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Tax notes

Recd: received
st
IT Act passed in 1961 and came into effect 1 April 62 there are around 600 sections

Cap Assets are Share Real Estate and Gold


Cap gains are profit by selling Cap Assets.
Income sometimes includes Cap gains and gifts. It should be less that 25k in a fin year. Gifts
received from relatives is not taxable.
Income does not only mean recd in cash, value of gift is regarded as gift.
Lottery or windfall, any money from gambling game show crossword is regarded as income 30%
taxable.
Section 2(24) defines income and there are 10 steps for the same.
1. Find out various inc and capital receipts, money recd from any service even in a casual
way like tuitions and beauty parlor.
2. Find out what cap receipts is deemed to be taxed under 2(24).
3. Find out which item of income is to be exempted. Agric income is not liable to tax. Only
state govt. has the power to impose tax on some plantation. Dividends recd from Shares
and debentures are not liable to tax, as the cos are paying the tax after the profit and
dividends are declared. Scholarship recd under 10(16)
4. Classify income under diff heads 5 heads
I. Salaries Section 15-17
II. Income from house prop Sec 22-27
III. Profits or gains from bus or prof 28-44
IV. 45-55 Capital gains
V. 56-59 income from other source

5. Claim the deductions from expenses.


6. Total Net income taxable under each head is to be found to arrive at the gross income
7. Claim deduction under 6A in section 80C, life insurance premium, NGO
8. Tot income = GIT (Deduction as per sections)
9. Find out the tax payable on the figure of total income.
o Men upto 1.6 lacs no tax
o 1.6-5.0 lacs 10% males.
o 5.0-8.0 lacs 20% tax.
o Greater that 8.0 lacs. 30%.
o Women 1.90 lacs no tax.
o 1.9-5 10%
o 5-8 20%
o grater than 8 30%
o for more than 65 yrs male or female
o upto 1.85 no tax
o more than 1.85-2.5 lakhs 20%
o Surcharge is 10% on tax if income I more than 10 Lacs
o Education cess 3%

Cess is money collected and issued for special purposes


STT Security Trans Tax and is deducted from the tax slab.

10. to find out whether we have paid tax or not. Ways to pay tax
at source
• 45% of tax to Indian govt from TDS
• Advance Tax can be paid in 3 installments
1st on or before 15th Sept. 30%
2nd 15th Dec of Fin yr 30%
3rd 15th March
• Self assessment Tax
Status:
Resident and non resident(NR).

Residents
 Resident ordinary(OR)
 Resident not ordinary (NOR)

OR in whichever part of the world you receive income you have to pay tax also in India.
NOR and NR for both status you are liable to tax in India only for the income earned in India and
income earned outside but recd in India.

Earning place
Country in which you render your service. Place of earning is also called place pf accrual.
Section 5 says ROR has to pay tax irrespective of the place of earning or wherever its recd.
Income recd from inv outside India and if u are ROR then you are taxed.
Div earned o/s India is liable to tax for ROR, but div of Indian company is not taxed
Rent from property o/s India is liable to tax.

Resident
Who has spent 182 or more than 182 days in India in a financial year is a Resident.
If you have been a non resident for 9/10 in preceding fin years, or if in the preceding 7 yrs you
have been in India for less than 730 days then you will be an RNOR. Otherwise you are ROR.
Being RNOR you can save tax on investment outside India.
How the profits are to be calculated?
From the year the business is carried out. When it is ready to start the particular activity.
If trading
Start very fast… don’t need any infrastructure.
If in a manufacture or an industry activity…there is a time lag…there is a gestation period.

Expenditure will be allowed only from the year you are ready to start the factory by manufacture
Goods… if trial production, you will be entitled to claim deduction… capital will be charged
which is only depreciation. No depreciation on land since it is a capital asset.

A company pays an employee his salary, not beyond that, but if the company wants to help an
employee, on an ex-gratia payment.
Example - If the employee dies on duty and the company decided to pay his family a certin
amount ex gratia… there is no deduction.. there was no contractual obligation to pay any
money… the SC held that it is not right, was paid on grounds of commercial experiencee. Thus it
will be allowed as a deductible expenditure under the IT act.
Exp. Incurred prior to the setup of business therefore cannot be allowed as a
deduction. Once it starts it has lot of expenses and only after all the setup it will manufacture.
That may take 3-4 yrs… all these expenses cannot be allowed as a deduction. Any capital expend
will be capitalized… say we are employing engineers for construction the factory building.. his
salary is capitalized.. when the building will go in the actual business use that yr deprec will be
allowed on the total expenses incl the engineers salary or all responsible for the construction of
the business.
Other admin expenses that are incurred in the pre operative period, then those exp are not
allowed as a provision for deduction…
Section 35B allows u to amortize certain preliminary expenses. Exp on
• Incorporating a company
• Prep the project report
• Market survey
• On engine services
• Raising capital

Only these expenses are allowed and that also not the full amount but 1/5th for 5 yrs starting with
the yr in which the company is ready to commence its business. Only when the business is carried
on though. If a business is discontinued, from that day all the expenses will not be allowed as a
deduction there are many expenses for winding up… but we are concerned with the day of
business stopped…it might even take 10 yrs… if any income is recd though after the stop date
will be liable to tax…

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If u want to claim deduction even after the business has been stopped, it is not necess that the
same bus continues, even if any other bus is started , before the 1st bus is discontinued then the
exp of the 1st business will still be allowed as deduction. Crucial change principle, erstwhile
industrial area at parel, all the old textile mills, all closed down.. India could not compete, sitting
on the gild mine known as land, biggest mills owned by GoI, Nat Textile Corp. having 10 mill sq
ft in the heart of Bombay. Before they closed down they went into other business. Past losses of
the old textile unit can be set off against profits or income of the new business. Some activity has
to be contd. Test is that the same managerial staff, has to be fin interdependence, will be deemed
to be the same business. Once that bus is contd. Still the losses are being set off against the new
cos profits….
Say if they sell their land outright, they get capital gains unabsorbed deprec. Can be set off
against the profits.
In IT there is a difference between the loss excess of expenditure over income and
depreciation a book entry, its got to be separately crried forward. Loss can be carried fwd only for
8 yrs and set off in the subsequent years only against business profits… on the other hand dep can
be carried over for an indefinite period of time as long as some business activity is carried
forward. and can be set off against income under any head., not only profits.

• Now if the co itself closes down or does not start any other activity, no deduction and
depreciation will also not be allowed
• Now if the co ceases to exist, ie winding up, going to the court of law ie the high court,
which will pass the liquidation order of winding up
• Now if it wants to amalgamate it is like the company ceases to exist say, A and B, there I
a big process under the Companies act and the High court passes the order of
amalgamation. A amalgamated in B, A loses its existence, A is being amalgamated.
Once the company ceases to exist, all its losses and deprec, lapses and nobody gets it.
Govt has introduce a new section 72A, ie if certain conditions are fulfilled then losses of
the amalgamating/Sick company can be taken adv of by the Amalgamated/Healthy
company as laid down in 72A

Conditions (Amalgamating is Sick Amalgamated is healthy)


• All the assets and liabilities of the amalgamating Co. must be taken over by the
amalgamated Co.
• The assets of the amalgamating co which are being taken over by the amalgamated
company should not be sold and used by the amalgamated company for the purpose
of the business for at least 5 years.
• The business should be contd. for 5 years, so that the workers benefit.

• 75% of the shareholders of the amalgamating comp (Sick Co.) must become
shareholders of the amalgamated company(Healthy Co.). So that they approve of the
amalgamation. Swap ratio is decided. What do the sick company shareholders get in
return for the shares that are held by them in the sick unit. Swap ratio matter goes to
the court, Creditors of the company are also called by the court.

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The H co says I don’t want ur assets or H does not want to continue for the mandatory 5 yrs
period, then you have a reverse merger where H merges into the Sick Co. wherein the S co
continues to exist.

Merger and acquisitions are different, Acquisition means that the shareholders change. Vodafone
has bought 66% in hutch, where hutch continues to exist only the shareholding pattern changes.
Demerger – where the undertakings of the cos are Demerged to another
L and T Demerged co
UltraTech Resulting company.

What about the losses of the Demerged cos. They cannot be set off by the resulting company but
to encourage demergers Section 72A here the losses can be set off only through the above 4
conditions.
• The consideration that is paid by the resulting co. must be paid to the shareholders of the
demerged company, i.e. shareholders of L and T
• All the assets and liabilities of the demerged Co. must be taken over by the Resulting Co.

• The assets of the demerged co which are being taken over by the resulting company
should not be sold and used by the resulting company for the purpose of the business for
at least 5 years.
• The business should be contd. for 5 years, so that the workers benefit.
• 75% of the shareholders of the demerged co. must become shareholders of the resulting
co.

Demerger Section 219AA


Not paid to L and T but to the shareholders of L and T. A demerger unlocks shareholders value.

Depreciation
Revenue Expenditure – if an expenditure is incurred to restore an asset to its original condition,
then it is an expenditure on repairs, that means it is a revenue expenditure. This is to be allowed
as a deduction.
Capital Expenditure – if an expenditure is done to add to the assets, or to increase the productivity
of the assets.
Rhodesia Railways now Zimbabwe Rail started to replace the rails wherever necessary, IT dept
said that, it is capital expenditure. However, it was won by Rhodesia saying it was restoration of
asset and it was allowed as a deduction.
Now courts have taken a more liberal view saying that, if the restoration is done in order to
achieve better technology, even if it increases the capacity.
Now that it is treated as a revenue expenditure, then the companies should write off in the books
of accounts which the companies don’t do as it shows lesser profitability. If decide to capitalize,
then the company has to claim depreciation.
Depreciation Section 32 of the IT act
Conditions for claiming Dep
• One must own the asset and only he can claim
• Have to use it in your business.
• From the year in which the asset is put to use for the purpose of your business. Even if
trial production starts the asset is deemed to be put to use.

On what do we claim dep, it is claimed on the actual cost of the asset. Actual cost is not the price
of the asset, instead it is the expenditure till the final setting of production.
Traveling exp of engineers + Shipment + Customs + Clearance + Transportation + Installation
All of the above is the actual cost, which is of course capitalized, to write off the depreciation. If
there is a term loan taken from any financial institution and there is interest which is to be paid,
the interest is capitalized only from the date of disbursement of the loan to the date of setting up
of the asset for production. After that date the interest to be paid becomes a deductible
expenditure under Section 36(1)(3) of the IT act.

How to claim Dep.


Classify the assets according to the block called as the block of assets.
 Residential Building 2.5%
 Commercial Building 5%
 Factory Building 10%
 Temp wooden structure 100%
 Trucks 40%
 Computers 60%
General rate of Plant and Machinery Dep is 20%
However for energy saving devices75%, or computers60% it varies, thus it needs to be classified
according to blocks.
1st year – add the actual cost of the each asset belonging to each block.

Zero Tax Companies.


It may happen that according to the IT law, there is no profit, yet the company declares a dividend
according to the companies act. Such cos are known as ZERO TAX companies. Ex is Reliance.
Stupid Govt. has prescribed a lower rate of depreciation under Companies act and higher under IT
act. That is why there is such a discrepancy.

Illustration - 1000 crores investment in Plant and machinery of the Refinery.


1st year the profit is Rs 100 crores (PBDT)
Now under Cos act Rate of deprec is 5%.
Rs 50 Crore is the depreciation provided.
Under IT law 20% is the rate therefore deprec is 200 crores
Thus there is no tax and the company actually faces a loss according to the IT law.
Thus the balance of 50crores is declared as dividend.

MAT Minimum alternate Tax


If you have a book profit 50 cr and no taxable profit then the co will have to pay 7.5% mandatory
on the book profit. The balance can be used to declare as dividend to shareholders. There is a
Dividend Distribution Tax DDT under section 115 O, which is currently @ 12.5% of
whatever the amount has been declared.

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Points to remember in the IT law
• Block of assets value will go on reducing every year.
• The rates will be the ones that are prescribed by the IT law.
• Dep is always claimed on the Reducing Balance Method.
Unabsorbed depreciation is the depreciation not absorbed by the profits, which is allowed to be
carried forward so long as the business continues and can be set off against any head.
Deprec is on 4 types of asset
- Building
- Furniture
- Plant and Machinery
- Intangible assets – Goodwill patents Franchising fees also can be claimed deprec on.

A structure is a building if it is meant to merely locate a business


It’s a plant if its specially designed to carry on the business – like the cold storage, a theatre, the
revolving restaurant of Ambassador is the plant, which is specially designed. Can claim a higher
rate of depreciation.
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Leasing
The ownership of the asset belong to the leasing company. Here the leasing company does not get
a depreciation but a deduction on the lease rental. It depends on
The value of the asset
Period of the lease – shorter the period higher the rent
Interest
Residual value – sometimes the company wants to buy after the leasing period according to this.
Types of leasing.
Equated lease – same – monthly quarterly
Front ended lease – higher in the initial years and lower later on
Back ended lease – lower initially
Balloon lease – like a balloon.
What is the objective, it is to structure the cash outflow to suit your business. Else you can buy it,
but depreciation has to be provided and its fixed by the Government. Adv. Is that we can write off
the asset earlier.

10 lacs for motorcar 3 year lease


fix the residual value at 90%, write of value over 3 years
writing off 30% on SLM
write off 15% on WDV.

Provisions under the IT law. Section 35


Capital Expenditure on Scientific Research Section 35 1 4 As and when the expenditure is
incurred even before the start, say constr of an R and D building, the co. can claim deduction for
those expenses
If a person wants to donate money, to an approved research centre by ICMR, will get a 100%
deduction on the donation for an approved program or industry such as
• Pharmaceuticals
• Electronic equipment
• Computers
• Bio Technology
• Telecomm equipment
• Chemical or
• any article that is notified by the CBDT ie
research on aircraft
Under Section 35 2B, donation is a weighted deduction, ie more than he has donated, ie 1 and
half of the donation from his taxable income.

Under Section 35A C gives deduction to the project who contributes to the project approved by
the national committee, based in Delhi. Here, the govt is just sacrificing revenue that it was
supposed to get.

Section 80 G if the charitable trust is approved under this section, any person who makes a
donation 50% is deductible, of course of the donation made. However if the donation exceeds
10% of the Gross Total Income then the excess will not be taken into account for deduction.
Under this section, the charitable trust has to be of a cosmopolitan nature. If it is set up for the
benefit of women and children of a specific community it will be held under section 80G.

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The Prime Ministers Fund, anybody making a donation gets a deduction without any limit on the
GTI, only one limitation, the donation must not exceed the GTI, thus it is only for the tax payers.
Section 35CCB 100% deduction if contribution is made to an institution, to conserve nature or a
forestation

Provision for retaining profits 33AB, is applicable for cos which are producing tea coffee or
rubber. Its like an incentive to retain a part of their profits and not distribute it as dividends.
So a tea co can set aside 40% of its profits every year by depositing it with tea board or
NABARD this amount is deductible, and within 5 years this deposited money has to be used for
planting new tea plantations, meant to encourage tea production. Coffee has to deposit the money
with Nat Bank for Rural and Agric dev.

Provision 33 ABA for the oil producing companies, can set aside 20% of the profits and this is
deductible and can use the money for searching for new oil wells.
Section 36 (1) (8) any inst provides long term finance, can set aside 40% of its profits in a
special reserve account, and not to distr the money through dividends. Here they do not have any
condition as such for the usage of the set aside funds. The idea is to help them strengthen
themselves so that they can provide more fund. HDFC is one fine example for the same

Amortisation – It means spreading of expenditure. Section 35B expenditure, which are the
preliminary expenses of setting up of a company, is allowed to be amortized over 5 years starting
from the commencement of the business, the condition is expenses should be within the limit of
2.5% of the project cost/capital employed whichever is higher.
Project cost means cost of all the assets, Fixed and Current, generally higher.
Capital Employed means the cap, share prem, long term borrowings.

Amortisation of Telecommunication license fees under section 35ABB, are not allowed as a
deduction, in equal installment over the period of the license, commencing with the year the
license fee is actually paid.

Example – if the license fee is 216 cr. For 10 years, we pay the DoT in the 1st year itself.
By amortization we get a deduction of 21.6 for 10 years
Now if DoT wants it in installment the installments would be 72 cr each year.
1st year we pay 72 Cr, entitled to a deduction of 7.2 cr
2nd year 72 Cr, 7.2 deduction + 8 Cr of the 2nd installments = 15.2 Cr
3rd year 15.2 + 9 cr deduct for 3rd installment = 24.2 Cr.
Now for the remaining 7 years get a deduction 24.2 Cr.

Section 35 B D A Deduct for amortization, on the expenses incurred for amalgamation or


demerger. It does not allow 100% deduction but only 20% for a period of five years from the year
of expenses.
Section 35 B B A is amortization of compensation paid under VRS, allowed as a deduction
spread out over 5 years.
Section 36 (1) (9), amortization on expenditure for institution promoting family planning. 20% is
allowed to be amortized over 5 years.
Presumptive Taxation.
For both Residents and non residents. For residents presumptive taxation is optional.
Section 44 A D meant for small civil contractor, if his gross receipts, are 40 lacs his presumed
income would be 8% of 40 lacs.
Section 44 A E, for transporter having 10 trucks or less,
Rs. 3600/- per month for heavy goods vehicle classified as, by the RTO. This is the income.
Rs. 3150 pm for a light goods vehicle.
On this amount he has to pay the tax.
Section 44 A F, for a small shopkeeper, turnover is less than 40 lacs and 5% is the presumed
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Presumptive taxation for Non residents, there 5 probations and are mandatory.
Section 44 B for a foreign shipping company,
• 7.5% of the freight on goods loaded or unloaded, is the presumed income for the shipping
company.
• 7.5% of the passengers fare who board or alight, is the presumed income.
Section 44 B B A
• 5% of the freight on goods loaded or unloaded, is the presumed income for the shipping
company.
• 5% of the passengers fare who board or alight, is the presumed income.
Section 44 (B) (B) for foreign contractors assistance to India oil producing companies.
10% of the contract cost, is assumed to be the income of such a contractor.

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Section 44 D Royalty – if an Indian company deals to ay a foreign company for its know how,
Can be paid in 3 installments
1st paid when the technical know how agreement is signed and filed with RBI
2nd paid when all the technical know how is delivered
3rd paid when the company starts producing goods with the help of the tech know how.
The whole amount is known to be the income, as no amount is allowed as a deduction.
So the entire royalty recd by a company, is deemed as income thought the rate of taxation is 10%
in this case. The company is taxable even if it does not sell a single product in India,

Section 9 (1) (7) – deals with fees for technical services, also treated as income and there is no
deduction in this case too. The presumed income is deemed to be 100%

Suzuki gets a lump sum royalty, and also get a recurring royalty for the sales made and the
presumed income is 100% and there is no deduction.

Tax Holidays for Infrastructure Development


Section 80i A is the section that grant tax holidays to companies who set up facilities.
10 consecutive years tax holiday within the initial 15 years, starting form the commencement.
o Sanitation and Sewerage plant or facilities.
o Ports – Sea and Airports.
o Construction of Bridges. HCC
o Light Rail Transit System put on top of a road. Ghatkopar to Versova.
o Mass Rapid Transit System.
o Scientific Research
o Power projects
o Special Economic Zone provided it is completed by 31st March 2009.
o Roads and Expressways 10/20 years.

Section 80i B tax holiday


Prod or refining of mineral oil for 7 years from commencement
• Cold Storage facility 100% tax holiday for 1st 5 yrs and 30% for next 5 years.

• Food Processing and handling of foods 100% for 1st 5 yrs and 30% for next 5 yrs.
• Setting of a hospital
 rural area
 100 beds minimum
 for 5 years
• Housing projects 100% tax free,
 Approved by the local authority and is completed within 4 years from the end of the
approval year
 Residential
 min. 1 Acre.
 1000 sq ft Mumbai and Delhi
 1500 sq ft in other areas
 Commercial areas 2500 sq ft
 No time period for tax holiday

Section 10 (A) (A) for exporters who export 100% - is applicable to the newly established unit in
a SEZ, that manufactures or provide any services starting from the financial year 2005-06.
o Exporting company
o 100% tax holiday
o starting from the commencement for 5 years.
o Next 5 years 50%
o Next 5 years 50% provided the profit is transferred to SEZ reinvestment reserve
account SEZRRA, utilize the profits for purchasing machinery or plant within 3 years of
creating the reserve. SEZRRA has to be approved by the Ministry of Commerce, Udyog
Bhavan.

Manufacture means converting any goods from raw material to semi finished or finished goods or
even assembling brought in CKD or SKD condition.
Any type of change brought about in the raw material is manufacture.
If a manufacturer also deals in the DTA, Domestic Tariff Area,
Example Total turnover 100
Export turnover 23
Total profit 10
Export profit 2.3 on which we get an exemption under section 10 A A.

Section 80 (l)(A) OBU and IFSC


off shore banking unit set up in SEZ has holiday, 100% for 1st 5 yrs and 50% for next 5
IFSC International Financial Services Sector set up in SEZ has holiday, 100% for 1st 5 yrs and
50% for next 5

Section 54 (G) (A) Any Industrial undertaking transferred from urban area to the SEZ, then when
they sell the urban assets and enjoy capital gains, these gains are not taxable, provided they
complete the transfer within 3 years. Condition – the new assets in the SEZ, cannot be sold for a
period of 3 years.

Capital Gains
Section 45 (1) Charging section, which says that gains arising out of transfer of a capital asset is
chargeable to tax in the financial year in which the transfer has taken place.
Cant claim or cant write off a loss of capital asset, it can only be written off when there is a
transfer.
What is a Capital Asset?
Any movable or immovable property, tangible and intangible, also the rights in the property,
tenancy rights, leasehold right, it excludes stock in trade, consumable stores or raw materials.

Business Tax is 30% on income over 2.5 lacs.

Asset held > 3 yrs = long term and tax is 20% on the capital gains.
Asset held < 3 yrs = short term and tax is 30% on the capital gains.
Listed Shares held > 1 year = long term no capital gains tax.
Listed Shares held < 1 year = short term rate of tax 10%
Unlisted Shares held > 3 year = long term capital gains tax. 20%
Unlisted Shares held < 3 year = short term capital gains tax. 30%

Illustration -
land CP 1 lac
option 1 – land is sold
SP 10 Crores
On 9 Cr 99 lacs one has to pay 20% of tax, but if invested in a notified bond the capital gains is
not taxable.

Option 2. land is not sold and entered into a JV


The land is not sold and is entered into a JV with a builder who will dev the land and share the
profits in a ratio, the tax on the income would be 30% and no bonds will take the money. This is
because the gains have been converted from Capital gains to concurrent gains, and is like a
business gain.
Personal assets are exempt from the clutches of capital gains, however gold, silver or any alloy or
precious or semi precious stones.

Inheritance or receipt of asset in the form of gift, etc, then, to know if the asset is long or short
term, we need to find out the period he held it and then the period we hold it and if its > 3 yrs it is
long term.
Cost of the asset even if the asset was a gift to you, has to be traced down and whatever are the
gains are taxable, and it does not matter how many hands it has changed.

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