Tax

TAX PLANNING and ESTATE PLANNING \"Approved courseware for the Certified Financial Planner CM certification education programme in India\" Published by 'International College of Financial Planning Ltd.'

Tax Planning and Estate Planning This course provides a comprehensive examination of the entire financial planning process, along with an overview of Introduction to Financial Planning Risk Analysis and Insurance Planning Investment planning Retirement Planning and Employee Benefits The course introduces methods of gathering client data and teaches students how to work with clients to set goals. “Every effort has been made to avoid any errors or omission in this book. In spite of this errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice, which, shall be taken care of in the next printing. It is notified that neither the publisher nor the author or seller will be responsible for any damage or loss of action to anyone of any kind, in any manner, there from. No part of this book may be reproduced or copied in any form or by any means or reproduced on any disc, tape, perforated media or other information storage device, etc. without the written permission of the publisher. Breach of this condition is liable for legal action. All disputes are subject to Delhi jurisdiction only.” ISBN 81-905887-1-3 Revised and Reprinted in 2019 Price: ₹9,000 (Inclusive of Workbook)

Tax Planning and Estate Planning Published by International College of Financial Planning Ltd. © International College of Financial Planning Limited 2002 No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form by any means, electronic, mechanical, photocopying, recording, scanning or otherwise without the prior written permission of the publisher. This subject material is issued by the International College of Financial Planning Ltd. on the understanding that: International College of Financial Planning Ltd., its directors, author(s),or any other persons involved in the preparation of this publication expressly disclaim all and any contractual, tortious, or other form of liability to any person (purchaser of this publication or not)in respect of the publication and any consequences arising from its use, including any omission made, by any person in reliance upon the whole or any part of the contents of this publication. The International College of Financial Planning Ltd. expressly disclaims all and any liability to any person in respect of anything and of the consequences of anything done or omitted to be done by any such person in reliance, whether whole or partial, upon the whole or any part of the contents of this subject material. No person should act on the basis of the material contained in the publication without considering and taking professional advice. No correspondence will be entered into in relation to this publication by the distributors, publisher, editor(s) or author(s) or any other person on their behalf or otherwise. Unless otherwise stated, copyright and all intellectual property rights in all course material(s) provided, is the property of the College. Any copying, duplication of the course material either directly and or indirectly for use other than for the purpose provided shall tantamount to infringement and shall be strongly defended and pursued, to the fullest extent permitted by law.

Module V (Exam 4) - Tax Planning and Estate Planning (TPEP) Exam 4 Topic List to the extent of 80% of Total Marks (150) i.e. 120 Marks (30 marks reserved for the Module I – Introduction to Financial Planning) Course Description: This module would cover the knowledge requirements of Indian Tax System, specifically related to Direct Taxes and personal taxation. The tax treatment of the types of income such as agricultural, business, salary and the attendant exemptions and benefits need to be discerned. The emphasis is on tax efficiency of transactions at all stages, viz. structuring of emoluments, saving taxes within permissible limits as suited to long-term goals, investing, spending, gifting and transferring wealth. The knowledge of various business forms and related tax strategies is also covered. The Estate planning is emphasized not as a late stage requirement but a necessary succession arrangement always in place for all assets – fixed, physical and financial. The discerning knowledge of tax laws and succession laws and their compliance procedures is a rigid requirement of this module. Learning Objectives: At the end of this module, a student should be able to: Understand the incidence of tax on various incomes, transactions, residency status, individual status and various business forms. Compute client’s eligibility for various tax deductions from gross salary income, tax treatment of various allowances and perquisites, income from house property and other income, tax admissible expenses from business or profession income. Compute the tax liability of a client after considering all types of income and eligible deductions, evaluating the incidence of capital gains tax on the basis of period of holding an asset, the type of asset and the status of taxpayer. Recommend tax planning strategies by discerning short-term and long-term tax incidence of investing in various financial products and the appropriateness of such financial instruments in achieving a client’s financial goals. Assimilate estate planning at all stages of a client’s life by identifying, evaluating and integrating all assets in a suitable estate planning vehicle. Help a client discern the need of a suitable succession strategy for wealth transfer, and seek/facilitate experts‟ advice, if ownership of assets is complex. Detailed Topic List: The topics are structured into five distinct sections as follows. The weights of these individual sections in relation to the Module TPEP are given along with testing objective and the nature of testing. A summary of distribution of marks is provided below:

Pattern of Question Bank TPEP module – 80% in Exam 4 Section-I Section-II Section-III Section-IV Section-V No. Marks No. Marks No. Marks No. Marks No. Marks of of of of of Items 10 Items 3 Items 3 Items 4 Items 8 1 10 3 3 4 8 Mark 24 8 2 4 2 4 2 4 2 4 Category 3 0 0 5 15 5 15 2 6 0 0 4 0 0 1 4 4 16 3 12 0 0 Total 14 18 11 26 14 38 11 26 10 12 Total Items: 60 / Total Marks – TPEP Module: 120 Total Marks – Exam 4: 150

CONTENTS SECTION–I: FEATURES OF INDIAN TAX SYSTEM AND DIRECT TAXES 1–42 1.1. Features of Indian Tax System 3-5 1.1.1. Three-tier Federal Structure of Taxation - Union Government, State Governments and Urban/Rural Local Bodies 3 1.1.2. Direct and Indirect Taxes 3 1.1.3. Predominance of Indirect Taxes 4 1.1.4. Tax-induced Distortions on Investment and Financing Decisions 4 1.2. Indian Direct Tax Structure 6-10 1.2.1. Central Board of Direct Taxes (CBDT) 6 1.2.2. Income-tax (IT) Act,1961 and Income Tax Rules (ITR),1962 7 1.2.3. Wealth Tax Act-1957 9 1.2.4. Finance Act 9 1.3. Tax Compliance Matters 11-32 1.3.1. Tax Returns and Procedure of Assessment 11 1.3.2. ITR Forms, Filing dates and Documentation 14 1.3.3. E-filing of Income Tax Returns 16 1.3.4. Advance Tax and Due Dates 20 1.3.5. Tax Deducted at Source (TDS) 22 1.3.6. Interest and Penalties 29 1.3.7. Fraud/Concealment Penalties 31 1.3.8. Tax Refund 31 1.4. Residency Rules 33-42 1.4.1. Residential Status of an Individual 33 1.4.2. Residential Status of Other Taxable Entities 34 1.4.3. Indian Income and Foreign Income 34 1.4.4. Tax Incidence for Different Taxpayers 40

Section–II: Personal Taxation and Business Taxation- Computation and Tax 43-390 2.1. Salary Income 43-127 2.1.1. Gross Salary Income - Basic pay, Bonus, Allowances, Retirement Benefits and Perquisites 47 49 2.1.2. Treatment of Various Allowances 53 2.1.3. Perquisites - Valuation and Taxability 62 70 2.1.4. Treatment of Retirement Benefits and Voluntary 70 Retirement Scheme (VRS) 2.1.5. Profit in Lieu of Salary 2.1.6. Deductions from Salary 2.2. Income from House Property 128-173 2.2.1. Basis of Charge and applicability 128 2.2.2. Self Occupied and Let out House Property 129 2.2.3. Determination of Gross and Net Annual Value 129 2.2.4. Deductions and Special Provisions 129 2.3. Income from Business or Profession 172-228 2.3.1. Scope of Income and its Computation 172 2.3.2. Deductible and Inadmissible Expenses 174 2.3.3. Deemed Income and Special Provisions 198 2.3.4. Tax Shelter and Tax Holidays 214 2.4. Capital Gains in Transfer of Capital Assets 229-266 2.4.1. Nature of Capital Gain - Short Term or Long Term Depending on Capital Asset and Holding Period 229 2.4.2. Computation of Capital Gains/Losses 231 2.4.3. Netting Rules and Carry Forward of Capital Losses 259 2.4.4. Exemptions in Capital Gains 259 2.5. Income from Residuary Sources and Tax Calculation Rules 267-354 2.5.1. Income from Other Sources - Chargeability, Exemptions and Deductions 268 2.5.2. Clubbing of Income 295 2.5.3. Deductions under Chapter VI-A 307 2.5.4. Taxable Income & Tax liability 329

2.6. Tax Characteristics of Business Forms 355-388 2.6.1. Sole Proprietorship 355 2.6.2. Partnership Firm 356 2.6.3. Hindu Undivided Family (HUF) 360 2.6.4. Association of Persons (AOP) 367 2.6.5. Cooperative Societies 372 2.6.6. Trusts 373 2.6.7. Companies 378 2.6.8. Others 378 Section-III: Taxation of Various Financial Products and Transactions, Tax Planning Strategies 389-450 3.1. Tax Implications for Non-resident Indians (NRIs) 391-397 3.1.1. Exempt Income of Non-resident Indians (NRIs) 391 3.1.2. Special Provisions on Certain Transactions 392 3.1.3. Double Taxation Relief 397 3.2. Tax Planning - Various Avenues and Techniques 398-407 3.2.1. Need and Importance of Tax Planning 398 3.2.2. Tax Planning vs. Tax Evasion and Avoidance 399 3.2.3. Tax Planning vs. Tax Management 402 3.2.4. Deferral of Tax Liability ‘Grade 3 & 4’ 403 3.2.5. Maximizations of Exclusions and Credits ‘Grade 3’ 403 3.2.6. Managing Loss Limitations ‘Grade 3’ 405 3.2.7. Deductible Expenditures of Individuals and Business Forms ‘Grade 3 & 4’ 405 3.3. Taxability of Various Financial Products 408-432 3.3.1. Provident Fund and Small Savings Schemes - Contribution, Interest, 408 Withdrawal and Terminal Value 412 415 3.3.2. Equity Shares - Listed and Unlisted 417 3.3.3. Equity Transactions - Stock Market and off Market 421 3.3.4. Equity Oriented Products - Equity Schemes of Mutual Funds, ETFs, ELSS, etc. 3.3.5. Debt Products - Bonds, Debentures, Government Securities, Income Schemes of Mutual Funds Including Fixed Maturity Plans (FMPs) ‘Grade 3 & 4’

3.3.6. Income Distribution and Dividends on Various Investment 427 Products ‘Grade 3 & 4’ 427 3.3.7. Securities Transaction Tax (STT) and Dividend Distribution Tax (DDT) 433 3.3.8. Life and Health Insurance products, Unit Linked Insurance Plans (ULIPs), Unit Linked Pension Plans (ULPPs), etc. 3.4. Taxation of Various Financial Transactions 433-450 3.4.1. Transaction in the Nature of Gifts/Prizes/Winnings 433 3.4.2. Agricultural Income 433 3.4.3. Cash Payment Over a Specified Limit 435 3.4.4. Dividend and Bonus Stripping Provisions - Shares, MF Schemes Including with Reinvestment Option 443 Section-IV: Estate Planning Process, Strategies and Taxation Aspects 451-522 4.1. Estate Planning Overview 453-467 4.1.1. The Concept of Estate Planning 453 4.1.2. Purpose and Need of Estate Planning 453 4.1.3. Risks and Drawbacks Involved in Estate Planning 454 4.1.4. Hindu and Indian Succession Act 455 4.1.5. Succession - Testate and Intestate 466 4.2. Estate Planning Process 468-470 4.2.1. Collect Comprehensive Information and Examine Circumstances to Set Estate Planning Goals 468 4.2.2. Determine Value of Client's Estate and Liquidity Aspects 468 4.2.3. Estimate Cost of Transfer and Other Expenses 470 4.2.4. Develop a Plan of Transfer 470 4.2.5. Implement Plan and Review Periodically 471 4.3. Methods of Estate Planning 472-486 4.3.1. Will 472 4.3.2. Trust 474 4.3.3. Insurance 476 4.3.4. Gift 478 4.3.5. Power of Attorney 480 4.3.6. Transfer of Property and Partition ‘Grade 3’ 481

4.4. Will 487-498 4.4.1. Characteristics and Contents of a Will 487 4.4.2. Types of Will - Unprivileged, Privileged, Joint, Mutual and Conditional 490 4.4.3. Legal Requirements and Testamentary Capacity 492 4.4.4. Modifying or Revoking a Will 495 4.4.5. Probate Process 497 4.5. Powers of Attorney 499-502 4.5.1. Use and Purpose 499 4.5.2. Types - General and Special 499 4.5.3. Revocation 500 4.5.4. Role of the Executor 501 4.6. Trust Structure for Efficient Transfer 503-522 4.6.1. Trust Structures for Tax Efficiency 504 4.6.2. Trust Structure to Align Strategic Objectives of the Settler 509 4.6.3. Trust Perpetuities 510 4.6.4. Trust as Pass-through Entity 512 4.6.5. Lower Taxes on Future Earnings and Capital Gains 512 4.6.6. Direct Acquisition of Assets - Benefit of Stamp Duty and Capital Gains Tax 516 4.6.7. Distributable Net Income 514 Section-V: Vehicles of Estate Planning-Features 523-561 5.1. Intra-Family Business and Property Transfer 525-535 5.1.1. Estate Planning for Family Business 525 5.1.2. Forms of Family Business Ownership 526 5.1.3. Calculating the Value of the Family Business 527 5.1.4. Transfer of Business and Inter-generation Wealth Transfer 528 5.1.5. Forms of Property Transfer - Joint Tenancy and Tenancy-in-common 532 5.1.6. Offshore Trusts and Regulatory Requirements 533 5.1.7. 'Asset Protection' and 'Creditor Protection Period' 534 5.2. Trusts - Characteristics & Regulation 536-551 5.2.1. The Indian Trust Act-1882 536 5.2.2. Classification of Trust – Revocable/Irrevocable and Simple/Complex 539

5.2.3. Characteristics of Trust – Discretionary and Determinate 539 5.2.4. Different Types of a Family Trust 541 5.2.5. Family Trust V/s Will 542 5.2.6. Parties to Trust 543 5.2.7. Hybrid Trusts 544 5.2.8. Cancellation (Extinguishing) and Revocation of Trust 545 5.2.9. Other Provisions 545

SECTION–I FEATURES OF INDIAN andTAX SYSTEM DIRECT TAXES SUB-SECTIONS 1.1 Features of Indian Tax System 1.2 Indian Direct Tax Structure 1.3 Tax Compliance Matters 1.4 Residency Rules 1

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Sub-Section–1.1 Features of Indian Tax System 1.1.1. Three-tier Federal Structure of Taxation - Union Government, State Governments and Urban/Rural Local Bodies India has a well-developed tax structure with a three-tier federal structure, comprising the Union Government, the State Governments, and the Urban/Rural Local Bodies. The power to levy taxes and duties is distributed among the three tiers of Governments, in accordance with the provisions of the Indian Constitution. The main taxes/duties that the Union Government is empowered to levy are Income-tax (except tax on agricultural income, which State Governments can levy), Securities Transaction Tax (STT), commodities transaction tax (CTT), Customs Duties, Central Excise on Tobacco products, petroleum products. After the imposition of Goods and service tax w.e.f. 1 July 2017central government can impose CGST (Central Goods and Service Tax) on supply of goods or services within a state/union territory. It can also impose integrated goods and services tax (IGST) on supply of goods or services from one state to another (Inter State) Principal taxes of state government are state excise duty on manufacture of alcohol, tax on professions/employment, land revenue, stamp duty. After the imposition of GST w.e.f. 1 July 2017 state government can impose SGST (state goods and service tax) on Intra state supply of goods or services. Also it shall share 50%of IGST collected by central government by way of IGST provided goods or services are consumed within that state. There is no VAT on sales except in case of petroleum products and alcoholic liquor. Local bodies are empowered to levy tax on properties (buildings), Entertainment tax, tax on markets and tax and user charge for utilities like water supply, drainage etc. 1.1.2 Direct and Indirect Taxes Tax is a compulsory contribution from a person to the expenses incurred by government in common interest of all without specific reference to specific benefits conferred on any Individual. Taxes are classified into two types: Direct Taxes Those taxes where incidence and burden falls on the same person. It can‘t be transferred to anyone else. For Example: income tax and wealth tax. Income tax, corporate tax, inheritance tax are some instances of direct taxation. Income tax is the tax levied on individual income from various sources like salaries, 3

investments, interest etc. Corporate tax is the tax paid by companies or firms on the incomes they earn. Indirect Taxes Those taxes where burden can be shifted to another person through a Change in price. For Example: sales tax (VAT), excise duty, custom duty and Goods and Service tax (GST). Indirect taxes are those paid by consumers when they buy goods and services. These include excise and customs duties. Customs duty is the charge levied when goods are imported into the country, and is paid by the importer or exporter. Excise duty is a levy paid by the manufacturer on items manufactured within the country. Usually, these charges are passed on to the consumer. 1.1.3 Predominance of Indirect Taxes There is Predominance of Indirect Taxes in Indian Taxation System. The importance of excise duty is the highest among indirect taxes. There are certain administrative and some special reasons which call for Predominance of Indirect Taxes. Because of wide spread poverty in underdeveloped countries it is difficult for government to impose direct taxes on income and wealth. Direct taxes may not yield sufficient revenue and Indirect taxes being concealed in prices are convenient to pay. In 1950-1951, of the total tax proceeds, 36.8% was contributed by direct taxes and 63.2% by indirect taxes. In 20007-2008, the share of direct taxes was 49% and that of indirect taxes was 51%. The share of direct taxes in England is 55% while in Japan and Australia it is about 70%. 1.1.4 Tax-induced Distortions on Investment and Financing Decisions Indian tax system is characterized by: (1) a high dependence on indirect taxes, (2) low average effective tax rates and tax productivity, and (3) high marginal effective tax rates and large tax-induced distortions on investment and financing decisions. The paper finds that the most recently proposed package of reforms would improve tax productivity and lower the marginal tax burden and tax-induced distortions. But firms that rely on internal sources of funds or face problems borrowing would continue to face high marginal tax rates. To improve the tax intake and savings and Investment rates, which h are low by regional standards, a series of tax reforms have been considered in India. Their main thrust is to combine lower statutory rates with base broadening, to realize more revenues while lowering the marginal tax burden and removing distortions. This in turn should foster growth, leading to an ―expansionary‖ fiscal adjustment. Consumption taxes should not in theory affect savings and investment decisions since future and current consumption are treated equally, and they remain neutral with respect to various sources of income. Empirical evidence is mixed, however. Some 4

studies find that such taxes indeed have no impact on employment and growth, but others find that-like income taxes, although to a lesser extent—they have a negative impact on growth by distorting the choice between labour and leisure, and also could depress savings. Corporate taxes raise the required rate of return on investment and thereby depress investment. In addition, corporate taxes tend to favour debt over equity financing or retained earnings, potentially leading to an inefficient allocation of resources, higher insolvency risks, and discrimination against smaller companies that face more difficulties borrowing. Corporate taxes are also non-neutral given the widespread use of rebates, exemptions, and special regimes for specific sectors or regions. This also benefits large companies which can bear a lower tax burden through tax planning and fiscal engineering. Cross-country studies confirm a negative link between the tax burden (measured by tax revenue to GDP) and growth for high-income countries. However, the result does not hold for low and middle-income countries, perhaps reflecting measurement problems. Firm-level empirical results, as well as simulation results using computable general equilibrium models, in contrast support the view that higher taxes negatively affect growth. 5

Sub-Section 1.2 Indian Direct Tax Structure 1.2.1. Central Board of Direct Taxes (CBDT) The Central Board of Direct Taxes is a statutory body constituted under the Central Board of Revenue Act, 1963. It consists of a number of members appointed by the Central Government for the performance of such duties, as may be entrusted to the Board from time to time. It is functioning under the jurisdiction of the Ministry of Finance. The Central Board of Direct Taxes, besides being the highest executive authority, exercises control and supervision over all officers of the Income-tax Department and is authorised to exercise certain powers conferred upon it by the Income-tax Act, 1961. In particular, it has the powers, subject to the control and approval of the Central Government to make any rules, from time to time for the proper administration of the provisions of the Income-tax Act, 1961. All the rules under the Act are framed by the Board under section 295 and placed before the Parliament. In addition to the general power of making rules and of superintendence, the Board has been given specific powers on several matters. The Board has been empowered under section 119 to issue instructions and circulars to its subordinates for the proper administration of the Act. It is obligatory for the various authorities and all other persons employed in the execution of the Act to observe and follow such orders, instructions and directions of the Board. However, the Board is not empowered to issue orders, instructions or directions in such a way as to (i) require any income-tax authority to make the assessment of a particular case in a particular manner or (ii) interfere with the discretion of the Commissioner (Appeals) in the exercise of his appellate functions. Further, the Board may, if it considers necessary or expedient to do so, for the purpose of proper and effective management of the work of assessment and collection of revenue, issue general or special orders from time to time in respect of any class of incomes or class of cases setting forth directions and instructions not being prejudicial to the assessee. In appropriate cases, the Board may relax the provisions of sections 115P, 115S, 139,143,144, 147, 148, 154, 155, 234A, 234B, 234E, 271 and 273. The Board can exercise its powers to remove difficulties in the matter of sections 201(1A), 210, 211 and 234C. The Central Government may appoint such persons as it thinks fit to be income-tax authorities. It may also authorise the Board or a Principal Director General or Director General, a Principal Chief Commissioner or Chief Commissioner or a Principal Director or Director or a Principal Commissioner or Commissioner to appoint income-tax authorities below the rank of an Assistant Commissioner or Deputy Commissioner. An income-tax authority authorised by the Board may appoint such executive or ministerial 6

staff as may be necessary to assist it in the execution of its functions. The Board may also direct, by way of notification, that any Income-tax authority or authorities shall be subordinate to such other income-tax authority as may be specified. Organisational Structure of the Central Board of Direct Taxes: The CBDT is headed by Chairman and also comprises of six members, all of whom are ex-officio Special Secretary to Government of India.  Member (Income Tax)  Member (Legislation and Computerisation)  Member (Revenue)  Member (Personnel & Vigilance)  Member (Investigation)  Member (Audit & Judicial) 1.2.2. Income-tax (IT) Act,1961 and Income Tax Rules (ITR),1962 Income-tax is a tax levied on the total income of the previous year of every person. A person includes an individual, Hindu Undivided Family (HUF), Association of Persons (AOP), Body of Individuals (BOI), a firm, a company etc. Income-tax is the most significant direct tax. The income-tax law in India consists of the following components– Income-tax Act, 1961: The levy of income-tax in India is governed by the Income-tax Act, 1961. In this book we shall briefly refer to this as the Act. This Act came into force on 1st April, 1962. The Act contains 298 sections and XIV schedules. These undergo change every year with additions and deletions brought about by the annual Finance Act passed by Parliament. In pursuance of the power given by the Income-tax Act, 1961 rules have been framed to facilitate proper administration of the Income-tax Act, 1961. The Finance Act: Every year, the Finance Minister of the Government of India introduces the Finance Bill in the Parliament‘s Budget Session. When the Finance Bill is passed by both the houses of the Parliament and gets the assent of the President, it becomes the Finance Act. Amendments are made every year to the Income-tax Act, 1961 and other tax laws by the Finance Act. The First Schedule to the Finance Act contains four parts which specify the rates of tax-  Part I of the First Schedule to the Finance Act specifies the rates of tax applicable for the current Assessment Year. 7

 Part II specifies the rates at which tax is deductible at source for the current Financial Year.  Part III gives the rates for calculating income-tax for deducting tax from income chargeable under the head ―Salaries‖ and computation of advance tax.  Part IV gives the rules for computing net agricultural income. Income-tax Rules: The administration of direct taxes is looked after by the Central Board of Direct Taxes (CBDT). The CBDT is empowered to make rules for carrying out the purposes of the Act. For the proper administration of the Income-tax Act, 1961, the CBDT frames rules from time to time. These rules are collectively called Income-tax Rules, 1962. It is important to keep in mind that along with the Income-tax Act, 1961, these rules should also be studied. Circulars and Notifications: Circulars are issued by the CBDT from time to time to deal with certain specific problems and to clarify doubts regarding the scope and meaning of the provisions. These circulars are issued for the guidance of the officers and/or assessees. The department is bound by the circulars. While such circulars are not binding on the assessees, they can take advantage of beneficial circulars. Notifications are issued by the Central Government to give effect to the provisions of the Act. For example, under section 10(15)(iv)(h), interest payable by any public sector company in respect of such bonds or debentures and subject to such conditions as the Central Government may, by notification in the Official Gazette, specify in this behalf would be exempt. Therefore, the bonds and debentures, interest on which would qualify for exemption under this section are specified by the Central Government through Notifications. The CBDT is also empowered to make and amend rules for the purposes of the Act by issue of notifications. For example, under section 35CCD, the CBDT is empowered to prescribe guidelines for notification of skill development project. Accordingly, the CBDT has, vide Notification No.54/2013 dated 15.7.2013, prescribed Rule 6AAF laying down the guidelines and conditions for approval of skill development project under section 35CCD. Case Laws: The study of case laws is an important and unavoidable part of the study of income-tax law. It is not possible for Parliament to conceive and provide for all possible issues that may arise in the implementation of any Act. Hence the judiciary will hear the disputes between the assessees and the department and give decisions on various issues. The 8

Supreme Court is the Apex Court of the country and the law laid down by the Supreme Courts the law of the land. The decisions given by various High Courts will apply in the respective states in which such High Courts have jurisdiction. 1.2.3. Wealth Tax Act, 1957 Abolished w.e.f. FY2015-16 (AY 2016-17) 1.2.4. Finance Act The Finance Act is an important Act in India and the Central Government, through this Act, gives effect to financial proposals at the beginning of every Financial Year. The Act applies to all the State and Union Territories of India unless specified otherwise. Every Financial Year therefore sees a new Finance Act thus making this Act one that renews itself each year. All the Governmental financial policies are included in this Act. The existing policies, new policies, as well as changes made to existing policies are all included here. Every Finance Act is assented by the President of India. Important Elements of Finance Act All the elements included in the Finance Act associated with a particular Financial Year are of course important. Even so, there are particular elements that take precedence over the others. The most important element is the rules laid down in the Act with respect to Income Tax Rates. Every year, the Act lays down in detail all the associated provisions related to Income Tax in the country. Since this applies to a large number of taxpayers, it is considered one of the most important elements. The Finance Act, is responsible for laying down the tax slabs that applies to taxpayers. These are a few important elements included and elaborated upon in detail in the Finance Act for a particular year. Direct Taxes The Finance Act for a particular financial year also includes the amendments that have been made with respect to Direct Taxes. The Amendments made under various sections are noted down in this section of the Finance Act and each amendment of every section is noted down separately. Also included in the Finance Act is the details of the insertion of new sections, if any. The Schedule The Schedule in any Finance Act is a systematic depiction of all the rules and regulations laid down by the Act for that Financial Year. The Schedule gives details on  Rates of Income Tax  Surcharge on Income Tax 9

 Rates for Deduction of Tax at Source  Details of Advance Tax  Details for computation of Net Agricultural Income among other details. 10

Sub-Section 1.3 Tax Compliance Matters 1.3.1. Tax Returns and Procedure of Assessment Return of Income – Section 139(1) Assessee Conditions under which filing of Return of Income is mandatory Company, Firm, LLP Any other assessee Always, whether there is profit or loss If GTI before exemption u/s 10(38)> maximum amount which is not chargeable to tax Notes: 1. Return of Income shall be filed by the assessee on or before due date. 2. Return of Income shall be filed in the prescribed form, verified in the prescribed manner and setting forth such other particulars as may be prescribed. 3. Any assessee who is not required mandatorily to file his Return of Income, may file voluntarily, but shall be on or before due date. Due Dates for Filing of Return of Income: Assessee Due date September 30th of 1. Company the relevant AY 2. Any person whose accounts of the RPY are required to July 31st of the be audited under any law (including audit u/s 44AB) relevant AY 3. Working partner of a firm whose accounts of the RPY are required to be audited under any law (including audit u/s 44AB) Any other assessee Return Mandatory for Resident (Other than RNOR) In case of a Resident assessee (other than RNOR), filing of Return of Income is mandatory (whether he has any income chargeable to tax or not) in the case of following situations: 1. Assessee has any asset o/s India (e.g. land, house property, etc.) or 2. Assessee has financial interest in any entity located o/s India (e.g. right to share in profit in a firm, shares in foreign company) or 11

3. Assessee has signing authority in any account o/s India (it does not matter whether bank account is in the name of assessee or not) Return of Loss – Section 139(3) & Section 80 Losses u/s Section Nature 72 Normal business or profession loss 73 Speculative business loss 74 Capital gains head loss 74A Loss from activity of owning & maintaining race horses can be carried forward only if RoI has been filed on or before due date specified u/s 139(1). Such return shall be deemed to be filed u/s 139(1) only. Notes: 1. It means that following losses can be carried forward even if ROI is not filed on time: Section Nature 71B Loss u/h Income from House Property 32(2) Unabsorbed depreciation 2. Restriction is in respect of carried forward only. i.e. current year losses can be set- off with current year incomes even if ROI is not filed on time. 3. Restriction is in respect of carried forward of losses only and not for brought forward losses. i.e. if ROI of year in which loss is incurred is filed on time but ROI of year in which loss is required to be adjusted is not filed on time, still such losses can be adjusted. 4. ROI filed in pursuance of section 139(3) shall be deemed to be filed u/s 139(1). i.e. for every section where reference to section 139(1) is provided, reference to section 139(3) shall also be considered. 5. Section 139(3) nowhere says ROI filing is mandatory in case assessee has incurred the losses. Again, its choice of assessee to file ROI or not. It just says, if assessee wants to carried forward the losses, then he needs to file ROI on or before due date. 12

Belated Return – Section 139(4) If the return of income is not filed within time allowed u/s 139(1), then assessee may file the same  on or before one year from the end of the relevant previous year, or  before completion of assessment whichever is earlier. Consequences of Not Filing the Return of Income on or Before Due Date 1. Interest u/s 234A 2. Mandatory fee of 5000/10000 under section 234F 3. Selected losses cannot be carried forward – section 139(3) read section 80 4. Deductions u/s 80-IA, 80-IB, etc. cannot be claimed Revised Return – Section 139(5) In case assessee discovers any omission or any wrong statement in the return filed u/s 139(1), then he may file revised RoI  within one year from the end of the relevant previous year, or  before completion of assessment whichever is earlier. Notes: 1. Revised return substitutes the original return from the date on which original return was filed. 2. Return filed u/s 139(3) can be revised as ROI filed u/s 139(3) is deemed to be filed u/s 139(1). 3. A return can be revised ‗n‘ number of times provided revised return is filed within time limits u/s 139(5). 4. Loss declared through revised return can be carried forward because revised return substitutes the original return from the date of filing of original return. Defective Return – Section 139(9)  Where the Assessing Officer  considers that the return of income furnished by the assessee is defective,  he shall intimate the defect to the assessee and give him an opportunity to rectify the defect  within a period of 15 days from the date of such intimation (AO may extend the time on application)  and if the defect is not rectified within the said period of 15 days, 13

 then the return shall be treated as an invalid return and the provisions of this Act shall apply as if the assessee had failed to furnish the return 1.3.2. ITR Forms, Filing Dates and Documentation Return of Income – Forms– Rule 12 Assessee Conditions ITR (a) Individual Total income consists of income under heads ITR-1 SAHAJ (i) ―Salaries‖ &/or family pension (ii) ―Income from house property‖, where assessee does not own more than one house property and does not have any brought forward loss under the head (iii) ―Income from other sources‖, except winnings from lottery, etc. &does not have any loss under this head But ITR-1 shall not be applicable for following: (i) Total Income > 50 lakh (ii) is a resident (except RNOR) and has, -  assets (including financial interest in any entity) located outside India; or  signing authority in any account located outside India; or  income from any source outside India (iii) has claimed relief u/s 90/90A/91; or (iv) has agricultural income >₹5,000. (b) Individual / HUF (i) Not covered by (a) above ITR-2 (ii) Total income does not include income derived from a proprietary business or profession. But if business income is derived as partner of the firm, ITR-2 can be used (c) Individual / HUF Total income does include income u/h ITR-3 PGBP from proprietary business (d) Individual / HUF Income u/h PGBP computed u/s ITR-4 14

/ Firm (not LLP) 44AD/44AE/44AOA SUGA M But ITR-4S shall not be applicable for following: (i) is a resident (except RNOR) and has, -  assets (including financial interest in any entity) located outside India; or  signing authority in any account located outside India; or  income from any source outside India (ii) has claimed relief u/s 90/90A/91; or (iii) has agricultural income >₹5,000. (e) Any person Other than ITR-5 e.g Firm AOPS/ (i) Individual BOIS LLP (ii) HUF (iii) Company (iv) Person to which (g) applies (f) Company Other than company to which (g) applies ITR-6 (g) Any person Required to file return u/s ITR-7 139(4A)/(4B)/(4C)/(4D)/(4E) Documentation: Supporting Documents There are some documents that you should keep ready while filing the IT Returns. These documents help in preparation of the tax return while calculating the tax liability:  Form No. 16 (received from the employer): Form 16 is the Annual Salary Statement issued by your employer and provides details about the income earned during the year.  Form No. 16A (a form that is received from all the payers who have got their tax deducted). This form needs to be collected from the parties who have deducted the tax while making payment to you during the year. This includes banks and companies (with whom you have kept fixed deposits and so on).  Summary of account: It is important to have a summary of all bank accounts that you operated in the last fiscal year. The bank statements have details of the interest income earned and the expenditures incurred during the year. 15

 Details of property owned: If you own some property or bought a new one during the last fiscal year, keep receipts of property tax paid during the year and rent received (if any).  Details of sale & purchase with respect to investments or assets sold during the year.  Details of any other tax payments made during the year. 1.3.3. E-filing of Income Tax Returns Electronic filing is a method of filing tax returns where the taxpayer information is transmitted to the revenue agencies electronically over the Internet, a modem, or a phone line. Electronic filing offers you many benefits that you cannot get through paper filing, such as:  Faster refunds using direct deposit  Accuracy -- tax preparation software does calculations for you  Receipt so you know your tax returns have been filed  Speeds up processing of your tax returns  Reduces costs for the Department of Revenue which saves you tax dollars  Secure transfer of your personal information Sl. Person Condition Manner of Furnishing Return of Income (i) (ii) 1 Individual (iii) (iv) or Hindu (a) Accounts are required to be Electronically under digital undivided audited under section 44AB signature family of the Act; (b) Where (a) is not applicable (A) Electronically under and,- digital signature; or (I) the return is furnished in (B) Transmitting the data Form No. ITR-2 or Form in the return No. ITR-3; or electronically under (II) the person, being a electronic verification resident, other than not code; or ordinarily resident within (C) Transmitting the data the meaning of sub- section in the return (6) of section 6, has, (A) electronically and assets (including financial thereafter submitting 16

interest in any entity) the verification of the located outside India; or return in Form ITR-V. (B) signing authority in any account located outside India; or (C) income from any source outside India; (III) any relief, in respect of tax paid outside India, under section 90 or 90A or deduction of tax under section 91 is claimed; or (IV) any report of audit referred to in proviso to sub-rule (2) is required to be furnished electronically; or (V) total income assessable under the Act during the previous year of the person (other than the person, being an individual of the age of 80 years or more at any time during the previous year and furnishing the return in Form ITR-1 or ITR-2),- (i) exceeds five lakh rupees; or (ii) any refund is claimed in the return of income; (c) In any other case. (A) Electronically under e.g digital signature; or (i) Individual is 80 years of age (B) Transmitting the data Or in the return (ii) Total Income ≤ 5 Lakh electronically under electronic verification code; or (C) Transmitting the data 17

in the return electronically and thereafter submitting the verification of the return in Form ITR-V; or (D) Paper form; 2 Company In all cases. Electronically under digital signature. 3 A person (a) In case of a political party; Electronically under digital required to signature; furnish the (b) In any other case (A) Electronically under return in digital signature; or Form ITR-7 (B) Transmitting the data in the return electronically under electronic verification code; or (C) Transmitting the data in the return electronically and thereafter submitting the verification of the return in Form ITR-V. 4 Firm or (a) Accounts are required to Electronically under digital signature; limited be audited under section liability 44AB of the Act; partnership (b) In any other case. (A) Electronically under or any digital signature; or person (B) Transmitting the data in the return (other than electronically under electronic verification a person code; or mentioned in Sl. 1 to 3 above) who (C) Transmitting the data is required in the return to file electronically and return in thereafter submitting Form ITR-5 the verification of the 18

return in Form ITR-V. Explanation For the purposes of this sub-rule \"electronic verification code\" means a code generated for the purpose of electronic verification of the person furnishing the return of income as per the data structure and standards specified by Principal Director General of Income-tax (Systems) or Director General of Income-tax (Systems). Filing Tax Return using the I-T Department Website: 1. Select appropriate tax return form here: https://incometaxindiaefiling.gov.in 2. Download the relevant Excel spreadsheet or JAVA utility. 3. Fill your tax return form offline and save the XML file generated by the software. 4. Register with http://incometaxindiaefiling.gov.in 5. Log in and click the relevant form on the left panel and select \"Submit Return\" 6. Now upload the XML file and verify by using Electronic Verification Code, or print the acknowledgement/ ITR-V Form. (Don't have a printer at home? Save the document in the PDF format and get a printout.) 7. If the return includes digital signature, the process is over. Else, you get a verification form (ITR-V). Sign it and mail it to 'Income Tax Department - CPC, Post Bag No - 1, Electronic City Post Office, Bengaluru - 560100, Karnataka' by 'Speed Post' or ordinary post within 120 days of submitting the return. 8. Once the tax department receives the physical copy of the ITR-V form, you will get an acknowledgement over email. 1.3.4. Advance Tax and Interest Liability for Payment of Advance Tax – Section 207 & Section 208 1. Every assessee is required to pay advance tax, if his advance tax liability is ₹10,000 or more. 2. A senior citizen having no income u/h PGBP is not required to pay advance tax. 3. Advance tax liability shall be computed as under: a) Income under five heads except income of business for which section 44AD has been opted. b) Adjustments for brought forward losses and clubbing 19

c) GTI = a±b d) Less: Deductions u/c VI-A& u/s 10AA e) TI = c – d f) Tax on TI including net agricultural income, if any g) Less: Rebate of ₹2,000 u/s 87A or Add: Surcharge on ‗f‘, if any h) EC & SHEC @ 3% on f ± g i) Total tax liability = f ± g + h j) Less: Relief u/s 89/90/90A/91 k) Less: MAT Credit u/s 115JAA l) Less: AMT Credit u/s 115JD m) Less: TDS/TCS n) Advance tax liability = i - (j+k+l+m) 4. Advance tax is payable only if amount calculated in point ‗n‘ is ₹10,000 or more. 5. Due dates & amount payable of advance tax liability Due date Advance tax payable June 15th of the RPY 15% of advance tax liability September 15th of the RPY 45% of advance tax liability December 15th of the RPY 75% of advance tax liability March 15th of the RPY 100% of advance tax liability *If tax payer adopts presumptive scheme u/s 44AD 100% of advance tax is payable by 15th March of RPS. Interest for shortfall in instalments of advance tax liability – Section 234C  In case there is shortfall in any instalment of advance tax liability, then interest shall be levied @ 3% for every instalment separately. In case of shortfall in last instalment, interest shall be levied @ 1% only.  In case capital gains and/or winnings from lotteries, etc. arises after due date(s) of payment of advance tax liability, then there shall be no interest if advance tax payable on such incomes is paid in the remaining instalments. (and in case income arises after March 15th but on or before March 31st, then advance tax payable on such incomes is paid by March 31st of the RPY)  For the purposes of calculating interest u/s 234A, 234B & 234C, amount on which interest is being calculated shall be rounded off to lower side of multiple of ₹100. 20

Due Condition for Interest Amount on which Period Rate Date Interest shall be 3 1%pm 15/6 Advance tax deposited by Levied months 1%pm 15/9 15/6 < 12% of x 1%pm 15/12 15% of x – advance tax 3 1%pm 15/3 Advance tax deposited by deposited by 15/6 months 15/9 < 36% of x 45% of x – advance tax 3 Advance tax deposited by deposited by 15/9 months 15/12 < 75% of x 1 month 75% of x – advance tax Advance tax deposited by deposited by 15/12 15/3 < x x – advance tax deposited by 15/3 Interest for Shortfall in Payment of Advance Tax as on April 1st of the Relevant Assessment Year – Section 234B If, on April 1st of the relevant Assessment Year, advance tax paid till March 31st of the relevant Previous Year is less than 90% of advance tax liability of the assessee, then on whole shortfall interest shall be levied @ 1%pm from April 1st till the date shortfall is paid by the assessee (part of the month shall be treated as full). Interest for Late Filing of Return – Section 234A Interest shall be charged @ 1%pm (part of the month shall be treated as full). Interest shall be charged on amount of shortfall in payment of tax (i.e. tax on total income less TDS less advance tax less self-assessment tax deposited till due date of return) Period of Interest:  If return is filed after due date: From the date following the due date till the date of furnishing of Return of Income  If return is not filed: From the date following the due date till the date of completion of assessment. 234 F Mandatory fee for delayed filing of return. Tax payer shall be liable to pay a fee, in addition to interest u/s 234A for delay in filling of return beyond due date. The amount of fee u/s 234F shall be 5000 if return is filed on or before 31st December of Assessment year and 10000 if return is filed thereafter. However it total income of assesse is up to 5,00,000 the amount of fee shall be 1000. It is to be noted this fee is compulsory for delayed filing of return consequently penalty u/s 271F has been removed. 21

1.3.5. Tax Deducted at Source (TDS) Salary – Section 192 Income Salary Deductor Deductee Employer (Every person) Rate of TDS Exemption Employee Average rate of Income-tax No TDS is required to be deducted in case total income of employee does not exceed maximum amount which is not chargeable to tax. Note: On non-monetary perquisites, employer may tax out of his own pocket. In such a case, such tax shall be exempt in the hands of employee, but perquisite amount shall be taxable. Such employee can claim credit of such tax paid by employer as TDS credit. For employer, perquisite amount shall be business expense, but tax paid by him out of his own pocket shall not be allowed as a business expense. Taxable premature withdrawal from provident Fund – 192 A If the amount of withdrawal is 50000 or more, TDS shall be done at the rate of 10 percent. If PAN number is not provided the TDS shall at maximum marginal rate. Interest on Securities – Section 193 Income Interest on securities Deductor Deductee Every person Rate of TDS Exemption Resident person 10%  Securities issued by CG/SG  Interest payable to resident individual/HUF on debentures issued by widely held company paid by account payee cheque and it does not exceed ₹5,000 for the whole year  Interest on securities maintained in demat form Interest Other than “Interest on securities” – Section 194A Income Interest other than Interest on Securities 22

Deductor  Every person except Individual/HUF Deductee  Individual/HUF shall be required to deduct TDS in case his Rate of TDS accounts were required to be audited u/s 44AB for the Exemption preceding financial year. Resident person 10%  Interest payable by banks, co-operative society doing business of banking or post office and it does not exceed ₹10,000 for the whole year. Every branch to be seen separately.  In any other case, interest does not exceed ₹5,000 for the whole year.  Interest payable:  to banks, insurance companies, UTI  by firm to its partner  on Post Office (Time Deposits), Post Office (Recurring Deposits), Post Office Monthly Income Account, Kisan Vikas Patra, NSC VIII Issue, Indira Vikas Patra  on deposits with banks (except FD/Time Deposits – TDS deductible)  by CG under Income-tax Act or Wealth-tax Act Winnings from Lottery or Crossword Puzzle – Section 194B Income Winnings from lottery, crossword puzzles, card game, other games Deductor Deductee Every person Rate of TDS Any person Exemption  30%  If winnings are in kind, then deduct or shall ensure that tax has been paid on such winnings. Winnings do not exceed ₹10,000. Every winning to be seen separately. Winnings from Horse Race – Section 194BB Income Winnings from horse race Deductor Every person Deductee Any person 23

Rate of TDS 30% Exemption Winnings do not exceed ₹10,000. Every winning to be seen separately. Payments to Contractors – Section 194C Income  Payment to contractor for carrying out any work.  Contract shall include sub-contract also. Deductor Deductee  Work includes: Rate of TDS  supply of labour; Exemption  advertising;  broadcasting and telecasting including production of programmes for such broadcasting or telecasting;  carriage of goods or passengers by any mode of transport other than by railways;  catering;  manufacturing a product according to the requirement of a customer by using material purchased from such customer, but does not include manufacturing a product according to the requirement of a customer by using material purchased from any other person.  Every person except Individual/HUF  Individual/HUF shall be required to deduct TDS in case his accounts were required to be audited u/s 44AB for the preceding financial year. Resident person i.e. contractor  If payment made to individual/HUF – 1%  In any other case – 2%  If payment made by Individual/HUF for services of contractor used exclusively for personal purposes.  If single payment does not exceed ₹30,000. But if sum total of whole year exceeds ₹1,00,000, then TDS is required to be deducted.  Payment to transporter, if he quotes his PAN to deductor & does not own more than 10 vehicles. Insurance Commission – Section 194D Income Insurance commission 24

Deductor Every person Deductee Resident person Rate of TDS 10% recipient company; 5% it others. Exemption Commission does not exceed ₹15,000 for the whole year. Payments to Non-resident Sportsmen or Sports Associations – Section 194E Deductor Every person Deductee Income Participation in games in India Sportsman – non-resident & non-citizen  Advertisement Contribution of articles on game  Game played in India Performance in India  Sports association – non-resident  Entertainer – non-resident & non-citizen  Rate of TDS 20% + surcharge + EC + SHEC Commission, etc., on the Sale of Lottery Tickets – Section 194G Income Commission, etc., on the sale of lottery tickets Deductor Every person Deductee Any person Rate of TDS 10% Exemption Commission, etc. does not exceed ₹15,000 for the whole year. Commission or Brokerage – Section 194H Income Commission or brokerage Deductor  Every person except Individual/HUF  Individual/HUF shall be required to deduct TDS in case his Deductee Rate of TDS accounts were required to be audited u/s 44AB for the Exemption preceding financial year. Resident person 10%  Commission payable by MTNL/BSNL to their public call office franchisees  Commission, etc. does not exceed ₹15,000 for the whole year.  Commission, etc. in relation to securities 25

Rent – Section 194-I Income Rent (whether deductee is owner or not) Deductor  Every person except Individual/HUF  Individual/HUF shall be required to deduct TDS in case his accounts were required to be audited u/s 44AB for the preceding financial year. Deductee Resident person Rate of TDS  Rent for plant & machinery – 2%  Land, buildings, furniture & fittings – 10% Exemption  Rent does not exceed ₹1,80,000 for the whole year. Payment for Purchase of Immovable Property – Section 194-IA Income Payment for purchase of immovable property (whether stock-in-trade or capital asset) Deductor Every person including individual Deductee Resident person Rate of TDS 1% Exemption  Purchase price is less than ₹50 lacs  Rural agricultural land Rent payable by individual/ HUF more than 50000 pm – 194 IB With effect from 1 June 2017 any individual or HUF responsible for paying rent for land or building is liable to deduct tax at source @ 5% provided the quantum of rent is more than 50000 pm (or part of month) Tax will be deducted in the last month of previous years or last month of tenancy whichever is earlier. Rate of TDS shall be 5% Tenant is not required to obtain TAN for this purpose but can use his PAN for the purpose of deposit of TDS. Fees for Professional or Technical Services – Section 194J Income  Fees for professional services – specified profession referred u/s 44AA (Sports Persons, Umpires and Referees, Coaches and Trainers, Team Physicians and Physiotherapists, Event Managers, Commentators, Anchors and Sports Columnists)  Fees for technical services  Royalty 26

 Remuneration/fees/commission to non-employee director Deductor  Every person except Individual/HUF  Individual/HUF shall be required to deduct TDS in case his accounts were required to be audited u/s 44AB for the preceding financial year. Deductee Resident person Rate of TDS 10% Exemption  If payment made by Individual/HUF for services used exclusively for personal purposes.  If payment does not exceed ₹30,000 for the whole year. Every nature of income to be seen separately.  No such limit for payments to non-employee director.  No TDS on acquisition of software if seller has already deducted TDS on such software and selling the same without any further modification. Payment of Compensation on Acquisition of Immovable Property – Section 194LA Income Compensation/enhanced compensation for compulsory acquisition of immovable property Deductor Every person Deductee Resident person Rate of TDS 10% Exemption  Payment does not exceed ₹2,00,000 for the whole year.  Compulsory acquisition of agricultural land whether urban or rural Other Sums – Section 195 Income Any payment which is chargeable under Income-tax Act, 1961 Deductor Every person (whether resident or non-resident) Deductee Non-resident person or foreign company Rate of TDS Rates in force + surcharge + EC + SHEC Other Provisions 1. TDS at Lower Rate or at NIL Rate – Section 197 27

In this regard, application may be made to jurisdictional AO. If AO is satisfied that total income of the assessee justifies TDS at lower rate or at NIL rate, he may issue certificate to that effect to the assessee. 2. Self-declaration for TDS at NIL Rate – Section 197A U/s 193 & 194A, assessee (other than company or firm) may submit a declaration to the deductor that tax liability on his total income shall be nil, and in that case deductor shall not deduct TDS, provided interest for the whole year does not exceed maximum amount which is not chargeable to tax. 3. TDS shall be deducted at the time of payment or credit in books of accounts whichever is earlier. This provision shall not be applicable in case of payment in the nature of salaries and winnings from lotteries, etc. In these cases, TDS shall be deducted at the time of actual payment only. 4. Where any asset is held jointly by two or more persons, credit of TDS on income arising out of such asset shall be shared by co-owners in the same proportion in which they have shared income. 5. Deposit of TDS Deducted with CG – Section 200(1) TDS deducted by the deductor shall be deposited with the CG by 7th of next month. In case of TDS related to month of March, same shall be deposited by April 30th. 6. Consequences if TDS is not Deducted or Deposited – Section 201 (a) Interest @1%pm shall be levied from the date on which TDS was deductible till the date on which TDS is actually deducted. Interest @ 1.5%pm shall be levied from the date on which TDS was deducted till the date on which TDS is deposited by the deductor. Such interest shall be deposited with CG before furnishing quarterly statements. (b) If TDS is not deposited after deduction, same (alongwith interest) shall be charge upon assets of the deductor. (c) In case deductor fails to deduct tax, he shall not be deemed to be an assessee in default if deductee himself pays such tax and deductor furnishes certificate to that effect from a CA. In this case, interest shall be levied till the date on which deductee has furnished his ROI. Further, it shall be deemed that deductor has deducted & deposited TDS on the date on which deductee has furnished his ROI. Consequential impacts of the same shall be u/h PGBP. 28

7. Submission of Quarterly Statements – Section 200(3) Every deductor shall submit quarterly statements of TDS deducted & deposited with CG by 15th of month following the quarter. In case of quarter ending March, statement shall be submitted by 15th May. 8. Fee for Default in Submission of Quarterly Statements – Section 234E 200/day, maximum limit – amount of TDS 9. Certificate for TDS to Deductee – Section 203 Deductor shall issue certificate for TDS in Form No. 16 (for TDS on salaries), 16B (for TDS u/s 194-IA) & Form No. 16A (for TDS on any other income). 10. TAN – Section 203A Every deductor shall apply for TAN (Tax Deduction & Collection Account Number) within 1 month from the end of the month in which TDS was deducted. 11. Statement by Income-tax Authority of Tax Deducted – Section 203AA Income-tax authority shall furnish a statement (annually) to the deductee in Form No. 26AS of the tax deducted & received by the CG. 12. Requirement to Furnish PAN – Section 206AA If deductee does not furnishes his PAN or quotes wrong PAN to the deductor, then deductor shall deduct TDS @ 20% or rates prescribed in relevant sections, whichever is higher. Further, application u/s 197 & self-declaration u/s 197A shall not be accepted in such circumstances. 13. No TDS Deductible – Section 196 No TDS required to be deducted in case payments made to Govt., RBI, corporation established by CG whose income is exempt & Mutual Fund. 14. TDS on Service Tax Portion If service tax charged by the service provider is separately indicated in the invoice, then TDS shall not be deducted on service tax portion, but only on fees charged for services provided. 1.3.6. Interest and Penalties S. Section Default Penalty Amount 1. 271(1)(b) Failure to comply with notice ₹10,000 for each failure u/s 142(1)/143(2) or direction u/s 142(2A) 29

2. 271A Failure to keep/maintain ₹25,000 books u/s 44AA or retain for period specified u/s 44AA 3. 271AA - Fails to keep & maintain 2% of the value of each any information and international transaction or document required by specified domestic section 92D(1)/(2) transaction entered into by - Fails to report such such person transaction - Maintains or furnishes an incorrect information or document 4. 271G Failure to furnish 2% of the value of the information/document u/s international transaction or 92D(3) – power with specified domestic AO/TPO/CIT(A) transaction for each such (w.e.f. 01/10/2014) failure 5. 271B Failure to get accounts audited ½% of sales / turnover / or furnish a report u/s 44AB receipts or ₹1,50,000, whichever is less 6. 271BA Failure to furnish report u/s ₹1,00,000 92E 7. 271C - Fails to deduct TDS whole Amount equal to TDS not or in part deducted or deposited - Fails to pay CDT - Fails to deposit tax in case of winnings are in kind 8. 271CA Fails to collect TCS whole or in Amount equal to TCS not part collected 9. 271D Takes/accepts loan/deposit in Amount equal to such contravention of section 269SS loan/deposit 10. 271E Pays loan/deposit in Amount equal to such contravention of section 269T repayment 11. 271H - Fails to deliver TDS/TCS Min – 10,000 quarterly return Max – 1,00,000 - Furnishes incorrect information in such return 30

12. 272AA Failure to comply with ₹1,000 provisions of section 133B (power to collect certain information) 13. 272B - Failure to comply with ₹10,000 provisions of section 139A - Quotes/intimates PAN which is false and he believes it to be false 14. 272BB - Fails to comply with ₹ 10,000 provisions of section 203A (to obtain TAN or to quote TAN) - Quotes TAN which is false and he believes it to be false 1.3.7. Under Reporting and Misreporting of Income (270A) w.e.f. Assessment year 2017-18 the penalty for concealment of income etc. is applicable as follows: (A) If under reporting of income is due to misreporting 200% of tax payable on under reported income. (B) If under reporting of income is not due to misreporting 50% of tax payable on under reported income 1.3.8. Tax Refund When Right to Claim Refund Arises [Section 237] Where any person satisfies the Assessing Officer that the amount of tax paid by him or on his behalf for any Assessment Year exceeds the amount with which he is properly chargeable under this Act for that year, he is entitled to the refund of the excess amount paid. Who Can Claim Refund? [Section 238] Usually refund can be claimed by a person who has made excess payment of tax. If income of a person is included in the total income of another person u/s. 60 to 64, the refund can be claimed by the latter and not by the former. Where a person cannot claim any refund because of his death, incapacity, insolvency, liquidation or other cause, his 31

legal representatives or the trustee or guardian or receiver, as the case may be, will be entitled to claim and receive such refund for the benefit of such person or his estate. Interest on Refund [Section 244A] Interest on Refund of Income Tax: Where refund of any amount becomes due to the assessee under the Income Tax Act, he shall be entitled to receive, in addition to the said amount, simple interest on the refund calculated in the following manner: (a) Where the refund is out of any tax deducted at source/ tax collected at source or advance tax paid or treated as paid u/s 199 during the financial year, interest will be paid at the rate of ½%, per month or part of a month from the period starting (i) From the 1st April of assessment year to the date on which refund is granted, if the return has been furnished on or before prescribed; or (ii) From the date of furnishing of return of income to the date on which the refund is granted, if return furnished after due date. (a) Where the refund is out of tax paid on self-assessment then interest will be @½% per month or part of month from date of furnishing of return of income or payment of tax whichever is later, to the date on which refund is granted. Set Off of Refunds against the Remaining Payable [Section 245] Where a refund is found to be due to any person, the tax authorities may, in lieu of payment of the refunds, set off the amount of refund against the sum payable under the Income-tax Act. Case Law: Prior intimation to assessee whether mandatory: While making set off of refunds against tax remaining payable, intimation is certainly not a jurisdictional requirement and absence thereof is merely an irregularity and, therefore, want of intimation would not vitiate the adjustment – Brij Bhushan Lal & Sons vs. Designated Authority 246 ITR 353. Refund due to assessee cannot be adjusted against demand raised, against a third party Archana Shukla vs. Joint CIT 244 ITR 829. Where refund arises as a result of any order passed in appeal or other proceedings under the Act, no formal application from the assessee is required. The Assessing Officer has to grant refund suomoto. 32

Sub-Section 1.4 Residency Rules 1.4.1. Residential Status of an Individual – Section 6(1) An individual is said to be resident in India in any previous year, if he: (a) is in India in that year for 182 days or more; or (b) is in India for 60 days or more in that year & was in India for 365 days or more in the 4 years preceding that year. ANALYSIS 1. The term ―stay in India‖ includes stay in the territorial waters of India (i.e. 12 nautical miles into the sea from the Indian coastline). Even the stay in a ship or boat moored in the territorial waters of India would be sufficient to make the individual resident in India. 2. It is not necessary that the period of stay must be continuous or active nor is it essential that the stay should be at the usual place of residence, business or employment of the individual. 3. For the purpose of counting the number of days stayed in India, both the date of departure as well as the date of arrival are considered to be in India. 4. The residence of an individual for income-tax purpose has nothing to do with citizenship, place of birth or domicile. An individual can, therefore, be resident in more countries than one even though he can have only one domicile. Exception to above Conditions In following two cases, an individual shall be resident in India only if he fulfils the condition of 182 days: (a) He is a citizen of India and leaves India during the relevant previous year as a member of the crew of an Indian ship, or for the purposes of employment outside India; (b) He is a citizen of India, or a person of Indian origin (a person is said to be of Indian origin if he or either of his parents or either of his grandparents were born in undivided India), who lives outside India & comes on a visit to India in relevant previous year. Resident & Ordinarily Resident (ROR) A resident individual said to be ROR for the relevant previous year when (a) He was resident in India for any 2 years (atleast) out of preceding 10 years, and 33

(b) He was in India for 730 days or more in preceding 7 years. Otherwise he shall be Resident but not ordinarily resident in India (RNOR). 1.4.2. Residential Status of Other Taxable Entities Hindu Undivided Family (HUF) – Section 6(2) A HUF shall be resident in India in any previous year except where during that year the control and management of its affairs is situated wholly outside India. Resident & Ordinarily Resident (ROR) A resident HUF said to be ROR for the relevant previous year when (a) His karta/manager was resident in India for any 2 years (atleast) out of preceding 10 years, and (b) His karta/manager was in India for 730 days or more in preceding 7 years. Otherwise it shall be Resident but not ordinarily resident in India (RNOR). Company – Section 6(3) A company shall be resident in India in any previous year, if - (i) it is an Indian company; or (ii) its place of effective management, in that year, is in India. Other Persons (i.e. Firm, AOP, BOI, Artificial Juridical Person) – Section 6(2)/(4) Any person shall be resident in India in any previous year except where during that year the control and management of its affairs is situated wholly outside India. Analysis In case of company & other persons, person shall be either resident or non-resident. There is no concept of ROR & RNOR 1.4.3. Indian Income and Foreign Income The taxability of a certain item as income would depend upon the method of accounting followed by the assessee. This is because under the cash system of accounting an income would be taxable only when it is received by the assessee himself or on his behalf. But under the mercantile system it would be taxable once the assessee gets the legal right to claim the amount. However, it has been specifically provided that in the case of income from salaries, the liability to tax arises immediately when the income is due to the assessee irrespective of the method of accounting followed. Likewise, in the case of dividends, the income would beincluded in total income of the shareholder under 34

section 8 in the year in which the final dividend is declared and, in the case of interim dividend, in the year in which they are made unconditionally available to the shareholders. Meaning of “Income Received or Deemed to be Received” All assessees are liable to tax in respect of the income received or deemed to be received by them in India during the previous year irrespective of - (i) their residential status, and (ii) the place of its accrual. Income is to be included in the total income of the assessee immediately on its actual or deemed receipt. The receipt of income refers to only the first occasion when the recipient gets the money under his control. Therefore, when once an amount is received as income, remittance or transmission of that amount from one place or person to another does not constitute receipt of income in the hands of the subsequent recipient or at the place of subsequent receipt. Income Deemed to be Received Under section 7, the following shall be deemed to be received by the assessee during the previous year irrespective of whether he had actually received the same or not - (i) The annual accretion in the previous year to the balance to the credit of an employee participating in a recognised provident fund (RPF). Thus, the contribution of the employer in excess of 12% of salary or interest credited in excess of 9.5% p.a. is deemed to be received by the assessee. (ii) The taxable transferred balance from unrecognized to recognized provident fund (being the employer‘s contribution and interest thereon). (iii) 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 under section80CCD. Income Deemed to Accrue or Arise in India [Section 9] Certain types of income are deemed to accrue or arise in India even though they may actually accrue or arise outside India. The categories of income which are deemed to accrue or arisen India are: (i) Any income accruing or arising to an assessee in any place outside India whether directly or indirectly (a) through or from any business connection in India, (b) through or from any property in India, (c) through or from any asset or source of income in India or (d)through the transfer of a capital asset situated in India. 35

The legislative intent of this clause is to cover incomes, which are accruing or arising, directly or indirectly from a source in India. The section codifies the source rule of taxation, which signifies that where a corporate structure is created to route funds, the actual gain or income arises only in consequence of the investment made in the activity to which such gains are attributable and not the mode through which such gains are realized. This principle which supports the source country‘s right to tax the gains derived from offshore transactions where the value is attributable to the underlying assets, is recognized internationally by several countries. Accordingly, Explanation 4 clarifies that the expression ―through‖ shall mean and include and shall be deemed to have always meant and included ―by means of‖, ―in consequence of‖ or ―by reason of‖. Further, Explanation 5 clarifies that an asset or a capital asset being any share or interest in accompany or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value further also Exp. 687 substantially from the assets located in India. (ii) Income, which falls under the head ―Salaries‖, if it is earned in India. Any income under the head ―Salaries‖ payable for rest period or leave period which is preceded and succeeded by services rendered in India, and forms part of the service contract of employment, shall be regarded as income earned in India. (iii) Income from ‗Salaries‘ which is payable by the Government to a citizen of India for services rendered outside India (However, allowances and perquisites paid outside India by the Government is exempt). (iv) Dividend paid by a Indian company outside India. (v) Interest (discussed in para 5 below) (vi) Royalty (discussed in para 6 below) (vii) Fees for technical services (discussed in para 7 below) (1)(a) Income from Business Connection The expression ―business connection‖ has-been explained in Explanation 2 to section 9 (1)(i). (i) ‗Business connection‘ shall include any business activity carried out through a person acting on behalf of the non-resident. (ii) He must have an authority which is habitually exercised to conclude contracts on behalf of the non-resident. However, if his activities are limited to the purchase of goods or merchandise for the non-resident, this provision will not apply. 36

(iii) Where he has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident, a business connection is established. (iv) Business connection is also established where he habitually secures orders in India, mainly or wholly for the non-resident. Further, there may be situations when other non-residents control the above-mentioned non-resident. Secondly, this non- resident may also control other non-residents. Thirdly, all other non-residents may be subject to the same common control, as that of the non-resident. In all the three situations, business connection is established, where a person habitually secures orders in India, mainly or wholly for such non-residents. Exception: \"Business connection\", however, shall not be held to be established in cases where the non-resident carries on business through a broker, general commission agent or any other agent of an independent status, if such a person is acting in the ordinary course of his business. A broker, general commission agent or any other agent shall be deemed to have an independent status where he does not work mainly or wholly for the non-resident. He will however, not be considered to have an independent status in the three situations explained in (iv) above, where he is employed by such a non-resident. Where a business is carried on in India through a person referred to in (ii), (iii) or (iv) mentioned above, only so much of income as is attributable to the operations carried out India shall be deemed to accrue or arise in India. (1) (b) &(c) Income from Property, Asset or Source of Income Any income which arises from any property (movable, immovable, tangible and intangible property) would be deemed to accrue or arise in India eg. hire charges or rent paid outside India for the use of the machinery or buildings situated in India, deposits with an Indian company for which interest is received outside India etc. (1)(d) Income through the Transfer of a Capital Asset Situated in India Capital gains arising from the transfer of a capital asset situated in India would be deemed to accrue or arise in India in all cases irrespective of the fact whether (i) the capital asset is movable or immovable, tangible or intangible; (ii) the place of registration of the document of transfer etc., is in India or outside; and (iii) the place of payment of the consideration for the transfer is within India or outside. Explanation 1 to section 9(1)(i) lists out income which shall not be deemed to accrue or arisen India. They are given below: 37

1. In the case of a business, in respect of which all the operations are not carried out in India [Explanation 1(a) to section 9(1)(i)] :In the case of a business of which all the operations are not carried out in India, the income of the business deemed to accrue or arise in India shall be only such part of income as is reasonably attributable to the operations carried out in India. Therefore, it follows that such part of income which cannot be reasonably attributed to the operations in India, is not deemed to accrue or arise in India. 2. Purchase of goods in India for export [Explanation 1(b) to section 9(1)(i)]: In the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export. 3. Collection of news and views in India for transmission out of India [Explanation1(c) to section 9(1)(i)]: In the case of a non-resident, being a person engaged in the business of running a news agency or of publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in India to him through or from activities which are confined to the collection of news and views in India for transmission out of India. 4. Shooting of cinematograph films in India [Explanation 1(d) to section 9(1)(i)]: In the case of a non-resident, no income shall be deemed to accrue or arise in India through or from operations which are confined to the shooting of any cinematograph film in India, if such non-resident is : (i) an individual, who is not a citizen of India or (ii) a firm which does not have any partner who is a citizen of India or who is resident in India ; or (iii) a company which does not have any shareholder who is a citizen of India or who is resident in India. (2) & (3) Income from Salaries: Under section 9(1)(ii) income which falls under the head ‗salaries‘, would be deemed to accrue or arise in India, if it is in respect of services rendered in India. Exception under section 9(2): Pension payable outside India by the Government to its officials and judges who permanently reside outside India shall not be deemed to accrue or arise in India. It may however, be noted here that the salary of an employee in the United Nations Organisation (UNO) or in its constituent bodies is exempt under United Nations(Privilege and Immunity) Act. (4) Income from Dividends All dividends paid by an Indian company must be deemed to accrue or arise in India. Under section 10(34), income from dividends referred to in section115-O are exempt 38

from tax in the hands of the shareholder. It may be noted that dividend distribution tax under section 115-O does not apply to deemed dividend under section2(22)(e), which is chargeable in the previous year in which such dividend is distributed or paid. (5) Interest Under section 9(1)(v), an interest is deemed to accrue or arise in India if it is payable by - (i) the Central Government or any State Government. (ii) a person resident in India (except where it is payable in respect of any money borrowed and used for the purposes of a business or profession carried on by him outside India or for the purposes of making or earning any income from any source outside India) (iii) a non-resident when it is payable in respect of any debt incurred or moneys borrowed and used for the purpose of a business or profession carried on in India by him. Interest on money borrowed by the non-resident for any purpose other than a business or profession, will not be deemed to accrue or arise in India. Thus, if a non-resident ‗A‘ borrows money from a non-resident ‗B‘ and invests the same in shares of an Indian company, interest payable by ‗A‘ to ‗B‘ will not be deemed to accrue or arise in India. (6) Royalty Royalty will be deemed to accrue or arise in India when it is payable by - (i) the Government; or (ii) a person who is a resident in India except in cases where it is payable for the transfer of any right or the use of any property or information or for the utilization of services for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (iii) a non-resident only when the royalty is payable in respect of any right, property or information used or services utilised for purposes of a business or profession carried on in India or for the purposes of making or earning any income from any source in India. (iv) Interest payable by PE to the Head Office outside India or any PE or any other part of such non-resident outside India should be deemed to arise or accrue in India. 39