certificate in Form 15CB is not required when remittance does
not exceed Rs 5,00,000 in total in a financial year.
Step 2 : Furnish the information in Form No15CA
Step 3 : Electronically upload Form 15CA on the designated website
Step 4 : Take Print out of Form 15CA and file a signed copy
Step 5 : Remit money to the Non Resident
There is a very common doubt which generally strike the minds of
students that is Double Taxation of money. Generally people thinks
that if a NRI is paying a tax in the country in which he is a non resident
then the country of his residence will also demands tax from that
person for that income. But if this happens this will leads to double
taxation. The thinking of students or other people is absolutely right
as the law interprets the same but Law is always a step ahead from
our minds. Law already found a way so as to avoid double taxation of
income in case of NRI’s and that amazing thing is DOUBLE
TAXATION AVOIDANCE AGREEMENT (DTAA)

NRI’s T axabilit
y
7) Computation Of Income Of NRI’s (Section 115D):

Section 115D deals with the Special provision for computation of

total income of non- residents, this section states that:
(1) No deduction in respect of any expenditure or allowance shall be
allowed under any provision of this Act in computing the investment
income of a non- resident Indian.
(2) Where in the case of an assessee, being a non- resident Indian,-
(a) the gross total income consists only of investment income or
income by way of long- term capital gains or both, no deduction
shall be allowed to the assessee under Chapter VIA and nothing
contained in the provisions of the second proviso to section 48 shall
apply to income chargeable under the head “Capital gains”

(b) the gross total income includes any income referred to in clause
(a), the gross total income shall be reduced by the amount of such
income and the deductions under Chapter VIA shall be allowed as if
the gross total income as so reduced were the gross total income of
the assessee.
8) Tax on investment income and long-term capital
gains (Section 115E)
Where the total income of an assessee, being a non-resident
Indian, includes—
(a) any income from investment or income from long-term capital
gains of an asset other than a specified asset;
(b) income by way of long-term capital gains,
The tax payable by him shall be the aggregate of—
the amount of income-tax calculated on the income in respect
of investment income referred to in clause (a), if any, included
in the total income, at the rate of 20%;
the amount of income-tax calculated on the income by way of
long-term capital gains referred to in clause (b), if any,
included in the total income, at the rate of 10%; and
the amount of income-tax with which he would have been
chargeable had his total income been reduced by the amount
of income referred to in clauses (a) and (b).

9) Capital gains on transfer of foreign exchange assets not to

be charged in certain cases (section 115F):
Where, in the case of an assessee being a non-resident Indian, any
long-term capital gains arise from the transfer of a foreign
exchange asset and the assessee has, within a period of six
months after the date of such transfer, invested the whole or any
part of the net consideration in any specified asset, or in any
savings certificates referred to in clause (4B) of section 10, the
capital gain shall be dealt with in accordance with the following
provisions of this section, that is to say,—
(a) If the cost of the new asset is not less
than the net consideration in respect of the original asset, the whole
of such capital gain shall not be charged under section 45;
(b) If the cost of the new asset is less than the net consideration in
respect of the original asset, so much of the capital gain as bears to
the whole of the capital gain the same proportion as the cost of
acquisition of the new asset bears to the net consideration shall not
be charged under section 45.

Foreign Exchange Asset:

Section 115C defined “foreign exchange asset” to be any specified
asset, which was acquired by the assessee using convertible
foreign exchange and the said specified asset as per sub-section (f)
of the same Section included shares with an Indian company.

Specified assets are:

Shares of an Indian company
Debentures or deposits with an Indian company, not being a
private company
Any security of the Central Government.
Other notified assets (no such asset has yet been notified.)

10) Benefit available in certain cases even after the assessee

becomes resident (Section 115H):
Where a person, who is a non-resident Indian in any previous year,
becomes assessable as resident in India in respect of the total income
of any subsequent year, he may furnish to the Assessing Officer
a declaration in writing along with his return of
income under section 139 for the assessment year for which he is
so assessable. Some conditions are required to be fulfilled for availing
this benefit.

11) International taxation: A different law

This can be a doubt in the mind of anybody who wants to study all
aspects of international taxation. So, let me clarify this:
There is no different law for studying international taxation.
There is no separate courts for the matters related to
international taxation.
The Income Tax Act, 1961 specifies certain separate
provisions for the taxability of foreign transactions.
The Provisions of Domestic law are applied to handle Cross
Border – Direct & Indirect Taxes
The emerging globalisation is proved as a boost to Indian economy
and accordingly it puts a challenge against Indian Taxation Authorities
so as to ensure the collectability of dues pertaining to international
transactions. But while observing the other side of this picture it seems
that this is not a difficult task as Indian chartered Accountants are
competent enough to deal with critical taxation issues. Here, taxation
department should take an initiative to delegate the work to Chartered
Accountants so that the correct picture of transactions can be
ascertained and the tax evasion can be prevented.

Transfer Pricing

Transfer Pricing: Usually there is a tendency among MNCs to

adjust their international transactions in such a way that maximum
profit arises in that country where the rate of tax is lowest and
minimum profit arises in that country where the rate of tax is
highest. This creates the problem of transfer pricing. Thus there
may be chances that MNC escape tax in those countries where the
tax rate is more by adjusting their international transaction and
declaring lesser profits in such country. This can be explained with
an example:
Suppose a subsidiary company, resident in country A (which has a
tax rate of, say, 30%) manufactures goods and transfers them to its
parent company in country B (which has a tax rate of 20%) for trading.
In order to increase the overall profits of the group company,
it will seek to supply the goods at prices which are lower than the
market price. So, in effect, the subsidiary company in country A will
have lower profits and hence, a lower tax incidence whereas the
parent company in country B is affected in the opposite manner higher
profits due to low costs, but lower taxes because of the tax rate.

Transfer pricing deals with the technique where parent companies sell
goods and services to subsidiary entities at an inflated price to
deliberately reduce profits and tax liability. The law requires that
goods and services should be sold to subsidiary companies at arm’s
length price — the price at which goods are traded between
unconnected companies.

In order to cover such tendencies of MNCs section 92A to 92F have

been enacted and section 271AA, 271BA and 271G have been
incorporated and section 271 has been amended providing for
penal provisions in this regard.

How the income from international transactions will be

computed: As per section 92 any income from international
ll be computed as per arm’s length price.
Any allowance of interest or expenses with respect to the
above income shall also be computed having regarded to arm’s
length price. Further where, in an international
transaction, two or more associated enterprises enter
into a mutual agreement for the
allocation or apportionment of, or any contribution to, any cost or
expense incurred or to be incurred in connection with a benefit,
service or facility provided or to be provided or apportioned to or as
the case may be, contributed by, any such enterprises shall be
determined having regard to the arm’s length price of such benefit,
service or facility, as the case may be.

In simple words it means that not only the income from an

international transaction is to be computed as per arm’s length price
but also any expense or cost to be incurred in an international
transaction in connection with a benefit or service or facility to be
provided will be computed as per arm’s length price.
Section 92 also provides that its provisions shall not apply where it
has effect of reducing the income chargeable to tax or increasing
the loss, as the case may be, computed on the basis of entries
made in the books of account in respect of the previous year in
which the international transaction was entered into.

Now the question arises about the meaning of some of the

concepts as mentioned above like International transactions,
associated enterprises and arm’s length. These can be
discussed as follows:
What is an International Transaction: To apply the provisions
related to transfer pricing as contained u/s 92, 92A to 92F there
must be an international transaction.
As per section 92B an international transaction means a transaction
between two or more associated enterprises, either or both of whom
are non-resident and such transaction is in the nature of purchase,
sale or lease of tangible or intangible property or provision of services,
or lending or borrowing money or any other transaction having a
bearing on the profits, income, losses or assets of such associated
enterprises.

International transaction shall also include a mutual agreement or

arrangement between two or more associated enterprises for the
allocation or apportionment of, or any contribution to, any cost or
expense incurred or to be incurred in connection with a benefit, service
or facility provided or to be provided to any of such associated
enterprises.

Further section 92B provides that, where a transaction entered into by

an enterprise with a person other than an associated enterprises and
there exist a prior agreement in relation to the relevant transaction
between such other person and associated enterprise, or the terms
of the relevant transaction are determined in substance between such
other person and the associated enterprises then such transaction
shall also be treated as an international transaction.

What is associated Enterprises: To apply the provisions relating

to transfer pricing there must also be associated enterprises.
Which enterprises can be termed as associated enterprises can be
known u/s 92B. As per section 92B(i) the associated enterprises in
relation to another enterprise is:

(a) which participates, directly or indirectly, or though one or more

intermediaries, in the management or control or capital of other
enterprise; or
(b) in respect of which, one or more persons who participate
directly or indirectly or through one or more intermediaries, in its
management or control or capital, are the same persons who
participate, directly or indirectly or through one or more
intermediaries, in the management or control or capital of the other
enterprise.

Two enterprises shall be deemed to be associated enterprises if, at

any time during the previous year,-
(a) One enterprise holds, directly or indirectly, shares carrying not
less than 26 per-cent of the voting power in the other enterprise; or
(b) Any person or enterprise holds, directly or indirectly, shares
carrying not less than 26 per-cent of the voting power in each of
such enterprises; or
(c) A loan advanced by one enterprise to the other enterprise
constitutes not less than 26 percent of the book value of the total
assets of other enterprise; or
(d) One enterprise guarantees not less than 10 per-cent of the total
borrowings of the other enterprise; or
(e) More than half of the board of directors or members of the
governing board, or one or more of the executive directors or
executive members of the governing board of one enterprise, are
appointed by the other enterprise;
(f) More than half of the board of directors or members of the
governing board, or one or more of the executive directors or
executive members of the governing board of each of the two
enterprises are appointed by the same person or persons; or
(g) The manufacture or processing of goods or articles or
business carried out by one enterprise is wholly dependent on the use
of know-how, patents, copyrights, trademarks, licenses, franchisees
or any other business or commercial rights of similar nature, or any
data, documentation, drawing or specification relating to any patent,
invention, model, design, secret formula or process, of which the
other enterprise is the owner or in respect of which the other
enterprise is the owner or in respect of which the other enterprise has
executive rights; or

(h) 90 per cent or more of the raw materials and consumables

required for the manufacture or processing of goods or articles carried
out by one enterprise, or by persons specified by the other enterprise,
and the prices and other conditions relating to the supply are
influenced by such other enterprise; or

(i) the goods or articles manufactured or processed by one

enterprise, are sold to the other enterprise or to persons specified
by the other enterprise, and the prices and other conditions relating
thereto are influenced by such other enterprise; or

(j) where one enterprise is controlled by an individual, the other

enterprise is also controlled by such individual or his relative or
jointly by such individual and relative of such individual; or
(k) where one enterprise is controlled by a Hindu undivided family,
the other enterprise is also controlled by a member of such HUF or
by a relative of a member of such HUF or jointly by such member and
his relative; or
(l) where one enterprise is a firm, association of persons or body
of individuals, the other enterprise holds not less than 10 percent
interest in such firm, association of person or body of individual.
(m) There exists between the two enterprises, any relationship of
mutual interest, as may be prescribed.

Wh at is arm ’s leng th p rice: As stated above the income

from an international transaction is computed as per arm’s length
price. Arm’s length price has been defined in section 92F(ii) as a
price which is applied or proposed to be applied in a transaction
between persons other than associated enterprises, in
uncontrolled conditions.

The arm’s length principle suggests that the associated enterprises

should be treated as independent enterprises and international
transaction is considered at the market price.
As per section 92C the arm’s length price in relation to an
international transaction shall be determined by any of the
prescribed methods discussed as below:

Comparable Uncontrolled Prices method (CUP): Under this

method, price charged in an uncontrolled transaction between
comparable entities is identified and compared with the tested entity
price (after making due adjustments in relation to terms and conditions
and risk involved) to determine the ALP.

Cost Plus Method (CPM): Here, the total cost of production

incurred by the enterprise in question in transferring goods and
services to Associated Enterprises (AEs) is calculated and the total
gross profit mark up used by comparable entities in similar
transactions with independent enterprises is determined. The total
gross mark-up arrived at is adjusted to take into account functional
and other differences and is added to the costs calculated to
determine ALP.

Resale Price Method (RPM): Under this method the price at which
property or services in question are resold or provided to an unrelated
enterprise is identified. Such resale price is reduced by the normal
gross profit accruing to an enterprise in a comparable incontrolled
transaction.

Profit Split Method (PSM): PSM is used when AEs transactions

are so integrated that it becomes impossible to conduct a TP
analysis on a transactional basis. First, the combined net profit
incurring to related enterprises from a transaction is determined.
Then, the combined net profit is allocated between related enterprises
with reference to market returns achieved by independent entities
in similar transactions. The relative contribution of related parties is
then evaluated on the basis of assets employed, functions performed
or to be performed and risk assumed.

Transactional Net Margin Method (TNMM): TNMM is normally

adopted in cases of transfer of semi-finished goods, distribution of
finished products (where resale price method (RPM) cannot be
adequately applied) and transactions involving the provision of
services. TNMM compares the net profit margin relative to an
appropriate base (sales, assets or costs incurred) of the tested party
with net profit margin of the independent enterprises in similar
transactions after making adjustments.

Any other method as may be prescribed by the Board

The most appropriate method of all the above methods should be
applied in determining arm’s length price depending upon various
factors like nature of transaction availability of information etc.

Where more than one price is determined by the most

appropriate method, the arm’s length price shall be taken to be the
arithmetical mean of such prices.
Actual price at which international transaction has been undertaken
shall be accepted where the variation with the arm’s length price
doesn’t exceed 5 percent.

Section 92CB provides that w.e.f. asst. year 2009-10 Income tax
authorities will accept the transfer price declared by the assessee
provided they are in accordance with the Safe Harbor Rules to be
notified by CBDT. Safe Harbour means circumstances in which the
income tax authorities shall accept the transfer price declared by the
assessee.

When the assessing officer can determine arm’s length price: As

per section 92C(3)
Where during the course of any proceeding for the assessment of
income, the Assessing Officer is, on the basis of material or
information or document in his possession, of the opinion that—
(a) the price charged or paid in an international transaction has not
been determined in accordance with the prescribed manner; or
(b) any information and document relating to an international
transaction have not been kept and maintained by the assessee in
accordance with the provisions contained in sub-section (1) of section
92D and the rules made in this behalf; or
(c) the information or data used in computation of the arm’s length
price is not reliable or correct; or
(d) the assessee has failed to furnish, within the specified time, any
information or document which he was required to furnish by a
notice issued under sub-section (3) of section 92D,
the Assessing Officer may proceed to determine the arm’s length price
in relation to the said international transaction on the basis of the
information or material available.
Procedure to be followed by the assessing officer while
determining arm’s length price: Proviso to section 92C(3)
provides that an opportunity shall be given by the Assessing Officer
by serving a notice calling upon the assessee to show cause, on a
date and time to be specified in the notice, why the arm’s length
price should not be so determined on the basis of material or
information or document in the possession of the Assessing Officer.
The Finance Act 2002 has inserted a new section 92CA according
to which in case of international transaction, the A.O may refer the
matter to Transfer Pricing officer, if he considers it necessary or
expedient to do so, with the prior approval of commissioner, for the
purpose of computing arm’s length price.

The following procedure will be followed by TPO while

determining ALP:

(1) Where a reference is made to the TPO, the Transfer Pricing

Officer shall serve a notice on the assessee requiring him to
produce or cause to be produced on a date to be specified therein,
any evidence on which the assessee may rely in support of the
computation made by him of the arm’s length price in relation to the
international transaction in question.
(2) On the date specified in the notice , or as soon thereafter as may
be, after hearing such evidence as the assessee may produce,
including any information or documents referred to in sub-section
(3) of section 92D and after considering such evidence as the Transfer
Pricing Officer may require on any specified points and after taking
into account all relevant materials which he has gathered, the
Transfer Pricing Officer shall, by order in writing, determine the arm’s
length price in relation to the international transaction and send a
copy of his order to the Assessing Officer and to the assessee.
(3) On receipt of the order under from TPO, the Assessing Officer
shall proceed to compute the total income of the assessee in
conformity with the arm’s length price as so determined by
the Transfer Pricing Officer.

The obligations of an assessee having international

transactions: The obligations of an assessee having international
transaction are as follows:

(1) The income from the international transaction should be

computed as per arm’s length price
(2) Every person who has entered into an international transaction
shall keep and maintain such information and document in respect
thereof and for such period, as may be prescribed by the board and
produce before the A.O or commissioner (Appeals) as and when
required in the course of proceedings under Income Tax Act within
a period of 30 days from the date of receipt of notice.
(3) The assessee entering into an international transaction is also
required to furnish an audit report in the form 3CEB by a chartered
accountant by 31st of September of relevant A.Y where the
assessee is a company and by 31st day of July in other cases.

Penal provisions: As per section 271AA if the required information

and documents are not maintained, the A.O or CIT(A) may impose
a penalty of a sum equal to 2% of the value of such international
transaction. Similar penalty is provided u/s 271G if the assessee
fails to furnish the documents requisitioned by the A.O or CIT (A).
Section 271BA provides that if an assessee fails to furnish the
report of Chartered accountant as required u/s 92E, the A.O may
impose penalty of Rs 1 Lakh.
Explanation 7 to section 271(1)(c) provides that where in the case
of an assessee who has entered into an international transaction
defined in section 92B, any amount is added or disallowed in
computing the total income under section 92C(4) then, the amount
so added or disallowed shall, for the purpose of section 271(1)(c) ,
be deemed to represent the income in respect of which particulars
have been concealed or inaccurate particulars have been furnished.
However the explanation does not apply where the assessee
proves to the satisfaction of the A.O or the CIT that the price
charged or paid in such transaction has been determined in
accordance with section 92C in good faith and with due diligence.
What is Corporate Tax Planning: Concepts and
significance of corporate tax planning; Tax
avoidance versus tax evasion; Techniques of
corporate tax planning; Tax considerations in
specific business situations: Make or buy
decisions; Own or lease an asset; Retain; Renewal
or replacement of asset; Shut down or continue
operations ?

Corporate Tax Planning

The term "corporate tax planning" encompasses the strategic

structuring of business operations in order to minimize tax liabilities.
Corporate tax planning activities generally seek to avoid legally
triggering tax costs rather than illegally evading an existing
obligation to pay taxes. Tax planning represents a forward-looking
activity, as opposed to tax compliance or reporting, which reflects
back on events that have already taken place. Corporations typically
engage certified public accountants or tax attorneys for technical
advice in this complicated area.
Corporate tax can be a minefield of regulation, with new rules set up
part way through the tax year and others introduced but not
taking affect until the next tax year. It means you could quite easily
be paying more tax than you should be. We can work closely with you
to review all your records and ascertain if we can set up a more tax
efficient structure for you.
The objectives of corporate tax planning are to implement strategies
that potentially reduce your tax liability and improve your
profitability. We can also keep you compliant, so that you
understand when submissions and payments to HM Revenue &
Customs are due so as to avoid the pitfalls of stringent fines.
Our corporate tax planning services include:
Determining the most tax effective structure for your
business
 Informing you of the opportunities and advise you on making
use of available tax reliefs
Achieving the optimum capital or revenue tax treatment
Reducing your tax exposure
on disposals and maximise available reliefs on acquisitions
Making use of industry specific tax opportunities
Compliance with all tax regulation including corporation
tax self assessment

Concepts and significance of corporate tax planning

Tax Planning
Tax Planning is an activity conducted by the tax payer to reduce the
tax liable upon him/her by making maximum use of all available
deductions, allowances, exclusions, etc. feasible under law. In other
words, it is the analysis of a financial situation from the taxation
point of view. The objective behind tax planning is insurance of tax
efficiency. Tax planning allows all elements of the financial plan to
function in sync to deliver maximum tax efficiency.
Tax planning is critical for budgetary efficiency. A reduced tax
liability and maximized the ability of retirement plans.
Objectives of Tax Planning
Minimal Litigation: There is always friction between the
collector and the payer of tax. In such a situation, it is
important that the compliance regarding tax payment is
followed and used properly so that friction is minimum.
Productivity: Among the most important objectives of tax
planning is channelization of taxable income to various
investment plans.
Reduction of Tax Liability: As a tax payer, you can save the
maximum amount from payable tax amount by using a proper
 arrangement of your enterprise working as per the required
laws.
Healthy Growth of Economy: The growth in an economy
depends largely upon the growth of its citizens. Tax planning
estimates generation of white money that is in free flow.
Economic Stability: Stability is supplemented when the tax
planning behind a business is proper.

Types of Tax Planning

1. Short-range and long-range Tax Planning: The tax planning
which is done annually to arrive at specific objectives is called
short-range tax planning. Whereas, long-range tax planning
does not include immediate pay-offs of any kind.
2. Permissive Tax Planning: Here the planning conforms to law
provisions of tax.
3. Purposive Tax Planning: This is the tax planning method that
is based on loopholes in the laws.
Tax planning is a term that stands for calculated application of tax
laws, so as to effectively manage a person’s taxation. Leading to
avail the tax benefits as per the law and in accordance with the
interest of the nation and its people.
Tax Planning in India
Indian law offers a variety of tax saving options for the taxpayers,
allowing for a large range of options for exemptions and deductions
through which you could limit your overall tax output.
The deductions are available from Sections 80C through to
80U and can be utilised by eligible taxpayers.
All these deductions happen against quantum of tax liabilities.
 There many other sections under the Income Tax Act, 1961
such as exemptions and tax credits that can lower your tax
liabilities.

Corporate Tax Planning

This is a way of lowering the liabilities on a registered company.

One of the most used methods is by including the deductions on
business transport, health insurance of employees, etc. With tax
deductions and exemptions provided under the Income Tax Act,
1961, your enterprise can largely reduce its tax burden in a legal
way.
Rising profits of an enterprise means higher liabilities of tax. In such
a situation, it is important that they dedicate enough time on tax
planning that reduces liabilities. With a tax plan, both direct tax and
indirect tax is lessened at the time of inflation. Not just this.
Tax planning means a proper planning of:
Expenses.
Capital budget.
Sales and Marketing costs.
A good tax planning results from the following
All you need to do is to claim the tax benefits is invest in
eligible instruments.
Giving correct information to relevant IT authorities.
Being well informed of applicable tax laws and court
judgements on the same.
Tax planning should be done completely under the purview of
law.
Planning should take into consideration business objectives
and flexibility for the incorporation of future changes.
 You could be a long-time taxpayer or a first-time payer, in case
you did not plan your taxes properly, you are probably paying
more in tax than you should.
Income Tax clauses seem so complex that the common man
is averse of dealing with taxes.

This is the arrangement of a tax payer’s business or financial dealings,

in such a way that complete tax benefit can be availed by legitimate
means, so that the amount of the tax is minimal.
Common mistakes people make regarding income tax
Procrastination: This is the root of all follies you will make as
a tax planner. This will eventually lead to you paying more taxes,
instead of making timely investment leading to optimum planning
of taxes.
Investing in insurance products for tax saving: When
approaching the last of a financial year, a lot of us receive phone
calls from insurance companies that insist that you buy an
insurance policy that saves tax. This isn’t one of the wisest
things to do.
Power of compounding through tax saving mutual
funds: Many people don’t consider the power of compounding
despite all supporting factors.
Failing to optimise all available options for tax
saving: Don’t be the person who believes that tax planning
starts and ends with Section 80C of Income-tax Act, 1961- that
only describes investment instruments for saving tax.

Generic Saving Methods in Tax Planning

Let’s talk about tax saving expenses. We end up paying tax on
various expenses which are otherwise eligible for tax benefits that
we fail to grasp due to ignorance about them. Read on to
understand some such expenses where you can save tax.

Medical expenses of disabled dependent: For a dependent

person in your family who has a disability, there is tax benefit
under section 80DD. This tax deduction is a social support for
disabled family member from the government, so as to ease
that person’s dependence on you. This means a saving of up
to Rs 1,25,000 on the taxable income.

Expenses for a disabled individual: Same as section 80DD

deductions. A person who has disability gets benefit through
section 80U. Maximum deduction is INR1,25,000.

Treatment of specified diseases:

o Treatment of diseases like cancer and AIDS is very

expensive and Section 80DDB offers the much needed

financial relief to the person suffering from such ailment
and his family members.

Charitable donations:
o There is another reason to rejoice when you make

donations. Besides supplementing your good deeds, you

also gather the right to claim another tax exemption
covered under section 80G.
o There is an upper limit on cash donations. Such

donations are capped at Rs 2,000.

Donations for scientific research or rural development:

 Donations towards scientific research are open for
deduction through section 80GGA.
o There are some other situations too where you get to
save tax.

Tax avoidance versus tax evasion

Every individual or assessee in a country dreams about to find a

way in which he can avoid tax. He wants to use any means for the
purpose of not paying or evading from tax. Tax Avoidance and Tax
Evasion are two terms that serves a common purpose i.e ‘To
reduce the amount of tax from person, firm or any legal entity’s
earnings” but one difference which can be drawn from these two
concepts is that one aims to do it in a legitimate manner and other
strives for an illegitimate manner.

Tax Evasion and Tax Avoidance are two techniques which are used
and applied by many people for the purpose of reducing their tax
liability. These actions are performed only after consulting an
expert in the field of tax. Tax avoidance is a completely legal
procedure while Tax Evasion is considered to be crime in the whole
world. Tax Avoidance is defined as a practice of using all the legal
means to pay the least amount of tax possible. The core difference
which can be ascertained from these two concepts of taxes is that
Tax evasion is a criminal offence and whereas Tax avoidance is
perfectly legal thing.

Tax Avoidance:
Any person who is able to avoid taxes is considered to be a wise
guy. It is believed Tax Avoidance is a term which signifies a
situation in which a taxpayer reduces his tax liabilities by taking
advantage of the loop holes and ambiguities in the legal provisions.
Since it is not illegal, tax avoidance is some sort of a legally
allowable way to reduce the tax burden. It is not completely defined
under Income Tax Act 1961.

Characteristics of Tax Avoidance:

Tax Avoidance is a way of reducing the taxes through the medium
provided by government but before moving towards those ways, it is
important to analyze tax avoidance from depth. Here are the
following features for tax avoidance:

1. Tax Avoidance involves the legal exploitation of tax laws to one’s

own advantages.
2. Every attempt by legal means to prevent or reduce tax liability which
would otherwise be incurred, by taking advantage of some provisions
or lack of provisions in the statutes of the country.
3. An arrangement entered into solely by or primarily for the
purpose of obtaining a tax advantages.

Perception of Court’s on Tax Avoidance

Role of judiciary on the concept of Tax Avoidance can be traced
back on the judgment which was pronounced by Justice Chinnapa
Reddy’s in the Mcdowell’s Case[. This case defines the distinction
between the term tax avoidance and tax evasion in a crisp manner,
it defines Tax Avoidance as “the art of dodging tax without breaking
the law”. The inception of Tax Avoidance can be traced back from
England as in the case of IRC v. Duke of Westminster[ , Lord
Tomlin said “Every Man is entitled, if he can, to order his affairs, so
that the tax attaching under the appropriate Acts, is less than it
otherwise would be. If he succeeds in ordering them so as to secure
this result, then, however unappreciative the commissioners of
Inland Revenue or his fellow tax gatherers may be of his ingenuity,
He cannot be compelled to pay an increased amount of tax.”

Tax Evasion
Tax evasion is a crime in which an individual or a business entity
intentionally underpays or hide their certain amount of income in order
to save more amount of taxes. This method is certainly illegal in all
the countries. Tax Evasion is basically non-payment of taxes by
means of not reporting all taxable income, or by taking not
allowed deductions. It originated in England between 1920 -1925.
♠ Activities relating to Tax Evasion

1. Under reporting income.

2. Inflating deductions or expenses.
3. Hiding Money.
4. Hiding interest in offshore accounts.
♠ Perception of Judiciary on Tax Evasion.

There are several cases relating to evasion of taxes. Some of the

evasion of tax are like in the case of Union of India v. Playworld
Electronics Pvt. Ltd. & endash the court declared that “It is the
obligation of every citizen to pay the taxes honestly without resorting
to subterfuges”. In the case of Calcutta Chromotype Ltd. V.
Collector of C. Ex., Calcutta & endash , the Hon’ble SC observed
“Colourable devices, however, cannot be part of tax planning.
Dubious methods resorting to artifice or subterfuge to avoid
payment of taxes on what really is income can today no longer be
applauded and legitimated as a splendid work by a wise man but
has to be condemned and punished with severest of penalties.”
Difference between Tax Avoidance and Tax Evasion

S.No. Tax Avoidance Tax Evasion

1. Payment of tax is Payment of tax is avoided

avoided though by through illegal means or
complying with the fraud.
provisions of law but
defeating the intention of
law.

2. It is undertaken by taking It is undertaken by

advantage of loop holes employing unfair means.
in law.

3. It is not performed It is performed through

through malafide unlawful way of paying
intention but by taxes and defaulter may
complying through the get punishment.
provision of law.

It is concluded from the above discussion that Tax Avoidance and

Tax Evasion are those concepts which enables a person to avoid
liability on his income tax charged. One concept is completely legal
as provided under Income Tax Act 1961 and another is a complete
illegal. For the purpose of Tax Avoidance, Government has
provided various ways in which a person can legally restrain tax on
his income whereas on the other hand Government has given
various penalties on the concept of Tax Evasion.

Techniques of corporate tax planning

1. Choice of Entity
The Tax Cut and Jobs Act slashes the corporate tax rate from 35
percent to 21 percent. This means that many business owners
whose companies are currently set up as pass-through entities (i.e.
S corporations, partnerships or LLCs) or sole proprietorships might
want to consider converting to a C corporation.

Under the Tax Cut and Jobs Act, income from pass-through entities
and sole proprietorships are subject to tax at the owner’s higher
individual tax rates (up to 37 percent). On the other hand, the same
income in a C corporation would only be subject to tax at 21
percent.

In the case of a C corporation, however, there will be a second level

of tax once the earnings are actually distributed to the owners
because these distributions are considered dividends. Therefore,
this strategy would make the most sense for businesses that
continually reinvest their earnings instead of paying them out to the
owners.

2. Pass-through Entity Deduction

Section 199A of the Tax Cut and Jobs Act allows the owners of
pass-through entities a 20 percent deduction for the qualified
business income (QBI) generated by their business, provided that
they meet certain requirements.

In order to meet the definition of a “qualified business,” you cannot

be in certain service-based industries, such as law, medicine and
accounting. Taxpayers whose income is below certain thresholds
are entitled to claim this deduction without being subject to any
limitations, even if they are in one of the aforementioned service-
based industries. However, the 20 percent deduction for those
taxpayers whose income is above these thresholds is subject to a few
limitations.

One such limitation is based on wages paid by the business. There

are significant planning opportunities here, especially for businesses
that use independent contractors instead of employees, and thus have
no wages. Changing your business model to convert these
contractors to employees to generate wages could open the door to
claiming the 20 percent deduction.

If it isn’t practical for you to “create” wages in the business, there is

another limitation based on the original cost of depreciable property
that you own and use in the business. Again, depending upon the
industry, there may be planning opportunities for acquiring new
depreciable property which could allow for the 20 percent deduction.

3. Expanded Section 179 Expensing

Generally speaking, the cost of fixed assets purchased for use in a
trade or business must be recovered over the asset’s useful life
(through depreciation deductions). Section 179 of the U.S. tax code
now allows eligible taxpayers to immediately deduct up to
$1,000,000 of the cost of qualifying assets placed in service during
a tax year.

Prior to the passage of the Tax Cuts and Jobs Act, qualifying property
for purposes of Section 179 generally included only tangible
personal property (i.e., machinery, equipment, computers, furniture &
fixtures, etc.), as well as certain qualified real property with a class
life of fewer than 20 years.
However, the Tax Cuts and Jobs Act expanded the definition of
qualified real property to include roofs, HVAC systems, fire
protection and security systems and tangible personal property
used predominantly in furnishing lodging.

4. Overall Accounting Method

There are two main accounting methods that you can use to calculate
taxable income: the accrual method and the cash method.
Under the accrual method, taxpayers recognize income when
it is earned and recognize expenses when they are incurred
and the liability is fixed.
Under the cash method, taxpayers report income when the
cash is actually received and expenses when the cash is
actually paid.

The amount of your net taxable income can significantly vary under
the two methods, depending upon the magnitude of your accounts
receivable and accounts payable.
Prior to the Tax Cuts and Jobs Act, taxpayers involved in the
purchase, production or sale of merchandise could not use the cash
method of accounting for tax purposes. However, the Tax Cuts and
Jobs Act enabled many taxpayers—including those involved in the
purchase, production or sale of merchandise—to utilize this method.
For tax years beginning after 2017, any entity (other than a tax shelter)
whose three-year average annual gross receipts are $25 million or
less can use the cash method of accounting.

5. Business Interest Expense Limitation

Beginning in the 2018 tax year, all businesses (except those with
average annual gross receipts of $25 million or less for the last
three years) will have limits on the deductibility of their business
interest expense.
Business interest expense over 30 percent of the
business’s “adjusted taxable income” will be disallowed. Adjusted
taxable income for this purpose is defined as taxable income
computed without the deductions for interest, taxes, depreciation
and amortization—essentially EBITDA. Interest expense disallowed
under this provision will be carried forward indefinitely, available for
deduction in future years (subject to the limitation above).

Many real estate businesses that are subject to this limitation may
have some opportunities available to them. The Tax Cuts and Jobs
Act allows you to “trade” accelerated depreciation deductions,
including bonus depreciation, in exchange for having no limitations
on the deductibility of your interest expense (provided that you
make an irrevocable election).

Tax considerations in specific business situations

Based on the legal form you choose for a business or commercial

enterprise; your tax obligations will vary:
Sole Proprietorship: A sole proprietorship is a business that is
owned by one person and that has not been set up as a
corporation. For tax purposes, the income and expenses from
the business are reported on the owner’s income tax return,
and the owner pays self-employment tax. The owner may also
be responsible for excise tax, estimated tax and employment
taxes.
Partnership: A partnership is a business owned by two or more
persons or entities who have a legal right to share in the
company’s profits and losses. The partners may or may not be
employees of the business. If they are, the business must pay
employment taxes on their behalf. If they are not, they receive
the same tax treatment as sole proprietors.
For federal tax purposes, the partnership must file an
informational return that reports operational profits and losses,
and the partnership is responsible for employees’ employment
taxes and any excise taxes. The income tax that the
partnership generates “passes through” to the individual
partner’s tax return based on each partner’s share of the
business. Each individual partner is responsible for income
tax, self-employment tax and estimated tax.
C Corporation: A corporation is a separate legal entity, formed
by adhering to certain formalities, such as filing articles of
incorporation with the state, creating bylaws, exchanging
capital stock for shareholder money or property, creating a board
of directors and holding a meeting of the board of directors.
A C corporation (so named because it is formed under the
provisions of Subchapter C of the Internal Revenue Code) is
subject to what is known as “double taxation.” The company
 pays a corporate tax on its earnings. In addition, all shareholders
pay personal income tax on any dividends or distributions.
Shareholders may not deduct corporate losses.
S Corporation: An S Corporation (formed under Subchapter S
of the Internal Revenue Code) avoids the “double taxation”
imposed on C corporations. Instead, the earnings or
distributions that an S corporation shareholder receives “pass
through” to his or her personal income tax return. Subchapter
S corporation shareholders are also responsible for federal
income tax due for certain capital gains and other passive
income. Subchapter S corporations may have no more than
100 shareholders and are typically not publicly traded.

Limited Liability Company (LLC): An LLC is a legal entity with

the attributes of both a corporation and a partnership, and its
owners are referred to as members. The members of an LLC
can always elect to treat the company as a corporation for tax
purposes. However, if such an election is not made, an LLC
with only one member will be treated as a sole proprietorship,
and an LLC with more than one member will be treated as a
partnership. For tax purposes, by default, if an LLC has only
one member, it’s treated as a sole proprietorship.

Employment Taxes

Employers are responsible for making deductions for and depositing

payments for Social Security tax, Medicare tax and federal
unemployment tax. Social Security and Medicare taxes apply to all
wages for work conducted by employees in America and in some
instances for work performed outside of America. The taxes are
deducted from employees’ pay and provide retirement and medical
benefits under the Social Security system.

The Federal Unemployment Tax Act;

funds a federal and state program that provides unemployment pay
to workers who are unemployed because of lost jobs. The tax is the
employer’s responsibility and is not deducted from an employees’
pay.
Failure to pay employment taxes can have significant
consequences. Employers may be subject to a 100% penalty, and
an employer’s personal assets may be subject to seizure to satisfy
employment tax arrearages.

Make or buy decisions

A make-or-buy decision refers to an act of using cost-benefit to

make a strategic choice between manufacturing a product in-house
or purchasing from an external supplier. It arises when a producing
company faces a diminishing capacity, experiences problems with
the current suppliers, or sees changing demand.

The make-or-buy decision compares the costs and benefits that

accrue by producing a good or service internally against the costs and
benefits that result from subcontracting. For an accurate comparison
of costs and benefits, managers need to evaluate the benefits of
purchasing expertise against the benefits of developing and nurturing
the same expertise within the company.

Understanding Make-or-Buy Decisions

Managers must incorporate in-house production costs when
considering in-house production. It includes all the transaction costs
involved in creating the product or service. It can also include extra
labor needed for production, monitoring costs, storage requirements
costs, and waste product disposal costs resulting from the
production process.
Similarly, businesses must focus on both the production
and transaction costs when considering outsourcing from outside
suppliers. For example, the product’s price, sales tax charges, and
shipping costs must be factored in. Companies must also include
inventory holding costs, which comprise warehousing and handling
costs, as well as risk and ordering costs.

The make-or-buy decision is sometimes treated as a financial or

accounting decision. While it is important to conduct an accounting
assessment and settle for the low-cost approach, it is more crucial
to understand the basis of the decision.

Thus, companies must consider the strategic dimension of make-or-

buy choices because they determine the profitability of the company
and play an important role in its financial health. They can
impact corporate strategy, core competence, cost structure,
customer service, and flexibility.

Make-or-Buy Decision Triggers

A company’s decision on whether to make or buy is based on its

core competence. The production cost and quality problems are the
major triggers of a make-or-buy decision. Other factors are
managerial decisions and a company’s long-term business strategy
that dictate the current operations pattern.

Historical policy decisions may also compel a company to consider in-

sourcing or outsourcing. Businesses can use such patterns to
procure some parts of services from outside suppliers regardless of
the company’s capability. Within the framework, the trend towards
in-sourcing can be attributed to better quality control, existing idle
production capacity, or unsatisfactory performance of outside
suppliers.

In contrast, factors that may trigger a company to outsource a part

rather than produce internally include the need for multiple sourcing,
lack of internal expertise, cost reduction, the introduction of a new
product or modification of an existing product or service, and
reduced risk exposure. A company with a previous reputation for
successfully providing outsourcing services may be considered to
sustain a long-term relationship.

Make-or-Buy Decision Criteria

Setting up a standard make-or-buy process that applies to all
companies is a complicated process. It is partly due to companies’
distinct behavior patterns and the fact that businesses operate in
different business environments that are unique to each business.
However, cost accounting remains the primary dimension of the
make-or-buy decision.

Companies evaluate outsourcing to determine if the current

overhead costs can be minimized to access new resources. While
cost remains the hallmark of any business decision, other factors
such as strategic, technological, core competency, risks, and
relationships, also constitute outsourcing decisions, not to mention
factors involved in developing and introducing a new product.

For example, managers can consider research and development

(R&D), design, engineering, manufacturing, and assembly as
sources of production costs when conducting an actual cost
analysis. The competitors’ financial capabilities and technological
abilities should also be evaluated during a sourcing decision.
Companies can evade the pitfalls typical with make-or-buy
decisions when the cost is the only variable used when considering
the technological aspects.

Benefits of a Make-or-Buy Decision

A make-or-buy decision framework relates to autonomy, and a
company selects from the many advanced options to account for
various factors associated with outsourcing.

1. Lower costs and higher capital investments

One of the most notable advantages that a company enjoys when

embracing a make-or-buy decision approach is that it can lower
costs and increase capital investments, regardless of whether it
decides to make materials in-house or subcontract from an external
vendor.
2. Source of competitive advantage

A rigorous make-or-buy analysis can also act as a source of

competitive advantage. For example, a company can increase the
value it delivers to customers and shareholders from its core service
and skills. It can also stay flexible by adopting a make-or-buy decision
approach.

Such a company is better placed to weather the storm of a market

downturn. To realize the benefits, companies must consider the
internal and external environment in which they operate. In
particular, the culture in which such decisions are reached, and the
agenda of the parties involved can influence the decisions and their
implementation, as well as the sustainability of the policy.

Own or lease an asset;

Whether you need to purchase a vehicle, some computer

equipment, or a bigger warehouse to expand your business or to
operate more effectively, take the time to consider how each purchase
might impact your operating capital.

Think about whether leasing is the way forward. If you decide to

lease an asset, you won’t have to hand over a large chunk of your
business’s cash. That cash could maintain your reserves, be used
to invest in more stock, or to develop a new product or service.

Sit down and calculate the potential impact to your business’s cash
flow if you were to:
Purchase each asset outright in cash.
Lease the assets you need.
Take out a small business loan.
By making loan repayments over time, you’ll be able to pay off a
larger capital purchase that may have been impossible to afford with
cash.
Paying loan installments can also make it easier to afford the assets
your business needs without stripping it of its available funds.

Choosing to buy new or secondhand

It always pays to do your due diligence before you sign a purchase

agreement for any new business assets. For example, the cost of
machinery and equipment can vary enormously, so it’s worthwhile
comparing prices of different brands, manufacturers and suppliers.
If you know that the quality of an asset will play an integral role in your
overall business success, it’s probably a wise idea to purchase it
brand new. Just keep in mind that you might not always be able to
claim the entire amount paid as a business expense – the values of
some assets are depreciated over several years.

Buying secondhand offers a way of reducing your business expenses.

Take the time to shop around to see whether you can locate a used
item in good condition that will be reliable.

Deciding to lease or buy

When you lease an asset, you’re simply renting it for a set period of
time. The leasing company retains ownership of the asset while
your business has the exclusive use of it for the term of the lease.
A lease will typically run for anything between 24 and 60 months.
Once the agreement is entered into, both parties are obligated to
see out the term of the lease.

Throughout the course of the lease agreement, you’ll pay the lender
regular installment payments for the right to use that asset. For
accounting and bookkeeping purposes, some leases can be
classified in the same way as an asset purchase and can be
capitalised on your balance sheet.

However, purchasing your own asset can be a cheaper option in the

long run. For example, if a printer costs $5,000 and is leased to your
business at a monthly rate of $200 over 3 years, once the lease period
is up, you’ve paid $7,200 – and you don’t even own the asset.
The advantages of leasing
Leasing provides a number of benefits that can be used to attract
customers:
Payment schedules are more flexible than loan contracts.
After-tax costs are lower because tax rates are different for the
lessor and the lessee.
Leasing involves 100% financing of the price of the asset.
For an operating lease, the company will create an expense
instead of a liability, allowing the company to obtain financial
funding – often referred to as “off-balance-sheet financing”.

Disadvantages of leasing
One major disadvantage of leasing is the agency cost problem. In a
lease, the lessor will transfer all rights to the lessee for a specific
period of time, creating a moral hazard issue. Because the lessee who
controls the asset is not the owner of the asset, the lessee may not
exercise the same amount of care as if it were his/her own asset.
This separation between the asset’s ownership (lessor) and control
of the asset (lessee) is referred to as the agency cost of leasing. This
is an important concept in lease accounting.

Important questions to consider

Before deciding whether to buy or lease, it’s prudent to take a few
important factors into account, such as:
How long will you need the asset for? Is it for a short-term
project?
Is it cost effective? Will the extra business you make cover the
expense of leasing or purchasing?
Will the asset become outdated in the near future? For
example, signing a five year lease on a computer that will
become obsolete in three years doesn’t make much sense.
What are your current financial priorities? Are there other
purchases that should be made first?

Upgrades and maintenance costs

In cases where technology is changing rapidly, you might prefer to

lease the asset your business needs instead of buying it. There are
also options where the lease agreement can include upgrading the
asset to a newer model once the agreement expires.
Likewise, some lease agreements may also include maintenance and
servicing costs. By leasing some assets, you could avoid paying
any upkeep costs associated with them, saving your business
money over the long term.
It’s important to look closely at any lease agreement before you sign
it. You may find that some agreements:
Give you the opportunity to purchase the asset at a reduced
cost when the lease expires.
Allow you to exchange the asset and upgrade to a newer
model when the lease expires – as long as you enter into a
new agreement at the same time.
Always be sure that you understand the terms of an agreement
before you sign it. It’s also smart to run a cost comparison and a
cash flow analysis between leasing an asset and buying one with
funds from a small business loan.
Ways to fund your asset purchase
There are always different options available for funding your
business’s asset purchases, including:
Outlaying cash or capital you have within your business.
Using a small business loan.
Employing a revolving line of credit.
Entering into a lease agreement to help fund the acquisition.

Renewal or replacement of asset

The main tax consideration which one has to keep in mind is

whether expenditure on repair, replacement or renewal is deductible
as revenue expenditure u/s 30,31, or 37(1). It the expenditure is
deductible as revenue expenditure under these sections, then cost
of financing such expenditure is reduced to the extent of tax save.
On the other hand if such expenditure is not allowed as deduction
u/s 30,31 or 37(1) then it may be capitalized and on the amount so
capitalized depreciation is available if certain conditions are
satisfied.
(B) Difference Between Revenue and Capital Expenditure

Revenue Expenditure
Capital Expenditure
Cost of acquisition andPurchase price of a current asset for
installment charges of a fixedresale or manufacture is a revenue
asset is a capital expenditure. expenditure.
Expenditure incurred to freeExpenditure incurred to free oneself
oneself from a capital liability from a revenue liability is a revenue
is a capital expenditure. expenditure.
Expenditure incurred towards

acquisition of a source ofExpenditure incurred towards an

income is a capitalincome is a revenue expenditure.
expenditure.
Expenditure incurred to
Expenditure incurred to maintain the
increase the operating
fixed assets is a revenue
capacity of fixed assets is
expenditure
capital expenditure.

Expenditure incurred forExpenditure incurred towards raising

obtaining capital by issue ofloans or issue of debentures is a
shares is a capital expenditure revenue expenditure.

“Repair” implies the existence of a thing has malfunctioned

and can be set right by effecting repairs which may involve
replacement of some parts, thereby making the thing as efficient as
it was before or close to it as possible. After repair the thing to which
the repair was carried out continues to be available for use.
Replacement is different from repair.

“Replacement” implies the removal or discarding of the things that

was in use, by a different or new thing capable of performing the
same function with the same or greater efficiency. The replacement
of a section in a series of machines which are interconnected , in a
segment of the production process which together form an
integrated whole may in some circumstances , be regarded as
amounting to repair when without such replacement that unit in that
segment will not function. That logic cannot be extended to the
entire manufacturing facility from the stage of Raw Material to the
delivery of the final finished product.

“Current Repair” implies the expenditure must have been incurred

to ‘preserve and maintain’ an already existing asset and the object
of the expenditure must not be to bring a new asset into existence
of for obtaining a new advantage.
Shifting of Administrative Office :
Expenditure incurred for shifting the administrative office from one
city to another city as a result of amalgamation of three companies
having a number of activities in various centers is allowable as
Revenue Expenditure.
Shifting of Head Office from one place to another is Capital
Expenditure :
Where the assessee-company shifted its head office from one place
to another place after it Board of Directors resolved that it would be
commercially prudent to centralized the Registered Office of the
company in one place, in connection with the shifting , it incurred huge
expenses including a certain payment made to the lawyers, the
expenses incurred on this account could not be on revenue account.
Expenditure of shifting of employees is Revenue Expenditure :
Expenditure incurred by assessee on shifting of employees to another
place consequent on shifting of factory to another site due to labour
unrest was allowable as Revenue Expenditure.
Decoration of reception / dining halls in Hotels is revenue
expenditure :
Expenses incurred in putting up decorative mirrors in the wall,
plaster molded roof, plywood panels, etc. in reception-cum dinning
halls of a Hotel, in order to deep the place fir and attract customers,
is deductible as revenue expenditure.
Expenditure on renovation an modernization of Hotel Premises
is Revenue Expenditure :
Expenditure incurred solely for repairs and modernizing the Hotel
and replacing the existing components of the building, furniture, and
fittings, with a view to create a conductive and beautiful
atmosphere for the purpose of running of a business of a Hotel , will
fall under the category of Revenue Expenditure only, and is hence
deductible.
Expenditure on Wall to Wall Carpet for office is capital
expenditure :
Expenditure on purchase of wall-to-wall carpet, for being used in the
office, has nothing to do with the augmenting, preserving or protecting
the turnover or profits of the business and hence it is in the nature
of capital expenditure.
Repairs to building can be capital or revenue, depending on
nature of change brought about :
So long as the repair does not bring into existence an additional
advantages or benefit of an enduring nature or change the nature,
character or the identity of the building itself, the expenditure must
be regarded as a revenue expenditure. On the other hand, if it does,
it will be in the nature of a Capital Expenditure.
Replacement of Assets as a whole is not ‘Repair’ :
Where substantial repairs are carried out in order to put to use an
existing asset, the same could be termed as Revenue Expenditure.
But where there is replacement ‘As a Whole’ , it amounts to
reconstruction and not repairs. It is pertinent that the asset in its old
form must continue to exist to say that the expenditure involved in
improving the assets is Revenue Expenditure. Where effacement
takes place and a new asset comes into being, then expenditure
involved would become a Capital Expenditure.
Repairs for converting Godown into Administrative Office :
Where the assessee incurred expenditure on repairs to a godown
used for business purpose so as to convert it into an Administrative
Office, the expenditure was allowable as revenue expenditure, since
the business asset has retained its character and only its use had
changed, and the use at both points of time, i.e. before and after the
expenditure was incurred, related to the business of the assessee
without there being any addition to or expansion of the profit-making
apparatus of the assessee.
Remodeling of furniture in retail outlet is revenue expenditure :
The expenditure incurred by the assessee company towards the
remodeling of furniture in its various retails depots which was
necessitated by changes in design, was deductible as revenue
expenditure.
Repair and replacement of false ceiling in cinema building is
revenue expenditure :

Expenditure on repair and replacement of false ceiling in cinema

building owned by the assessee was allowable as revenue
expenditure, since it was incurred for keeping the business running.
Replacement of electric wiring in cinema building is revenue
expenditure, since it was incurred for keeping the business running.

Shut down or continue operations

The survival of a organization depends up on the efficiency of its

management. Whatever decisions taken by the management
directly or indirectly affects all activities of an Organization.
Therefore, through this article, wants to simplify implications of
Income Tax provisions on managerial decisions
The general considerations which area applicable in the case of
Managerial decisions are
a. Expenses allowed as deduction
b. Year in which it is allowable
c. To what extend it is allowed
d. To what extend it can be carried forward

Following are the special cases

I. Shut down or continue operations
Sometime business is forced to shut down due to the following
reasons–
a. Fall in demand
b. financial problems
c. Change in technology
d. High rate of taxation
e. Mismanagement
f. Pressure of commercial banks

Tax provisions
Following are the important points which are to be considered by an
assesse while taking Shut down and continue decisions
1. Treatment of losses and unabsorbed depreciation
A. Business Loss.
If the business or profession has been discontinued loss, can be
carried forward and set-off against profits and gains of business or
profession.
B. Unabsorbed depreciation
i. It can be set off against income under any head
ii. Can be carried forward and off for indefinite period, whether
business is carried on or discontinued.
2. If a part of a business is discontinued in the previous year, it
cannot be regarded as discontinuation of business in the previous
year.
3. The loss can be set-off by the same person who has suffered the
loss.
a. The assesse is entitled to the set-off of his loss carried forward from
the previous year against the income of wife and minor child included
in his income
b. loss by amalgamating companies cannot be se-off by the
amalgamated company except as per Sec 72 A
c. loss suffered by the HUF in its business cannot be set-off by the
members after partition of the family
d. When a partner dies or retires,his share of loss cannot be set-off
and carried forward by the reconstituted firm
4. Withdrawal of certain deductions.
The following deductions will be withdrawn and liable to tax in the
year in which business is discontinued
a. Deduction under Section 33AB—-Tea Development Account
/Coffee Development Account.
b. Deduction under Section 115VT—Reserve for Shipping
Business.
5. Deemed Income
If the assets used for scientific research and Family Planning are
sold, the selling price to the extent of deduction claimed shall be
deemed as profits of the previous year in which such assets are
sold.
6. Sale of depreciable assets
At the time of sale, there may be short –term capital gain or Short-
term capital loss
If Net Consideration >W.D.V, Then short –term capital gain.
Otherwise Short-term capital loss.
Short –term capital gain is taxable. Short-term capital loss can be
set –off against capital gains only
7. Sale of other assets
In the case of other assets , there may be long-term capital gain or
short –term capital gain or long-term capital loss or short –term capital
loss .

II.. Retain, Replacement ,Renewal of Asset

Replacement expenditure is capital expenditure—- .It is not
deductible
Repair and replacement of false ceiling in cinema building is
revenue expenditure.
Expenditure in repairs to car damaged during riots is deductible

Renewal
Sometimes capital expenditure and sometimes revenue
expenditure.
Capital expenditure—-when capacity is increased due to renewal.
Revenue expenditure –capacity is not increased .Expenses incurred
to get capacity of asset back.
Routine Repair expenses are allowed as deduction.

III. Own or lease.

Following calculations are to be made
Calculation of present value of post -tax cash outflows in case of
borrowing
A. Cash out flows =loan repayment+ interest on loan.
B. Since both depreciation and interest on loan are tax deductible
while calculating business income, therefore there will be tax
savings in payment of income tax
Tax savings= (interest+ depreciation) × P.V.Factor×Tax rate
applicable to buyer
c. Post tax cash out flows A-B
d. Post Tax Cash flows ×Present value factor
II. Calculation of present value of post -tax cash outflows in case of
lease
A. Cash outflows =Annual lease rent +other charges
B. Tax savings=A× Tax rate applicable to Lessee.
C. Post Tax Cash flows=A-B
D. Post Tax Cash flows ×Present value factor
Should select the option which shows lesser present value of cash
outflows

IV. Tax Planning With respect to make or buy.

Following are the important points you have to be considered with
this respect
You have to consider many costing considerations. You may decide
it on the basis of marginal cost .
Basically, the decision to make or buy is a costing decision and is
influenced by many factors are as follows
I. Availability of factors
II. Investment required in fixed assets
III. Availability of skilled and unskilled labour
IV. Availability of suppliers
V. Existence of idle capacity in organization
With due considerations to above factors ,marginal costing and
differential costing techniques of cost accounting help a lot in reaching
at any conclusion

Tax considerations
Buy decision in a surplus capacity condition forced to sell an asset
and attract capital gain tax If a new industrial undertaking is
established to make the product, the following
deductions are to be considered
a. Tax holiday-sec 10AA
b. Deductions U/S
I.80 IAC
II. 80IBA
III. 80ID
IV. 80IA
V. 80IB
VI. 80IC
VII. 80IE
If the product is a consumable one, raw material is required to replace
a worn out part at the time of repair, its cost will be treated as revenue
expense and deductible in computing the income

V. Sale of Assets used for Scientific Research

Following are the important points related with Sale of Assets used
for Scientific Research
1. Selling the asset without using it for business purposes
There may be Two Incomes
a. Business Income—Cost of asset or Selling Price whichever is
less is deemed business income u/s 41(3)
b. Long-term Capital gain/loss=Selling Price—-Indexed cost of
acquisition or Shot term capital gain or loss
c. Selling the asset after using it for business purposes
Then there will be no deemed business income u/s 41(3).The entire
selling price should be the short-term capital gain

VI. Tax planning with respect to expand or contract of business

A. Expansion without business Restructuring mechanism
Following are the tax incentives available to the business /business
house
I. Additional depreciation of new plant and machinery
II. Deduction for preliminary expenses u/s sec 35 D
III. Deduction in respect of employment of new workmen u/s
80JJAA
IV. Section 80 I Deductions (Sec 80IA, Sec 80IAB,Sec IAC. Sec
80IB,Sec 80IBA,Sec 80IC,Sec 80ID,Sec 80IE)

B. Expansion through business Restructuring mechanism

These business restructuring practices can be discussed under the
following headings
B1. Amalgamation of Companies
B2. Corporatisation of an existing non corporate business
B1. Tax issues relating to Amalgamation of Companies

CONDITIONS
If the following conditions are satisfied, then we may call it as
Amalgamation of Companies as per Sec 2(IB) OF Income Tax Act
1961
1. All the properties of the Amalgamating Company become the
properties of the Amalgamated Company
2. All the liabilities of the Amalgamating Company become the
liabilities of the Amalgamated Company
3. 3/4 of the Shareholders of the Amalgamating Company become
the shareholders of the Amalgamated Company

From the point of view of Amalgamating Company

1. Proportionate depreciation can be claimed on transferred assets
2. No capital Gain Tax on transfer of Capital Assets to Indian
Company
3. No capital Gain Tax on transfer of shares held in Indian Company
by the amalgamating Foreign Company to a foreign amalgamated
Company

From the point of view of Shareholders of Amalgamating

Company
1. Surrender of shares of Amalgamating Company against the
receipt of shares of amalgamated Company does not attract
capital gain tax. On Subsequent sales of these shares definitely
attract capital gain tax.
Following terms are to be understood at this juncture
1. Cost of Acquistion of shares of Amalgamating Company Will be the
Cost of Acquistion of shares of amalgamated Company
2. Holding period is to be calculated by taking into consideration the
date of acquisition of shares of Amalgamating Company

From the point of view of Amalgamated Company

1. Assets transferred (block of assets) from amalgamating company
to be included in the block of assets of amalgamated Company At
WDV at the beginning of the in the hands of the Amalgamated
Company.
2. Proportionate depreciation can be claimed on transferred assets
3. Brought forward business loss and unabsorbed depreciation of
amalgamating can be enjoyed by the amalgamated company
subject to conditions u/s 72A.

Condition u/s 72A.

A. The amalgamating company has been engaged in the business
in which the accumulated loss occurred or depreciation remains
unabsorbed for last three years or more
B. The amalgamating Company has held continuously as on the
date of amalgamation at least 3/4 of the book value of fixed assets
held by it two years prior to the date of amalgamation
C. The amalgamated company continues the business of the
amalgamating company for at least five years etc
4. Unabsorbed Scientific Research Expenditure as per Sec 35– Can
be carried forward .
5. Unamortized Capital expenditure on Telecommunication Licence
can be written off by the Amalgamated Company—- (Sec 35 ABB)
6. The deduction under section 35 AD shall continue to be available
to the Amalgamated Company for remaining number of years.
7. Amortization of expenditure in case of amalgamation is allowed
for 20 percent per annum for next five years (Sec 35DD)
8. Sec 35 DDA —-amortization of VRS Expenditure –The remaining
period can be enjoyed by the amalgamated company
9. Sec 35E Amortization of expenditure on prospecting etc for
development of certain minerals – The remaining period can be
enjoyed by the amalgamated company
10. Sec 36(1) (ix) —Capital Expenditure on Family Planning – The
remaining period can be enjoyed by the amalgamated company
11. Sec 10AA-SEZ– The remaining period can be enjoyed by the
amalgamated company
12. sec 80 I Deductions— The remaining period can be enjoyed by
the amalgamated company

Tax planning for contraction of business

A. Contraction of business without business restructuring
mechanism
No tax incentives is available
B. Contraction through business restructuring mechanism
I. DEMERGER
II. Slump sale

Demerger
It means ,in relation to the companies ,means the transfer ,pursuant
to a scheme of arrangement under the companies act ,by a
demerged company of its one or more undertakings to any resultant
company

TAX INCENTIVES
From the point of view of demerged company
1. Benefit of deduction u/s 32 AD shall not be withdrawn
2. No capital Gain Tax on transfer of Capital Assets to Indian
Company
3. No capital Gain Tax on transfer of shares held in Indian Company
by the demerged Foreign Company to the resulting foreign
Company

From the point of view of Shareholders of Demerged Company

1. Beneficial provision regarding counting of period of holding of
new shares
2. Calculation of cost of shares of the resulting company (Sec 49(2)
C).
The cost of acquisition of shares of resulting company as a result of
demerger shall be:
Cost of acquisition of shares held by the assesse in the demerged
Company×
Net Book value of assets transferred÷ Net worth of demerged
company before demerger
3. Calculation of cost of shares held in demerged company(Sec
49(2D) The cost of acquisition of original shares held by the
shareholder in the demerged company shall be deemed to have been
reduced by the amount as so arrived at under sec 49(2C)

From the point of view of Resultant Company

1. proportionate depreciation can be claimed on transferred assets
2. Brought forward business loss and unabsorbed depreciation
directly relatable to the undertaking transferred by the demerged
company to the resulting company shall be allowed to be carried
forward and set-off in the hands of resulting company

3. Unamortized Capital expenditure on Tele Communication

Licence can be written off by the resulting company—- (Sec 35
ABB)

4. Amortization of expenditure in case of Demerger is allowed for 20

percent per annum for next five years (Sec 35DD)
5. Sec 35 DDA amortization of VRS Expenditure –The remaining
period can be enjoyed by the resultant company

6. Sec 35E Amortization of expenditure on prospecting etc for

development of certain minerals – The remaining period can be
enjoyed by the resultant company
7. Sec 36 (1) (ix) Capital Expenditure on Family Planning – The
remaining period can be enjoyed by the resultant company

8. Sec 80 I Deductions— The remaining period can be enjoyed by

the amalgamated company
What is Deduction and collection of tax at source;
Advance payment of tax; E-filing of income-tax
returns ?

Deduction and collection of tax at source; Advance payment of

tax; E-filing of income-tax returns

Deduction and collection of tax at source

Tax Deducted at Source – Concept
According to the Income Tax Act, 1961, policies and regulations
related to tax deducted at source (TDS) are managed by CBDT
(Central Board of Direct Taxes). A person who is liable to deduct the
tax is called “deductor” and the person from whose account the
relevant TDS is deducted is called “deductee”.

As per the working mechanism of TDS, the deductor deducts the

tax at the time of making payment (if it is above a predefined limit)
and forward the same to the government on behalf of the deductee.
It is the deductor’s duty to pay the tax deducted at source to the
government within a prescribed time limit. The deductor after filing
returns, issues a TDS certificate to the deductee.
Types of TDS
UPDATE: 2 new sections (194K & 194-O) have been inserted in
Income Tax Act by FM Nirmala Sitharaman in Union Budget 2020.
Section 194K has introduced TDS on dividend income from
shares and mutual fund units by putting an end to Dividend
Distribution Tax (DDT). Further section 194-O has introduced TDS
at 1% for sale of goods and services by an e-commerce
participant facilitated by an e-commerce operator.
Below mentioned ar some of the sources of income that fall
under the purview of tax deducted at source (TDS):

Salary – Payment from employer to employee

Interest on securities
Interest excluding interest on securities
Prize money from winning games like a crossword puzzle,
card, lottery, etc.
Contractor payments
Insurance Commission
LIC maturity amount
Brokerage or commission
Transfer of immovable property
Compensation on acquiring immovable property
Payment of rent
Commission payments
Interest on bank deposits
Remuneration paid to director of the company, etc.

Points to Remember Before Deducting TDS

Section 192 to 194L of Income Tax Act can be referred for the
complete list of expenses and sources of income under TDS.
 If an individual does not fall under income tax slab, he or she
can furnish Form 15G or Form 15H to the deductor as a
declaration in advance for non-deduction of tax at source.
Form 15H is for senior citizens.
Form 15G is for all other individuals.
TDS is applicable to each type of income beyond a certain
limit.
TDS is deducted as per the income tax slab rate for salaried
individuals.
For other deductees, TDS is deducted at the specified
percentage for each income type.

*TDS is deducted at the rate of 2% for deductees other than

individuals and HUFs.
TDS is not applicable in the following cases:
When the amount is paid to government or any government
body and Reserve Bank of India.
Amount is paid to notified mutual funds under Section 10(23D).
When deductee has certificate of no-deduction under Section
192 of the Income Tax Act.
When amount is paid to state or central financial corporations.
Interest credited or paid to :

Banks or Banking Company

Life Insurance Corporation, Unit Trust of India or any other
insurance company
National Savings Certificate
Kisan Vikas Patra
Non Resident External Account
Banking Co-operative society
 Savings account and Recurring deposits of banks and co-
operative society
Notified body for non-deduction of tax

Advantages of Tax deducted at source (TDS)

It helps to prevent tax evasion.
As TDS deductions take place throughout the financial year,
it’s an effective mode of revenue inflow to the government.
It widens the tax collection base.
It is a way to share the responsibility of tax collection between
the government and the deductors.

TDS Certificates
As per Section 203 of Income Tax Act, everyone who deducts tax at
source is required to furnish a certificate to the respective deductee
specifying the amount deducted as tax, along with all the other
particulars. Such certificates are called TDS certificates.
In case of Salary Incom
The employer has to provide Form 16 to his employee
specifying the amount of tax deducted at source.
The form has all the particulars related to computation,
deduction and payment of tax.

For non-salaried cases

Form 16A is given by the deductor mentioning all details
of tax computation, deduction and payments.
The certificate needs to be issued to the deductee within
15 days of due date of filing TDS return.
 TCS Certificate (Tax Collected at Source): A certificate
that contains the amount of TDS collected and deposited
with the tax department. It is issued via Form 27D.

Depositing TDS to Central Government

The deductor needs to deposit the TDS to central
government by making a payment through NSDL using
physical form that can be processed in authorized bank
branches.

The payment can be made online through the official

portal of NSDL using Challan 281 and by routing the
payments through net banking.

The amount deducted as tax needs to be deposited

before filing the TDS return.
The e-payment is compulsory for all assesses who are
liable for audit under Section 44AB.

TDS Payment Due Dates

Monthly due date for payment of TDS is as below:
MonthDue date

April On or before 7th May

May On or before 7th June

June On or before 7th July

July On or before 7th August

Aug On or before 7th September

 Sept On or before 7th October
Oct On or before 7th November

Nov On or before 7th December

Dec On or before 7th January

Jan On or before 7th February

Feb On or before 7th March

On or before 7th April for government

deductors
Mar
On or before 30th April for non-government
deductors
TDS Return Filing Due Dates
The due dates for quarterly filing of TDS returns are as follows:
Quarter Quarter Period Due date to file TDS return

1st Quarter April to June On 31st July of the same FY

2nd Quarter July to September On 31st Oct of the same FY

3rd Quarter October to December On 31st Jan of the same FY

4th Quarter January to March On 31st May of the next FY

Penalties Associated With TDS Deduction

The deductor has to pay penalty, if the TDS deduction and payment
deadlines are breached.
For non-deduction of TDS
If a deductor/collector fails to collect the tax at source, whole of such
expenses can be disallowed from computation of total profits by the
income tax assessing officer.

For late-deduction of TDS

In case the tax at source is deducted after a day or few days of making
the payment of income, then simple interest at the rate of
1% per month on the amount of tax deducted at source will be
levied.

For late-payment of TDS

As mentioned above, there is a monthly due date for depositing the
TDS so collected to the government. If deductors fail to do so, they
have to pay simple interest on the amount deducted as tax at the
rate of 1.5% per month.

For late-filing of TDS Returns

If the deductor fails to furnish the TDS return on or before specified
due date, he shall be liable to pay a penalty of ₹ 200 per day till the
date of default. Please note that the total amount of such penalty
cannot exceed the total amount of tax deducted at source.
For non-filing of TDS Returns
If the deductor fails to file TDS return within the due date, then the
assessing officer may charge a penalty ranging from ₹ 10000 to ₹ 1
lakh.

Important Points to Remember

Everyone who is deducting TDS needs to have TAN (Tax
deduction and collection Account Number) as per the
provisions of Section 203 A of the Income Tax Act.
 TAN is a mandatory requirement for filing of TDS returns.
Moreover, it should be mentioned on the tax deduction
certificate issued.
TDS deductions are linked to your PAN (Permanent
Account Number). Thus, it is essential to have PAN
details of the deductee to deduct tax at source.
Every deductee needs to present the TDS certificate to
adjust the amount of tax deducted against the total tax
payable.
TDS details can be checked through Tax credit Form
26AS which is available to all PAN holders.
This consolidated tax statement gives you the clear
details of TDS deducted on various types of payments.

Advance Income Tax Payment

Advance tax refers to the tax to be deposited by a taxpayer with

the income tax department during the year without waiting for the
end of the year. This is to ensure that the government is able to collect
taxes more uniformly throughout the year.
While the government collects tax at source by mandatorily applying
TDS, in some cases a person's income, though taxable, does not
attract full TDS and hence, the person can claim an Income tax
refund. Conversely, in some cases, TDS deducted may be less
than the total tax liability for the year. In all such cases, the advance
tax has to be deposited.

Advance Tax Payment Criteria

If your total tax liability (after adjusting for TDS) exceeds ₹ 10,000
(Rupees Ten Thousand) in a financial year, then you must pay
advance tax. Advance tax applies to all tax payers including
salaried, freelancers, professionals and senior citizens. However,
senior citizens who are above 60 years of age and do not run a
business are exempted from paying advance tax. While calculating
the advance tax, you need to include income from all sources for
the current year under various income heads. Some of the common
exceptions for payment of advance tax are:
Senior citizens (above the age of 60 years) who are not
running any business are exempt from paying advance tax.
Salaried individuals under TDS net, are not required to pay
advance tax on income from salary. However, they may still
need to pay advance tax on income from other sources such
as interest, capital gains, rent and other non salary income.
If the TDS deducted is more than tax payable for the year, one
is exempted from paying advance tax.

Calculate advance tax

First of all, you need to estimate your income earned for the
year. Note that the advance tax calculation is based on an
estimate of income. The various heads of income that should
be taken into account are: interest income, capital gains,
professional income, rent, income of minors whose income is
clubbed with that of the taxpayer and any other income that is
likely to accrue during the year.
Now, add the salary income to the above income to determine
the gross taxable income. Note that while advance tax is not
payable on salary, the sum total of salary and income from
other sources may change the applicable tax slab and result in
additional tax liability.

.
 The next step is to subtract TDS that is already deducted or is
likely to get deducted as per TDS slabs applicable for various
types of income.
In case the tax liability after deducting TDS is more than ₹
10,000, you must pay advance tax.
Advance tax calculator is available online on Income Tax
Department website. You can fill all the required details and
know the amount you have to pay as advance income tax.
Note that sometimes, you may not be able to estimate the
expected income correctly and at the end of the year, may find
the income to be more than what you had expected. In such a
scenario, in case you did not pay the full advance tax on time,
you may be required to pay interest and penalty for no
payment of advance tax. Hence, it is prudent to estimate the
income carefully and pay slightly higher advance tax than what
may be due. You can claim credit for the same in your ITR and
get refund of the same.

Advance Tax Payment Due Dates for AY 2020-21

It is important to pay advance tax on or before the due dates to
avoid paying interest and penalty at the time of filing annual return
of income. Advance tax due dates for self employed, businessman
and corporate taxpayers for FY 2019-20, AY 2020-21 are as
follows:

Advance Tax Due Dates Advance Tax Installment Amount

On or before 15th June Not less than 15% of advance tax

liability

.
Advance Tax Due Dates Advance Tax Installment Amount

On or before 15th Not less than 45% of advance tax

September liability

On or before 15th Not less than 75% of advance tax

December liability

On or before 15th March 100% of advance tax liability

Advance Tax Payment Online

Now you can pay advance tax online by using Challan ITNS
280 and selecting "Type of Payment" as "(100) Advance Tax". The
challan is available online on income tax department website
https://onlineservices.tin.egov-nsdl.com/etaxnew/tdsnontds.jsp.
Payment can be made using netbanking facility of major banks in
India. Advance tax challan is generated instantly and is identified by
3 unique fields –
(1) BSR code of the bank branch,
(2) Date of payment and
(3) serial number. Keep a copy of the challan with you and check
that it reflects correctly in the Form 26AS available on income tax
website. You can claim credit for the advance tax paid at the time of
filing your ITR after the end of the year.

Penalty for non-payment of advanced tax

Interest under section 234B:- If you fail to pay advance tax or the
tax paid by you is less than 90% of the assessed tax, then you will
be liable to pay simple interest at 1% every month. In case no
advanced tax is paid, interest will be calculated on the amount
which is equal to the tax levied, or else it will calculated on the amount
by which advance tax paid falls short of assessed tax.

Penalty under section 234C:- In case if you don't pay your due
advance tax installment in time then you will be charged a simple
interest of 1% for the next 3 months on the amount of shortfall as a
penalty. The penalty is purely due to the delay in paying the due
advance tax.

advance tax is paid more than required

Sometimes it happens that the advance tax paid by you is higher
than your tax liability. In that case you will receive the excess
amount as a refund. However, if the amount is more than 10% of
tax liability, you will be entitled to get an interest at the rate of 6%
per annum from Income Tax Department.

E-Filing of Income Tax Returns

According to Section 139 (1) of the Income Tax Act, 1961 of India,
individuals whose total income during the previous year is more
than the maximum amount not chargeable to tax, should file
their ITR or income tax returns. When such individuals file their
income tax returns online, the process is known as e-filing. As a
taxpayer, you can seek professional help or file your returns
yourself by simply registering on the income tax department website
or other relevant websites. While every year the due date for filing
tax returns is July 31st, the government may offer a grace period of
15-30 days to file the returns online or physically.
Types of e-filing
Here are the different ways in which you can e-file your income tax
returns:
You can use a Digital Signature Certificate or DSC to e-file
your tax returns. It has been made mandatory to file IT forms
using Digital Signature Certificate (DSC) by a chartered
accountant.
In case you want to e-file your tax returns without DSC, an ITR
V form is generated which should then be printed, duly signed
and submitted to CPC, Bangalore. This document must be
sent by ordinary post or speed post within 120 days from the
date of e-filing.
As a taxpayer, you can also e-file IT returns through an E-
return Intermediary (ERI), with or without DSC.

Parties who file income tax

Filing tax returns online is a simple and process and can be done by
most assessees.
Assessee with a cumulative income of Rs. 5 Lakhs and above.
Individual/HUF resident with assets located outside India.
An assessee as to provide returns under section 139 (4B) (ITR
7).
Assessee needs to provide a notice under Section 11(2) (a) to
the assessing officer
An assessee required to furnish a report of audit specified
under sections 10(23C) (IV), 10(23C) (v), 10(23C) (VI),
10(23C) (via), 10A, 12A (1) (b), 44AB, 80IA, 80IB, 80IC, 80ID,
80JJAA, 80LA, 92E or 115JB of the Act.
A firm that does not fall under the provisions of section 44AB),
AOP, BOI, Local Authority (ITR 5), Artificial Juridical Person or
Cooperative Society.
 A person who claims relief under sections 90 or 90A or
deductions under section 91.
A person who is a resident and has the signing authority in any
account, which is located outside India.
All companies.
Checklist for e-filing income tax returns
When filing income tax returns online, you might get confused
while deciding which form to submit. Hence, the various
categories of Income Tax Return forms and their relevance for
parties have been tabulated below.

ITR 1
Individuals with income from salary and interest
(Sahaj)

Individuals with Hindu Undivided Families not

ITR 2
having income from business or profession

Individuals/HUFs being partners in firms and not

ITR 3 carrying out business or profession under any
proprietorship

Individuals and HUFs having income from a

ITR 4
proprietary business or profession
ITR 4S Individuals/HUF having income from presumptive
(Sugam) business

ITR 5 Firms, AOPs, BOIs and LLP

Companies other than companies claiming

ITR 6
exemption under section 11

Individuals including companies required to

ITR 7 furnish return under section 139(4A) or section
139(4B) or section 139(4C) or section 139(4D)