Taxation Laws2

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COM633

: TAXATION LAWS - II

Objective: 1. To familiarize and educate the student with the concept of Income Tax in India, as regards Capital Gains, Clubbing of Income, Set Off and Carry Forward of Losses, Deductions from Gross Total Income, Computation of Total Income and Tax Liability, Assessment procedure and Income Tax Authorities 2. To familiarize and educate the student on certain important indirect tax legislations- Central Excise Act, Service Tax, Central Sales Tax and VAT. (The paper is divided in to two parts) PART- A Unit: - 1 Capital Gains: (Individual Assessee, in respect of landed property & Securities only) Sec.45, 47, 48,49. 51, 54, 54B, 54D, 54E, 54EA, 54EB, 54EC, 54ED, 54F, 54H and 55.Capital Asset - Transfer of Capital assets - Transactions not regarded as transfer - Deductions – Exemptions - Computation of income from Capital Gain. Unit: - 2 Clubbing of Income: Persons - Included In Assessee’s Total Income (Theory only)

Income of Other

Unit: - 3 Set Off and Carry Forward of Losses: Different sources under the same head of income - Sources from different heads of income-special provisions regarding income from House property. (Theory only)

Unit: - 4 Computation of Total Income and Tax Liability: Deduction from Gross Total Income u/s 80C– 80CCC – 80CCD – 80D – 80DD – 80DDB – 80E – 80G – 80GG – 80GGA – 80U – Computation of Total Income and Tax Liability of individual assessees only. Unit: - 5

Procedure for Assessment:

Self Assessment- Assessment-Best Judgment Assessment- Income escaping Assessment-Notice- Rectification of mistakes-time limit for completion. Unit: - 6

Income Tax Authorities:

Income Tax Authorities: A brief discussion on - Income Tax Officer and Powers and Functions - Central Board of Direct Taxes, Functions - Commissioner of Income Tax, Functions.

Books for Reference: 1. Dr. Vinod K. Singhania: Direct Taxes – Law and Practice, Taxman publication. 2. T.N.Manoharan: Students Handbook on Income Tax Law. Snow white publications. 3. Bhagwathi Prasad: Direct Taxes – Law and Practice, Vishwa Prakashana. 4. Gaur & Narang: Income Tax.

PART- B

Unit: - 7

The Central Excise Act:

Introduction; Definitions: Central Excise Officer, Excisable Goods, Manufacture, and Wholesale Dealer, and Assessee (Rule-2); Duty to be levied; CENVAT; Valuation of excisable goods for levying duty and with reference to retail price; remission of duty on deficient goods; registration of persons; restriction on possession of excisable goods. Rules regarding removal of goods, Assessment and payment of duty, filing of returns. (CENVAT Credit Rules excluded); Powers of Central Excise Officers

Unit: - 8

Service Tax:

Introduction; Meaning and classification of taxable service (Sec.65A); Charge of service tax (Sec.66 & 66A); valuation of taxable services for the purpose of charging (Sec.67); payment of service tax (Sec.68); registration (Sec.69); furnishing of returns (Sec.70) Service Tax to be deposited with the Central Govt. (Sec.73A); Penalty for failure to pay (Sec.76)(*Taxable service pertaining to (Definitions in Sec.65) a) Clearing and Forwarding, (b) Courier Agency, (c) Manpower recruitment or supply agency, (d) Practicing Chartered Accountant and (e) Security Agency only)(Theory only) Unit: - 10

Value Added Tax:

(Karnataka VAT Act 2003 as amended by Act of 2005) Introduction- meaning of the terms –Agricultural Produce, Business, Capital Goods, Dealer, Goods, Prescribed Authority, Taxable Turnover, Total Turnover, Turnover and Works Contract. (Sec.2), Levy of Tax (Sec.3), Liability to Tax and Rates (Sec.4), Exemptions (Sec.5), Collection of Tax (Sec.9) Deduction at Source (Sec.9A), Output

Tax, Input Tax, and Net Tax (Sec.10), Input Tax restrictions (Sec.11), Deduction of Input Tax on Capital Goods (Sec.12), Special Rebates (Sec.14). (Theory only)

UNIT- I CAPITAL GAINS INTRODUCTION When we buy any kind of property for a lower price and then subsequently sell it at a higher price, we make a gain. The gain on sale of a capital asset is called capital gain. This gain is not a regular income like salary, or house rent. It is a One-time gain; in other words the capital gain is not recurring, i.e., not occur again and again periodically. Whenever there is a loss on sale of any capital asset it will be termed as loss under the head capital gain.

BASIS OF CHARGE The capital gain is chargeable to income tax if the following conditions are satisfied: 1. There is a capital asset. 2. Assessee should transfer the capital asset. 3. Transfer of capital assets should take place during the previous year. 4. There should be gain or loss on account of such transfer of capital asset. 5. Such profits or gains is not exempt from tax under sections 54,54B,54D,54EC,54F,54G & 54GA

CAPITAL ASSET Any income profit or gains arising from the transfer of a capital asset is chargeable as capital gains. Capital Asset means property of any kind, whether fixed or circulating, movable or immovable, tangible or intangible, held by the assesses, whether or not connected with his business or profession, but does not include,

a) Stock-in-trade, consumable stores or raw-materials held for the purpose of business or profession.

b) Personal effects like wearing apparel, furniture, motor vehicles etc., held for personal use of the tax payer or any member of his family. However, jewellery, even if it is for personal use, is a capital asset. c) Agricultural land in India other than the following: Land situated in any area within the jurisdiction of muni-cipality, municipal corporation, notified area committee, town area committee, town committee, or a cantonment board which has a population of not less than 10,000 according to the figures published before the first day of the previous year based on the last preceding census. • Land situated in any area around the above referred bodies upto a distance of 8 kilometers from the local limits of such bodies as notified by the Central Government (Please see Annexure 'A' for the notification). •

d) 6 1/2 per cent Gold Bonds, 1977, 7 per cent Gold Bonds, 1980, National Defence Gold Bonds, 1980 and Special Bearer Bonds, 1991 issued by the Central Government. e) Gold deposit bonds issued under the Gold Deposit Scheme 1999 notified by the Central Government. Though there is no definition of "property" in the Income-tax Act, it has been judicially held that a property is a bundle of rights which the owner can lawfully exercise to the exclusion of all others and is entitled to use and enjoy as he pleases provided he does not infringe any law of the State. It can be either corporeal or incorporeal. Once something is determined as property it becomes a capital asset unless it figures in the exceptions mentioned above. Something is determined as property it becomes a capital asset unless it figures in the exceptions mentioned above.

TYPES OF CAPITAL ASSET There are two types of Capital Assets: 1. Short Term Capital Assets (STCA): An asset, which is held by an assessee for less than 36 months, immediately before its transfer, is called short Term Capital Assets. In other words, an asset, which is transferred within 36 months of its acquisition by assessee, is called Short Term Capital Assets. 2. Long Term Capital Assets (LTCA): An asset, which is held by an assessee

for 36 months or more, immediately before its transfer, is called long

Term Capital Assets. In other words, an asset, which is transferred on or after 36 months of its acquisition by assessee, is called Long Term Capital Assets. The period of 36 months is taken as 12 months under following cases: Equity or Preference shares, Securities like debentures, government securities, which are listed in recognised stock exchange, Units of UTI Units of Mutual Funds Zero Coupon Bonds

TYPES OF CAPITAL GAIN Capital gain arising on transfer of a short term capital asset is short term capital gain, whereas transfer of long term capital asset generates long term capital gain. The tax incidence is generally higher in the case of short-term capital gain as compared to long term capital gain.

TRANSFER Capital gain arises on transfer of capital asset. The word transfer under income tax act is defined under section 2(47). As per section 2 (47) Transfer, in relation to a capital asset, includes sale, exchange or relinquishment of the asset or extinguishments of any right therein or the compulsory acquisition thereof under any law. In simple words Transfer includes: Sale of asset Exchange of asset Relinquishment of asset (means surrender of asset) Extinguishments of any right on asset (means reducing any right

on asset)

Compulsory acquisition of asset.

i) Sale, exchange or relinquishement of a capital asset A sale takes place when title in the property is transferred for a price. The sale need not be voluntary. An involuntary sale like that by a Court of a property of judgement debtor at the instance of a decree holder is also transfer of a capital asset. An exchange of capital asset takes place when the title in one property is passed in consideration of the title in another property. Relinquishment of a capital asset arises when the owner surrenders his rights in property in favour of another person. For example, the transfer of rights to Subscribe the shares in a company under a 'Right Issue' to a third person. ii) Extinguishment of any rights in a capital asset This covers every possible transaction which results in destruction, extinction, termination, Cessation or cancellation of all or any bundle of rights in a capital asset. For example, termination of a lease or and of a mortgagee interest in a property. iii) Compulsory acquisition of the capital asset under any law Acquisition of immovable properties under the Land acquisition Act, acquisition of industrial undertaking under the Industries (Development and Regulation) Act or preemptive purchase of immovable properties by the Income-tax Department are some of the examples of compulsory acquisition of a capital asset. iv) Conversion of a capital asset into stock-in-trade Normally, there can be no transfer if the ownership in an asset remains with the same person. However the Income-tax Act provides an exception for the purpose of capital gains. When a person converts any capital asset owned by him into stock-in-trade of a business carried on by him, it is regarded as a transfer. For example, where an investor in shares starts a business of dealing in shares and treats his existing investments as the stock-in-trade of 6 new business, such conversion arises and is regarded as a transfer. v) Part performance of a contract of sale Normally transfer of an immovable property worth Rs.100/- or more is not complete

without execution and registration of a conveyance deed. However, section 53A of the Transfer of Property Act envisages situations where under a contract for transfer of an

immovable property, the purchaser has paid the price and has taken possession of the property, but the conveyance is either not executed or if executed is not registered. In such cases the transferor is debarred from agitating his title to the property against the purchaser. The act of giving possession of an immovable property in part performance of a contract is treated as "transfer" for the purposes of capital gains. This extended meaning of transfer applies also to cases where possession is already with the purchaser and he is allowed to retain it in part performance of the contract. vi) Transfer of rights in immovable properties through the medium of co-operative societies, companies etc. Usually flats in multi-storeyed building and other dwelling units in group housing schemes are registered in the name of a co-operative society formed by the individual allottees. Sometimes companies are floated for his purpose and allottees take shares in such companies. In such cases transfer of rights to use and enjoy the flat is effected by changing the membership of co-operative society or by transferring the shares in the company. Possession and enjoyment of immovable property is also made by what is commonly known as Tower of Attorney' transfers. All these transactions are regarded as transfer. vii) Transfer by a person to a firm or other or Body of a person to a Association of Persons (AOP) Individuals (BOI) Normally, firm/AOP/BOI is not considered a distinct legal entity from its partners or members and so transfer of a capital asset from the partners to the firm/AOP/BOI is not considered as 'Transfer'. However, under the Capital Gains, it is specifically provided that if any capital asset is transferred by a partner to a firm/AOP/BOI by way of capital contribution or otherwise, the same would be construed as transfer. viii) Distribution of capital assets on Dissolution Normally, distribution of capital assets on dissolution of a firm/AOP/BOI is also not considered as transfer for file same reasons as mentioned in (vii) above. However, folder the capital gains, this is considered as transfer by the firm/AOP/BOI and therefore gives rise to capital gains .| the case of the firm/AOP/BOI. ix) Distribution of money or other assets by a Company on liquidation (i) If a shareholder receives any money or other assets from a Company in liquidation, the shareholder is liable to pay capital gains as the same would have been received in

lieu of the shares held by him in the company. However, if the assets of a company are distributed to the shareholders on its liquidation, such distribution shall not be regarded as transfer by the company. (ii)Transactions not regarded as Transfer The following, though may fall under the above definition of transfer are to be treated as not transfer for the purpose of computing Capital Gains: Distribution of capital assets on the total or partial, partition of a Hindu Undivided

Family; of a capital asset under a gift or will or an irrevocable trust except transfer under a gift or an irrevocable trust, of shares, debentures or warrants allotted by a company to its employees under Employees' Stock Option Plan or Scheme; iii) transfer of a capital asset by a company to its subsidiary company, if: a) the parent company or its nominees hold the whole of the share capital of a subsidiary company, b) the subsidiary company is an Indian company, c) the capital asset is not transferred as stock-in- trade, d) the subsidiary company does not convert such capital asset into stock-in-trade for a period of 8 years from the date of transfer, and e) the parent company or its nominees continue to hold the whole of the share capital of the subsidiary company for 8 years from the date of transfer. iv) transfer of a capital asset by a subsidiary company to the holding company, if: a) the whole of the share capital of the subsidiary company is held by the holding company, b) the holding company is an Indian Company, c) the capital asset is not transferred as stock-in-trade, d) the holding company does not convert such capital asset into stock-in-trade for a period of 8 years from the date of transfer, and e) the holding company or its nominees continue or hold the whole of the share capital of the subsidiary company for 8 years from the date of transfer.

v) In a scheme of amalgamation, transfer of a capital asset by the amalgamating company to the amalgamated company if the amalgamated company is an Indian company. vi) transfer of shares of an amalgamating company, if: a) the transfer is made in consideration of the allotment of share or shares in the amalgamated company, and b) the amalgamated company is an Indian company. vii) transfer of shares of an Indian Company by an amalgamating foreign company to the amalgamated foreign company, if: a) at least twenty-five per cent of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company and b) such transfer does not attract tax on capital gains in the country, in which the amalgamating company is incorporated. viii) in a demerger : a) transfer of a capital asset by the demerged company to the resulting company, if the resulting company is an Indian company; b) transfer of share or shares held in an Indian company by the demerged foreign company to the resulting foreign company if: i) the shareholders holding not less than three-fourths in value of the shares of the demerged foreign company continue to remain shareholders of the resulting foreign company; and ii) such transfer does not attract tax on capital gains in the country, in which the demerged foreign company is incorporated. c) Transfer or issue of shares, in consideration of demerger of the undertaking by,the resulting company to the shareholders of the demerged company. ix) Transfer of bonds or Global Depository Receipts, purchased in foreign currency, by a non-resident to another non-resident outside India. x) Transfer of agricultural land in India effected before first of March,'70. xi) transfer of any work of art, archaeological, scientific or art collection, book, manuscript, drawing, painting, photograph or print, to the Government or a University or the National Museum, National Art Gallery, National Archives or any such other public museum or institution notified by the Central Government in the Official Gazette to be of national importance or to be of renown throughout any State or States.

xii) transfer by way of conversion of bonds or debentures, debenture stock or deposit

certificate in any form, of a company into shares or debentures of that company. xiii) transfer of membership of a recognised stock exchange made by a person (other than a company) on or before 31.12.1998, to a company in exchange of shares allotted by that company. However, if the shares of the company are transferred within 3 years of their acquisition, the gains not charged to tax by treating their acquisition as not transfer would be taxed as capital gains in the year of transfer of the shares.

xiv) transfer of land of a sick industrial company, made under a scheme prepared and sanction under section 18 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) where such sick industrial company is being managed by its workers' co-operative and such transfer is made during the period commencing from the previous year in which the said company has become a sick industrial company under section 17(1) of that Act and ending with the previous year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses. xv) Transfer of a capital asset to a company in the course of corporitisation of a recognised stock exchange in India as a result of which an Association of Persons (AOP) or Body of Individuals (BOI) is succeeded by such company,if: a) all the liabilities of the AOP or BOI relating to the business immediately before the succession become the assets and liabilities of the company, b) corporitisation is carried out in accordance with a scheme which is approved by Securities and Exchanges Board of India (SEBI). (xvi) Where a firm is succeeded by a company in the business carried on by it as a result of which the firm sells or otherwise transfers any capital asset or intangible asset to the company, if: a) all the assets and liabilities of the firm relating to the business immediately before the succession become the assets and liabilities of the company, b) all the partners of the firm immediately before the succession become the shareholders of the company in the same proportion in which their capital accounts stood in the books of the firm on the date of succession, c) the partners of the firm do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the Company and

d) the aggregate of the shareholding in the company of the partners of the firm is not less than fifty percent of the total voting power in the company and their shareholding continues to be as such for a period of five years from the date of the succession. If the conditions laid down above are not complied with, then the amount of profits or gains arising from the above transfer would be deemed to be the profits and gains of the successor company for the previous year during which the above conditions are not complied with.

xvii) Where a sole proprietary concern is succeeded by a company in the business carried on by it as a result of which the sole proprietary concern sells or otherwise transfers any capital asset or intangible asset to the company, if: a) all the assets and liabilities of the sole proprietary concern relating to the business immediately before the succession become the assets and liabilities of the company. b) the shareholding of the sole proprietor in the company is not less than fifty percent of the total voting power in the company and his shareholding continues to so remain as such for a period of five years from the date of the succession and c) the sole proprietor does not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company. If the conditions laid down above are not complied with, then the amount of profits or gains arising from the above transfer would be deemed to be the profits and gains of the successor company for the previous year during which the above conditions are not complied with. xviii) transfer in a scheme of lending of any securities under an arrangement subject to the guidelines of Securities and Exchanges Board of India (SEBI).

COMPUTATION OF CAPITAL GAINS (section 48) PARTICULARS

AMOUNT

Full Value of Consideration

Less: Cost of Acquisition*(COA)

Cost of Improvement*(COI)

Expenditure on transfer

Capital Gains

Less: Exemptions U/S 54

Taxable Capital Gains



To be indexed in case of LTCA

Short Term Capital Gains (STCG) Short Term Capital Gains is computed as below : Computation of short - term Capital Gains 1. 2. a.

Find out full value of consideration Deduct the following : expenditure incurred wholly and exclusively in connection with such transfer

b. cost of acquisition; and c. cost of improvement 3. From the resulting sum deduct the exemption provided by sections 54B, 54D, 54G 4. The balancing amount is short-term capital gain Long Term Capital Gains (LTCG) Long Term Capital Gains is computed as below: Computation of long - term Capital Gains 1. Find out full value of consideration 2. Deduct the following : a. expenditure incurred wholly and exclusively in connection with such transfer b. indexed cost of acquisition; and c. indexed cost of improvement 3. From the resulting sum deduct the exemption provided by sections 54, 54B, 54D, 54EC, 54ED, 54F and 54G 4. The balancing amount is long-term capital gain

FULL VALUE OF CONSIDERATION Full value of consideration means & includes the whole/complete sale price or exchange value or compensation including enhanced compensation received in respect of capital asset in transfer. The following points are important to note in relation to full value of consideration. The consideration may be in cash or kind. The consideration received in kind is valued at its fair market value. It may be received or receivable. The consideration must be actual irrespective of its adequacy.

COST OF ACQUISITION

Cost of Acquisition (COA) means any capital expenses incurred at the time of acquiring capital asset under transfer, i.e., the purchase price, expenses incurred in the form of registration, storage etc. In other words, cost of acquisition of an asset is the value for which it was acquired by the assessee. Expenses of capital nature for completing or acquiring the title are included in the cost of acquisition. For computing LTCG, the Cost of Acquisition should be indexed as follows: Indexed Cost of Acquisition = COA X CII of Year of transfer CII of Year of acquisition

The indices for the various previous years are given below:

Financial Year

Cost Inflation Index

Financial Year

Cost Inflation Index

2008-2009

582

1993-1994

244

2007-2008

551

1992-1993

223

2006-2007

519

1991-1992

199

2005-2006

497

1990-1991

182

2004-2005

480

1989-1990

172

2003-2004

463

1988-1989

161

2002-2003

447

1987-1988

150

2001-2002

426

1986-1987

140

2000-2001

406

1985-1986

133

1999-2000

389

1984-1985

125

1998-1999

351

1983-1984

116

1997-1998

331

1982-1983

109

1996-1997

305

1981-1982

100

1995-1996

281

1994-1995

259

Example: 1. Cost of acquisition in 1982-83 rs 120000. Find out the indexed cost if sold in 2008-09. Solution: Indexed cost = 120000X582/109 = 640734.

If capital assets were acquired before 1.4.81, the assesses has the option to have either actual cost of acquisition or fair market value as on 1.4.81 as the cost of acquisition. If assesses chooses the value as on 1.4.81 then the indexation will also be done as per the CII of 1981 and not as per the year of acquisition. Cost of acquisition with reference to certain modes or acquisition Where the capital asset became the property of the assessee: a) on any distribution of assets on the total or partial partition of a Hindu undivided family; b) under a gift or will c) by succession, inheritance or devolution; d) on any distribution of assets on the dissolution of a 'firm, body of individuals, or other association of persons, where such dissolution had taken place at any time before 01.04.1987; e) on any distribution of assets on the liquidation of a company; f) under a transfer to a revocable or an irrevocable trust; g) by transfer in a scheme of amalgamation; h) by an individual member of a Hindu Undivided Family living his separate property to the assessee HUF anytime after 31.12.1969. The cost of acquisition of the asset shall be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the asset incurred or borne by the previous owner or the assessee, as the case may be, till the date of acquisition of the asset by the assessee. If the previous owner had also acquired the capital asset by any of the modes above, then the cost to that previous owner who had acquired it by mode of acquisition other than the above, should be taken as cost of acquisition. Where shares in an amalgamated Indian company became the property of the assessee in a scheme of amalgamation the cost of acquisition of the shares of the amalgamated company shall be the cost of acquisition of the shares in the amalgamating company.

Where a share or debenture in a company, became the property of the assessee on conversion of bonds on debentures the cost of acquisition of the asset shall be the part of the cost of debenture, debenture stock or deposit certificates in relation to which such asset is acquired by the assessee. Where shares, debentures or warrants are acquired by the assessee under Employee Stock Option Plan or Scheme and they are taken as perquisites under section 17(2) the cost of acquisition would be the valuation done under section 17(2). Cost of Acquisition of shares in the resulting company, in a demerger. Net book value of the assets transferred in a demerger Net worth of the demerged company immediately before demerger Cost of acquisition of shares of the demerged company. The cost of acquisition of the original shares held by the shareholder in the demerged company will be reduced by the above amount. Where the capital asset is goodwill of a business or a mark or brand name associated with a business, fit to manufacture, produce or process any article or tenancy rights, stage carriage permits or loom hours, cost of acquisition is the purchase price paid by the and in case no such purchase price is paid it is nil. Where the cost for which the previous owner acquired the property cannot be ascertained the cost of acquisition to ,the previous owner means the fair market value on the on which the capital asset became the property of the owner. Where share or a stock of a company became the property of the assessee on : a) the consolidation and division of all or any of the share capital of the company in to shares of larger amount than its existing shares; b) the conversion of any shares of the company into stock; c) the reconversion of any stock of the company into shares; d) the sub-division of any of the shares of the company into shares of smaller amount; or e) the conversion of one kind of shares of the company into another kind.Cost of acquisition of the share or stock is as calculated from the cost of acquisition of the shares or stock from which it is derived.

The cost of acquisition of rights shares is the amount which is paid by the subscriber to get them. In case a subscriber purchases the right shares on renunciation by an existing share holder, the cost of acquisition would include the amount paid by him to the person who has renounced the rights in his favour and also the amount which he pays to the company for subscribing to the shares. The person who has renounced the rights is liable for capital gains on the rights renounced by him and the cost of acquisition of such rights renounced is nil. The cost of acquisition of bonus shares is nil. Where equity share(s) are allotted to a shareholder of a recognised stock exchange in India under a scheme of corporitisation approved by SEBI, the cost of acquisition of the original membership of the exchange is the cost of acquisition of the equity share(s).

COST OF IMPROVEMENT Cost of improvement is the capital expenditure incurred by an assessee for making any addition or improvement in the capital asset. It also includes any expenditure incurred in protecting or curing the title. In other words, cost of improvement includes all those expenditures, which are incurred to increase the value of the capital asset. Indexed Cost of improvement = COA X CII of Year of transfer CII of Year of improvement Any cost of improvement incurred before 1st April 1981 is not considered or it is ignored. The reason behind it is that for carrying any improvement in asset before 1st April 1981, asset should have been purchased before 1st April 1981. If asset is purchased before 1st April we consider the fair market value. The fair market value of asset on 1st April 1981 will certainly include the improvement made in the asset.

EXPEDITURE ON TRANSFER

Expenditure incurred wholly and exclusively for transfer of capital asset is called expenditure on transfer. It is fully deductible from the full value of consideration while calculating the capital gain. Examples of expenditure on transfer are the commission or brokerage paid by seller, any fees like registration fees, and cost of stamp papers etc., travelling expenses, and litigation expenses incurred for transferring the capital assets are expenditure on transfer. Note: Expenditure incurred by buyer at the time of buying the capital assets like brokerage, commission, registration fees, cost of stamp paper etc. are to be added in the cost of acquisition before indexation.

EXEMPTIONS FROM CAPITAL GAINS Long Term Capital Gain from the Transfer of Residential House Property (Section 54) The exemption under the Section 54 is available only to an individual or a HUF who transfers (or sells) a residential house/property that results in a long-term capital gain, and then invests the amount of gain in acquiring a new residential house. This exemption is available subject to fulfillment of the following requirements: (i) The transferor shall be an individual or the HUF, (ii) The asset to be transferred must be of long-term capital asset, being buildings or lands appurtenant thereto, being a residential house, (iii) The income from such residential house shall be assessable under the head "Income from House Property", (iv) The transferor assessee should purchase a residential house in India within a period of one year before or two years from the date of transfer or construct a residential house within three years from the date of the transfer of the original house. (Construction must be completed within these 3 years.), and (v) The new house property purchased or constructed has not been transferred within a period of three years from the date of purchase or construction. Amount of Exemption The amount of exemption under section 54 is Equal to the amount of the capital gain if cost of new house property is more than the capital gain, or • Equal to the cost of the new house property if the cost is less than the capital gain. •

Deposit Scheme under Section 54 Where the amount of capital gain is not so utilized for the purchase or construction of a new residential house before the due date of furnishing of the return of income, it shall

be deposited by him on or before the due date in an account with a public sector bank in accordance with the Capital Gain Account Scheme, 1988. The amount already utilized on the new house together with the amount deposited shall be deemed to be the amount utilized for the purchase of new house under section 54. If the amount deposited is not

utilised for the purpose of purchase or construction of new house within the stipulated period, then the amount not so utilised will be treated as long term capital gain of the previous year in which the period of three years expires. In such case the assessee is entitled to withdraw the amount from the bank.

Consequences of Selling the New House Before 3-years If the new house property is transferred within a period of three years from the date of the purchase or construction, the amount of capital gains arising therefrom, together with the amount of gains exempted earlier, will be chargeable to tax in the year of sale of the house property. To attain this, the amount of exemption under section 54 shall be reduced from the cost of acquisition to the new house, while calculating short-term capital gains on the transfer of the new asset. Capital Gain on the Transfer of Agricultural Land (Section 54B) Capital gains arising on the transfer of land used by an individual or his parents for agricultural purposes for a period of two years immediately preceding the date of transfer is exempt form the tax if the individual assessee has purchased another agricultural land within a period of two years from the date of such transfer Quantum of Exemption Lower of the following: • •

Cost of new lands. Capital Gains.

Withdrawal of Exemption If the new capital asset is transferred within three years from the date of acquisition, then the cost of new asset claimed as exempt shall be reduced by the capital gains.

Capital Gain on Compulsory Acquisition of Land and Building of an Industrial Undertaking (Section 54D) Capital gains arising on the compulsory acquisition of any land or building forming a part of an industrial undertaking is exempt subject to the following requirements:

Such land or building was used by the assessee for the purpose of industrial undertaking for two years preceding the date of compulsory acquisition, • The assessee has purchased any land or building or constructed a building within 3 years from the date of the receipt of the compensation, and •

Newly acquired land or building should be used for the purpose of shifting or reestablishing the said undertaking or setting up another industrial undertaking. •

Quantum of Exemption Lower of the following: • •

Cost of new assets. Capital Gains.

Withdrawal of Exemption If the new asset is transferred within three years from the date of acquisition, then the cost of acquisition of new asset shall be reduced by the capital gains already exempt.

Long Term Capital Gain Exemption for Investment in Certain Bonds (Section 54EC) This exemption is is available an individual, HUF, company or any other person who invests the long term capital gain, within 6 months of a the transfer of the capital asset, in any of the specified bond (issued on or after April 1, 2006) redeemable after 3 years: • •

National Highway Authority of India (NHAI), or Rural Electrification Corporation Ltd. (REC) Note: Maximum Limit for Investment in a New Asset is Rs.50 Lakhs If exemption is availed here, then rebate under section 80C is not available.

Quantum of Exemption Lower of the following: • •

Cost of new assets. Capital Gains.

Withdrawal of Exemption If, within a period of three years: New asset is transferred or converted (otherwise than by transfer) into money. • Loan or advance is acquired on the specified asset. •

Then the amount which was exempt from Capital Gains, will be chargeable in the year of such event. Long Term Capital Gain from the Transfer of a Capital Asset other than Residential House Property (Section 54F) The following conditions are to be fulfilled by the assessee: He does not own more than one residential house, other than new asset, on the date of transfer of original asset. • He does not purchase more than one residential house within a year or constructs within three years after the date of transfer of the asset. • The income from such residential house is chargeable under the head "Income from House Property", other than the one owned at the time of transfer. •

The exemption is available only an individual or a HUF who transfers (or sells) a capital asset that results in a long-term capital gain, and then invests the amount of gain in acquiring a new residential house. This exemption is available subject to fulfillment of the following requirements: (i) The transferor assessee should purchase or a residential house in India within a period of one year before or two years from the date of transfer or construct a residential house within three years from the date of the transfer of the original house. (Construction must be completed within these 3 years.), and (ii) The new house property purchased or constructed has not been transferred within a period of three years from the date of purchase or construction. Quantum of Exemption If the cost of new asset is less than the net consideration, then

Capital Gains * Cost of New Residential House Amount of Net consideration

Withdrawal of Exemption

If the assessee Transfers the new asset within three years from the date of acquisition or construction, then the cost of new asset claimed as exempt shall be reduced by the capital gains. • Purchases or Constructs a residential house (other than the new asset) with in 2 years after the date of transfer then any amount claimed as exempt shall be reduced by the capital gains. •

Capital Gain on Transfer of Capital assets in Case of Shifting of Industrial Undertaking from Urban Area (Section 54G) This exemption is is available an individual, HUF, company or any other person who transfers the capital assets (being plant, machinery, land or building or any right in the land or building) being used for the purpose of industrial undertaking situated in an urban area to any area other than urban area. The assessee purchases within one year before or 3 years after the date of transfer: (i) Purchases plant or machinery for the purpose of business of industrial undertaking in the area to which the said undertaking has shifted, (ii) Acquires building or land or constructed building for the purpose of his business in the said area, (iii) Shifts the original asset and transferred the establishment in the said area, and (iv) Incurs expenses on such other purpose as may be specified in a scheme framed by Central Government for the purpose of this section.

Quantum of Capital gains tax Exemption Lower of the following: • •

Cost of new assets and expenditure Capital Gains.

Withdrawal of Exemption

If the new asset is transferred within three years from the date of acquisition, then the cost of acquisition of new asset shall be reduced by the capital gains already exempt.

Capital Gain on Transfer of Capital assets in Case of Shifting of Industrial Undertaking from Urban Area to any SEZ (Section 54GA) This exemption is is available an individual, HUF, company or any other person who transfers the capital assets (being plant, machinery, land or building or any right in the land or building) being used for the purpose of industrial undertaking situated in an urban area to a special economic zone (SEZ). The assessee purchases within one year before or 3 years after the date of transfer: (i) Purchases plant or machinery for the purpose of business of industrial undertaking in the area to which the said undertaking has shifted, (ii) Acquires building or land or constructed building for the purpose of his business in the said area, (iii) Shifts the original asset and transferred the establishment in the said area, and (iv) Incurs expenses on such other purpose as may be specified in a scheme framed by Central Government for the purpose of this section. Quantum of Capital Gains Tax Exemption Least of the following: • •

Cost of new assets and expenditure Capital Gains.

Withdrawal of Exemption If the new asset is transferred within three years from the date of acquisition, then the cost of acquisition of new asset shall be reduced by the capital gains already exempt.

Tax on Short Term Capital Gains: •

Under Section 111A:

Short term capital gains arising on transfer of Equity Share or Units of an Equity Oriented Mutual Fund on satisfaction of the following conditions

would be taxable @ 15% from AY 2009-10 onwards, whereas Income other than Short term Capital Gains of the assessee shall be taxed as per the Normal prevailing Slab Rates for specific assesses. The conditions whereof are:

i. The Transaction of sale of such equity share/ unit is entered into on or after October 1st’ 2004; ii.

Such transaction is chargeable to Securities Transaction tax;

iii. Such Equity shares are transferred through a Recognized Stock Exchange or sold to a Mutual Fund. •

In any Other Case:

The Short term capital gains shall be computed after including same in Total Income and charging Tax as per assessee specific Slab Rates. Tax on Long Term Capital Gains: •

Under Section 112:

Any Long term Capital Gains made by an assessee other than on transfer of listed securities on any recognized stock exchange or units of UTI/ Mutual funds covered u/s 10(23D)/ Zero Coupon Bonds shall be taxed under this section at a flat rate of 20% in case of any assessee. However in case of Long term capital gains u/s 115AB, 115AC, 115AD and 115AE the rate of tax shall be specified @ 10%. In case of transfer of listed securities on any recognized stock exchange or units of UTI/ Mutual funds covered u/s 10(23D)/ Zero Coupon Bonds: •

The Long term capital gains shall be computed as minimum of the following: 1. Tax @ 20% on Long term capital gains computed after indexation of cost of such shares, securities or units; OR 2. Tax @ 10% on Long term capital gains computed without indexation of cost of such shares, securities or units.

Long Term Capital gains in case of transfer of Listed equity shares or units of equity oriented mutual funds on or after October 1st’ 2004 is exempt u/s 10(38). •

PLEASE NOTE: Deductions from Section 80C to 80U shall not be available in case of long term & short term capital gains both. •

Listed securities means securities as defined in Sec 2(h) of The Securities Contracts (Regulation) Act’ 1956 and listed in any recognized stock exchange in India. •

SOLVED PROBLEMS: 1. Mr. A Ghosh sold a house on 1.9.2008 for Rs. 7,00,000. This house was inherited by him during 1981-82 from his father who had constructed it in 1971-72 for Rs.50,000. Mr. Ghosh spent Rs 50,000 on renovation of the house in 1986-87. Fair market value of the house as on 1.4.1981 was Rs.1,50,000. This house was under negotiations for sale in May 1990 and he received Rs.80, 000 as advance money. The contract could not materialise and the advance money was forfeited. Compute the amount of capital gain assuming that he does not qualify for any exemption. [C.I.I for 1981- 82: 100; 1986-87: 140; 1990-91 : 182 and 2008-09 : 582]. Sol: Computation of Capital Gain (Assessment year 2009- 2010): PARTICULARS

AMOUNT

Sale Price on 1.9.2008

7,00,000.

Less: Cost of Acquisition

1,50,000

Less: Advance money forfeited

80,000. Net Cost

Indexed Cost [70,000 * 582/100]

AMOUNT

70,000. 4,07,400.

Indexed Cost of improvement [50,000 * 582/140]

2,07,857.

6,15,257. 84, 743.

Long term Capital Gain

2. Compute the taxable capital gain from particulars given below: a. Net consideration of a residential house Rs. 15,00,000. (2.6.2008) [C.I.I : 582]. b. Cost of acquisition of this house Rs 3,00,000 (1.5.87) [ C.I.I : 150] c. New house acquired on 1.9.2008 for Rs 2,50,000.

Sol: Computation of capital gain:

Net consideration

15, 00,000.

Less: Cost (indexed 3,00,000 *583/150)

11, 64, 000.

Long term capital gain Less: Exempted u/s 54 (1)- cost of New house Taxable Capital Gain

3,36,000. 2, 50, 000. 86, 000.

3. S, an owner of three houses, sells a residential house in Chennai for Rs 11,90,000 on May 23, 2008. This house was purchased by him on 1.4. 1987 for Rs 2, 90, 000.

On May 30, 2008, he purchased a flat in Mumbai for Rs 8, 70, 000 for the purpose of the residence of his son- in- law. On March 1, 2009, S sells the house in Mumbai for Rs 12, 10, 000. Compute the capital gain on the two transactions. Is S eligible for exemption u/s 54 in respect of the second sale? Cost inflation index for the financial year 1987-88 and 2008 – 09 are 150 and 582.

Sol: Computation of capital gain and exemption u /s 54 for the Assessment year 2009- 2010.

Sale price of house at Chennai

11,90,000

Less: Indexed cost of the house [2,90,000 * 582/150]

11,25,200

Long term capital gain

64,800

Exemption u/s 54: Investment of Rs 8,70,000 made to purchase flat in Mumbai within 2 years of the sale of the Chennai house. Since the amount invested in the new house is more than the amount of long term capital gain, so it is fully exempted.

64, 800 NIL

Sale of Bombay flat: Sale price

12,10,000

Less: Cost price of the flat (Purchased on May 30, 2008)

8,70,000

Short term capital gain

3,40,000

Long term capital gain of Chennai house got exempted by investing the same in Mumbai flat. Since Mumbai flat was transferred within one year of purchase, so new capital gain and Capital gain got exempted earlier, both will be taxed. Total capital gain to be taxed shall be Rs 3,40,000 + 64,800 = Rs 4,04,800. Mr. S is not eligible for any exemption u/s 54 at the time of sale of Mumbai flat within one year of its purchase. Exemption u/s 54 is allowed only if it is sold after 3 years of its acquisition and the amount of long term capital gain is re-invested to purchase or construct a residential house within specified time limit. 4. Mr. Raj Singh sold a plot of land at Jaipur on 1.6.2008 [C.I.I = 582] for Rs 12, 40,000. He paid Rs 40,000 as selling expenses. The plot was received by him on death of his Father on 15.3.85 [C.I.I = 125]. His father had acquired it on 1.4.1980 for Rs 1,00,000 and its FMV on 1.4.1981 was Rs 1,40,000.

On 1.10.2008, he invested Rs 3,00,000 in bonds issued by Rural Electrification Corp. Limited notified u/s 54 EC and Rs 2,00,000 on 1.3.2009 in Bonds of National Highway Authority of India. Compute his taxable capital gain.

Sol: Computation of taxable Capital gain: Long term capital asset: Sale price of plot as on 1.6.2008

12,40,000

Less: Expenses on sale

40,000

Net consideration

12,00,000

Less : Indexed cost [ 1,40,000 * 582/125]

6,51,840

Long term Capital Gain

5,48,160

Less: Exemption u/s 54 EC Amount invested in bonds of Rural Electrification Corp Ltd

3,00,000

Less: Exemption u/s 54 EC Investment in bonds of National Highway Authority Not allowed as investment was made after a period of more than 6 months ie., on 1.3.2009

NIL.

Taxable Long Term Capital Gain

2,48,160

Note: The FMV has been indexed with the index of the year in which son inherited the house. Assessee is not allowed to transfer the Bonds of Rural Electrification Corp or take a loan against these bonds or is not allowed to convert these bonds into money upto 3 years from the date of investment in these bonds.

5. Mr. H submits the following particulars about sale of assets during the year 2008-09. Jewellery

Plot

Gold

Rs Sale price Expenses on sale Cost of Acquisition Year of Acquisition CII

4,00,000 NIL 70,000 1987-88 150

Rs

Rs

12,24,000 24,000 2,50,000 1984-85 125

3,00,000 NIL 1,00,000 1999- 2000 389

He has purchase a house for Rs 12, 00,000 on 1.3.2009.Calculate the amount of taxable capital gain if C.I.I for 2008- 09 is 582. Sol: Calculation of taxable capital gain

Sale price Less expenses on sale NET CONSIDERATION Less: Indexed Cost [70,000 * 582/150]

Jewellery Rs 4,00,000 NIL 4,00,000

Percentage of LTCG to Net Consideration Jewellery Plot Gold 32.1% 3% 50.13% As it will be beneficial for Him to claim exemption u/s 54 by claiming it first from Gold, then from Jewellery and finally from Plot. Gold:Investment 3,00,000 Net consideration 3,00,000 Jewellery: Investment 4,00,000 Net consideration 4,00,000 Plot: Investment 5,00,000 Net consideration 12,00,000 [36,000 *5,00,000/12,00,000] Taxable long term capital gain

Gold Rs 3,00,000 NIL 3,00,000

2,71600

[2,50,000 * 582/125] [1,00,000 * 582/389] Long Term Capital Gain

Plot Rs 12,24,000 24,000 12,00,000

11,64,000 1,28,400

36,000

1,49614 1,50,386

1,50,386 1,28,400

15,000 NIL

21,000

NIL

5. i) Mr.Yash sold an asset on 15.8.2008 (C.I.I 582) for Rs 1,24,000. The cost price of the asset purchased on 11.2.76 is Rs. 20,000. The fair market value of the same on 1.4.81 [C.I.I 100] was Rs 20,000. The income of Mr.Yash from other sources during the previous year was Rs 22,700. ii) Sh.Dewan, who inherited building properties consisting of a residential house and a shop worth Rs 1,38,000; sold on 1.11.2008 residential property for Rs 2,90,000 [C.I.I 582]. The fair market value of the property sold was Rs 40,000 on 1.4.81 [ C.I.I 100]. His income from all other sources was Rs 12,000. In the above problem, how will the capital gain be treated? Sol: Computation of taxable capital gain i) Sales price Less: FMV on 1.4.81 (indexed 20,000*582/100) Capital gains full taxable

1,24,000 1,16,400 7600

ii) Sale price

2,90,000

Less: FMV on 1.4.81 (40,000 *582/100)

2,32,800

Capital Gain – fully taxable

57,200

6. Mr. James is a film producer. During the previous year, he sold a film projector of Rs 1,70,000 which had cost him Rs 1,50,000 and in respect of which Rs 40,000 had been allowed as depreciation during the last two years. Besides, his total income from business was Rs 75,000. Expenses on sale amounts to Rs 5000.

Sol: Computation of capital gains Sale price of projector (an item of P &M) 1,70,000 Less: Expenses on sale 5000 Net consideration 1,65,000 Less: WDV (1,50,000 – 40,000) 1,10,000 Short term Capital Gain 55,000 (Under the new method of depreciation any amount realised over and above the WDV of asset and cost of transfer is short term capital gain as block of asset has ceased to exist). Statement of Total Income Profits and Gains Business Income

75,000

Capital Gains Short Term Capital Gain Total Income 7.

55,000 1,30,000

During the year ended 31st March, 2009, Mr. David sold the following assets:

Particulars i) Shop purchased in 1985- 86 (C.I.I- 133) for Rs 18,000 ii) Machinery purchased in 1983- 84 ( C.I.I – 125)for Rs 50,000 (WDV on 1.4.2008 Rs 35,000) iii) Furniture purchased on 1.5 2008 for Rs 1,000 iv) Agricultural land in Agra purchased in 1979 – 80 for Rs 10,000 [FMV on 1.4.81 (C.I.I – 100) being Rs 15,000] v) One residential house purchased in 1987- 88 (C.I.I- 100) costing Rs 30,000

Sale Proceeds 90,000 60,000 1,300 1,00,000 1,50,000

During the year he bought another house for his residence for Rs 2,50,000. Work out the amount of Capital Gains to be included in the Gross Total Income and also compute his total income, if his other business income during the year was Rs 10,000. Cost Inflation Index for 2008- 09 is 582. Sol: Computation of Capital Gain (Assessment Year 2009- 2010) Short term Capital Gains: Furniture [Purchased on 1.5.2008] (1300 – 1000) Machinery : Sale Price (ii) Sale Price (iv)

Rs 60,000 12,000

Total sale price: Less: WDV (10,000 + 35,000)

72,000 45,000

Rs

Rs

300

27,000 Short term Capital Gain

Long term Capital assets: i) Residential house : S.P

27,300

1,50,000

Less: Cost (30,000 * 582/150) Capital Gain Less: Exempted u/s 54 : For purchase of new house ii) Agricultural land : S.P Less:FMV on 1.4.81 (15,000* 582/100) iii) Shop : S.P Less: Cost (18,000 * 582/133)

1,16,400 33,600 33,600 NIL 1,00,000 87,300 12,700 90,000 78,767 11,233 23,933

Total long term Capital Gain Less: Exempted u/s 54 F- Fully as he has invested Rs 2,50,000 – 33,600 (exemption u/s 54) = Rs 2,16.400 in purchase of another house within prescribed period which is more than net consideration of Agri. Land and shop [1,00,000 + 90,000 =1,90,000] Taxable Capital Gain

23,933

NIL 27,300

Statement of Total Income Profits and Gains: Business Profit Capital Gains: Short Term Capital Gain Long Term Capital Gain GTI being Total Income

10,000 27,300 NIL

27,300 37,300

8. Mr. X purchased shares of various companies worth Rs 1,00,000 during 2000-01. [CII – 406]. On 1.11.2006 [CII – 519] he became dealer in shares and securities and converted his shares into stock in trade. The FMV on the date of conversion was Rs 3,00,000. These shares were sold during 2008-09 [CII- 582] at Rs 4,00,000. Compute his Capital Gain and business profit.

Sol: Computation of Capital gain and Business Profit Previous year 2006 -07: Conversion of asset shall be deemed as transfer of the year in which converted FMV on the date of conversion Less: Indexed Cost (1,00,000 * 519/406) Long term Capital Gain Previous year 2008 – 09: Sale price of stock in trade Less cost: FMV on date of conversion

3,00,000 1,27,833 1,72,167 4,00,000 3,00,000

Business profit

1,00,000

Note: Although Capital Gain is computed in the year in which asset was converted into stock in trade but both capital gain and business profit on sale of stock in trade are taxable in the year in which stock- in- trade is actually sold. However, Long Term Capital Gain on sale of shares is exempt from tax u/s 10(38). 9.

Mr. X owns a residential house at Bangalore. From the following information, Compute the amount of Capital Gain. Cost of construction (during 88-89) 4,00,000 Cost of Additions and improvements (during 97-98) 2,00,000 Sale Consideration (sale made on 10.10.2008) 28,00,000 Expenses on transfer 20,000 Cost of new house purchase in Hyderabad (on 15.1.2009) 5,00,000 (House is half finished) Amount deposited in Capital Gain deposit scheme in SBI on 25.7.2009 4,00,000 An amount of Rs 3,00,000 withdrawn from capital gain deposit scheme on 12th May 2011 and utilized for the completion of the house. Cost inflation index for 1988-89 is 161, for 1997-98 is 331 and for 2008-09 is 582. Sol: Computation of Capital Gain for the Assessment Year 2009- 10. Sale consideration received (10.10.08) Less: Selling Expenses Indexed cost of construction (1988- 89) [4,00,000 * 582/ 161] Indexed cost of additions (1997- 98) [2,00,000 * 582/ 331]

28,00,000 20,000 14,45,963 3,51,662

18,17,625

Long Term capital gain

Exemption u/s 54 Amount invested to purchase a new house at Hyderabad (on 15.1.2009 i.e., within specified period) Amount deposited in capital gains account Scheme (on 25.7.2009 i.e., before the prescribed date of filing of return of income) Capital gain chargeable to tax

9,82,375

5,00,000 4,00,000

Assessment Year 2012- 13: Amount deposited in capital gain account Scheme Less: Amount utilized for the completion of the House within specified period of 3 years. Unutilized amount is long term capital gain taxable in the Accounting year 2012-13

9,00,000 82, 375

4,00,000 3,00,000 1,00,000

10.Following assets are sold by Mr. A during the previous year 2008-09: Particulars

Personal Car

Shop

Agricultural land in

Jewellery

Hyderabad city Year of purchase

2002-02

2002-03

Date of Sale

April 2008

Purchase Price

2,00,000

88,000

Sale proceeds

80,000

4,20,000

Selling expenses

1000

1200

50,000

-

1,00,000

FMV on 1.1. 1981

-

May 2008

June, 1972 Oct 2008 50,000 24,50,000

May 1970 Dec 2008 60,000 9,80,000 1800 90,000

Mr. A purchased agricultural land worth Rs 6,00,000 on 10th Dec, 2008 outside the municipal limits of Hyderabad and on 15th March 2009, he deposits another Rs 8,00,000

in a schedule bank in a Capital Gain deposit account scheme to buy another piece of agricultural land. He bought a residential house in Hyderabad city and invested Rs 16,00,000. This house was bought in April 2009. CII for 1981-82 is 100, for 2001- 02 is 426, for 2002- 03 is 447 and for 2008- 09 it is 582. Find out taxable Capital Gain. Sol: Computation of capital gains for the Assessment Year 2009-10. 1. Personal Car: Personal car is not a capital asset and hence there cannot be a capital gain on the sale of such a car. 2. Shop: Sale proceeds Less: Selling expenses Net sale consideration Less: Indexed cost of shop [88,000 * 582/447] Long term Capital Gain 3. Agricultural Land: Sale proceeds Less: Selling expenses Net sale consideration Less indexed cost of acquisition Cost (1972) FMV (1.4. 1981) FMV is adopted and indexed [1,00,000 *582/100] Long term capital gain Less exemption u/s 54 B Amount invested to purchase agricultural land Amount deposited in Deposit Account (within Stipulated time) Long term capital gain 4. Jewellery: Sale proceeds Less: Selling expenses Net sale consideration Less cost of acquisition: Cost(1970) FMV (1.4.1981) Whichever is higher is taken as cost indexing of FMV [90,000 * 582/100] Long term capital Gain

4,20,000 1200 4,18,800 1, 14,577 3, 04,223

3, 04,223 24,50,000 50, 000 24,00,000

50,000 1,00,000 5,82,000 18,18,000 6,00,000 8,00,000

14,00,000 4,18,000 9,80,000 1800 9,78,200

60,000 90,000 5,23,800 4,54,400

Net sale consideration of long term Long term capital gain Capital assets o Shop 4,18,800 3,04,223 o Agricultural Land 24,00,000 4,18,000 o Jewellery 9,78,200 4,54,400 37,97,000 L.T Capital gain 11,76,623 Less exemption u/s 54F 11,76,623 * 16,00,000 4,96,727 37,90,000 6,79,896 11.

Mr. X owns 2 acres of agricultural land in an urban area of Ludhiana which he sold on 30th Nov, 2008 at Rs 50 lakhs per acre. Other particulars are: i) Cost of 2 acres of land purchased in 1977 is Rs 6 lakhs. ii)FMV as on 1.4.1981 is Rs 10 lakhs. iii)Selling expenses Rs 1 lakh. iv)He owns one residential house on 30.11.2008. v)Date of filing of return of income is 31st July, 2009. vi)He purchased 10 acres of agricultural land in a rural area for Rs 20 lakhs on 10th June, 2009. vii)Mr.X purchased a piece of plot to construct a residential building for Rs 6 lakhs at Ludhiana. viii)He deposits Rs 15 lakhs in a scheduled bank in a Capital gain deposit account scheme on 30th July, 2009. ix)Amount invested in Bonds of National Highway Authority of India Rs 10 lakhs on 31st March, 2009. Assume that he actually withdraws Rs 12 lakhs from the deposit account to complete his residential house.

Sol: Computation of capital gain for the Assessment year 2009- 10: Selling price of 2 acres of agricultural land Less: Selling expenses Net sale consideration Less: Indexed cost of agricultural land FMV as on 1.4.1981 is taken into account [10,00,000 * 582/100]

1,00,00,000 1,00,000 99,00,000 58,20,000

Long term capital gain

40,80,000

Less exemption u/s 54 B amount invested to buy Agricultural land within stipulated period Balance long term capital gain

20,00,000 20,80,000

Less exemption u/s 54 EC Amount invested to buy bonds of NHAI within stipulated 6 months Balance long term capital gain

10,00,000 10,80,000

Less exemption u/s 54F Amount invested to purchase plot to construct residential house Amount deposited in deposit account to construct residential house

6,00,000 15,00,000 21,00,000

Proportional exemption=40,80,000 * 21,00,000 99,00,000 Long term capital gain to be taxed

8,65.455 2,14,545

Assessment year 2012- 13: Date of sale of original asset 30.11.2008 Amount deposited in Capital gain deposit account scheme is to be utilized to construct a new house upto 29.11.2011 (ie., completed within 3 years of sale) Amount deposited in deposit account scheme Less amount actually withdrawn and utilized to construct

15,00,000

a new house upto 29.11.2011 Unutilized amount

12,00,000 3,00,000

Exemption availed on unutilized amount will be deemed long term capital gain is taxable in Assessment Year 2012- 13. Deemed LTC/g = Exemption u/s 54F * Amount utilized Amount deposited = 6,18,182 * 3,00,000 = 1,23,636 15,00,000 Notes: 1. Unutilized amount is allowed to be withdrawn after 29.11.2011 and Rs 1,23,636 will be taxable in the Assessment year 2012- 13 as deemed long term capital gains. 2. Exemption u/s 54F regarding deposit in capital gain deposit scheme of Rs 15,00,000 has been allowed as Rs 6,18,182 and therefore, exemption allowed on unutilised amount of Rs 3,00,000 shall be only Rs 1,23,636 which will be taxed in Assessment year 2012-13.

Exercise questions: 1. Mr. Joshi sold his residential house on 1.11.2008 for Rs 9,25,000 which he had purchased for Rs 1,10,000 on 1 .2 1982. He spent Rs 16,100 for its improvement in 1988-89. In 1990-91, he had agreed to sell the house to K. Rajashekhar for Rs 6,50,000 and had received an advance of Rs10,000 for the same. However, since Mr. Rajashekhar did not get the sale registered within the agreed time, the agreement was cancelled and the advance money was forfeited by Mr. Joshi.

Compute the taxable capital gain for the Assessment year 2009-10 assuming that Mr. Joshi bought a new residential house on 1.11.2008 for Rs 2,50,000 and invested on 1.3. 2009 Rs 1,50,000 in the capital gains bonds of National Highway Authority of India (notified u/s 54EC) (The cost inflation index for the financial years 198182, 1988-89, 1990-91 and 2008-09 were 101, 161, 182 and 582 respectively. 2.

Siddhartha converts his plot of land purchased in the year 1981-82 for Rs 30,000 into stock-in-trade on 31st March, 2008. The fair market value on 31st March, 2008 is Rs 1,80,000. The Stock-in-trade is sold for Rs 2,20,000 in the month of January 2009. Find out the taxable income, if any, and so under which head of income and for which assessment year? The cost of inflation index in 1981-82 was 100, in 200708 it was 551 and in 2008-09 it was 582.

3. A Joint family purchased a house on 1.5.1985 (CII – 133) in Bombay for Rs 3.5 lakhs. It sold the house on 10.6.2008 (CII – 582) for Rs 19 lakhs. On 14.7.2008, it purchased another house at Hardwar at a total cost of Rs 4 lakhs. It did not own any other house property. Compute the income chargeable under the head ‘Capital Gains’. 4.

Mr. X provides the following information regarding his transaction for the sale of residential house during the assessment year 2009-10: • • • •

House purchased in 1978 for Fair Market Value on 1.4.81(CII – 100) Sold in Oct 2008 (CII – 582) Amount invested in purchase of another house in April 2008

1,50,000 3,50,000 23,00,000 2,00,000

Compute the amount of taxable capital gain.

5. From the following particulars given by Ramesh, compute the taxable capital gain for the assessment year 2009- 10: Name of asset Government Securities Furniture

Date of Purchase 1.10.2007 15.2.91

Cost Rs 10,000 5,000

Date of sale 30.6.2008 20.2.2009

Sale Price Rs 15,000 3,000

Exp Rs 200 -

(WDV on 1.4.2008 Rs 4000) Land (Fair market value on 1.4.81 Rs 20,000) 10.1.72 Residential House 1.12.85

20,000 60,000

6.1.2009 5.5.2008

1,00,000 3,00,000

1,000 2,000

The assessee has no other residential house on 5.5.2008. He purchased another house for residential purposes on 20.3.2009 for Rs 90,000. CII for 2008-09 is 582, 1994-95 is 259, 1990-91 is 182 and for 1985-86 is 133.

UNIT -II

CLUBBING OF INCOME Income of Other Persons - Included In Assessee’s Total Income (Theory only) After going through this Chapter you should be able to understand the:

Circumstances when income of some other person is included in the Income of Assessee Provisions when these sections will be applicable Under what head and in whose income it will be included.

Generally an assessee is taxed in respect of his own income. But sometimes in some exceptional circumstances this basic principle is deviated and the assessee may be taxed in respect of income which legally belongs to somebody else. Earlier the taxpayers made an attempt to reduce their tax liability by transferring their assets in favour of their family members or by arranging their sources of income in such a way that tax incidence falls on others, whereas benefits of income is derived by them . So to counteract such practices of tax avoidance, necessary provisions have been incorporated in sections 60 to 64 of the Income Tax Act Hence, a person is liable to pay tax on his own income as well as income belonging to others on fulfilment of certain conditions. Inclusion of other’s Incomes in the income of the assessee is called Clubbing of Income and the income which is so included is called Deemed Income. It is as per the provisions contained in Sections 60 to 64 of the Income Tax Act.

1. TRANSFER OF INCOME WITHOUT TRANSFER OF ASSET (SEC. 60) Section 60 is applicable if the following conditions are satisfied: The taxpayer owns an asset The ownership of asset is not transferred by him.

The income from the asset is transferred to any person under a settlement, or agreement. If the above conditions are satisfied, the income from the asset would be taxable in the hands of the transferor

NOTE ON TRANSFER: "Transfer"

arrangement.

includes any settlement, trust, covenant, agreement or

Illustration: Mr X owns Debentures worth Rs 1,000,000 of ABC Ltd., (annual) interest being Rs. 100,000. On April 1, 2009, he transfers interest income to Mr Y, his friend without transferring the ownership of these debentures. Although during 2009-10, interest of Rs. 100,000 is received by Mr Y, it is taxable in the hands of Mr X as per Section 60.

.

2. REVOCABLE TRANSFER OF ASSETS (SEC 61) ‘Revocable transfer’ means the transferor of asset assumes a right to re-acquire asset or income from such an asset, either whole or in parts at any time in future, during the lifetime of transferee. It also includes a transfer which gives a right to re-assume power of the income from asset or asset during the lifetime of transferee. If the following conditions are satisfied section 61 will become applicable. An asset is transferred under a “revocable transfer”, The transfer for this purpose includes any settlement, or agreement Then any income from such an asset is taxable in the hands of the transferor and not the transferee (owner). Note:-In the case of irrevocable transfer of asset , the income from such assets will be deemed to be the income of the transferee (To whom the asset has been transferred), provided that the transfer is not for the benefit of the spouse of the transferor.

3. INCOME OF SPOUSE The following incomes of the spouse of an individual shall be included in the total income of the individual:

3.a REMUNERATION FROM A CONCERN IN WHICH SPOUSE HAS SUBSTANTIAL INTEREST [SEC 64 (1) (ii)]

Concern – Concern could be any form of business or professional concern. It could be a sole proprietor, partnership, company, etc. Substantial interest - An individual is deemed to have substantial interest, if he /she (individually or along with his relatives) beneficially holds equity shares carrying not less than 20 per cent voting power in the case of a company or is entitled to not less than 20 percent of the profits in the case of a concern other than a company at any time during the previous year. If the following conditions are fulfilled this section becomes applicable. If spouse of an individual gets any salary, commission, fees etc (Remuneration) from a concern The individual has a substantial interest in such a concern The remuneration paid to the spouse is not due to technical or Professional knowledge of the spouse. Then such salary, commission, fees, etc shall be considered as income of the Individual and not of the spouse.

Illustration - X has a substantial interest in A Ltd. and Mrs. X is employed by A Ltd. without any technical or professional qualification to justify the Remuneration. In this case, salary income of Mrs. X shall be taxable in the hands of X. When both husband and wife have substantial interest Where both the husband and wife have a substantial interest in a concern and Both are in receipt of the remuneration from such concern both the remunerations will be included in the total income of husband or wife whose total income, excluding such remuneration, is greater.

3.b INCOME FROM ASSETS TRANSFERRED TO SPOUSE [SEC. 64(1) (IV)] Income from assets transferred to spouse becomes taxable under provisions of section 64 (1) (iv) as per following conditions:The taxpayer is an individual He/she has transferred an asset (other than a house property) The asset is transferred to his/her spouse

The asset is transferred without adequate consideration. Moreover there is no agreement to live apart. If the above conditions are satisfied, any income from such asset shall be deemed to be the income of the taxpayer who has transferred the asset. Illustration - X transfers 500 debentures of IFCI to his wife without adequate consideration. Interest income on these debentures will be included in the income of X. When Section 64(i) (iv) is not applicable On this basis of the aforesaid discussion and judicial pronouncements, section 64 is not applicable in the following cases: * If assets are transferred before marriage. * If assets are transferred for adequate consideration. * If assets are transferred in connection with an agreement to live apart. * If on the date of accrual of income, transferee is not spouse of the transferor. * If property is acquired by the spouse out of pin money (i.e. an allowance given to the wife by her husband for her dress and usual household expenses). In the aforesaid five cases, income arising from the transferred asset cannot be clubbed in the hands of the transferor

3.c INCOME FROM ASSETS TRANSFERRED TO SON’S WIFE [SEC. 64 (1) (VI)] Income from assets transferred to son’s wife attract the provisions of section 64 (1) (vi) as per conditions below:The taxpayer is an individual. He/she has transferred an asset after May 31, 1973.

The asset is transferred to son’s wife. The asset is transferred without adequate consideration. In the case of such individuals, the income from the asset is included in the Income of the taxpayer who has transferred the asset.

3.d INCOME FROM ASSETS TRANSFERRED TO A PERSON FOR THE BENEFIT OF SPOUSE [SEC. 64 (1) (VII)] Income from assets transferred to a person for the benefit of spouse attract the provisions of section 64 (1) (vii) on clubbing of income. If: The taxpayer is an individual. He/she has transferred an asset to a person or an association of persons. Asset is transferred for the benefit of spouse. The transfer of asset is without adequate consideration. In case of such individuals income from such an asset is taxable in the hands of the taxpayer who has transferred the asset.

3.e INCOME FROM ASSETS TRANSFERRED TO A PERSON FOR THE BENEFIT OF SON’S WIFE [SEC. 64 (1) (VIII)] Income from assets transferred to a person for the benefit of son’s wife attract the provisions of section 64 (1) (vii) on clubbing of income. If, The taxpayer is an individual. He/she has transferred an asset after May 31, 1973.

The asset is transferred to any person or an association of persons. The asset is transferred for the benefit of son’s wife. The asset is transferred without adequate consideration.

In case of such individual, the income from the asset is included in the income of the person who has transferred the asset.

4. INCOME OF MINOR CHILD (SEC. 64 (1A) All income which arises or accrues to the minor child shall be clubbed in the Income of his parent (Sec. 64(1A), whose total income (excluding Minor’s Income) is greater. However, in case parents are separated, the income of minor will be included in the income of that parent who maintains the minor child in the relevant previous year. Exemption to parent [Sec10 (32)] An individual shall be entitled to exemption of Rs. 1,500 per annum(p.a.) in respect of each minor child if the income of such minor as included under section 64 (1A) exceeds that amount. However if the income of any minor child is less than Rs. 1,500 p.a. the aforesaid exemption shall be restricted to the income so included in the total income of the individual.

When Section 64(1A) is not applicable In case of income of minor child from following sources, the income of minor child is not clubbed with the income of his parent. Income of minor child on account of any manual work. Income of minor child on account of any activity involving application of his skill, talent or specialized knowledge and experience. Income of minor child (from all sources) suffering from any disability of the nature specified under section 80U

QUESTIONS: SECTION—A 1. What is clubbing of income? 2. In what circumstances is the income of one person treated as the income of another?

State the circumstances in which the income of wife of an assessee are included in the assessee’s total income. 4. State the treatment of Income of a minor in clubbing of incomes. 3.

SECTION—B

1. Briefly explain under what circumstances income of other persons can be included in the income of assessee under Income tax Act, 1961? 2. What are the provisions of law regarding the clubbing of income of spouse and other family member in the income of individual?

UNIT -III SET OFF AND CARRY FORWARD OF LOSSES Different sources under the same head of income - Sources from different heads of income-special provisions regarding income from House property. (Theory only)

This chapter helps one to understand: If there is a loss sustained by the assessee, whether such a loss can be Set off against income from any other source/head and the restrictions for the same. If it cannot be set off, can that loss be carried forward and, What are the provisions/restrictions for the above and for how many years it can be carried forward.

INTRODUCTION:

Income-tax is a composite tax on the total income of a person earned during a Period of one previous year. There might be cases where an assessee has different sources of income under the same head of income. Similarly, he may have income under different heads of income. It might also happen that the net result from a particular source/head may be a loss. This loss can be set off against other sources/head in a particular manner. For example, where a person carries on two businesses and one business gives him a loss and the other a profit, then the income under the head ‘Profits and gains of business or profession’ will be the net income i.e. after the adjustment of the loss. Similarly, if there is a loss under one head of income, it should normally be adjusted against the income from another head of income while computing the Gross Total Income, of course subject to certain restrictions. These provisions for set off or carry forward and set off of loss are contained in sections 70 to 80 of Income-tax Act.

STEPS IN SET OFF AND CARRY FORWARDS Step1: Inter-source adjustment under the same head of income Step 2: Inter head adjustment in the same assessment year. Step 2 is only

applied if it is not possible to set off a particular loss under Step1 Step3: Carry forward of a loss. This step is only applicable if a loss is not set Off under Step 1 and 2.

INTER SOURCE ADJUSTMENT (SEC.70) Where the net result for any assessment year in respect of any source is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head. This may also be referred to as inter source adjustment. For example, if the assessee has two houses and the net income from one house is Rs. 84,000 while from the other house there is a loss of Rs. 60,000 the loss shall be adjusted against the income (as both fall under the same head i.e. ‘Income from house property) and after set off, the income under the head ‘income from house property’ shall be Rs. 24,000.This is Inter source adjustment. On the other hand, if an assessee has two houses and there is a net Income of Rs.80,000 from one house and loss of Rs.1,20,000 from another, the net loss under this head will be (-) 40,000. Such a loss can be set off against any kind of income under any other head which is termed as Inter-head adjustment. However, there are certain exceptions to this general rule of inter source adjustment. In the following cases loss from one source cannot be adjusted against income from another source of income although it falls under the same head:

LOSS FROM SPECULATION BUSINESS “Speculation business” means a business in which contracts for the purchase or sale of any commodity including stocks and shares is periodically or ultimately settled without the actual delivery or transfer of the commodity or scrips .

As per section 73 any loss arising from a speculation business carried on by an assessee shall be set off only against income of any another speculation business run by the assessee. It cannot be set off from a non-speculative business income, although income from both kinds of businesses are taxable under the head ‘profits and gains of business or profession’. However, a loss from a non-speculative business can be set off against income from speculation business but vice versa is not possible. LOSS FROM THE ACTIVITY OF OWNING AND MAINTAINING RACE HORSES As per section 74A, the loss incurred by an assessee, in the activity of owning and maintaining race horses, shall only be set off against the income from such an activity. It cannot be set off against the income from any other sources.

LONG TERM CAPITAL LOSS Long term capital loss can be set off only against long-term capital gain. However, short-term capital loss can be set off from any capital gain (long-term or short-term)

INTER HEAD ADJUSTMENT (SECTION 71) As explained above, any loss from one source of income is firstly set off against any gain from another source within the same head. Any remaining loss can then be set off against Income from any other Head. This is known as Inter-Head adjustment. However, there are exceptions to this rule also as discussed below. As already discussed above, in the following cases no inter source adjustment is permitted, hence, the question does not arise of any inter-head adjustment. In other words following are the exceptions to inter-head adjustment also. No loss of whatsoever nature can be set off against winnings from lotteries, crossword puzzles, card games etc. Loss from a speculation business;

Loss from the activity of owning and maintaining race horses; Loss from a source which is exempt.

Long-term capital loss Besides the above mentioned exceptions which are applicable both in inter source adjustment and inter head adjustment, there are two more exceptions to inter head adjustment. They are; Loss under the head capital gain Loss under the head business and profession LOSS UNDER THE HEAD ‘CAPITAL GAINS’ In case of an Inter-head adjustment of losses, any capital loss, whether short-term or long-term, shall not be allowed to be set off against income under any other head. It shall however be allowed to be carried forward LOSS UNDER THE HEAD BUSINESS OR PROFESSION [SECTION 7 (2A)] From the Assessment Year 2005-06, any loss under the head ‘Business and Profession’ cannot be set off against income from ‘Salaries’. However, it can be set off against the Income from any other head.

CARRY FORWARD AND SET OFF OF LOSSES: If the losses could not be set off under the same head or under different heads in the same assessment year, such losses are allowed to be carried forward to be claimed as set off from the income of the subsequent assessment years. Only the following losses are allowed to be carried forward and set off in the subsequent years. a) House property loss; b) Business loss;

c) Speculation loss; d) Capital loss;

e) Loss on account of owning and maintaining race horses. Another very important aspect is that in case of carry forward, losses can be only set off under the same head of income only. Inter head adjustment is not allowed.

Compulsory filing of loss of return (Section 80): Although the above losses are allowed to be carried forward, it is allowed only when such loss has been determined in pursuance of a return of loss submitted by the assessee on or before the due date for filing of the returns prescribed under section 139(1). However loss under the head income from house property can be carried forward even if the return is not filed within the due date mentioned under section 139(1).

CARRY FORWARD AND SET OFF OF LOSS FROM HOUSE PROPERTY (SECTION 71B) A loss under the head house property will be allowed to be carried forward for 8 assessment years to claim it as a set off in the subsequent years under the head ‘Income from house property’. Therefore, if the loss of house property of the previous year 20082009 which could not be set off because of absence or inadequacy of the income of previous year 2008-2009, it may be carried forward for 8 succeeding assessment to be set off from income under the head house property. CARRY FORWARD AND SET OFF OF BUSINESS LOSSES (SECTION 72) Where the loss under the head ‘profits and gains of business or profession’ other than loss from speculation business, could not be set off in the same assessment year because either the assessee had no income under any other head or the income was less than the loss, such loss which could not be set off in the same assessment year, can be carried forward to the following 8 assessment years, However it is subject to following conditions. I) Business losses can be adjusted only against business income: Business Income may be from the same business in which the loss was incurred, or may be any other business.

II) Business in respect of which a loss is incurred may or may not be continued. III) Losses can be set off only by the assessee who has incurred loss with a few exceptions like when a partnership firm is converted into a company, amalgamation of companies, etc.

IV) Period of carry forward: Each year’s loss is a separate loss and no loss shall be carried forward for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed. SET OFF AND CARRY FORWARD OF SPECULATION LOSS (SECTION 73). As stated earlier, the loss of a speculation business of any assessment year is allowed to be set off only against the profits and gains of another speculation business in the same assessment year. If a speculation loss could not be set off from the income of another speculation business in the same assessment year, it is allowed to be carried forward for 8 assessment years immediately succeeding the assessment year for which the loss was first computed. Also, it can only be set off against the income of only a speculation business. It may be observed that it is not necessary that the same speculation business must continue in the assessment year in which the loss is set off. However, filing of return before the due date is necessary for carry forward of such a loss.

LOSS UNDER THE HEAD CAPITAL GAIN Loss on short term capital asset Any loss on short-term capital asset is allowed to be carried forward to be set-off in subsequent years against capital gains (short-term as well as long-term). The period of carry forward is 8 years.

Loss on Long-term capital asset Any loss from long-term capital assets can also be carried forward to be set-off in subsequent years but against only long-term capital gains. The period of carry forward is 8 years.

LOSS ON OWNING AND MAINTAINING RACE HORSES SECTION 74 A (3)

Any loss suffered by the assessee in respect of maintaining of race horses can be set-off against the income from the activity of owning and maintaining race horses in subsequent years .The period for carry forward of such a loss is only four years

immediately succeeding the assessment year in which the loss was computed for the first time.

SET AND CARRY FORWARD AT A GLANCE

Income Head Nature of Loss

Set off in Same Assessment Year

Carried forward to Subsequent Assessment Year To be set off

Income from House Property

Income from Any Head of Income.

Only against Income from House Property.

Only against Speculation Profit.

Only against Speculation Profit.

Any Income except Salary.

Only against Profit or Gains from business or Profession.

House Property •



Let Out Property

No of Years for which it can be carried forward

8

Self Occupied Property

Speculation Business

Speculation Loss

Other Business or Profession

Any Loss from Business or Profession other than Speculation Loss and Unabsorbed Depreciation

4

8

Capital Gains Long Term Capital Only against Gains Long term Capital Gains.

Only against Long term Capital Gains.

Capital Gains Short Term Capital Only against Gains Capital Gains (Both Short Term & Long Term).

Only against Capital Gains (Both Short Term 8 & Long Term).

Other Sources Income from owning and maintaining Race

Only against Income from owning and

Only against Income from owning and

8

4

Horses Other Sources Income from Other Sources

maintaining Race maintaining Race Horses. Horses. Any Income.

No Carry Forward

NA

QUESTIONS: SECTION - A 1. 2. 3. 4. 5. 6. 7.

What are Long term capital losses? What is speculation loss? What is set off of losses? What is carry forward of losses? What is Inter head set off? State the provisions for set off of losses from casual incomes? State the provisions regarding loss from maintenance of horses?

SECTION—B

1. Explain the provisions of Income tax act, 1961 regarding carry forward and set off of losses. 2. What are the provisions regarding the set off of the following losses: Short term capital losses, speculation losses, Long term capital losses, Losses of lottery and card games. 3. Explain the provisions regarding set off and carry forward of losses under the head income from other sources.

UNIT - IV COMPUTATION OF TOTAL INCOME & TAX LIABILITY

Deduction from Gross Total Income u/s 80C– 80CCC – 80CCD – 80D – 80DD – 80DDB – 80E – 80G – 80GG – 80GGA – 80U – Computation of Total Income and Tax Liability of individual assessees only.

Taxable income shall be computed as follows: Step 1: Find out income under the five heads of income. Step 2: Adjustment of losses of the current year & earlier years. Losses should be set off according to the provisions of sections 70 to 80. The income after adjustment of losses is gross total income. Step 3: Deductions fro gross total income: from the gross total income, the following deductions are available

Sectio Nature of deduction n 80C

Payment of insurance premia, contribution to provident fund

80CC C

Contribution to certain pension fund

80CC D

Contribution to pension scheme of central government

80D

Payment for medical insurance premia

80DD

Maintenance including medical treatment of a dependant being a person with disability

80DD B

Medical treatment expenditure

80E

Repayment of loan taken for higher studies

80G

Donations to charitable institutions & funds

80GG Rent paid 80GG Donations for scientific research or rural development A 80GG Contributions given to political parties C 80-IA

Profits & gains from industrial undertakings or enterprises engaged in infrastructure development

80-IAB Profits & gains by an undertakings or enterprises engaged in development of special economic zone

80-IB

Profits & gains from certain industrial undertakings other than infrastructure development undertakings

80-IC

Profits & gains of certain undertakings in certain special category of states

80-ID

Profits from the business of hotel & convention centre

80-IE

Profits from certain undertakings in north eastern states

80JJA

Profits from the business of collecting & processing of biodegradable waste

80QQ Royalty income of authors B 80RRB Royalty on patents 80U

Income of a person with disability

Step 4: Rounding off – The balance should be rounded off to the nearest Rs.10. it is known as net income or total income or taxable income. STEP 5: Computation of tax liability Net income of an individual is chargeable to tax at rates given below: Tax rates in India for Resident Individual being Senior Citizen

When total Income Income Tax in (Chargeable at Surcharge Rs. normal rate)

Educational Cess ( On Income tax + Surcharge)

Does not exceed Rs. Nil 2,25,000

Nil

Nil

Is greater than Rs. (TI - Rs. 2,25,000 & less than 2,25,000) x Rs. 3,00,000 10%

Nil

3%

Is greater than Rs. [(TI - Rs. 3,00,000 & less than 3,00,000) x Nil Rs. 5,00,000 20%] + 7,500

3%

Is greater than Rs. 5,00,000

If TI is more than Rs. [(TI - Rs. 10,00,000 then 10% of 5,00,000) x 3% Income tax shall be paid as 30%] + 47,500 Surcharge.

Income Tax Rates for Resident Individual being Women When total Income Income Tax in (Chargeable at Surcharge Rs. normal rate)

Educational Cess ( On Income tax + Surcharge)

Does not exceed Rs. Nil 1,80,000

Nil

Nil

Is greater than Rs. (TI - Rs. 1,80,000 & less than 1,80,000) x Rs. 3,00,000 10%

Nil

3%

Is greater than Rs. [(TI - Rs. 3,00,000 & less than 3,00,000) x Nil Rs. 5,00,000 20%] + 12,000

3%

Is greater than Rs. 5,00,000

If TI is more than Rs. [(TI - Rs. 10,00,000 then 10% of 5,00,000) x 3% Income tax shall be paid as 30%] + 52,000 Surcharge.

Tax rates in India for Other Individuals When total Income Income Tax in (Chargeable at Surcharge Rs. normal rate)

Educational Cess ( On Income tax + Surcharge)

Does not exceed Rs. Nil 1,50,000

Nil

Nil

Is greater than Rs. (TI - Rs. 1,50,000 & less than 1,50,000) x Rs. 3,00,000 10%

Nil

3%

Is greater than Rs. [(TI - Rs. 3,00,000 & less than 3,00,000) x Nil Rs. 5,00,000 20%] + 15,000

3%

Is greater than Rs. 5,00,000

[(TI - Rs. If TI is more than Rs. 3% 5,00,000) x 10,00,000 then 10% of 30%] + 55,000 Income tax shall be paid as

Surcharge.

Final tax liability shall be determined as under:

Amou nt Tax on net income Add surcharge Tax & surcharge Add education cess Add secondary & higher education cess(1% of tax & surcharge Total tax Less tax rebate Tax

DEDUCTIONS UNDER CHAPTER VI-A (Sections 80C -80U) Section 80C While calculating the Income Tax, Deductions from Income under section 80C can be availed by Individual or HUF, for certain contributions or payments made. Nature of payments are as follows: 1. By way of deduction from the Salary payable, in accordance with the conditions of his service, by or on behalf of the Government, for the purpose of

securing a Deferred Annuity or making provision to his spouse or children. This is restricted to 1/5th of the Salary or actual deduction w.e.less 2. As contribution to Provident Fund under Provident Funds Act, 1925 (Statutory Provident Fund 3. As contribution to Recognised Provident Fund 4. As contribution to Approved Superannuation Fund

5. As contribution to Pension Fund set up by Mutual Funds notified under section 10(23D) or UTI 6. Tuition Fees (not including Development Fees, Donation, etc.) at the time of admission or thereafter to any University, College, School or Other Educational Institution situated in India for the purpose of Full Time Education for two children. 7. To effect or to keep in force a Contract of Deferred Annuity (not being a plan with a option to receive the sum in cash by Insured and not covered by other clauses below) on life of self, spouse or children. 8. life insurance premium paid to assure life of individual, spouse or children, restricted to actual amount or 20% of the sum assured. 9. As contribution to Provident Fund set up by the Central Government and notified by the Central Government (Public Provident Fund) 10. As contribution for participation in (ULIP) Unit Linked Insurance Plan of UTI 11. As contribution for participation in Unit Linked Insurance Plan of 'LIC Mutual Fund' notified under section 10(23D 12. As subscription to Central Government Security or National Savings Scheme Deposits 13.As subscription to notified savings certificate(NSC VIII Issue) 14. To effect or keep in force a contract for Annuity Plan of LIC or any other Insurer 15. As subscription to Notified Deposit or Pension Fund of National Housing Bank Deductions from Income is available for subscription to any Deposit Scheme of • •

Public Sector Company, engaged in providing long term finance for construction or purchase of houses in India for residential purposes Statutory Authority constituted in India, for dealing with and satisfying the need for o Housing accommodation or Planning, development or improvement of cities, towns and villages, or both

16. Deductions from Income is available for subscription to

• • •

Equity Shares or Debentures forming part of any Eligible Issue of Capital approved by a Public Company Eligible Issue of Capital by any Public Financial Institution in the prescribed form Units of any Mutual Fund notified under section 10(23D), approved on an application by such Mutual Fund to Board, which is applied for Eligible issue of Capital

The qualifying amount FOR ALL THE ABOVE ITEMS shall not exceed Rs.1,00,000 SECTION 80CCC Eligible Assessee – Individual Nature of Payment Contribution paid or deposited to certain pension funds to effect or keep in force a contract for any annuity plan of Life Insurance Corporation of India or any other insurer for receiving pension from the fund referred to in clause 10(23AAB). Any amount standing to the credit of the assessee in a fund including interest, bonus, etc., is received by the assessee or his nominee, whether on surrender of plan or as pension shall be treated as income in his hands. If deduction is claimed under this section, deduction under section 80C is not available. QUANTUM OF DEDUCTION Lower of the following: • •

Actual Contribution. RS 100000

SECTION 80CCD

Eligible assessee – employee of central government Nature of Payment Contribution made by such employee or Central Government to a pension Scheme notified by Central Government of India. Where any amount standing to the credit of the assessee in such Pension scheme, together with the amount received by the assessee • •

On account of closure or his opting out of the pension scheme Pension received from the annuity plan purchased or taken on such closure or opting out is chargeable as income of the previous year in which such sum is received.

If deduction is claimed under this section, deduction under section 80C is not available. Quantum of deduction: Lower of the following: • •

Actual Contribution. 10% of the salary

Note: In each case of contribution by employee and Central Govt. Hence, a total of 20% of salary can be claimed as deduction Section 80CCE This section restricts the total deduction under sections 80C (individual limit of Rs.1,00,000), 80CCC (Individual Limit of Rs.1,00,000) & 80CCD (Individual Limit of 20% of the Salary of the Employee) to Rs.1,00,000 Section 80D Deduction in respect of Medical Insurance Premia Deduction is allowed for any medical insurance premium under an approved scheme of General Insurance. corporation of India, (popularly known as MEDICLAIM) or of any other insurance company, paid by any mode except cash, out of assessee’s taxable income during the previous year, in respect of the following: Feature This is an additional deduction after deduction u/s 80C because overall limit on deductions u/s 80C, 80CCC and 80CCD is Rs. 1,00,000. (Sec.80CCE). See below example. ELIGIBLE ASSESSE (a) In case of an individual- Insurance on the health of the assessee, or wife or husband, or [dependent] parents or dependent children. (b) In case of an H.U.F.- Insurance on the health of any member of the family. Amount of Deduction For A.Y. 2009-10:(1) In case of an individual assessee : Actual amount or Rs 15000 (senior citizen 20000) An additional deduction upto Rs. 15000 (Rs. 20,000 in case of the person insured is senior citizen) shall be allowable in respect of medical insurance premium for parent(s) whether or not dependent on the assessee.

SECTION -80DD/ Rule 11A

Deduction in respect of maintenance including medical treatment of person with physical disability Individual or HUF resident in India: • With disability - Rs. 50,000 • With severe disability - Rs. 75,000 SECTION 80DDB – Expenditure incurred on treatment of self, dependant who is suffering from a notified disease. Actual amount or Rs40000 w.e.is less SECTION -80E Deduction for interest paid on loan taken for pursuing his higher education or for the purpose of higher education of his relative. W.e.f. A.Y. 2010-11 meaning of higher education has been enlarged to cover all post schooling courses “Relative” means the spouse and children of the individual. ELIGIBLE ASSESSE - Individual whether resident or not. Actual amount paid qualifies for deduction.

SECTION 80G

Under Section 80G of the Income Tax Act, donations have been segregated as follows: Those eligible for 100% deduction, • Those eligible for 50% deduction, • Those eligible for 100% or 50% deduction, subject to maximum of the 10% of the gross total income. •

For the purpose of claiming deduction, the assets are classified into four categories: Category A Donations that qualify for 100% deduction. Category B

Donations that qualify for 50% deduction.

Category C Donations (to be restricted to 10% of Total Income) that qualify for 100% deduction. Category D Donations (to be restricted to 10% of Total Income) that qualify for 50% deduction. Note: Total Income = Gross Total Income - Chapter VI-A Deductions (except 80G) Category C & Category D donations cannot cumulatively exceed 10% of the Total Income. Deductions for Donations - Category A The following list of Items qualify for deductions to the extent of 100% of Total Income. 1. Technology: Fund for Technology Department and Application set up by the Central Government of India. 2. Security: Fund donated for any of the following funds established by the armed forces of the Union for the welfare of the past and present members of such forces or their dependants is eligible for deduction u/s 80G. • • • •

3. Education: -

The Army Central Welfare Fund, or The Indian Naval Benevolent Fund, or The Air Force Central Welfare Fund National Defence Fund.

Donations for any of the following Education funds is eligible for deduction u/s 80G. A university or any educational institution of national eminence. • Any Zila Saksharta Samiti constituted in any district for the purposes of improvement of primary education in villages and towns in such district and for literacy and post-literacy activities. •

4. Medical: Donations for any of the following Medical funds is eligible for deduction u/s 80G. The National Illness Assistance Fund • The National Blood Transfusion Council or to any State Blood Transfusion Council • Any fund set up by a State Government to provide medical relief to the poor • The National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities. •

5. Relief: Fund donated for any of the following Relief funds is eligible for deduction u/s 80G. The Prime Minister's National Relief Fund. • The Prime Minister's Armenia Earthquake Relief Fund. • The Africa (Public Contributions India) Fund. • The Chief Minister's Relief Fund or the Lieutenant Governor's Relief Fund in respect of any State or the Union Territory. •

6. Others Donations: Fund donated for any of the following funds is eligible for deduction u/s 80G. • • •

The National Sports Fund. The National Cultural Fund. The National Foundation for Communal Harmony.

Quantum of Deductions for category A: 100% of donations. Deductions for Donations - Category B Any donations made for the following funds are eligible for deductions under 80G. •

The Prime Minister's Drought Relief Fund.

• • • •

The National Children's Fund. The Jawaharlal Memorial Fund. The Indira Gandhi Memorial Trust. The Rajiv Gandhi Foundation.

Quantum of Deductions for category B: 50% of donations. Deductions for Donations - Category C Any donations made for the following purpose are eligible for deductions under 80G. Family Planning: Donations made to the Government or to any such local authority, institution or association approved by the Central Government of India, for the purpose of promoting family planning. •

Sports Development: Any sum paid by a company to the Indian Olympic Association or to any other association or institution established in India notified by the Central Government for a. The development of infrastructure for sports and games; or b. The sponsorship of sports and games; in India •

Quantum of Deductions for category C: 100% of donations. But the Donations should be restricted to 10% of Total Income. Note: Total Income = Gross Total Income - Chapter VI-A Deductions (except 80G) Category C & Category D donations cannot cumulatively exceed 10% of the Total Income. Deductions for Donations - Category D Any donations made for the following purpose are eligible for deductions under 80G. Renovation of any Places of Public Worship: Donations for the renovation or repair of any temple, mosque, gurdwara, church or other place notified by Central Government to be of historic, archaeological or artistic importance or to be a place of public worship or renown throughout any State(s). •

Government Charity: Donations to the Government or Local Authority, to be utilised for charitable purpose.(Other than family planning) •

General Charity: Donations to any other funds or any Institutions approved under Section 80G. •

For promoting Housing accommodation: Donations to any authority constituted in India by or under any law for the purpose of dealing with and satisfying the need for housing accommodation for the purpose of planning, development or improvement of cities, towns and villages, or for both. •

Minority community: Donations to any Corporation established by the Central Government or any State Government for promoting the interests of the members of the minority community. •

Quantum of Deductions for category D: 50% of donations. But the Donations should be restricted to 10% of Total Income. Note: Total Income = Gross Total Income - Chapter VI-A Deductions (except 80G) Category C & Category D donations cannot cumulatively exceed 10% of the Total Income. SECTION 80GG Payment of house rent if an individual is living in a rented house & does not have a self occupied house. The amount of deduction is 2000p.m or Rent paid-10% of adjusted GTI OR 25% OF adjusted GTI WHICHEVER IS LESS

Deductions for Donations Research and Rural area Development u/s 80GGA Any assessee not having "Profit and Gains of Business or Profession" is eligible for deductions for donations made under 80GGA. The whole amount contributed to any of the following Payee are eligible for deduction. Scientific Research: • • • •

Scientific Research Association University Colleges Any other institution approved u/s 35(1)(ii)

Research in Social Science or Statistical Research: • • •

University Colleges Any other institution approved u/s 35(1)(ii)

Rural Area Development Programme: Association or Institution, approved under section 35CCA(2) or 35CCA(2A) •

Training of persons for Rural Area Development Programme: Association or Institution, approved under section 35CCA(2) or 35CCA(2A) •

Carrying out Eligible Project or Scheme [notified u/s 35AC]: • • •

Public Sector Company Local Authority Association or Institution

Fund for Rural Area Development Programme: Rural Development Fund notified by Central Government of India under section 35CCA(1)(c) •

Urban Poverty Eradication Fund: National Urban Poverty Eradication Fund notified by Central Government of India under section 35CCA(1)(c) •

Quantum of Deductions:

Whole Amount contributed is deductible. Note: Where deduction is claimed under this section, no deduction can be claimed under any other section. Deductions for Donations For Political Parties u/s 80GGB & 80GGC Contribution by an Indian Company: Any contribution made by an Indian Company to any political party is deductible u/s 80GGB. Contribution by any other Person: Any contribution made by any other person Except • •

Local Authority Artificial Juridical Person, wholly or partly funded by Govt.

is deductible u/s 80GGC. Quantum of Deductions: Whole Amount contributed is deductible.

SECTION 80U – Medically handicapped or mentally retarded persons Rs 50000 In case of severe disability Rs75000

SOLVED PROBLEMS:

1. The following are particulars of income of Mr.Behl for the Assessment year 200910: 1. Income from House property (computed) 2. Business income 3. Dividends (Gross) from a Co-op Society 4. Long term Capital Gain: Long Term

61,200 80,000 500

5. 6.

7. 8. 9.

a)from Land 1000 b)from Jewellery 800 He paid Rs 28,000 as Life Insurance Premium on his own life on a policy of Rs 2,00,000. He gave Rs 20,000 as donation to a charitable institution approved under section 80 G. During the year he deposited Rs 20,000 in an equity linked saving scheme (Dhan 80) notified u/s 80C. He deposited Rs 12,500 in National Saving Scheme 1992. Interest accrued on NS certificates VIII issue purchased in November 2007 for Rs 30,000 is Rs 2260. Compute his Total Income. Sol: Computation of Total Income of Mr. Behl Income from House Property(computed) Business Income Capital Gain: Land Jewellery Total Long Term Capital Gain Other sources: NSC VIII issue Interest Dividend from Co-operative society Gross Total Income Deductions u/s 80: i) u/s 80 C: (Note 1) ii) u/s 80 G: Donations QA Actual Donation Rs 20,000 or 10% of G.Tax I w.e. is less 10% of [1,45,760 – (52,760 + 1800) = 9120 Rate 50% of Rs 9120 Total Income

Note 1:QA for deduction u/s 80C: a. Life insurance premium b. Interest on NSC VIII issue c. Amount deposited in NSS 1992 d. Amount invested in Dhan 88 (scheme notified u/s 80C) Total qualifying amount

61,200 80,000 1000 800 2260 500

1800 2760 1,45,760

52,760

4560

28,000 2,260 12,500 10,000 52,760

57, 320 88,440

2. You are required to compute total taxable income of Mr. Kapoor of the financial year ending 31st March, 2009 from the following particulars: a. Salary per month Rs 24,000. He spent 3 months in Australia on leave on full pay. On 31st Dec, he was discharged on payment of a compensation of Rs 90,000. Salary accrues on the last date of the month. b. He contributed towards Provident Fund (Recognised) at 15% of his salary. Similar amount was contributed by his employer. He paid Rs 4000 on the assurance of his own life. c. He held Rs 1,00,000, 10% Govt of India Bonds. He paid an interest of Rs 7000 on a loan which he took for the purchase of such investement. d. He owns several properties in Calcutta the rental value of which amounts to Rs 86,800 per annum including Rs 11,800 for a cottage where he resides. He has incurred the following expenses: Vacancy allowance Rs 2400; Repairs Rs14,000; Collection charges Rs 6000; Legal Expenses for acquisition of land Rs 20,000. e. He had also come agricultural land in Nepal and he derived an income of Rs 10,000 f. He also received 1/5th share from Hindu Undivided Family Rs15,000. g. He is medically handicapped person and has been duly certified by the Govt doctor. h. He paid by cheque Rs 12,000 as premium under the scheme of Mediclaim for insurance of his health and Rs 24,000 paid by cheque for the medical insurance of his aged parents. Sol: Computation of total income of Mr. Kapoor for the Assessment year 2009-10: Income from salary: Salary at Rs 24,000 pm (1.4.2008 to 31.12.2008) (9 months including leave salary) Compensation on termination of service Employer’s contribution in employee`s RPF over 12% of salary (32,400 – 25,920) Salary Income Income from House property: Let out house propery:

21,16,000 90,000 6480 3,12,480

Rental value ( 86,800 – 11,800) Less vacancy Annual rental value Less: Municipal taxes Net annual value Deductions u/s 24: Standard Deduction : 30% of NAV

75,000 2400 72,600 NIL 72,600

Self-occupied house : Annual value is taken as Income from other sources: Agricultural income from Nepal Interest on Govt Bonds Less: Interest on loan paid

50,820

10,000 10,000 7000

Gross total income Deductions u/s 80: a. u/s 80C: Qualifying savings (Note 1) b. u/s 80D: Premium paid regarding Mediclaim (self) 12,000 Premium paid for medical Insurance of aged parents (senior Citizens) 20,000 c. u/s 80U: Medically handicapped assessee Total Income Note 1 . QA for deduction u/s 80C Contribution to RPF LIC premium QA

21,780 50,820 NIL

3000

13,000 3,76,300

36,400

32,000 50,000

1,18,400 2,57,900

32,400 4,000 36,400

Note: Share of income received from HUF is exempted from tax u/s 10 (2). 3. From the particulars given below, determine total income of Mr.Rohit Sharma for the assessment year 2009-10: Salary income (computed) House property income (computed) Business loss Capital Gain: Short term Long term

Income from other sources:

4,50,000 30,000 (-) 80,000 20,000 12,000

Winnings from lottery Winnings from card games Interest on Securities

50,000 16,000 10,000

Mr. Rohit’s savings are: a. RPF Rs 1000 pm. b. Life Insurance premium Rs 20,000 pa c. Life Insurance premium of Major son Rs 10,000 pa d. Life Insurance premium of Father Rs 10,000 pa e. Contribution towards pension Fund of LIC Rs12,000. Mr. Rohit paid medical insurance as under: a. Own medical insurance premium paid by cheque Rs 16,000 b. Medi claim insurance premium of his old father (paid by cheque) Rs 8000. c. Medi claim insurance premium of his mother paid in cash Rs 5000. Mr. Rohit’s old father is handicapped and he spent Rs 30,000 on his treatment during the previous year 2008-09. Mr. Rohit is suffering from a specified disease and during the year he spent Rs 60,000 on the treatment. Mr. Rohit’s son is studying in a reputed management college and doing MBA and he took a loan of Rs 2,00,000 at 12% from a Nationalized bank in 2006. During the previous year 2008-09, Mr. Rohit re-paid to the Bank Rs 48,000 which includes interest of Rs 24,000. Sol: Computation of Total income of Mr. Rohit for the assessment year 2009-10: Salary income (computed) House property income (computed) Capital gain short term Income from other sources : Interest on securities Set- off loss from business Business loss to be C/f (Note 1) Long term capital gains Income from other sources: Winnings from lotteries Winnings from card games Gross total income

4,50,000 30,000 20,000 10,000 60,000 (-) 80,000 (-) 20,000 12,000 50,000 16,000

66,000 5,28,000

Deductions u/s 80: U/s 80C: Contribution to RPF Life insurance premium Life insurance premium of Major son QA

12,000 20,000 10,000 42,000

U/s 80 CCC: Contribution in pension fund of LIC U/s 80 D: Medical insurance premium of self Rs 16,000 but restricted to Medical claim insurance of father (additional deduction allowed)

100% 12,000

15,000 8,000

23,000

U/s 80 DD: Medical treatment of handicapped dependent relative (fixed)

50,000

U/s 80 DDB: Expenses incurred on medical treatment of notified disease Rs 60,000 or 40,000 whichever is lesser is allowed as deduction

40,000

U/s 80 E: Interest paid on loan taken for higher education Rs 2,00,000 at 12%

24, 000

Total income

42,000

1,83,000 3,37,000

Notes: 1.Business loss is not allowed to be set off out of total income under the head salary and winnings from lottery and races. He can set off business loss out of long term capital gain but he should not set off his business loss out of long term capital

gain as he is to pay tax at a lower rate of 20% on long term capital gain. So, business loss should be C/F. 2. Life insurance premium of father does not qualify for 80 C deduction. 3. 80 CCC deduction is allowed for the full amount of premium paid but the total of all deductions u/s 80C, 80CCC and 80 CCD should not exceed Rs 1,00,000. 4. Medical insurance premium of mother paid in cash does not qualify for deduction u/s 80 D. 5. Rohit’s son is studying in higher degree education which is a post graduate degree in management (MBA) and it is a full time course.

4. From the following particulars given below, compute the total income and tax payable of Mr. Deb, a central Govt employee working at Chandigarh: I. 1. Salary 2. TA Bill Actual expenditure 3. His contribution to SPF 4. Employer’s contribution to SPF 5. Interest on accumulated Balance of SPF at 13% 6. Entertainment Allowance

7000 pm. 5000 pa. 6000 pa. 700 pm. 10% of salary. 2000 5000 pa.

II. He owns two houses, one of which is let out at a rent of Rs 400 pm and other (whose annual value is Rs 1000) remained vacant throughout the year on account of his employment at Ambala where he has taken a house on rent. The two houses are subject to Municipal Taxes of Rs 600 and 100 respectively. III. He received Rs 11,500 as interest from the Government securities and Rs 1600 as bank interest. He pays Life Insurance premium of Rs 5000 on his life policy of Rs 40,000. He deposited Rs 3000 in Home Deposit Account.

Sol: Computation of Total income of Mr. Deb for the current assessment year:

I.

Income from salary: a. Salary @ Rs 7000 pm b. Travelling allowance – exempted c. Entertainment Allowance Gross Salary Deduction u/s 16: U/s 16 (ii) Entertainment Allowance [Note 2]

II.

Income from house property: Rent of let out house Less: Municipal Taxes Net Annual value Deduction u/s 24: Standard deduction : 30% of NAV The other house is exempted u/s 23 (2)

III.

Income from other sources Bank Interest Interest on Govt securities Gross Total Income Deduction u/s 80C: 1. a. Contribution to SPF b. Premium of Life Insurance c. Contribution to Home Deposit Account QA

84,000 5,000 89,000 5,000 4,800 600 4,200 1,260 2,940 NIL 1,600 11, 500

2,940

13,100 1,00,040

8,400 5,000 3,000 16,400 at 100% 16,400

Total Income

83, 640

Note: 1. Tax liability shall be nil as total income does not exceed exempted limit. 2. Deduction u/s 16 (ii) Entertainment Allowance Govt Employee : No precondition. Least of 3 items shall be the deduction. Limits: 1. Statutory Limit 5000 th 2. 1/5 of 84,000 16,800 3. Actual E.A. received 5000 Least is Rs 5000 5. The following particulars are given by MD Mathur, Madras, in respect of his annual income for the year ended 31.3.2009:

a. Consolidated salary till 30.9.2008 at Rs 13,500 pm and from 1.10.2008 Rs 14,000 pm. b. House rent allowance at 20% of salary. c. Actual house rent paid Rs 3,500 pm d. Contribution to recognised PF by self and by employer each 12% of salary. e. Life insurance premium paid Rs 1,200 (Sum assured Rs 10,000) f. Leave travel allowance received Rs 22,700, Rs 20,000 was spent on travel to home district under LTC. g. Interest and dividend income: Interest on Term Deposits with Punjab National Bank 29,000 Income from units of UTI 3,000 Interest on debentures of Ponds India Ltd 21,750 Dividend from a co-op society 15,000 Interest on Govt securities 13,000 h. Long term capital gains 30,000 Short term capital gains on sale of shares (STT paid) 20,000 i. Medical expenses incurred in treatment of self and family Rs 5000. His employer reimbursed Rs 2,500. j. Rent received from tenant of own house property Rs 9,600. Municipal taxes paid Rs 600.

Prepare Mathur`s statement of income showing computation of taxable income giving such explanation as necessary and tax liability. Salary is due on the last date of the month.

Sol: Computation of total income of Mr. MD Mathur for the assessment year 2009-10. I. Salaries: Salary (1.4.2008 to 30.9.2008 at 13,500 pm 1.10.2008 to 31.3.2009 at 14,000 pm) House Rent Allowance received Less exempted u/s 10 (13A) Actual HRA received 33,000 Rent Paid – 10% of salary [42,000 – 16,500] 25,500 50% of salary 82,500 Least exempted Taxable HRA Employer`s contribution exempted as it is upto 12% of salary Excess of Leave Travel Allowance over actual expenditure [22,700 – 20,000] Reimbursement of Medical Expenses (Exempted) Gross Salary Deductions u/s 16 Salary income House property ARV Less : Taxes Net AV Standard Deduction : 30% of NAV II.

III. Capital Gains: Long term capital gain Short term capital gain on shares (STT paid) IV.

Income from other sources:

1,65,000 33,000

25,500 7,500 NIL 2,700 NIL 1,75,200 NIL 1,75,200 9,600 600 9,000 2,700

6,300

30,000 20,000

50,000

Interest on Bank deposit Income from units of UTI – exempted Dividend from a Co-op society Interest on debentures Interest on Govt securities Gross Total Income Deduction u/s 80C Own contribution to RPF at 12%

Life Insurance Premium

29,000 NIL 15,000 21,750 13,000

78,730 3,10,250

19,800

1,200 21,000 at 100% 21,000 2,89,250

Total income 1. Computation of tax liability: On Long term capital gain Rs 30,000 at 20% On Short term capital gain (STT paid) Rs 20,000 * 15% On balance income i.e., 2,89,250- 30,000- 20,000 = 2,39,250. On first Rs 1,50,000 On balance Rs 89,250 at 10% TAX: Add: Education cess at 2% of tax Secondary and Higher education cess at 1% of tax Tax Payable

6,000 3,000 NIL 8,925 359 179

8,925 17,925 358 18,463

Tax payable rounded off Rs 18,460. 6. The following are particulars of the income of the GND University teacher during the year ending 31st March 2009: a. Salary Rs 14,200 per month from which 10% is deducted for statutory provident fund to which the University contributes 12%. b. Rent free bungalow of the annual letting value of Rs 18,000. c. Wardenship allowance Rs 7,200 pa d. 12% interest on Govt loan of Rs 65,000. e. Income from house property (computed) Rs 29,560. f. He received Rs 3,500 for writing articles in a journal. g. He paid Rs 2,000 (by cheque) to GIC under mediclaim. h. Interest on postal saving bank deposit Rs 300. i. Interest (gross) Rs 2,500.

j. Examinership remuneration Rs 3,500. During the year he paid Rs 2,400 as life insurance premium on his own policies and spent Rs 600 on books purchased for his own use. Find out his total income, tax and exempted income. Population of Amritsar is 12 lakhs.

Sol: Salary income Pay @ Rs 14,200 pm Wardenship allowance @ 100 pm Value of Rent free accommodation at Amritsar: 10% of salary i.e., (1,70,400 + 7,200) Employer’s contribution to SPF – exempted Gross salary Deductions u/s 16 Salary income Income from house property (computed) Income from other sources: Interest (gross) Examinership remuneration Interest on Govt loan Remuneration for writing articles Gross Total Income Deductions u/s 80: U/s 80C: Own contribution to SPF Life Insurance Premium U/s 80D: Mediclaim Total Income

1,70,400 7,200 17,760 NIL 1,95,360 NIL 1,95,360 29,560 2,500 3,500 7,800 3,500

17,040 2,400

Computation of tax on total income of Rs 2,20,780: On first Rs 1,50,000 of total income On next Rs 70,780 of total income

Tax: Add: Education cess at 2% of tax Secondary and higher education cess @ 1% of tax Total tax

19,440 2,000

10%

142 71

17,300 2,42,220

21,440 2,20,780 NIL 7078 7078

213 7291

Tax payable rounded off to 7,290 .

7. Dr. Singh is a practitioner. Besides his own practice, he works as a part time physician in a private hospital for which he receives a monthly remuneration. He is also Consultant- Physician of ABC Co. Ltd on a monthly retainer fee. The doctor maintains a record of his receipts and payments and for the year ended 31st March, 2009, the following information is abstracted therefrom: Receipts: Consultation fee receipts Gross Remuneration from the private hospital Retainer fee from ABC Co. Ltd Interest on bank deposits (nationalised bank) Payments: Rent and electricity charges for the clinic Telephone charges Printing and stationery Car maintenance expenses Wages of clinical assistant Driver’s salary Life Insurance Premium

1,70,000 1,30,000 24,000 18,000 17,000 7,400 500 9,000 6,600 3,600 12, 400

The written down value of the car purchased in January 1990 and the furniture at the clinic as on 1.4.2008 are noted to be Rs 40,000 and Rs 2000 respectively. 30% of the use of the car and the telephone is attributable to personal and private purposes. Prepare a statement showing the total income and tax payable of the doctor for the assessment year 2009-10: Sol: Computation of Total Income of Dr.Singh: I.

Salary: Salary from private hospital Retainer fee Less: Deductions u/s 16

1,30,000 24,000 1,54,000 NIL

Salary Income

1,54,000

II. Professional Gain Receipts Consultation fee Less expenses:

1,70,000

Rent and electricity 17,000 Telephone (7,400 less 30% for personal use 2,220) 5,180 Printing & Stationary 500 Wages of clinical Assistant 6,600 Car maintenance (9000 less 30% for personal use: 2700) 6,300 Driver’s salary (3,600 less 30% for personal use 1080) 2,520 Depreciation of car ( 40,000 * 15%) 6,000 Less: 30% for personal use 1,800 4,200 Depreciation on furniture (10% of Rs 2,000) 200

42,500

III. Other sources: Interest on Bank Deposit Gross Total Income

18,000 2,99,500

Deductions: U/s 80C: Life Insurance Premium Total Income Note: Computation of tax on total income of Rs 2,87,100 On first Rs 1,50,000 of total income On next Rs 1,37,100 of total income

12,400 2,87,100

NIL 13,710 13,710

10%

Tax: Add: Education cess @ 2% of tax Secondary and Higher education cess @ 1% of tax Total Tax

1,27,500

274 137

411 14,121

Tax payable rounded off Rs 14, 120.

8. From the following Receipts and Payments Account for the year ended 31st March, 2009 of Dr. Deb and from further particulars given below, compute his total income and tax payable.

RECEIPTS To opening cash balance To consultation fees To salary from Medical college To sale of shares To interest from bank To loan from Bank To cash gifts on Son’s marriage

PAYMENTS 8478 By consulting room exp 90,000 By cost of X- Ray machine 1,66,000 By car expenses 21,522 By Life Insurance Premium 3,200 By son’s marriage Exp 10,000 By advance income tax 10,000 By household expenses By closing cash balance 3,09,200

12,000 60,000 6,000 22,000 5,000 3,000 1,72,000 29,200 3,09,200

Particulars: a. ½ of Car expenses are treated as personal. b. Cost of shares acquired in 1988-89 was Rs 5000 and CII for 1988-89 is 161 and for 2008-09 is 582. c. He deposited Rs 17,000 in PPF on 30.3.2008 and Rs 20,000 in NSC VIII issue. d. Includes interest on loan of Rs 5000 for purchase of office computer. Household expenses include. e. He has insured himself for Rs 1,00,000. Sol: Computation of total income of Dr. Deb for the assessment year 2009-10.

I.

Income from salary: Salary from medical college Less: deductions u/s 16 II.

Professional income: Professional Receipts: Consultation fees Less: Professional expenses Consultation room expenses Depreciation on X-Ray machine at 15% of 60,000 Car expenses (1/2 allowable) Interest on loan for office computer

1,66,000 NIL

1,66,000

90,000 12,000 9,000 3,000 5,000

III. Capital gains: Long term Sale price Cost (5000* 582/161) Taxable capital gain IV. Other sources: Interest from bank Gross Total Income Deduction: U/s 80C :[ See Note 1] Total income

29,000

61,000

21,522 18,075 3,447

3,200 2,33,647 57,000 @ 100%

57,000 1,76,647

Total income rounded off Rs 1,76,650 Tax liability: On long term capital gain on shares Balance income = 1,76,650 - 3,450 = 1,73,200 On first Rs 1,50,000 NIL On balance Rs 23,200 10% Tax Add: Education cess @ 2% Secondary and higher education cess @ 1%

NIL NIL 2320 2320 46 23

69 2389

Total tax liability rounded off Rs 2390 Note: 1. QA for deduction u/s 80C Life insurance premium [Actual 22,000 or 20% of sum Assured; Rs 1,00,000 or 20,000 whichever is less

20,000

Amount deposited in PPF NSC (VIII issue) Total QA

17,000 20,000 57,000

Exercise questions: 1. Mr RD Rane has made the following payments during the year 2008-09. Discuss whether he can claim any benefit u/s 80 or not: a.Rs 14,000 (Rs 8000 by cheque and Rs 6000 by cash) to General Insurance Corporation under Mediclaim. He also paid by cheque Rs 18,000 for medical insurance of his parents. b.Rs 20,000 to ICICIPRU Insurance Pension Fund. c.Rs 40,000 to a hospital for treatment of his minor son who is suffering from a notified chronic ailment. d.Rs 6000 pm paid as rent of a house at Delhi. He does not own any other house. e.Rs 10,000 to a sports association notified u/s 80 G. f. Rs 8000 to Ganga Development Board (notified u/s 35A) 2. Mr. Mahapatra, a physically handicapped assessee submits the following particulars of income for the year ended 31.3.2009: a. Rent from house at Calcutta Rs 24,000 pa Municipal taxes paid by tenant Rs 1200 which is 50% of total taxes. b. Poultry farming business income Rs 71,000 c. Speculation gain from shares Rs 20,000 Speculation loss from Gold Rs 30,000 d. Other sources: • Dividend from Indian company 9000 • Interest on units from Mutual fund 2000 • Bank interest 7000 • Interest on debentures 33,000 • Interest on Govt securities 5000 e. He paid Rs 10,000 to a veterinary college of Bengal Govt engaged in research in poultry farming. f. He gave Rs 6000 to Calcutta Municipal Corporation for carrying out a project approved by National Committee.

Calculate his total income.

3. An assessee, who is an individual received the following incomes during the financial year 2008-09: a. Insurance commission received from LIC b.Cloth business profits c.He made the following payments during the year: • Deposit of Rs 10,000 in National Saving Scheme 1992.

10,656 75,000

• Payment of Rs 500 pm to Jeevan Dhara Policy. • Investment of Rs 10,000 in units of mutual funds Notified u/s 80C as equity linked saving scheme. • Donation given to:  National Children Welfare Fund 5000  PM National Relief Fund 5000  Gujarat Relief Fund 2000  PM Folks Art Fund 1000  PM Students’ Aid Fund 2000  Maharashtra CM’s Earthquake Relief Fund 2000  Local authority to promote Family Planning  Public Charitable Trust (Approved)

2000 10,000

d.He paid Rs 6000 by cheque to General Insurance Company under Mediclaim. Compute his total income.

UNIT – V PROCEDURE FOR ASSESSMENT

Assessment- Assessment-Best Judgment Assessment- Income escaping Assessment-Notice- Rectification of mistakes-time limit for completion. INTRODUCTION: After the end of financial year i.e., the previous year (the year in which an Assessee earns income), an assessee is required to compute his exact amount of income and tax thereon. The income so computed and tax on it has to be filled in a form (generally form No. 2D “SARAL”), and tax is deposited in bank, a copy of the income tax form and the proof of the income tax deposited in the bank is prepared in duplicate. A copy is submitted with income tax office and the assessee himself retains the other copy.

At present for the Assessment Year 2009-10, Return of income is required to be filed by the following persons: Person If Gross total income Exceeds 1. Senior Citizen Rs. 2, 25,000 p.a. i.e., person age 65 years or more 2. Woman Rs. 1, 80,000 p.a. 3. Ay other person not covered above i.e., Man below 65 years of age Rs. 1, 50,000 p.a.

Last date of filing income tax return

The last date to submit the income tax return is 31st October of the Assessment Year for assessee whose accounts are required to be audited under any law.

If Assessee does not file his return of income even after the due date then the Assessing Officer (AO) can issue a notice to the assessee asking for filing his return of income. This notice is issued under section 142(1) of the income tax Act. If the Assessee does not comply with this notice also then the AO can complete the assessment i.e., compute his income and the tax liability under section 144 called “Best Judgment Assessment”.

TYPES OF INCOME TAX RETURN In income tax Act there are various types of income tax returns such as Regular Return, Loss Return, Belated Return, Revised Return, and Regular Return: Regular return is the income tax return filed by assessee on or before the due date it is covered u/s 139(1) of the income tax Act. Thus, if an assessee submits his return of income before due date of filing of return of income, then the return of income is called Regular return.

Loss Return: A return filed by an assessee indicating the amount of loss incurred is called Loss return. It is covered u/s 139(3) of the income Tax Act. Thus, if an assessee submits his return of income in which assessee declares the loss incurred by him during the previous year, and then the return of income is called Loss return. It important to note here, that if the loss return is submitted before the before due date of filing of return of income, then only the loss can be carried forward. (NOTE: losses can be carried forward up to 8 years if the return of income is filed before due date.) If loss return is not filed on or before due date then the losses incurred cannot be carried forward for set-off in coming year.

Belated Return: Belated return is the return filed by the assessee after the due date; it is covered u/s 139(4) of the income tax Act. Thus, if an assessee submits his return of income after the due date of filing of return of income, then the return of income is called Belated return.

Revised Return:

Revised return is a new return filed by income tax assesses which corrects the information filed earlier in the regular return is called Revised return. It is covered u/s 139(5). A return can be revised any number of times by an assessee. A belated return however, cannot be revised. Time period for revising a return and for filing a belated return is the earlier of the following two dates: End of one year from the end of relevant Assessment year Date of Completion of Assessment.

Permanent Account Number (PAN) Sec 139A Income tax department issues Permanent Account Number called PAN to all those persons who apply for it. The application is made in from no. 49A along with a prescribed fee and documents. Computer allots the PAN randomly. Therefore, it is unique for every person. PAN is a 10 digit alphanumeric code the first 5 digits are the alphabets, next 4 digits are the numbers and the last one digit is also an alphabet, e.g., ADMPM7588C is an example of PAN. It is mandatory to mention the PAN on income tax return. Wrong quoting of PAN is an offence, which is punishable with a fine of Rs. 10,000. PAN is actually used by income tax department as our account number on which all the details relating to persons income are stored. It helps income tax department in keeping track of incomes of a person.

TYPES OF ASSESSMENT: Assessment can be of the following types: 1. Self assessment. 2. Assessment on the basis of return. 3. Regular Assessment by Assessing Officer. 4. Re - Assignment.

1. SELF ASSESSMENT: Before filing the return of income, an assessee has to do the following himself: 1.Compute his total income. 2.Compute the tax on the total income.

3.Compute interest on delay or shortfall in payment of any instalment of advance tax (u/s 234C). 4.Compute interest on delay in filing the return. (u/s 234A). 5.Deposit the amount of tax and interest through a challan in a notified bank. He will file the return of income along with a photocopy of challan. Such assessment is known Self – Assessment because in this case the assessee computes his total income, tax payable on it and deposits the tax and interest himself.

2. SUMMARY ASSESSMENT OR ASSESSMENT ON THE BASIS OF RETURN: In such an assessment neither the assessee is called in the department nor he is required to produce his books of account or other documents. If in the opinion of the Assessing Authority the return, prima facie, is correct and complete he will assess the assessee summarily. Where a return has been filed u/s 139 or in response to a notice u/s 142(1). i) If any tax or interest is found due on the basis of such return, an intimation shall be sent to the assessee specifying the sum so payable and such intimation shall be deemed to be a notice of demand issued u/s 156; ii) If any refund is due on the basis of such return, it shall be granted to the assessee and an intimation to this effect shall be sent to the assessee; and iii) In any other case, acknowledgement of the return shall be deemed to be intimation u/s 143 (1). Where the assessment is made u/s 143 (1) on the basis of return, an intimation shall not be sent after the expiry of one year from the end of the financial year in which the return is made.

3. REGULAR ASSESSMENT: ‘Regular Assessment’ means the assessment made on the basis of evidence u/s 143 (3) or best judgement assessment u/s 144. i) Assessment on the basis of evidence or Scrutiny Assessment: Notice u/s 143 (2). When the Assessing Officer considers it necessary to verify the correctness or completeness of the return, to ensure that the income has not been understated or the loss declared is not excessive, or the tax has not been underpaid, he shall serve on the assessee a notice either to attend his officer or to produce on a date specified any evidence in support of his return.

However, such a notice can be served on the assessee only within 12 months from the end of the month in which the return is filed. [Sec 143(2)]

Inquiry before Assessment: For the purpose of making an assessment, the Assessing Officer may serve on any person who has made a return or in whose case the time allowed u/s 139(1) for furnishing the return has expired, a notice requiring him, or a date to be specified therein: • Where such person has not made a return before the end of the relevant assessment year, to furnish a return of his income assessable under this Act, in the prescribed form, or • To produce such accounts or documents as the Assessing Officer may require, or • To furnish in writing and verified in the prescribed manner information in such form and on such points or matters as the Assessing Officer may require. He can also call for a statement of all assets and liabilities of the assessee but for doing so he has to take the previous approval of the Joint Commissioner. Assessment after evidence: Where the notice is issued to the assessee [u/s 143 (2) (ii)], he will pass on an order after hearing such evidence as the assessee may produce in response notice u/s 143 (2) and such other evidence as the Assessing Officer may require on specified points and after taking into account all relevant material which the Assessing Officer has gathered, he shall pass an order in writing determining the total income or loss of the assessee and the sun payable by him or refund of any amount due to him on the basis of such assessment.

ii) Best Judgement Assessment: In a Best Judgment Assessment, the Assessing Officer should really base the assessment on his best assessment i.e., he must not act dishonestly or vindicatively or capriciously. He must make a fair estimate of the proper figure of assessment and for this purpose, he must be able to take into consideration local knowledge and repute in

regard to the assessee`s circumstances and his own knowledge of previous returns and assessment of the assessee and all other matters which he thinks will assist him in arriving at a fair and proper estimate. Although there must necessarily be guess- work in the matter but it must be honest guess-work. If an appeal is filed against such an assessment the Assessment Officer shall have to disclose the basis of judgment before the appellate authority. The aforesaid assessment is also called an ‘ex-parte assessment.’ Best Judgement Assessment can be compulsory or discretionary.

Compulsory Best Judgement Assessment: The Assessing Officer shall make the assessment to the best of his judgment compulsorily in any of the following three cases: i) Where the assessee has failed to make the voluntary return or fails to file the return after receiving a notice from Assessing Officer, or ii) Where there has been a failure to comply with all the terms of a notice [under section 142 (1) requiring the assessee to produce accounts or other documents or information specified therein or fails to get the accounts audited [under section 142 (2A)]; or iii) Where the return has been made, but the Assessing Officer considers it to be incorrect or incomplete and serves a notice [under section 143 (2) upon the assessee requiring his appearance or the production by him of evidence in support of his return, but the assessee does not comply with the terms of notice.

Consequences of Best Judgment Assessment: The following are the consequences of a Best Judgement Assessment: i)

The assessee becomes liable to penalties (under section 271).

ii)

The assessee becomes liable to prosecution (u/s 276 CC and 276D).

iii) The assessee is prevented is from bringing on record any new facts before the appellate authorities if an appeal is preferred against a Best Judgement Assessment regarding the quantum of assessment. iv) A refund may not be granted under this section.

Remedy against Best Judgement Assessment: Filing an appeal: If in the opinion of the assessee, excessive tax has been imposed on him under Best Judgement Assessment, the assessee is entitled to: i) Appeal to the Commissioner (Appeals) against such assessment;

ii) Appeal to the Appellate Tribunal against the order of the Commissioner (Appeals); iv) He may go to the High Court or any question of law involved in the case; v) He may apply to the Commisioner for revision.

Discretionary Best Judgment Assessment: Where the Assessing Officer is not satisfied about the correctness of the accounts of the assessee or where no method of accounting has been regularly employed by the assessee, the Assessing Officer may, in his discretion make the Best Judgment Assessment under section 144. The Assessee can file an appeal against such an assessment as under compulsory Best Judgement Assessment.

4. RE-ASSESSMENT (INCOME ESCAPING ASSESSMENT):

Income Escaping Assessment: If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may assess or re-assess such income. The following shall be deemed to be cases of income escaping assessment: i)

Where no return of income has been furnished by an assessee, although his total income is above the non- taxable limit;

ii)

Where a return of income has been furnished but no assessment has been made and the assessee is found to have understated his income or claimed excessive loss, deduction etc., in the return; and

iii) Where an assessment has been made, but income chargeable to tax has been under-assessed or assessed at too low a rate or any excessive loss or relief or depreciation allowance or any other allowance under the Act has been allowed. Once an assessment is re- opened, any other income which has escaped assessment and which comes to the notice of the Assessing Officer subsequently in the course of the proceeding under this section, can also be included in the assessment.

Issue of notice where income has escaped assessment: Before making the assessment, re- assessment or recomputation u/s 147, the Assessing Officer shall serve on the assessee a notice requiring him to furnish the return of income within such period as may be specified as may be specified in the notice. However, before issuing any notice under this section the Assessing Officer shall record his reasons for doing so.

RECTIFICATION OF MISTAKE Who can rectify a mistake The rectification can be done by: i)

The authority concerned of its own; or

ii)

On an application being made by the assessee in this connection; or

iii) Where the authority concerned is the Commissioner (Appeals), the mistake is brought to his notice by the Assessing Officer.

The order of rectification shall be passed in writing by the authority concerned. Thus, the only authority which can rectify an order is the authority which passed the order and not any higher and lower authority. However, the person holding that office may change and the rectification may be made by his successor.

Which mistake can be rectified Any mistake apparent from record in the order passed by the authority can be rectified.

Limitations: i) Normally, where an application for rectification is made by the assessee, the authority shall pass an order within a period of six months from the end of the month in which the application is received by it: a) Making the amendment; or b) Refusing to allow the claim.

ii) Within four years from the end of the financial year in which the order sought to be rectified was passed.

Notice for Rectification: If the rectification enhances the liability of the assessee or reduces the refund, the authority concerned shall give notice to the assessee of its intention so to do and shall give him a reasonable opportunity of being heard before such an order is passed. Where any such rectification has the effect of reducing the assessment the Assessing Officer shall make any refund which may be due to such assessee.

QUESTIONS : Section---A

1. 2. 3. 4. 5. 6. 7.

What is self Assessment? What is Re-Assessment? What is Best Judgment Assessment? What is Regular Assessment? What is Remedy against Best Judgment Assessment? What is income escaping assessment? What are Rectification of Mistakes?

SECTION---B

1. What is meant by Best Judgment Assessment? Under what circumstances can recourse be had to this method of Assessment? 2. What is Rectification of mistake? Explain its provisions?

SECTION—C

1. 2. i. ii. iii. iv.

Explain briefly the different types of assessment? Write short notes on: Best Judgment Assessment Regular Assessment Self Assessment Rectification of Mistakes

UNIT – VI INCOME TAX AUTHORITIES:

Income Tax Authorities: A brief discussion on - Income Tax Officer and Powers and Functions - Central Board of Direct Taxes, Functions Commissioner of Income Tax, Functions.

The Income Tax Department functions under supervision and control of the Central Board of Direct Taxes (CBDT). It has around 60,000 personnel located in more than 500 cities and towns across the country. The field offices are divided into regions, and each region is headed by a Chief Commissioner of Income Tax. Every region is assigned annual performance targets, such as revenue collections, and is provided with necessary expenditure budget to meet with its operating expenses. The Income Tax Act 1961 lays down the frame work or the basis of charge and the computation of total income of a person. It also stipulates the manner in which it is to be brought to tax, defining in detail the exemptions, deductions, rebates and beliefs. The Act defines Income Tax Authorities, their jurisdiction and powers. It also lays down the manner of enforcement of the Act by such authorities through an integrated process of assessments, collection and recovery, appeals and revisions, penalties and prosecutions. The Act is fast changing and dynamic in nature and undergoes amendments annually through the Finance Act. In exercise of the powers conferred by section 295 of the Income Tax Act 1961 and Rule 15 of Part A, Rule 11 of Part B and Rule 9 of Part C of the Fourth Schedule to the Act, the CBDT has notified Income Tax Rules 1962. These Rules lay down limits, conditions, definitions, explanations, and forms of applications and procedures for the uniform application of the Income Tax Act.

The Income tax authorities, for administering the IT Act, may be classified into three levels: ·Top level comprising Chief Commissioners and Commissioners, ·Middle level comprising Additional, Joint, Deputy and Assistant Commissioners of Income Tax; ·Lower level comprising Income Tax Officers and Tax Recovery Officers (‘TRO’). The CBDT has the power to issue circulars, notifications, instructions etc. for administration of the IT Act (which are binding on the tax authorities). Further, certain powers like issuing orders, granting waiver of applicability of certain provisions of the

IT Act to the taxpayer, etc. have been vested with Chief Commissioners and Commissioners. There are Commissioner (Appeals) and the Income Tax Appellate Tribunal (‘ITAT’) for resolving the disputes between the tax payers and the Income Tax Authorities. Further, a National Tax Tribunal (‘NTT’) has also been set up (though non operational till date) which will adjudicate the cases pending in and replace the High Courts as forum for resolving the tax issues.

There shall be the following classes of income-tax authorities for the purposes of the Act, namely:(a) The Central Board of Direct Taxes constituted under the Central Boards of Revenue Act, 1963 (54 of 1963), (b) Directors-General of Income-tax or Chief Commissioners of Income-tax, (c) Directors of Income-tax or Commissioners of Income-tax or Commissioners of Income-tax (Appeals), (cc) Additional Directors of Income-tax or Additional Commissioners of Income-tax or Additional Commissioners of Income-tax (Appeals), (cca) Joint Directors of Income-tax or Joint Commissioners of Income-tax, (d) Deputy Directors of Income-tax or Deputy Commissioners of Income-tax or Deputy Commissioners of Income-tax (Appeals), (e) Assistant Directors of Income-tax or Assistant Commissioners of Income-tax, (f) Income-tax Officers, (g) Tax Recovery Officers, (h) Inspectors of Income-tax. Appointment of income-tax authorities: (1) The Central Government may appoint such persons as it thinks fit to be income-tax authorities. (2) Without prejudice to the provisions of sub-section (1), and subject to the rules and orders of the Central Government regulating the conditions of service of persons in public services and posts, the Central Government may authorize the Board, or a Director-General, a Chief Commissioner or a Director or a Commissioner to appoint

income-tax authorities below the rank of an Assistant Commissioner [or Deputy Commissioner]. (3) Subject to the rules and orders of the Central Government regulating the conditions of service of persons in public services and posts, an income- tax authority authorised in this behalf by the Board may appoint such executive or ministerial staff as may be necessary to assist it in the execution of its functions. Powers of the authorities: 1. Income-tax authorities shall exercise all or any of the powers and perform all or any of the functions conferred on, or, as the case may be, assigned to such authorities by or

under this Act in accordance with such directions as the Board may issue for the exercise of the powers and performance of the functions by all or any of those authorities.

2. The directions of the Board under sub-section (1) may authorise any other incometax authority to issue orders in writing for the exercise of the powers and performance of the functions by all or any of the other income-tax authorities who are subordinate to it. 3. In issuing the directions or orders referred to in sub-sections (1) and (2), the Board or other income-tax authority authorised by it may have regard to any one or more of the following criteria, namely: (a) Territorial area; (b) Persons or classes of persons; (c) Incomes or classes of income; and (d) Cases or classes of cases 4. The Director General or Chief Commissioner or Commissioner may, after giving the assessee a reasonable opportunity of being heard in the matter, wherever it is possible to do so, and after recording his reasons for doing so, transfer any case from one or more Assessing Officers subordinate to him (whether with or without concurrent jurisdiction) to any other Assessing Officer or Assessing Officers (whether with or without concurrent jurisdiction) also subordinate to him. 5. The [Assessing] Officer, [Deputy Commissioner (Appeals)], [Joint Commissioner[, Commissioner (Appeals)] [, Chief Commissioner or Commissioner and the Dispute Resolution Panel referred to in clause (a) of sub-section (15) of section 144C] shall, for the purposes of this Act, have the same powers as are vested in a court under the Code of Civil Procedure, 1908 (5 of 1908), when trying a suit in respect of the following matters, namely :

(a) Discovery and inspection; (b) Enforcing the attendance of any person, including any officer of a banking company and examining him on oath; (c) Compelling the production of books of account and other documents; and (d) Issuing commissions.

CBDT 1.

Organization and Functions

The Central Board of Direct Taxes in a statutory authority functioning under the Central Board of Revenue Act, 1963. The officials of the Board in their ex-officio capacity also function as a Division of the Ministry dealing with matters relating to levy and collection of direct taxes and formulation of policy concerning administrative reforms and changes for the effective functioning of Income-tax Department. 2. Historical Background of C.B.D.T. The Central Board of Revenue as the Department apex body charged with the administration of taxes came into existence as a result of the Central Board of Revenue Act, 1924. Initially the Board was in charge of both direct and indirect taxes. However, when the administration of taxes become too unwieldy for one Board to handle, the Board was split up into two, namely the Central Board of Direct Taxes and Central Board of Excise and Customs with effect from 1.1.1964. This bifurcation was brought about by constitution of the two Boards u/s 3 of the Central Boards of Revenue Act, 1963. 3. Composition and Functions of C.B.D.T. The Central Board of Direct Taxes consists of a Chairman and following Members: 1. Chairman 2. Member (income-tax) 3. Member (investigation) 4. Member (audit & judicial) 5. Member (legislation) 6. Member (personnel)

7. Member (revenue & audit) The Chairman and Members of Central Board of Direct Taxes are assisted by Joint Secretaries, Directors, Deputy Secretaries, Under Secretaries and ministerial staff to carry out their day-to-day functions. The CBDT monitors the functioning of field offices/field formations which comprises of following: 1. Chief Commissioners/Commissioners of Income-tax 2. Director General (Inv.)/Directors of Income-tax (Inv.) 3. Director General (Exemp.)/Director of Income-tax (Exemp.) 4. Director General (Foreign Tax)/Director of Income-tax (Foreign Tax) 5. Commissioners of Income-tax (Appeals)

6. Commissioners of Income-tax (Judicial) 7. Commissioner of Income Tax (Computer Operations) 8. Commissioner of Income Tax (Audit). 9. Commissioner of Income Tax (Judicial). 10. Commissioner of Income Tax (CIB). 11. Commissioner of Income Tax (Departmental Representative), Income Tax Settlement Commission. 12. Commissioner of Income Tax (Departmental Representative), Income Tax Appellate Tribunal. To monitor the day-today functioning of field formations, the CBDT is assisted by the following attached offices /Directorates: 1. Directorate of Income-tax (IT) This Directorate has two wings i.e. (A) Inspection- Board exercises efficient control and inspection of the work of the Income-tax officers throughout the country. (B) Examination - Centralised Conduct of departmental examinations for departmental promotions 2. Directorate of Inspection (Audit) Ensures expeditious disposal and settlement of receipt audit objections and also review the work done in the different Commissioner Charges. 3. Directorate of Inspection (Research, Statistics and Public Relation) The main functions of this Directorate are research study on tax matters, printing of All India Revenue Statistics, preparation of taxpayers Information series, Departmental publications, publicity and public relations.

4. Directorate of Organisation & Management Services This Directorate has been assigned the job of Administrative Planning, Organisational Development, Management Information Systems and Work Measurement. 5. Directorate of Inspection (Vigilance) The main functions of this Directorate are conducting departmental enquiries, drafting of charge sheets, presenting the cases on behalf of the Department, preparing the enquiry reports against charged officials extra and passing of final orders. 6. Directorate of Income-tax (Systems)

This Directorate performs the functions of Management Information System, Computerization in the Department and Designing of uniform system of computerisation for Income Tax Department. 7. Directorate of Income-tax (Infrastructure) This Directorate will assist CBDT in attending to infrastructure matters. 8. Director General (Vigilance)/Director of Income Tax (Vigilance) The main function of this Directorate are conducting departmental enquiries, drafting of charge sheets, presenting the cases on behalf of the Department, preparing the enquiry reports against charges officials extra and passing of final orders. 9. Director General of Income-tax (Training) The National Academy of Direct Taxes, Nagpur is the premier training institution in the country for the officers and the staff of the Income-tax Department. Its primary task is to impart inductions training to the directly recruited Indian Revenue Service Officers The Academy imparts training to officers and staff of the Income-tax Department in coordination with its 5 Regional Training Institutes located at Bangalore, Calcutta, Hazari Bagh, Lucknow and Mumbai.

QUESTIONS:

SECTION---A

1. 2. 3. 4. 5.

State any four Income tax authorities. State any two powers of CBDT.] Who is Assessing officer? Expand: CBDT, ITO, AO, TRO State functions of tax recovery officer?

SECTION---B 1. Describe the organisation of Income tax department? 2. Discuss the powers of Income Tax Authorities. SECTION---C

1. What are the various authorities envisaged in the Indian Income Tax law and what are their functions? 2. Discuss the powers of Central Board of Direct taxes or Commissioner of Income tax. 3. Write short notes on: Director General, Chief Commissioner, Commissioner, Joint Commissioner, Deputy Commissioner, Assessing Officer, and Commissioner (appeals)

UNIT -VII CENTRAL EXCISE Introduction; Definitions: Central Excise Officer, Excisable Goods, Manufacture, and Wholesale Dealer, and Assessee (Rule-2); Duty to be levied; CENVAT; Valuation of excisable goods for levying duty and with reference to retail price; remission of duty on deficient goods; registration of persons; restriction on possession of excisable goods. Rules regarding removal of goods, Assessment and payment of duty, filing of returns. (CENVAT Credit Rules excluded); Powers of Central Excise Officers

INTRODUCTION: Central excise is duty charged on goods manufactured in India. The levy and collection is governed by Central Excise Act, 1944 & Central Excise Rules, 2002, Central Excise Tariff Act, 1985. Central excise levied under entry 84 of union list to the constitution. Excise duty is levied on all goods and tobacco manufactured or produced in India except alcoholic liquor for human consumption opium, Indian hemp, narcotics and narcotic drugs, but including medicinal and toilet preparations containing alcohol Difference between Central Excise & Income Tax Income Tax -

Central Excise

Levied on person and corporate - Levied on commodities Related on income - Related to commodity Tax burden cannot be shifted - Tax burden can be shifted Administrative cost of collection is more- Administrative cost of collection is less

Definitions – Section 2 & Rule 2 Sec 2(a) ‘Adjudicating Authority’ means any authority competent to pass any order or decision under this act, but does not include Central Board of Excise & Customs (CBEC), Commissioner of Central Excise (Appeals) or the Appellate Tribunal.

Sec 2(b) – Central Excise Officer : means Chief Commissioner, Commissioner, Joint Commissioner, Deputy Commissioner or Assistant Commissioner of Central Excise or any

other officer of the Central Excise department or any person (including an officer of the State Government) invested by the CBEC with any of the powers of a Central Excise officer under this Act.

Sec 2(d) – Excisable Goods are those specified in the first and second schedule of the Central Excise Tariff Act, 1985 as being subject to levy of Central Excise duty

Sec 2(e) – Factory means any premises including the precincts thereof, wherein or in any part of which, excisable goods are manufactured or wherein any manufacturing process connected with production of these goods is carried on

Sec 2(f) – Manufacture includes any process (i) incidental or ancillary to the completion of a manufactured product and (ii) which is specified in relation to any goods in the section or chapter notes of first schedule to Central Excise Tariff Act, 1985 as ‘amounting to manufacture’ or (iii) which in relation to the goods specified in the Third Schedule, of the Central Excise Act, 1944 involves packing or repacking of such goods in a unit container or labeling or rebelling of containers including the declaration or alteration of retail sale price on it or adoption of any other treatment on the goods to render the product marketable to the consumer, and the word ‘manufacturer’ shall be constructed accordingly and shall include not only a person who employs hired labour in the production or manufacture of excisable goods but also any person who engages in their production or manufacture on his own account.

Rule 2(c) – Assessee means any person who is liable for payment of duty assessed or a producer or manufacturer of excisable goods or a registered person of a private warehouse in which excisable goods are stored and includes an authorized agent of such person.

LEVY OF CENTRAL EXCISE Conditions: a)

There must be goods

b) c) d)

Goods must be movable and marketable They should be excisable and They should have been produced and manufacture in India.

Charging Section Sec 3 – (1)

There shall be levied and collected in such manner as may be prescribed (a) a duty of central Excise called the Cenvat on all excisable goods, (excluding goods produced or manufactured in Special Economic Zones) which are produced or manufactured in India as and at the rates set forth in the first schedule to the Central Excise Tariff Act, 1985 and (b) a special duty of excise in addition to the duty of excise specified in clause (a) on excisable goods specified in second schedule to C.E.T. Act, 1985 which are produced or manufactured in India, as and at the rates set forth in the said second schedule thereto. However, the duties of excise which shall be levied and collected on any excisable goods produced or manufactured in Free Trade Zone and brought to any other place in India or by a 100% EOU and brought to any other place in India shall be an amount equal to the aggregate of the duties of customs leviable under the Customs Act or any other law in force as if they are imported into India. Where the said duties of Customs are chargeable on advalorem basis, the value thereof shall be determined in accordance with the provisions of the Customs Act, 1962 and the Customs Tarrif Act, 1975 Explanation 1 : If such customs duties for like goods are attracted at different rates, then such duty is deemed to be leviable at the highest of those rages Explanation 2 : FTZ means a Zone which the Central Government may by notification in the official gazette specify in this behalf. 100% EOU means an undertaking approved so by the CBEC and appointed as such undertaking by the Government. SEZ means a zone which the Central Government may, by notification in the official gazette, specify in this behalf (1A) Goods produced/manufactured in a factory in India by or on behalf of Government are also subject to the provisions of section 3(1)

(2)

The central Government may by notification in the Official Gazette, fix tariff values of any articles chargeable to duty advalorem for the purpose of levying Central Excise duty either specifically or under general headings in the I & II schedule of the Central Excise Tariff Act, 1985 and may also alter them for the time being in force (3) Different Tariff values may be fixed, taking into account the trade practice (a) for different classes or description of same excisable goods; or (b) for excisable goods of the same class or description (i) produced/manufactured by different classes of produces or manufacturers or

(ii)

sold to different classes of buyers provided in fixing Tariff values in respect of excisable goods falling under sub clause (i) or sub clause (ii), regard shall be had to the sale prices charged by the different classes of producers/manufacturers or as the case may be, the normal practice of the wholesale trade in such goods.

Central Excise Tariff Act, 1985 Excise duty is levied only on the goods specified in Central Excise Tariff Act, 1985. The Act consists of following schedules: Schedule I : Cenvat Duty Schedule II : Special Excise duty Schedule III : Goods liable for duty based on MRP The goods are classified on the basis of Harmonized System Nomenclature, in schedule I & II on which duty is payable at the rates specified in respective schedules. SED is payable only on the goods specified in second schedule and at the rates specified therein. The tariff also contains notes and explanations under each section/chapter for ascertaining the classification of goods and defining certain processes as manufacture. The following forms of levy are followed in Central Excise Tariff: a) Specific Rate: Duty is levied based on unit of measurement i.e., based on quantity. Eg. Tea, Molasses, Cement other than white cement etc., b) Advalorem: Duty is levied as a percentage on the value of goods called assessable value determined u/s 4, Sec 4A or Tariff value fixed by Government of C.E. Act. Eg. Cosmetics, Motor vehicles, chemicals, machineries, computers, fabrics, etc.

c) Slab rate: In either case of specific or advalorem duties may be fixed at different rates depending on slab. Eg. Cigarettes d) Compound levy: Duty is levied at a fixed amount based on the equipment used to produce the goods. The manufacturer has the option to pay compounded duty in lieu of duty payable based on specific or advalorem rate. Eg. Marble slab, Stainless steel patties/pattas.

Types of Duties

CENVAT Duty: This is the basic duty levied on excisable goods of Central Excise Act. It is levied at the rates prescribed in first schedule of C.E. Tariff Act. If any exemption notification is issued under the Act, the rate as per the notification shall be the effective rate. The rate of duty is 16% for all goods specified in First Schedule.

Special Excise Duty: It is levied on the goods specified in second schedule of Central Excise Tariff Act. The rate of duty is 8% and 16%. Eg Tyres & tubes of cars and bus, Air conditioners, Motor spirit, Pan masala, aerated soft drinks, motor cars etc.,

Additional Duties of Excise (AED): It is levied under several acts on certain excisable goods for specified purpose and the net receipt is used for the said purpose.

Other types of duties: a) b) c) d)

National calamity duty ADE under Sugar Export promotion Act 1953 Additional duty of excise and customs on HSD Oil and motor spirit ADE (Textile and Textile Articles) Act 1978 Education Cess: Education Cess is levied in accordance with chapter VI of Finance Act 2004 as to fulfill the commitment of the Government to provide and finance universalized quality basic education. It is levied @ 2% on the aggregate of all duties of excise including the Special Excise duty.

VALUATION Excise duty is payable on value of goods manufactured and cleared. Generally the duty is payable on the transaction value between the buyer and manufacturer, except when the manufacturer and buyer related and price is not the sole consideration. The value of the goods on which duty is payable is determined under Section 4

4(1) Where under this act, the duty of excise is chargeable on any excisable goods with reference to their value, then, on each removal of the goods, such value shall – a) in case where the goods are sold by the assessee, for delivery at the time and place of removal, the assessee and the buyer of the goods are not related and the price is sole consideration for the sale, be the transaction value; b) in any other case, including the case where the goods are not sold, be the value determined in such manner as may be prescribed Explanation : It is declared that the price-cum-duty of the excisable goods sold by the assessee shall be the price actually paid to him for the goods sold. In case, any additional money consideration flows directly or indirectly from the buyer to the assessee in connection with the sale of such goods, such price-cum-duty (excluding sales tax and other taxes) paid shall be deemed to include the duty payable on such goods.

4(2) The provision of this section shall not apply in respect of any excisable goods for which a tariff value has been fixed under section 3(2) 4(3) Definitions : The following are defined for the purpose of section 4 relevant to valuation: a)

Assessee – means the person who is liable to pay the duty of excise under this Act and includes his agent b) Persons shall be deemed to be related if (i) they are inter collected undertakings (ii) they are relatives (iii) amongst them the buyer is a relative and distributor of the assessee, or sub distributor of such distributor (iv) they are so associated that they have interest, directly or indirectly in the business of each other c) Place of removal : means

(i)

a factory or any other place or premises of production or manufacture of the excisable goods from where they are removed (ii) a warehouse or any other place or premises wherein the excisable goods have been permitted to be deposited without payment of duty, from where such goods are removed on payment of duty (iii) a depot, premises of a consignment agent or any other place or premises from where excisable goods are to be sold after their clearance from the factory d) time of removal : in respect of excisable goods removed from the place of removal shall be the time at which such goods are cleared from factory

e)

transaction value – 4(3)(d) : means the price actually paid or payable for the goods when sold. In addition to the amount charged the following shall be included (i) any amount that the buyer is liable to pay to or on behalf of the assessee by reason of or in connection with the sale whether payable at the time of sale or at the any other time (ii) any amount charged for or to make provision for advertising, publicity, marketing, selling, organization expenses, servicing, storage, outward handling, warranty, commission or any other matter. The following shall not be included in transaction value (i) Excise duty (ii)Sales tax (iii) Other taxes if any actually paid or payable of such goods

If any of the conditions specified for assessing the duty based on transaction value is not fulfilled, the value shall be ascertained on the basis of ‘Central Excise Valuation (Determination of Price of Excisable Goods), Rules 2000

1)

2)

Delivery at place other than place of removal Rule 5 : If the goods are delivered at a place other the place of removal(factory), the transaction value shall be reduced by the cost of transportation from the place of removal to the place of delivery. Ex. B ltd clears goods from a factory at Bangalore to a customer at Chennai to be delivered at the customer’s place in Chennai free of cost. The transaction value shall be reduced by the transportation cost between Bangalore to Chennai to arrive at the assessable value.

Additional consideration received, Rule 6: If the price charged is not the sole consideration, then the money value of additional consideration flowing directly or indirectly from the buyer shall be included to transaction value for levy of duty. The value of following goods and services whether supplied free of cost or at reduced price for use in connection with the production and sale of such goods shall be included (i) value of materials and components, parts and similar items relating to such goods (ii) value of tools, dies, moulds, drawings, blue prints, technical maps and charts and similar items (iii) value of materials consumed, including packing materials and

(iv) value of engineering, development, art work, design work, and plans and sketches undertake elsewhere than in the factory of production and necessary for production of such goods. Ex. N manufactures and sells cycles to M. M supplies tyres and tubes required for the cycles free of cost to N. The cost of such tyres and tubes shall be included in transaction value at the time of clearance

3) Goods removed to depot etc., Rule 7: The value of the goods sold from the depot, consignment agent’s premises or any other place shall be the transaction value of the goods sold from such other place at or about the same time. The buyer and the assessee should not be related and the price shall be the sole consideration. If the goods are not sold at or about the same time the normal transaction value nearest to the time of removal of goods shall be adopted. The normal transaction value is based on the greatest aggregate quantity of goods sold to unrelated buyers. X Ltd clears goods from its factory in Bangalore to its depot in cochin to be sold from there. The transaction value prevailing at the same time in cochin shall be adopted as the assessable value at factory in Bangalore.

4) Captive consumption, Rule 8: The value of excisable goods consumed by assessee for manufacture of other article shall be 110% of cost of such goods manufactured. CAS-4 (Cost Accounting standard) issued by ICWAI shall be applied for calculating the cost of goods manufactured. As per CAS-4 material consumed, direct wages, salaries, direct expenses, works overheads, research and development cost, packing cost, administrative cost relating to production would be taken into account for arriving at cost of production. The material cost shall be net of discounts, sales tax and cenvat credit if any. Ex.

5) Sale only through related persons not being ICU’s, Rule 9: Where the assessee so arranges that goods are not sold, except to or through a person who is related other than ICU, then the value shall be of the goods shall be the normal transaction value at which these goods are sold by the related person to unrelated buyers 6) Sale through interconnected undertakings, Rule 10: If the ICU’s are so connected that they are relatives, or distributor, sub distributor or have mutual interest, the value shall be ascertained as per Rule 9. In other case the value shall be computed as if the parties are not related

7) Residuary Rule, Rule 11: If the value of excisable goods cannot be ascertained as per the specified rules, the value shall be determined using reasonable means consistent with the principles and general provisions of Central Excise Act. VALUATION BASED ON MRP – SECTION 4A: The Central Government may specify, by issue of a notification, any goods for assessment under this section in relation to which the manufacturers are required to declare the retail sale price on the package of such goods. The assessable value in case of such notified goods shall be the Retail sale price less such percentage/amount of abatement as may be notified Where more than one retail price is declared on the package, the maximum of such retail sale prices shall be deemed to be the retail price for levy of duty Where different retail sale prices are declared on different packages for sale in different areas, each such retail price shall be the assessable value of excisable goods intended to be sold in the area to which retail sale price relates If the RSP declared on the package is altered to increase, then such altered RSP shall be deemed to be the retail sale price Government has notified 99 categories for the purpose of section 4A with abatements, the list of which include a) b) c) d) e) f) g)

Clocks with abatement of 45% Glazed tiles with abatement of 45% Chocolates with abatement of 35% Aerated waters with abatement of 42.5% Icecream with abatement of 45% Refrigerators with abatement of 40% Air conditioners with abatement of 30%

Exemption from Excise duty, Sec 5A Section 5A empowers the central government to give exemption from duty of excise, in public interest, by issue of notification from the whole or part of duty, either absolutely or with conditions. Any exemption unless specifically provide shall not apply to goods manufactured in FTZ, 100% EOU and brought in to India.

MISCELLANEOUS PROVISIONS

REGISTRATION The following persons are required to be registered under Central Excise Act 1. Manufacturer/Producer of excisable goods 2. Persons who intend to issue cenvatable invoices as First stage dealer & Second stage dealer 3. Persons holding warehouses for storage of non duty paid goods 4. Exporters who intend to avail cenvat credit 5. persons who obtain excisable goods for availing end use exemption Registration is separately required for every premises like depot, godown etc., unless when the premises of part of same factory but are segregated by public road, canal or railway line.

Payment of Duty: The duty on goods removed from a factory or warehouse during a month shall be paid by 5 of following month. If duty is paid electronically, it shall be paid by 6th of following month In respect of assessee availing exemption based on value (SSI), the duty shall be paid by th 15 of following and if paid electronically by 16th of following month Duty for the month of march shall be paid with 31st March in all cases When the duty is deposited by cheque, the date of presentation of cheque shall be deemed to be the date of payment Failure to payment of duty by due date, will attract interest @13% P.A. Failure to pay duty beyond 30 days required assessee to clear goods without availing cenvat credit until the duty is paid. -

th

ASSESSMENT, RETURNS ETC.,

Self Assessment: Assessment under central excise is a self assessment based on invoice. The assessee should assess the duty payable on excisable goods except in case of cigarettes.

Provisional assessment:

where the assessee is unable to determine the value of excisable goods or the rate of duty applicable, he may request the Assistant commissioner or Deputy commissioner for provisional assessment stating the reasons and period of coverage The authority by order may allow payment of duty on provisional basis upon which the assessee is required to execute a bond The final assessment shall be made after receipt of information, but a period not exceeding 6 months for the date of order of provisional assessment. Demand Assessment – Scrutiny assessment The Central excise officer can issue notice within one year from relevant date requiring assessee to pay duty, when such excise duty -

has not been levied or has not been paid or has been short levied or is short paid or is erroneously refunded, The notice can be issued within 5 years if the non payment, short payment, short levy etc is on account of fraud, collusion, willful misstatement, suppression of facts, or contravention of any provisions. Relevant date means

-

date of filing return if return is filed if return not filed the last date on which the return is to be filed where the duty is provisionally assessed, date of adjustment after final assessment where the duty is refunded, the date of refund in any other case, the date on which duty is to be paid. The officer considering the representation if any, made by the person on whom notice is served, shall determine the amount of duty which shall not be in excess of amount specified in the notice.

Returns: Assessee shall file monthly return in form ER-1 within 10 days from the end of month to which it relates. In case assessee avails exemption based on value (SSI), a quarterly return has to be filed within 20 days of end of the quarter. The return provides details such as excisable goods manufactured for the month or quarter, quantity removed, with or without duty, value, rate of duty, payment etc.,

The return also contains a self assessment memorandum, which provides for a declaration with reference to correctness of particulars stated, determination of duty and genuineness of payment of duty The assessee is also required to furnish annual return by 30th of November furnishing the prescribed particulars SSI Manufacturers whose aggregate value of clearances in the preceding financial year had not exceeded 4 crores, are entitled to concession to a SSI. SSI unit is a unit where the aggregate value of clearances of all excisable goods for home consumption a) b)

by a manufacturer from one or more factories or from a factory by one or more manufacturers does not exceed 4 crores in the preceding financial year Quantum of exemption: SSI unit is entitled to exemption of duty for clearances or captive consumption up to an aggregate value not exceeding Rs.1 Crores. (increased to 1.5 crores from 1.4.2007). Clearances above 1 crores are liable for normal rate of duty. The manufacturer shall not avail the cenvat credit on inputs & Capital goods, used in manufacture of goods for clearance up to 1 crores. The manufacturer has option not to avail exemption and pay duty at normal rates.

POWERS OF CENTRAL EXCISE OFFICERS 1. Visit and Inspection by Central Excise Officers

As per rule 22(1) of Central Excise Rules, an officer empowered by Commissioner shall have access to any premises registered under CE Rules for purpose of carrying out any scrutiny, verification and checks as may be necessary to safeguard the interest of revenue. All officers in the rank of Inspector and above are authorised for this purpose. All officers of rank of an Inspector and above have been authorised under rule 22(1) within their jurisdiction.

They should be in uniform or carry their identity card. The officers should carry their identity cards and should produce them on demand. The officers can check the records and verify the stock under these rules. Under rule 22(2) of CE Rules; the assessee is required to produce account books and returns (whether maintained under Central Excise rules or otherwise) for scrutiny of excise officers or audit purposes. The inspection can be done of registered premises only. Visit Book of Excise Officers - Each factory is required to maintain a visit book in prescribed form. Inspector and Superintendent visiting the factory are required to fill in the book. The visit book should contain name and address of the factory, excisable items manufactured, Central Excise Commissionerate, division and range at the top. [CBE&C Circular No 3/90-CX dated 24-1-1990]. Restricted visits to SSI Units - Excise Officers and departmental audit parties can visit small scale industries (SSI units) for specific purposes only and on specific written permission of Assistant / Deputy Commissioner. Assessee can ask for the written permission. The visiting officer should make entry in visit book. However, these restrictions are not applicable to visits of audit parties of Comptroller and Auditor General of India (CAG). This audit, called CERA audit (Central Revenue Audit), is under Constitutional authority and hence obviously, their powers cannot be curtailed by any executive instructions. 2. Power to Stop conveyance, search and seize

Excise officers are empowered under Rule 23 of Central Excise Rules [earlier rules 199] to search any conveyance carrying excisable goods in respect of which he has reason to believe that the goods are being carried with the intention of evading duty. POWER TO DETAIN OR SEIZE THE GOODS – If Central Excise Officer has reason to believe that any goods, which are liable to excise duty but no duty is paid thereon or the said goods are removed with intention of evading the duty payable theron, the Central Excise Officer may detain or seize the goods - Rule 24 of Central Excise Rules [earlier rule 200]. Vehicle carrying the goods can also be seized under section 110 of Customs Act as made applicable to Excise. For a registered premises or for stopping and searching any conveyance in transit, no search warrant is required. - Chapter 17 Part I Para 2.3 of CBE&C’s CE Manual, 2001. [Visit to registered premises is permissible, but search without warrant ?] 3. Power to Summons

Section 14 of CEA authorises Excise Officers to issue summons. The term 'summons' means asking a person to appear before the named authority and give evidence and produce documents or other things. Person summoned is bound to attend and state the truth upon any subject respecting which they are examined. [section 14(2) of CEA similar section 108(3) of Customs Act]. The enquiry are ‘judicial proceedings’.

These power of 'summons' are different than powers of Courts to issue summons under CPC or CrPC. The power of 'summons' to investigating officer only means ‘demand presence of’ or ‘call upon a person to appear’. The investigation officer cannot administer oath to person being interrogated. As per section 174 of Indian Penal Code, non-attendance in obedience of an order from public servant is an offense punishable with imprisonment upto 6 months and fine upto Rs 1,000/Summons for documents should specify the documents called - Summons for producing documents should specify which documents are required. Authority issuing summons should apply his mind with regard to necessity to obtain and examine documents mentioned in the order. - Barium Chemicals v. A J Rana - AIR 1972 SC 591 - in this case, summons was set aside on ground of vagueness. All documents pertaining to appellant were called, which were in custody of Registrar of Court and also those which had no bearing on the matter. 4. Power to arrest

An Excise Officer not below the rank of Inspector, to arrest a person whom they have ‘reason to believe’ to be liable to be punished under provisions of the Act. Such arrest can be only with prior approval of Commissioner of Central Excise. [section 13]. - There is no specific provision that the approval letter should be shown to the person being arrested. Forward to magistrate or Police custody - The person arrested has to be forwarded to the Central Excise Officer who is empowered to send the arrested person to a Magistrate. If such empowered excise officer is not available within reasonable distance, the person may be sent to Officer-in-Charge of nearest Police Station [section 19 of CEA]. Superintendent of CE has been empowered for this purpose. Arrested person must be produced before Judicial Magistrate within 24 hours of arrest. Power to grant bail is normally exercised by a Judicial Magistrate.

Enquiry after arrest - The Excise Officer can also make enquiry after arrest (section 21 of CEA). The procedures as prescribed under Criminal Procedure Code have to be followed after the arrest. Offences non-cognizable - Offences under section 9 of CEA are non-cognizable. As per section 155 of Criminal Procedure Code, a police officer cannot investigate a noncognizable case without the order of a Magistrate. A police officer cannot arrest a person who has committed a non cognizable offence, without a warrant, as per section2(1) of Code of Criminal Procedure. 5. Powers of Search

Search and seizure are coercive measures designed to be enforced forcibly against persons unwilling to be subjected to these operations. SOME PROVISIONS OF CUSTOMS ACT APPLICABLE - Section 12 of CEA authorises Central Government to apply provisions of Customs Act regarding levy, exemption, drawback, warehousing, offences, penalties, confiscation and procedure relating to offences and appeal to Central Excise, making suitable modifications and alterations to adapt them to circumstances. Under these powers, notification dated 4th May, 1963 has been issued making some provisions of Customs Act applicable to Central Excise subject to some modifications. These are (a) section 105(1) - Powers of search (b) section 110 - seizure of goods, documents and things (c) section 115 confiscation of conveyances (d) section 118(a) - confiscation of packages containing goods (e) section 119 - confiscation of goods used for concealing goods (f) section 120 confiscation of goods even if form changes (g) section 121 - confiscation of sale proceeds of contravening goods (h) section 124 - issue of show cause notice before confiscation of goods (i) section 142(1)(b) - Recovery of duty (j) section 150 procedure for sale of goods. - Section 18 of CEA provides that all searches and seizures must be as per provisions of Code of Criminal Procedure. Under section 165 of CrPC, the requirements are : (a) The officer making investigation should have reason to believe that anything necessary for investigation may be found in a place within his jurisdiction (b) such thing cannot be otherwise obtained without undue delay (c) grounds of such belief should be recorded in writing and specifying the things for which search is to be made (d) the officer should search himself, if practicable or require any officer subordinate to him to make the search (e) authority to subordinate officer should be in writing, specifying the place to be searched and things for which search is to be made (f) copy of record made should be sent to Magistrate and should be furnished to the owner or occupier of the place searched, if he applies for the copies. The copies should be supplied free of cost.

Power to Search - Under section 105 of Customs Act (as modified to Excise), Assistant / Deputy Commissioner of Central Excise, who has reasons to believe that any goods liable to confiscation or any document or thing relevant to any proceeding under CEA are secreted in any place, can authorise any Central Excise Officer upto rank of Inspector to search or he may himself search for such goods, documents or things ( in common discussions ‘search’ is called ‘raid’ ). Such authority will be by way of a search warrant signed by him under his seal. However, in urgent necessity, search can be carried out without a search warrant. Search warrant should be shown to the person in charge of the premises and his signature should be obtained. Search warrant should indicate the place to be searched, but name of person need not be mentioned as the search warrant is in respect of place and not person.

.

6. Powers of Seizure

If, during search, some goods are found, which are liable for confiscation, the same can be seized by excise officers. Seizure means to take possession of goods in pursuance of demand under legal right. Seizure is only taking goods in custody or detention. Ownership of goods remains with the owner even after seizure and he can get the goods released under bond. [Confiscation means the goods become property of Central Government]. Seizure under the Act - Vide section 110 of Customs Act, as made applicable to Central Excise, Excise Officer is empowered to seize the goods if he has reasons to believe that such goods are liable for confiscation under Central Excises Act, 1944. Vehicle carrying the contraband goods can also be seized. Goods can be seized by officer of rank of Superintendent and above. List of seized goods must be prepared. These should be signed by independent witnesses (called panch in Hindi. The document prepared after seizure is called panchanama). Copy of panchanama must be handed over on the spot to the person from whom goods were seized. Seized goods should be carried away and handed over to Police Station. If police station does not have enough space, these can be kept in the custody of officer of Central Excise department. If they are bulky, they can be kept in possession of the owner himself on obtaining guarantee from him regarding safe custody. In such cases, at least 4 samples should be taken. SEIZURE OF HEAVY GOODS - If it is not practicable to seize the goods, Excise Officer can order that the goods should not be removed or dealt with; without previous permission of the officer.

Provisional Release of seized goods - Seized goods and vehicles can be released by the Excise Officer on such conditions as he may deem fit. Normally cash security of about 25% of value of goods may be asked for release of goods under bond. However, this percentage can vary widely depending on gravity of offence. Bond in form B-4 (earlier B-11) should be executed. Bond amount is to be decided by adjudicating authority, while bond can be accepted by Superintendent. Vehicle can be released by Assistant / Deputy Commissioner while goods can be released on bond by the Adjudicating Authority (depending on value - it may be Assistant / Deputy Commissioner, Additional Commissioner or Commissioner). In case of conveyance, as per departmental instructions, bond amount should be equal to estimated value of vehicle and security deposit will depend on gravity of offence. Department has clarified that u/s 112 of Customs Act, penalty can be heavy. Hence,

security deposit should depend upon gravity of the offence. - MF(DR) letter No. 591/40/98-Cus (AS) dated 1-9-1999. Return goods within 6 months if no SCN - If goods are felt to be liable for confiscation, a show cause notice has to be served giving him grounds for confiscation, asking his representation and giving him opportunity of personal hearing as per section 124 of Customs Act, as made applicable to Central Excise. Vide section 110(2) of Customs Act, as made applicable to excise, if no show cause notice is issued within six months, the goods shall be returned to person from whose possession they were seized. This period can be further extended by six months on sufficient cause, by Commissioner of Central Excise. Since the words used are ‘shall be returned’, it has been held that it is a mandatory requirement. The owner of goods gets a civil right and goods must be returned even if no application is made. In Overseas Paints Linkers v. UOI 2001(127) ELT 42 (All HC DB), it was held that notice must be given i.e. ‘served’. Mere ‘issue’ of notice is not enough. If not so served, goods must be returned, unless time is extended by Commissioner. This period of 6 months can be further extended by six months on sufficient cause by Commissioner of Customs. 7. Departmental Adjudication

Excise authorities are empowered to determine classification, valuation, refund claims and the tax/duty payable. They are also empowered to grant various permissions under rules and impose fines, penalties, etc. This is called “departmental adjudication”. Adjudicate means to hear or try and decide judicially and adjudication means giving a decision.

UNIT -VIII Service Tax Introduction; Meaning and classification of taxable service (Sec.65A); Charge of service tax (Sec.66 & 66A); valuation of taxable services for the purpose of charging (Sec.67); payment of service tax (Sec.68); registration (Sec.69); furnishing of returns (Sec.70) Service Tax to be deposited with the

Central Govt. (Sec.73A); Penalty for failure to pay (Sec.76)(*Taxable service pertaining to (Definitions in Sec.65) a) Clearing and Forwarding, (b) Courier Agency, (c) Manpower recruitment or supply agency, (d) Practicing Chartered Accountant and (e) Security Agency only)(Theory only) INTRODUCTION:

Chapter V of the Finance Act, 1994 EXTENT, COMMENCEMENT AND APPLICATION (1) This Chapter extends to the whole of India except the State of Jammu and Kashmir. (2) It shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint. (3) It shall apply to taxable services provided on or after the commencement of this DEFINITIONS In this Chapter, unless the context otherwise requires, -1."advertisement" includes any notice, circular, label, wrapper, document, hoarding or any other audio or visual representation made by means of light, sound, smoke or gas;

2. "Advertising agency" means any person engaged in providing any service connected with the making, preparation, display or exhibition of advertisement and includes an advertising consultant

3. Appellate Tribunal" means the Customs, Excise and Gold (Control) Appellate constituted under section 129 of the Customs Act, 1962 (52 of 1962);

4."Assessee" means a person liable to pay the service tax and includes his agent;

5."clearing and forwarding agent" means any person who is engaged in providing any service, either directly or indirectly, connected with the clearing and forwarding operations in any manner to any other person and includes a consignment agent; (25a)

6.“club or association” means any person or body of persons providing services, facilities or advantages, for a subscription or any other amount, to its members, but does not include(i) Any body established or constituted by or under any law for the time being in force; or (ii) any person or body of persons engaged in the activities of trade unions, promotion of agriculture, horticulture or animal husbandry; or (iii) any person or body of persons engaged in any activity having objectives which are in the nature of public service and are of a charitable, religious or political nature; or (iv) any person or body of persons associated with press or media; 7. “Commercial or industrial construction service” means — (a) Construction of a new building or a civil structure or a part thereof; or (b) Construction of pipeline or (c) completion and finishing services such as glazing, plastering, painting, floor and wall tiling, wall covering and wall papering, wood and metal joinery and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fittings and other similar services, in relation to building or civil structure; or (d) Repair, alteration, renovation or restoration of, or similar services in relation to, building or civil structure, pipeline or conduit, which is — (i) Used, or to be used, primarily for; or (ii) Occupied, or to be occupied, primarily with; or (iii) Engaged, or to be engaged, primarily in,

commerce or industry, or work intended for commerce or industry, but does not include such services provided in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams;

8."courier agency" means a any person engaged in the door-to-door transportation of time – sensitive documents, goods or articles utilising the services of a person, either directly or indirectly, to carry or accompany such documents, goods or articles;

9."credit rating agency" means any person engaged in the business of credit rating of any debt obligation or of any project or programme requiring finance, whether in the form of debt or otherwise, and includes credit rating of any financial obligation, instrument or security, which has the purpose of providing a potential investor or any other person any information pertaining to the relative safety of timely payment of interest or principal; 10. ‘Event management’ means any service provided in relation to planning, promotion, organizing or presentation of any arts, entertainment, business, sports, [marriage]* or any other event and includes any consultation provided in this regard; 11. ‘goods” has the meaning assigned to it in clause (7) of section 2 of the sale of Goods Act, 1930 (3 of 1930 12. ‘Interior decorator” means any person engaged, whether directly or indirectly, in the business of providing by way of advice, consulting, technical assistance or in any other manner, services related to planning, design or beautification of space, whether man-made or otherwise and includes a landscape designer 13. ‘management or [business]* consultant” means any person who is engaged in providing any service, either directly or indirectly, in connection with the management of any organization [or business]* in any manner and includes any person who renders any advice, consultancy or technical assistance, in relation to financial management, human resources management, marketing management, production management, logistics management, procurement and management of information technology resources or other similar areas of management; 14. ‘Manpower recruitment or supply agency” means any person engaged in providing any service, directly or indirectly, in any manner for recruitment or supply of manpower, temporarily or otherwise, to any other person; 15. market research agency” means any person engaged in conducting market research in any manner, in relation to any product, service or utility, including all types of customized and syndicated research services;

16. packaging

activity” means packaging of goods including pouch filling, bottling, labeling or imprinting of the package, but does not include any packaging activity that amounts to ‘manufacture’ within the meaning of clause (f) of section 2 of the Central Excise Act, 1944 (1 of 1944);

17. practising

chartered accountant” means a person who is a member of the Institute of Chartered Accountants of India and is holding a certificate of practice granted under the provision of the Chartered Accountants Act, 1949 (38 of 1949) and includes any concern engaged in rendering services in the field of Chartered accountan

18. practicing

company secretary” means a person who is a member of the Institute of company Secretaries of India and is holding a certificate of practice granted under the provisions of the Company Secretaries Act, 1980 (56 of 1980) and includes any concern engaged in rendering services in the field of company secretaryship

19.”real estate agent” means a person who is engaged in rendering any service in relation to sale, purchase, leasing or renting of real estate and includes a real estate consultant; 20. “Real estate consultant” means a person who renders in any manner, either directly or indirectly, advice, consultancy or technical assistance, in relation to evaluation, conception, design. Development, construction, implementation, supervision, maintenance, marketing, acquisition or management, of real estate; 21. “security agency” means any person engaged in the business of rendering services relating to the security of any property, whether movable or immovable, or of any person, in any manner and includes the services of investigation, detection or verification, of any fact or activity, whether of a personal nature or otherwise, including the services of providing security personnel;

22. “service tax” means tax leviable under the provisions of this Chapter; 23. “storage and warehousing” includes storage and warehousing services for goods including liquids and gases but does not include any service provided for storage of agricultural produce or any service provided by a cold storage;

24. “taxable service” means any service provided or to be provided (a) to any person, by a stock-broker in connection with the sale or purchase of securities listed on a recognized stock exchange; (b) to a policy holder or any person, by an insurer, including re-insurer carrying on general insurance business in relation to general insurance businesses; © to any person, by an advertising agency in relation to advertisement, in any manner; (d) to any person, by courier agency in relation to door-to-door transportation of timesensitive documents, goods or articles; (e) to any person, by a consulting engineer in relation to advice, consultancy or technical assistance in any manner in one or more disciplines of engineering including the discipline of computer hardware engineering.

Explanation.— For the purposes of this sub-clause, it is hereby declared that services provided by a consulting engineer in relation to advice, consultancy or technical assistance in the disciplines of both computer hardware engineering and computer software engineering shall also be classifiable under this sub-clause; [Clause (g) substituted vide Finance Bill 2008, w.e.f. 16th May, 2008]

(f) to any person, by a custom house agent in relation to the entry or departure of conveyances or the import or export of goods; (g) to a shipping line, by a steamer agent in relation to a ship’s husbandry or dispatch or any administrative work related thereto as well as the booking, advertising or canvassing of cargo, including container feeder services; (h) to any person, by a clearing and forwarding agent in relation to clearing and forwarding operations, in any manner; (i) to any person, by a manpower recruitment or supply agency in relation to the recruitment or supply of manpower, temporarily or otherwise, in any manner; ‘Explanation.—For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, recruitment or supply of manpower includes services in relation to pre-recruitment screening, verification of the credentials and antecedents of the candidate and authenticity of documents submitted by the candidate]*

(j) to any person, by an air travel agent in relation to the booking of passage for travel by air; (k) to any person, by a Mandap keeper in elation to the use of Mandap in any manner including the facilities provided or to be provided to such person in relation to such use and also the services, if any, provided or to be provided as a caterer; (l) to any person, by a tour operator in relation to a tour; (m) to any person, by a rent-a-cab scheme operator in relation to the renting of a cab; (n) to any person, by an architect in his professional capacity, in any manner; (o) to any person, by an interior decorator in relation to planning, design or beautification of spaces, whether manmade or otherwise, in any manner; (p) to any person by a management or [business]* consultant in connection with the management of any organization or [business,]* in any manner;

(q) to any person, by a practising chartered accountant in his professional capacity, in any manner; ® to any person, by a practising cost accountant in his professional capacity, in any manner; (s) to any person, by a practising company secretary in his professional capacity, in any manner; (t) to any person, by a real estate agent in relation to real estate; (u) to any person, by a security agency in relation to the security of any property or person, by providing security personnel or otherwise and includes the provision of services of investigation, detection or verification of any fact or activity; (v) to any person, by a credit rating agency in relation to credit rating of any financial obligation, instrument or security; (w) to any person, by a market research agency in relation to market research of any product, service or utility, in any manner; (x) to any person, by an underwriter in relation to underwriting, in any manner; (y) to any person, by a scientist or technocrat or any science or technology institution or organization, in relation to scientific or technical consultancy; (z) to any person, by a photography studio or agency in relation to photography, in any manner;,etc

PAYMENT OF SERVICE TAX(68) (1) Every person providing taxable service to any person shall pay service tax at the rate specified in section 66 in such manner and within such period as may be prescribed. (2) Notwithstanding anything contained in sub-section (1), in respect of any taxable service notified by the Central Government in the Official Gazette, the service tax thereon shall be paid by such person and in such manner as may be prescribed at the rate specified in section 66 and all the provisions of this chapter shall apply to such person as if he is the person liable for paying the service tax in relation to such service.

REGISTRATION(69) (1) Every person liable to pay the service tax under this chapter or the rules made

there under shall, within such time and in such manner and in such form as may be prescribed, make an application for registration to the Superintendent of Central Excise. (2) The Central Government may, by notification in the Official Gazette, specify such other person or class of persons, who shall make an application for registration within such time and in such manner and in such form as may be prescribed.

Furnishing of returns(section 70) (1) Every person liable to pay the service tax shall himself assess the tax due on the services provided by him and shall furnish to the Superintendent of Central Excise, a return in such form and in such manner and at such frequency [and with such late fee not exceeding two thousand rupees, for delayed furnishing of return, as may be prescribed”] (2) The person or class of persons notified under sub-section (2) of section 69, shall furnish to the Superintendent of Central Excise, a return in such form and in such manner and at such frequency as may be prescribed.

scheme for submission of returns through service tax preparers (section 71) (1) Without prejudice to the provisions of section 70, the Board may, by notification in the Official Gazette, frame a Scheme for the purposes of enabling any person or class of persons to prepare and furnish a return under section 70, and authorise a Service Tax Return Preparer to act as such under the Scheme. (2) A Service Tax Return Preparer shall assist the person or class of persons to prepare and furnish the return in such manner as may be specified in the Scheme framed under this section. (3) For the purposes of this section,— (a) “Service Tax Return Preparer” means any individual, who has been authorised to act as a Service Tax Return Preparer under the Scheme framed under this section; (b) “person or class of persons” means such person, as may be specified in the Scheme, who is required to furnish a return required to be filed under section 70. (4) The Scheme framed by the Board under this section may provide for the following, namely:— (a) the manner in which and the period for which the Service Tax Return Preparer shall be authorised under sub-section (1);

(b) the educational and other qualifications to be possessed, and the training and other conditions required to be fulfilled, by a person to act as a Service Tax Return Preparer; © the code of conduct for the Service Tax Return Preparer; (d) the duties and obligations of the Service Tax Return Preparer; (e) the circumstances under which the authorisation given to a Service Tax Return Preparer may be withdrawn; (f) any other matter which is required to be, or may be, specified by the Scheme for the purposes of this section.

Filing of return by certain customers (section 71A) Notwithstanding any thing contained in the provisions of Sections 69 and 70, the provisions there of shall not apply to a person referred to in the proviso to sub-section (1) of Section 68 for the filing of return in respect of Service Tax for the respective period and service specified therein and such person shall furnish return to the Central Excise officer within six months from the day on which the Finance Bill, 2003 receives the assent of the President in the prescribed manner on the basis of the self assessment of the Service Tax and the provisions of Section 71 shall apply accordingly. [inserted for the period 16.7.97 to 16.10.98 by Section 158 of Finance Act,2003 and shall have effect and be deemed always to have had effect from 16.7.97.]

BEST JUDGEMENT ASSESSMENT (SECTION 72) (a) fails to furnish the return under section 70; (b) having made a return, fails to assess the tax in accordance with the provisions of this Chapter or rules made thereunder, the Central Excise Officer, may require the person to produce such accounts, documents or other evidence as he may deem necessary and after taking into account all the relevant material which is available or which he has gathered, shall by an order in writing, after giving the person an opportunity of being heard, make the assessment of the value of taxable service to the best of his judgment and determine the sum payable by the assessee or refundable to the assessee on the basis of such assessment.

73. Recovery of Service tax not levied or paid or short levied or short paid or erroneously refunded – (1) Where any service tax has not been levied or paid or has been short-levied or shortpaid or erroneously refunded, the Central Excise Officer may, within one year from

the relevant date, serve notice on the person chargeable with the service tax which has not been levied or paid or which has been short-levied or short-paid or the person to whom such tax refund has erroneously been made, requiring him to show cause why he should not pay the amount specified in the notice :

Provided that where any service tax has not been levied or paid or has been shortlevied or short-paid or erroneously refunded by reason of — (a) fraud; or (b) collusion; or © wilful mis-statement; or (d) suppression of facts; or (e) contravention of any of the provisions of this Chapter or of the rules made there under with intent to evade payment of service tax, by the person chargeable with the service tax or his agent, the provisions of this sub-section shall have effect, as if, for the words “one year”, the words “five years” had been substituted.

Explanation. — Where the service of the notice is stayed by an order of a court, the period of such stay shall be excluded in computing the aforesaid period of one year or five years, as the case may be.

(1A) Where any service tax has not been levied or paid or has been short-levied or shortpaid or erroneously refunded, by reason of fraud, collusion or any wilful misstatement or suppression of facts, or contravention of any of the provisions of this Chapter or the rules made thereunder, with intent to evade payment of service tax, by such person or his agent, to whom a notice is served under the proviso to sub-section (1) by the Central Excise Officer, such person or agent may pay service tax in full or in part as may be accepted by him, and the interest payable thereon under section 75 and penalty equal to twenty-five per cent. of the service tax specified in the notice or the service tax so accepted by such person within thirty days of the receipt of the notice.”;

(2) The Central Excise Officer shall, after considering the representation, if any, made by the person on whom notice is served under sub-section (1), determine the amount of service tax due from, or erroneously refunded to, such person (not being in excess of the amount specified in the notice) and thereupon such person shall pay the amount

so determined.

“Provided that where such person has paid the service tax in full together with interest and penalty under sub-section (1A), the proceedings in respect of such person and other persons to whom notices are served under sub-section (1) shall be deemed to be concluded:

Provided further that where such person has paid service tax in part along with interest and penalty under sub-section (1A), the Central Excise Officer shall determine the amount of service tax or interest not being in excess of the amount partly due from such person.”;

(3) Where any service tax has not been levied or paid or has been short-levied or shortpaid or erroneously refunded, the person chargeable with the service tax, or the person to whom such tax refund has erroneously been made, may pay the amount of such service tax, chargeable or erroneously refunded, on the basis of his own ascertainment thereof, or on the basis of tax ascertained by a Central Excise Officer before service of notice on him under sub-section (1) in respect of such service tax, and inform the Central Excise Officer of such payment in writing, who, on receipt of such information shall not serve any notice under sub-section (1) in respect of the amount so paid :

Provided that the Central Excise Officer may determine the amount of short payment of service tax or erroneously refunded service tax, if any, which in his opinion has not been paid by such person and, then, the Central Excise Officer shall proceed to recover such amount in the manner specified in this section, and the period of “one year” referred to in sub-section (1) shall be counted from the date of receipt of such information of payment.

Explanation. — For the removal of doubts, it is hereby declared that the interest under section 75 shall be payable on the amount paid by the person under this subsection and also on the amount of short payment of service tax or erroneously refunded service tax, if any, as may be determined by the Central Excise Officer, but for this sub-section.

(4) Nothing contained in sub-section (3) shall apply to a case where any service tax

has not been levied or paid or has been short-levied or short-paid or erroneously refunded by reason of— (a) fraud; or (b) collusion; or © wilful mis-statement; or (d) suppression of facts; or (e) contravention of any of the provisions of this Chapter or of the rules made thereunder with intent to evade payment of service tax.

(5) The provisions of sub-section (3) shall not apply to any case where the service tax had become payable or ought to have been paid before the 14th day of May, 2003.

(6) For the purposes of this section, “relevant date” means, — (i) in the case of taxable service in respect of which service tax has not been levied or paid or has been short-levied or short-paid — (a) where under the rules made under this Chapter, a periodical return, showing particulars of service tax paid during the period to which the said return relates, is to be filed by an assessee, the date on which such return is so filed; (b) where no periodical return as aforesaid is filed, the last date on which such return is to be filed under the said rules; © in any other case, the date on which the service tax is to be paid under this Chapter or the rules made thereunder; (ii) in a case where the service tax is provisionally assessed under this Chapter or the rules made thereunder, the date of adjustment of the service tax after the final assessment thereof; (iii) in a case where any sum, relating to service tax, has erroneously been refunded, the date of such refund.’;

73A. Service Tax collected from any person to be deposited with Central Government:(1) Any person who is liable to pay service tax under the provisions of this Chapter or the rules made thereunder, and has collected any amount in excess of the service tax assessed or determined and paid on any taxable service under the provisions of this Chapter or the rules made thereunder from the recipient of taxable service in any

manner as representing service tax, shall forthwith pay the amount so collected to the credit of the Central Government.

(2) Where any person who has collected any amount, which is not required to be collected, from any other person, in any manner as representing service tax, such person shall forthwith pay the amount so collected to the credit of the Central Government.

(3) Where any amount is required to be paid to the credit of the Central Government under sub-section (1) or sub-section (2) and the same has not been so paid, the Central Excise Officer shall serve, on the person liable to pay such amount, a notice requiring him to show cause why the said amount, as specified in the notice, should not be paid by him to the credit of the Central Government.

(4) The Central Excise Officer shall, after considering the representation, if any, made by the person on whom the notice is served under sub-section (3), determine the amount due from such person, not being in excess of the amount specified in the notice, and thereupon such person shall pay the amount so determined.

(5) The amount paid to the credit of the Central Government under sub-section (1) or subsection (2) or sub-section (4), shall be adjusted against the service tax payable by the person on finalisation of assessment or any other proceeding for determination of service tax relating to the taxable service referred to in sub-section (1).

(6) Where any surplus amount is left after the adjustment under sub-section (5), such amount shall either be credited to the Consumer Welfare Fund referred to in section 12C of the Central Excise Act, 1944 or, as the case may be, refunded to the person who has borne the incidence of such amount, in accordance with the provisions of section 11B of the said Act and such person may make an application under that section in such cases within six months from the date of the public notice to be issued by the Central Excise Officer for the refund of such surplus amount.

73B.Interest on amount collected in excess-

Where an amount has been collected in excess of the tax assessed or determined and paid for any taxable service under this Chapter or the rules made thereunder from the recipient of such service, the person who is liable to pay such amount as determined under sub-section (4) of section 73A, shall, in addition to the amount, be liable to pay interest at such rate not below ten per cent. and not exceeding twenty-four per cent. per annum, as is for the time being fixed by the Central Government, by notification in the Official Gazette, from the first day of the month succeeding the month in which the amount ought to have been paid under this Chapter, but for the provisions contained in sub-section (4) of section 73A, till the date of payment of such amount:

Provided that in such cases where the amount becomes payable consequent to issue of an order, instruction or direction by the Board under section 37B of the Central Excise Act, 1944, and such amount payable is voluntarily paid in full, without reserving any right to appeal against such payment at any subsequent stage, within forty-five days from the date of issue of such order, instruction or direction, as the case may be, no interest shall be payable and in other cases, the interest shall be payable on the whole amount, including the amount already paid.

Explanation 1.—Where the amount determined under sub-section (4) of section 73A is reduced by the Commissioner (Appeals), the Appellate Tribunal or, as the case may be, the court, the interest payable thereon under this section shall be on such reduced amount. Explanation 2.—Where the amount determined under sub-section (4) of section 73A is increased by the Commissioner (Appeals), the Appellate Tribunal or, as the case may be, the court, the interest payable thereon under this section shall be on such increased amount.

73C. Provisional attachment to protect revenue in certain cases (1) Where, during the pendency of any proceeding under section 73 or section 73A, the Central Excise Officer is of the opinion that for the purpose of protecting the interests of revenue, it is necessary so to do, he may, with the previous approval of the Commissioner of Central Excise, by order in writing, attach provisionally any property belonging to the person on whom notice is served under sub-section (1) of section 73 or sub-section (3) of section 73A, as the case may be, in such manner as may be prescribed.

(2) Every such provisional attachment shall cease to have effect after the expiry of a

period of six months from the date of the order made under sub-section (1):

Provided that the Chief Commissioner of Central Excise may, for reasons to be recorded in writing, extend the aforesaid period by such further period or periods as he thinks fit, so, however, that the total period of extension shall not in any case exceed two years.

73D. Publication of information in respect of persons in certain cases (1) If the Central Government is of the opinion that it is necessary or expedient in the public interest to publish the name of any person and any other particulars relating to any proceedings under this Chapter in respect of such person, it may cause to be published such names and particulars in such manner as may be prescribed.

(2) No publication under this section shall be made in relation to any penalty imposed under this Chapter until the time for presenting an appeal to the Commissioner (Appeals) under section 85 or the Appellate Tribunal under section 86, as the case may be, has expired without an appeal having been presented or the appeal, if presented, has been disposed of.

Explanation.—In the case of a firm, company or other association of persons, the names of the partners of the firm, directors, managing agents, secretaries and treasurers or managers of the company, or the members of the association, as the case may be, shall also be published if, in the opinion of the Central Government, circumstances of the case justify it.”;

74. Rectification of mistake. – (1) With a view to rectifying any mistake apparent from the record, the Central Excise Officer who passed any order under the provisions of this Chapter may, within two years of the date on which such order was passed, amend the order.

(2) Where any matter has been considered and decided in any proceeding by way of appeal or revision relating to an order referred to in sub-section (1), the Central Excise Officer passing such order may, notwithstanding anything contained in any law for the time being in force, amend the order under that sub-section in relation to any matter

other than the matter which has been so considered and decided.

(3) Subject to the other provisions of this section, the Central Excise Officer concerned (a) may make an amendment under sub-section (1) of his own motion; or (b) shall make such amendment if any mistake is brought to his notice by the assessee or the [Commissioner] of Central Excise or the [Commissioner] of Central Excise (Appeals).

(4) An amendment, which has the effect of enhancing the liability of the assessee or reducing a refund , shall not be made under this section unless the Central Excise Officer concerned has given notice to the assessee of his intention so to do and has allowed the assessee a reasonable opportunity of being heard.

(5) Where an amendment is made under this section, an order shall be passed in writing by the Central Excise Officer concerned.

(6) Subject to the other provisions of this Chapter where any such amendment has the effect of reducing the the liability of the assessee or increasing the refund, the Central Excise Officer shall make any refund which may be due to such assessee.

(7) Where any such amendment has the effect of enhancing the liability of the assessee or reducing the refund already made, the Central Excise Officer shall make an order specifying the sum payable by the assessee and the provisions of this Chapter shall apply accordingly.

75. Interest on delayed payment of Service Tax – Every person, liable to pay the tax in accordance with the provisions of section 68 or rules made thereunder, who fails to credit the tax or any part thereof to the account of the Central Government within the period prescribed, shall pay simple interest [at such rate not below ten per cent and not exceeding thirty-six per cent per annum as is for the time being fixed by the Central Government, by Notification in the Ofiicial Gezette for the period] by which such crediting of the tax or any part thereof is

delayed.

76. Penalty for failure to pay service tax Any person, liable to pay service tax in accordance with the provisions of section 68 or the rules made under this Chapter, who fails to pay such tax, shall pay, in addition to such tax and the interest on that tax amount in accordance with the provisions of section 75, a penalty which shall not be less than two hundred rupees for every day during which such failure continues or at the rate of two per cent. of such tax, per month, whichever is higher, starting with the first day after the due date till the date of actual payment of the outstanding amount of service tax:

Provided that the total amount of the penalty payable in terms of this section shall not exceed the service tax payable.

Illustration X, an assessee, fails to pay service tax of Rs. 10 lakhs payable by 5th March. X pays the amount on 15th March. The default has continued for 10 days. The penalty payable by X is computed as follows:— 2% of the amount of default for 10 days = 2 x 10, 00, 000 x 10/31= Rs. 6,451.61 Penalty calculated @ Rs. 200 per day for 10 days =Rs. 2,000 Penalty liable to be paid is Rs. 6,452.00.”;

77. Penalty for contravention of rules and provisions of Act for which no penalty is specified elsewhere. — (1) Any person,— (a) who is liable to pay service tax, or required to take registration, fails to take registration in accordance with the provisions of section 69 or rules made under this Chapter shall be liable to pay a penalty which may extend to five thousand rupees or two hundred rupees for every day during which such failure continues, whichever is higher, starting with the first day after the due date, till the date of actual

compliance; (b) who fails to keep, maintain or retain books of account and other documents as required in accordance with the provisions of this Chapter or the rules made thereunder, shall be liable to a penalty which may extend to five thousand rupees; © who fails to— (i) furnish information called by an officer in accordance with the provisions of this Chapter or rules made thereunder; or (ii) produce documents called for by a Central Excise Officer in accordance with the provisions of this Chapter or rules made thereunder; or (iii) appear before the Central Excise Officer, when issued with a summon for appearance to give evidence or to produce a document in an inquiry, shall be liable to a penalty which may extend to five thousand rupees or two hundred rupees for every day during which such failure continues, whichever is higher, starting with the first day after the due date, till the date of actual compliance; (d) who is required to pay tax electronically, through internet banking, fails to pay the tax electronically, shall be liable to a penalty which may extend to five thousand rupees; (e) who issues invoice in accordance with the provisions of the Act or rules made thereunder, with incorrect or incomplete details or fails to account for an invoice in his books of account, shall be liable to a penalty which may extend to five thousand rupees. (2) Any person, who contravenes any of the provisions of this Chapter or any rules made thereunder for which no penalty is separately provided in this Chapter, shall be liable to a penalty which may extend to five thousand rupees.”; [ Section (77) substituted vide Finance Bill 2008, w.e.f. 16th May, 2008 ]

78. Penalty for suppressing value of taxable service. – Where any service tax has not been levied or paid or has been short-levied or shortpaid or erroneously refunded, by reason of — (a) fraud; or (b) collusion; or

© wilful mis-statement; or (d) suppression of facts; or (e) contravention of any of the provisions of this Chapter or of the rules made thereunder with intent to evade payment of service tax, the person, liable to pay such service tax or erroneous refund, as determined under sub-section (2) of section 73, shall also be liable to pay a penalty, in addition to such service tax and interest thereon, if any, payable by him, which shall not be less than, but which shall not exceed twice, the amount of service tax so not levied or paid or short-levied or shortpaid or erroneously refunded:”;

Provided that where such service tax as determined under sub-section (2) of section 73, and the interest payable thereon under section 75, is paid within thirty days from the date of communication of order of the Central Excise Officer determining such service tax, the amount of penalty liable to be paid by such person under this section shall be twenty-five per cent. of the service tax so determined :

Provided further that the benefit of reduced penalty under the first proviso shall be available only if the amount of penalty so determined has also been paid within the period of thirty days referred to in that proviso :

Provided also that where the service tax determined to be payable is reduced or increased by the Commissioner (Appeals), the Appellate Tribunal or, as the case may be, the court, then, for the purposes of this section, the service tax as reduced or increased, as the case may be, shall be taken into account :

Provided also that in case where the service tax determined to be payable is increased by the Commissioner (Appeals), the Appellate Tribunal or, as the case may be, the court, then, the benefit of reduced penalty under the first proviso shall be available, if the amount of service tax so increased, the interest payable thereon and twenty-five per cent. of the consequential increase of penalty have also been paid within thirty days of communication of the order by which such increase in service tax takes effect. Provided also that if the penalty is payable under this section, the provisions of section 76 shall not apply. [ Inserted vide Finance Bill 2008, w.e.f. 16th May, 2008 ] Explanation. - For the removal of doubts, it is hereby declared that (1) the provisions of this section shall also apply to cases in which the order

determining the service tax under sub-section (2) of section 73 relates to notices issued prior to the day on which the Finance Bill, 2003 receives the assent of the President; (2) any amount paid to the credit of the Central Government prior to the date of communication of the order referred to in the first proviso or the fourth proviso shall be adjusted against the total amount due from such person.”

80. Penalty not to be imposed in certain cases. – Notwithstanding anything contained in the provisions of section 76, section 77 or section 78, no penalty shall be imposable on the assessee for any failure referred to in said provisions, if the assessee proves that there was reasonable cause for the said failure.

82. Power to search premises – (1) If the Commissioner of Central Excise has reason to believe that any documents or book or things which in his opinion will be any useful for or relevant to proceedings under this Chapter are secreted in any place, he may authorize any Assistant Commissioner of Central Excise or, as the case may be, Deputy Commissioner of Central Excise to search for and seize or may himself search for and seize, such documents or books or things. (2) The provisions of the Code of Criminal Procedure, 1973 (2 of 1974), relating to searches, shall, so far as may be, apply or searches under this section as they apply to searches under that Code.

83A Power of adjudication. Where under this Chapter or the rules made thereunder any person is liable to a penalty, such penalty may be adjudged by the Central Excise Officer conferred with such power as the Central Board of Excise and Customs constituted under the Central Boards of Revenue Act, 1963 (54 of 1963), may, by notification in the Official Gazette, specify.

UNIT-10 Value Added Tax: (Karnataka VAT Act 2003 as amended by Act of 2005) Introduction- meaning of the terms –Agricultural Produce, Business, Capital Goods, Dealer, Goods, Prescribed Authority, Taxable Turnover, Total Turnover, Turnover and Works Contract. (Sec.2), Levy of Tax (Sec.3), Liability to Tax and Rates (Sec.4), Exemptions (Sec.5), Collection of Tax (Sec.9) Deduction at Source (Sec.9A), Output Tax, Input Tax, and Net Tax (Sec.10), Input Tax restrictions (Sec.11), Deduction of Input Tax on Capital Goods (Sec.12), Special Rebates (Sec.14). (Theory only) Introduction 1. Short title, extent and commencement.(1) This Act may be called the Karnataka Value Added Tax Act 2003. (2) It extends to the whole of the State of Karnataka. (3) It shall come into force on such date as the Government may, by notification, appoint and different dates may be appointed for different provisions of the Act. (4) The tax shall be levied on the sale or purchase of goods made after such date as the Government may, by notification, appoint and different dates may be appointed for different class or classes of goods.

Basic Concept of VAT

Generally, any tax is related to selling price of product. In modern production technology, raw material passes through various stages and processes till it reaches the ultimate stage e.g., steel ingots are made in a steel mill. These are rolled into plates by a re-rolling unit, while third manufacturer makes furniture from these plates. Thus, output of the first manufacturer becomes input for second manufacturer, who carries out further processing and supply it to third manufacturer. This process continues till a final product emerges. This product then goes to distributor/wholesaler, who sells it to retailer and then it reaches the ultimate consumer. If a tax is based on selling price of a product, the tax burden goes on increasing as raw

material and final product passes from one stage to other. For example, let us assume that tax on a product is 10% of selling price. Manufacturer ‘A’ supplies his output to ‘B’ at Rs. 100. Thus, ‘B’ gets the material at Rs. 110, inclusive of tax @ 10%. He carries out further processing and sells his output to ‘C’ at Rs. 150. While calculating his cost, ‘B’ has considered his purchase cost of materials as Rs. 110 and added Rs. 40 as his conversion charges. While selling product to C, B will charge tax again @ 10%. Thus C will get the item at Rs. 165 (150+10% tax). As stages of production and/or sales continue, each subsequent purchaser has to pay tax again and again on the material which has already suffered tax. This is called cascading effect. Cascading effect of conventional system of taxes - A tax purely based on selling price of a product has cascading effect, which has the following disadvantages - (a) Computation of exact tax content difficult (b) Varying Tax Burden as tax burden depends on number of stages through which a product passes (c) Discourages Ancillarisation (d) Increases cost of production (e) Concessions on basis of use is not possible (f) Exports cannot be made tax free. VAT to avoid the cascading effect – VAT was developed to avoid cascading effect of taxes. In the aforesaid example, ‘value added’ by B is only Rs. 40 (150–110), tax on which would have been only Rs. 4, while the tax paid was Rs. 15. In VAT, the idea is that B will pay tax on only Rs 40 i.e. value added by him. Then, it makes no difference whether a product passes through 5 or 10 stages or even 100 stages, as every person will pay tax only on ‘value added’ by him to the product and not on total selling price. Tax credit system - VAT removes these defects by tax credit system. Under this system, credit is given at each stage of tax paid at earlier stage. Illustration of tax credit system - In the example we saw above, ‘B’ will purchase goods from ‘A’ @ Rs. 110, which is inclusive of duty of Rs. 10. Since ‘B’ is going to get credit of duty of Rs. 10, he will not consider this amount for his costing. He will charge conversion charges of Rs. 40.00 and sell his goods at Rs. 140. He will charge 10% tax and raise invoice of Rs. 154.00 to ‘C’. (140 plus tax @ 10%). In the Invoice

prepared by ‘B’, the duty shown will be Rs. 14. However, ‘B’ will get credit of Rs. 10 paid on the raw material purchased by him from ‘A’. Thus, effective duty paid by ‘B’ will be only Rs. 4. ‘C’ will get the goods at Rs. 154 and not at Rs. 165 which he would have got in absence of Cenvat. Thus, in effect, ‘B’ has to pay duty only on Rs 40, which is the value added by him.

Following example will illustrate the tax credit method of Cenvat. Example 1: Transaction without

Transaction With VAT

VAT Details

A

B

A

B

Purchases

-

110

-

100

Value Added

100

40

100

40

Sub–Total

100

150

100

140

Add Tax 10%

10

15

10

14

Total

110

165

110

154

Note - 'B' is purchasing goods from 'A'. In second case, his purchase price is Rs 100/as he is entitled to Cenvat credit of Rs 10/- i.e. tax paid on purchases. His invoice shows tax paid as Rs 14. However, since he has got credit of Rs 10/-, effectively he is paying only Rs 4/- as tax, which is 10% of Rs 40/-, i.e. 10% of 'value added' by him. ADVANTAGES OF TAX CREDIT SYSTEM - The ‘Tax Credit Method’ has following advantages - (a) Audit control is much better, which helps in controlling tax evasion. It acts as a self-policing mechanism (b) Flexibility in applying varying tax rates to different commodities (c) Useful in giving tax benefits on exports or other preferred end-uses like uses by common man etc. Most of the countries have adopted ‘tax credit’ method for implementation of VAT. MEANING OF ‘VALUE ADDED’ – In the above illustration, the ‘value’ of inputs is

Rs 110, while ‘value’ of output is Rs 150. Thus, the manufacturer has made ‘value addition’ of Rs 40 to the product. Simply put, ‘value added’ is the difference between

Selling price and the purchase price. Thus, VAT will replace the present sales tax in India. Under the current single-point system of tax levy, the manufacturer or importer of goods into a State is liable to sales tax. There is no sales tax on the further distribution channel. VAT, in simple terms, is a multi-point levy on each of the entities in the supply chain with the facility of set-off of input tax - that is, the tax paid at the stage of purchase of goods by a trader and on purchase of raw materials by a manufacturer. Only the value addition in the hands of each of the entities is subject to tax.

Example 2:, if a dealer purchases goods for Rs 100 from another dealer and a tax of Rs 10 has been charged in the bill, and he sells the goods for Rs 120 on which the dealer will charge a tax of Rs 12 at 10 per cent, the tax payable by the dealer will be only Rs 2, being the difference between the tax collected of Rs 12 and tax already paid on purchases of Rs 10. Thus, the dealer has paid tax at 10 per cent on Rs 20 being the value addition in his hands Purchase price - Rs 100 Tax paid on purchase - Rs 10 (input tax) Sale price - Rs 120 Tax payable on sale price - Rs 12 (output tax) Input tax credit - Rs 10 VAT payable - Rs 2 VAT levy will be administered by the Value Added Tax Act and the rules made there-under. VAT can be computed by using either of the three methods detailed below The Subtraction method:- The tax rate is applied to the difference between the value of output and the cost of input. • The Addition method: The value added is computed by adding all the payments that is payable to the factors of production (viz., wages, salaries, interest payments etc). • Tax credit method: This entails set-off of the tax paid on inputs from tax •

collected on sales.

Advantages of VAT In the advantages part we will first look after the broad coverage of VAT in the Indian market. Then we will consider the level of security the Indian VAT is having on our revenues. Obviously the selection of items to be covered by VAT in India will be given a bullet to think upon and at last we will check out the coordination VAT in India will be having with our existing direct tax system. 1) Coverage If the tax is carried through the retail level, it offers all the economic advantages of a tax that includes the entire retail price within its scope, at the same time the direct payment of the tax is spread out and over a large number of firms instead of being concentrated on particular groups, such as wholesalers or retailers. If retailers do evade, tax will be lost only on their margins because customers that are registered firms gain nothing if their suppliers fail to collect tax, except delay in payment; they will pay more to the government themselves. Under other forms of sales tax, both seller and customer gain by evading tax. One particular advantage is that of the widening of the tax base by bringing all transactions into the tax net. Specifically, VAT gives the new government the opportunity to bring back into the tax system all those persons and entities who were given tax exemptions in one form or another by the previous regime. 2) Revenue security VAT represents an important instrument against tax evasion and is superior to a business tax or a sales tax from the point of view of revenue security for three reasons. In the first place, under VAT it is only buyers at the final stage who have an interest in undervaluing their purchases, since the deduction system ensures that buyers at earlier stages will be refunded the taxes on their purchases. Therefore, tax losses due to undervaluation should be limited to the value added at the last stage. Under a retail sales tax, on the other hand, retailer and consumer have a mutual interest in underdeclaring the actual purchase price.

Secondly, under VAT, if payment of tax is successfully avoided at one stage nothing will be lost if it is picked up at a later stage; and even if it is not picked up subsequently, the government will at least have collected the VAT paid at stages previous to that at which the tax was avoided; while if evasion takes place at the final stage the state will lose only the tax on the value added at that point. If evasion takes place under a sales tax, on the other hand, all the taxes due on the product are lost to the government. A significant advantage of the value added form in any country is the cross-audit feature. Tax charged by one firm is reported as a deduction by the firms buying from it. Only on the final sale to the consumer is there no possibility of cross audit. Cross audit is possible with any form of sales tax, but the tax-credit feature emphasises and simplifies it and is likely to make firms more careful not to evade because they know of the possibility of cross check. 3) Selectivity VAT may be selectively applied to specific goods or business entities. We have already addressed essential goods and small business. In addition the VAT does not burden capital goods because the consumption-type VAT provides a full credit for the tax included in purchases of capital goods. The credit does not subsidize the purchase of capital goods; it simply eliminates the tax that has been imposed on them. 4) Co-ordination of VAT with direct taxation Most taxpayers cheat on their sales not to evade VAT but to evade personal and corporate income taxes. The operation of a VAT resembles that of the income tax more than that of other taxes, and an effective VAT greatly aids income tax administration and revenue collection. It is interesting to note that when Trinidad and Tobago set out to introduce VAT it chose one of its top income tax administrators as the VAT Commissioner. It must be stressed once again that if properly implemented VAT can ultimately lead to a reduction in overall rates of tax. Revenues will not be sacrificed but would in fact be enhanced as a consequence of the broadened tax base. This does not seem to be a bad idea at all.

The main disadvantages which have been identified in connection with the Value Added Tax are: 1) VAT is regressive It is claimed that the tax is regressive, ie its burden falls disproportionately on the poor since the poor are likely to spend more of their income than the relatively rich person. There is merit in this argument, particularly if it attempts to replace direct or indirect taxes with steep, progressive rates. However, observation from around the world and even Guyana has shown that steep tax rates lead to evasion, and in the case of income tax act as a disincentive to effort. Further, there is now a tendency in most countries to reduce this progressivity of taxes as has been done in Guyana where a flat rate of income tax has been introduced. In any case VAT recognises and makes room for progressivity by applying no or low rates of tax on essential items such as food, clothes and medicine. In addition it allows for steep rates of tax on luxury items, although this can create problems for administration and open opportunities for evasion by way of deliberate misclassification, a problem incidentally not peculiar to VAT, and which takes place extensively in the area of customs duties. 2) VAT is too difficult to operate from the position of both the administration and business. (a) The administration It is often argued that VAT places a special burden on tax administration. However, it is worth noting that wherever VAT was introduced one of its effects was the rationalisation and simplification of the previous indirect tax system and its administration. Each of the previous indirect taxes such as customs duties, purchase tax and excise duties replaced by VAT had its own rate structure as well as a different tax base and separate administrative procedure. The consolidation and incorporation of numerous indirect taxes into the VAT would simplify the rate structure, tax base, and administration of the indirect tax system, thereby eliminating the overlapping auditing practices that had plagued those systems. In addition, the abolition of a number of alternative indirect taxes releases experienced personnel to focus on a single tax. It also means reduction in the number of forms used, legislation to be applied and returns and accounts with which the business person has to contend. (b) Business

It is true that the VAT is collected from a larger number of firms than under any form of income tax or single state sales tax; to the typical smaller firms the complexities of the tax and the need for more extensive records (for example, to justify deductions) are likely to prove serious. However, it is often overlooked that businesses already function with considerable administrative responsibility for a number of laws including the National Insurance Act and the Income Tax Act. Under the Income Tax (Accounts and Records) Regulations of 1980 every person, without exception is required to maintain detailed and extensive records of all its transactions. Compliance with this will certainly ensure compliance with VAT regulations, and since there is an actual benefit to be derived from accounting for VAT paid on input there is an incentive for proper record-keeping. As we have noted before, VAT also allows for the exemption of small businesses from the system. Under any form of sales taxation, small businesses have to be granted special treatment because of their inability to cope with the requirements of keeping adequate records which larger enterprises can handle at a reasonable cost. The intent of the special treatment is to reduce the administrative burden on small enterprises, but not the taxes that normally would be charged on the goods and services they supply. The revenue loss at the final link in the commercial cycle is limited only to the value added at that stage ,whereas in the case of income tax or sales tax the entire tax is lost. To recover the loss from exemptions, a flat tax on turnover may be applied. In the larger businesses with proper staff and computers, the task is really one of double entry book-keeping and any additional work is hardly ever noticed. 3. VAT is inflationary Some businessmen seize almost any opportunity to raise prices, and the introduction of VAT certainly offers such an opportunity. However, temporary price controls, a careful setting of the rate of VAT and the significance of the taxes they replace should generally ensure that there is no increase if any in the cost of living. To the extent that they lead to a reduction in income tax, any price increases may be offset by increases in take-home pay. In any case, any price consequence is one time only and prices should stabilise thereafter.

4. VAT favours the capital intensive firm It is also argued that VAT places a heavy direct impact of tax on the labour-intensive firm compared to the capital- intensive competitor, since the ratio of value added to

selling price is greater for the former. This is a real problem for labour-intensive economies and industries.

Definitions.- In this Act unless the context otherwise requires:(1) ‘Agriculture’ with its grammatical variations includes horticulture, the raising of crops, grass or garden produce and grazing but does not include dairy farming, poultry farming, stock breeding and mere cutting of wood. (2) ‘Agriculturist’ means a person who cultivates land personally. (3) ‘Agricultural produce or horticultural produce’ shall not be deemed to include tea, beedi leaves, raw cashew, timber, wood, tamarind and such produce, except coffee as has been subject to any physical, chemical or other process for being made fit for consumption, save mere cleaning, grading, sorting or drying. (4)‘Business’ includes:(a) any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce or manufacture, whether or not such trade, commerce, manufacture, adventure or concern is carried on in furtherance of gain or profit and whether or not any gain or profit accrues therefrom; and any transaction in connection with, or incidental or ancillary to, such trade, commerce, manufacture, adventure or concern. (c)

(5) ‘Capital goods’ means plant, including cold storage and similar plant, machinery, goods vehicles, equipments, moulds, tools and jigs whose total cost is not less than an amount to be notified by the Government or the Commissioner, and used in the course of business other than for sale. (6)‘Dealer’ means any person who carries on the business of buying, selling, supplying or distributing goods, directly or otherwise, whether for cash or for deferred payment, or for commission, remuneration or other valuable consideration, and includes(a) an industrial, commercial or trading undertaking of the Government, the Central Government, a State Government of any State other than the State of Karnataka, a statutory body, a local authority, company, a Hindu undivided family, , a partnership firm, a society, a club or an association which carries on such business; (b) a casual trader, a person who has, whether as principal, agent or in any other capacity, carries on occasional transactions of a business nature involving the buying, selling, supply or distribution of goods in the State, whether for cash or for deferred payment, or for commission, remuneration or other valuable consideration; (c) a commission agent, a broker or del credere agent or an auctioneer or any other mercantile agent by whatever name called, who carries on the business of buying, selling , supplying or distributing goods on behalf of any principal;

(d) a non-resident dealer or an agent of a non-resident dealer, a local branch of a firm or company or association situated outside the State ; (e) a person who sells goods produced by him by manufacture or otherwise; (f) a person engaged in the business of transfer otherwise than in pursuance of a contract of property in any goods for cash deferred payment or other valuable consideration. (g) a person engaged in the business of transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract; (h) a person engaged in the business of delivery of goods on hire purchase or any system of payment by installments; (i) a person engaged in the business of transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration; (7)‘Goods’ means all kinds of movable property (other than newspaper, actionable claims, stocks and shares and securities) and includes livestock, all materials, commodities and articles (including goods, as goods or in some other form) involved in the execution of a works contract or those goods to be used in the fitting out, improvement or repair of movable property, and all growing crops, grass or things attached to, or forming part of the land which are agreed to be severed before sale or under the contract of sale. (8)‘Input’ means any goods including capital goods purchased by a dealer in the course of his business for re-sale or for use in the manufacture or processing or packing or storing of other goods or any other use in business. (9)‘Input tax’ has the meaning assigned to it in Section 10. (10)‘Maximum retail price’ or ‘MRP’ shall mean the price marked on the package in which the goods are contained. (11) ‘Output tax’ has the meaning assigned to it in Section 10. (12)‘Prescribed authority’ means an officer of the Commercial Taxes Department, authorised by the Government or the Commissioner to perform such functions as may be assigned to him.

(13)‘Taxable turnover’ means the turnover on which a dealer shall be liable to pay tax as determined after making such deductions from his total turnover and in such manner as may be prescribed, but shall not include the turnover of purchase or sale in the course of interstate trade or commerce or in the course of export of the goods out of the territory of India or in the course of import of the goods into the territory of India and

the value of goods transferred or despatched outside the State otherwise than by way of sale. (14) ‘Total turnover’ means the aggregate turnover in all goods of a dealer at all places of business in the State, whether or not the whole or any portion of such turnover is liable to tax, including the turnover of purchase or sale in the course of interstate trade or commerce or in the course of export of the goods out of the territory of India or in the course of import of the goods into the territory of India and the value of goods transferred or despatched outside the State otherwise than by way of sale. (15) ‘Turnover’ means the aggregate amount for which goods are sold or distributed or delivered or otherwise disposed of in any of the ways referred to in clause (29) by a dealer, either directly or through another, on his own account or on account of others, whether for cash or for deferred payment or other valuable consideration, and includes the aggregate amount for which goods are purchased from a person not registered under the Act and the value of goods transferred or despatched outside the State otherwise than by way of sale, and subject to such conditions and restrictions as may be prescribed the amount for which goods are sold shall include any sums charged for anything done by the dealer in respect of the goods sold at the time of or before the delivery thereof. (16)‘Works contract’ includes any agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property. THE INCIDENCE AND LEVY OF TAX (17) Levy of tax.The tax shall be levied on every sale of goods in the State by a registered dealer or a dealer liable to be registered, in accordance with the provisions of this Act. The tax shall also be levied, and paid by every registered dealer or a dealer liable to be registered, on the sale of taxable goods to him, for use in the course of his business, by a person who is not registered under this Act.

The tax shall also be levied, and paid by every registered dealer or a dealer liable to be registered, on the sale of taxable goods to him, for use in the course of his business, by a person who is not registered under this Act. Liability to tax and rates thereof.(1) Every dealer who is or is required to be registered as specified in Sections 22 and 24, shall be liable to pay tax, on his taxable turnover, (a) in respect of goods mentioned in,(i) Second Schedule, at the rate of one per cent,

(ii) Third Schedule, at the rate of four per cent, and (iii) Fourth Schedule, at the rate of twenty per cent. (b) in respect of other goods, at the rate of twenty five per cent. (2) Where goods sold or purchased are contained in containers or are packed in any packing material liable to tax under this Act, the rate of tax applicable to taxable turnover of such containers or packing materials shall, whether the price of the containers or packing materials is charged for separately or not, be the same as the rate of tax applicable to such goods so contained or packed, and where such goods sold or purchased are exempt from tax under this Act, the containers or packing materials shall also be exempt. (3) The State Government may, by notification, reduce the tax payable under subsection (1) in respect of any goods. 5. Exemption of tax.- Goods specified in the First Schedule and any other goods as may be specified by a notification by the State Government shall be exempt from the tax payable under this Act. 6. Place of sale of goods.- (1) The sale or purchase of goods, other than in the course of inter-State trade or commerce or in the course of import or export, shall be deemed, for the purposes of this Act, to have taken place in the State irrespective of the place where the contract of sale or purchase is made, if the goods are within the State.(a) in the case of specific or ascertained goods, at the time the contract of sale or purchase is made; and (b) in the case of unascertained or future goods, at the time of their appropriation to the contract of sale or purchase by the seller or by the purchaser, whether the assent of the other party is prior or subsequent to such appropriation. (2) Where there is a single contract of sale or purchase of goods situated at more places than one, the provisions of clause (a) shall apply as if there were separate contracts in respect of goods at each of such places. (3) Notwithstanding anything contained in the Sale of Goods Act, 1930 (Central Act 3 of 1930), for the purpose of this Act, the transfer of property of goods (whether as goods or in some other form) involved in the execution of a works contract shall be deemed to have taken place in the State, if the goods are within the State at the time of such transfer, irrespective of the place where the agreement for works contract is made, whether the assent of the other party is prior or subsequent to such transfer.

(4) Notwithstanding anything contained in the Sale of Goods Act, 1930 (Central Act 3 of 1930), for the purpose of this Act, the transfer of the right to use any goods for any purpose (whether or not for a specified period) shall be deemed to have taken place in the State, if such goods are for use within the State irrespective of the place where the contract of transfer of the right to use the goods is made.

(18) Output tax, input tax and net tax.-

(1) Output tax in relation to any registered dealer means the tax payable under this Act in respect of any taxable sale of goods made by that dealer in the course of his business, and includes tax payable by a commission agent in respect of taxable sales of goods made on behalf of such dealer subject to issue of a prescribed declaration by such agent. (2) Subject to input tax restrictions specified in Sections 11,12,14, 17, 18 and 19, input tax in relation to any registered dealer means the tax collected or payable under this Act on the sale to him of any goods for use in the course of his business, and includes the tax on the sale of goods to his agent who purchases such goods on his behalf subject to the manner as may be prescribed to claim input tax in such cases. (3) Subject to input tax restrictions specified in Sections 11, 12, 14, 17, 18 and 19, the net tax payable by a registered dealer in respect of each tax period shall be the amount of output tax payable by him in that period less the input tax deductible by him as may be prescribed in that period and shall be accounted for in accordance with the provisions of Chapter V. (4) For the purpose of calculating the amount of net tax to be paid or refunded, no deduction for input tax shall be made unless a tax invoice, debit note or credit note, in relation to a sale, has been issued in accordance with Section 29 or Section 30 and is with the registered dealer taking the deduction at the time any return in respect of the sale is furnished, except such tax paid under sub-section (2) of Section 3. Time of sale of goods.(1) Notwithstanding anything contained in the Sale of Goods Act, 1930 (Central Act 3 of 1930), for the purpose of this Act, and subject to subsection (2), the sale of goods shall be deemed to have taken place at the time of transfer of title or possession or incorporation of the goods in the course of execution of any works contract whether or not there is receipt of payment: Provided that where a dealer issues a tax invoice in respect of such sale within fourteen days from the date of the sale, the sale shall be deemed to have taken place at the time the invoice is issued. (2) Where, before the time applicable in sub-section (1), the dealer selling the goods issues a tax invoice in respect of such sale or receives payment in respect of such sale, the sale shall, to the extent that it is covered by the invoice or payment, be deemed to have taken at the time the invoice is issued or the payment is received.

(3) The Commissioner may on an application of any dealer exempt such dealer subject to such conditions as he may specify, from the time specified in sub- section (1).

Agents liable to pay tax.-

(1) Notwithstanding anything contained in any law for the time being in force including this Act, every person who, for an agreed commission or brokerage, buys or sells on behalf of any principal who is a resident of the State shall be liable to tax under this Act at the rate or rates leviable thereunder in respect of such purchase or sale, notwithstanding that such principal is not a dealer or that the turnover of purchase or sale relating to such principal is less than the minimum specified in sub-sections (1), (2) and (3) of Section 22. (2) The principal shall not be liable to tax on his turnover in respect of which the agent is liable to tax under sub-section (1), and the burden of proving that the turnover has been effected through an agent liable to tax under the said sub-section, shall be on such principal. Collection of tax by registered dealers, Governments and statutory authorities.(1) Every registered dealer liable to pay tax under the Act shall collect such tax at the rate or rates at which he is liable to pay tax, and the tax collected shall be accounted for under the provisions of this Act and rules made thereunder. (2) The Central Government, a State Government, a statutory body or a local authority shall, in respect of any taxable sale of goods effected by them, collect by way of tax any amount which a registered dealer effecting such sale would have collected by way of tax under this Act, issue a tax invoice, pay the tax so collected into the Government Treasury or any designated bank and furnish monthly returns, as specified under Section 35, to the prescribed authority. Input tax restrictions.(a) Input tax shall not be deducted in calculating the net tax payable, in respect of: (1) tax paid on purchases attributable to sale of exempted goods exempted under Section 5, except when such goods are sold in the course of export out of the territory of India; (2) tax paid on purchase of goods that are dispatched outside the State, other than as a direct result of sale or purchase in the course of inter-State trade or commerce; (3) tax paid on goods including capital goods as specified in the Fifth Schedule and any other goods as may be notified by the Government or the Commissioner, purchased or put to use for purposes other than for re-sale; (4) tax paid on purchase of capital goods other than those falling under clause (3), except as provided in Section 12;

(5) tax paid on purchase of goods used as inputs in the manufacture, processing or packing of other taxable goods despatched to a place outside the State not as a direct result of sale or purchase in the course of inter-State trade, except as provided in Section 14; (6) tax paid on purchases attributable to naptha, liquified petroleum gas, furnace oil, light diesel oil, superior kerosene oil, kerosene and any other petroleum product, when used as fuel in motor vehicles, but when used as fuel in production of any goods for sale in the course of export out of the territory of India or taxable goods or captive power, input tax shall be deducted as provided in Section 14.

(7) tax paid under sub-section (2) of Section 3 on the purchase of fuel; (8) tax paid under sub-section (2) of Section 3 on the purchase of goods excluding fuel, until output tax is payable on such goods or other goods in which such goods are put to use except when the said goods are exported out of the territory of India; (9) tax paid on goods purchased by a dealer who is required to be registered under the Act, but has failed to register. (b) Input tax shall not be deducted by an agent purchasing or selling goods on behalf of any other person other than a non-resident principal. Deduction of input tax in respect of Capital goods.(1) Deduction of input tax shall be allowed to the registered dealer in respect of the purchase of capital goods for use in the business of sale of any goods in the course of export out of the territory of India and in the case of any other dealer in respect of the purchase of capital goods wholly or partly for use in the business of taxable goods. (2) Deduction of input tax under this Section shall be allowed only after commencement of commercial production, or sale of taxable goods or sale of any goods in the course of export out of the territory of the India by the registered dealer and shall be apportioned over a specified period, as may be prescribed. Special rebating scheme.Deduction of input tax shall be allowed on the difference between the rate of input tax charged at a rate higher than four per cent and the rate specified in Third Schedule on purchases specified in subsection (5) and sub-section (6) of Section 11.

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