This act applies to every entity (hereinafter referred to as assessee) in this country, which derive income in any form and from any source.

Direct taxes discriminate between taxpayers. Theoretically, you can tax the person earning a specific sum or a particular source of income depending upon the social objectives of the state. Taxing the higher income group more than the lower income sections can check social imbalances. It is a vital tool to direct state policy if used effectively.

• What is Income in the layman’s language?

It is the periodical product of one’s work, business, lands, or investments commonly expressed in terms of money. The sources of income are quite exhaustive. Any return in money terms for product, services of any nature could be construed as income. However, one must point out that for the purpose of taxation, income has been categorised under the following broad heads.

1. Income from Salary.
2. Income from House Property.
3. Profits and Gains from Business or Profession.
4. Agricultural income.
5. Capital Gains
6. Income from all other sources not covered by the classification given above.

The Assessment Year is a period of 12 months beginning immediately after the previous year on 1st April and ending on 31st March of the following year i.e. the year that follows the previous year. For example, for the financial year 1997-98 the assessment year is 1998-99 (Period beginning from 1^st April 1998 to 31^st March 1999).

The Previous Year is a period of 12 months beginning on 1st April and ending on 31 St March of the following year and the year just previous to the assessment year i.e. the year in which income is earned. For example, for the assessment year 1998-99 the previous year is 1997-98. Period beginning from 1^st April 1997 to 31^st March 1998.

Yes, the very basis of charge to tax is wholly dependent on residential conditions, which are described below.

• The Assessee should be in India for a period of 182 days or more in previous year.

• The Assessee should be in India for a period of 60 days or more in the previous year and 365 days or more during the 4 (four) years preceding the previous year.

• The Assessee should be resident in India for 9 out of 10 previous years preceding the relevant previous year.

• The Assessee is resident in India for a period of 730 days or more in the preceding 7 previous years.

• The above stated conditions are modified for persons going abroad for employment or those who are part of a ship’s crew. Such persons are treated as non-–resident even if they fulfil the basic conditions above.

• In the additional conditions, 60 days is to be substituted by 150 days or more in cases where a person of Indian origin abroad come on a visit to India.

• How many types of assessees are recognised by law? Which conditions should be fulfilled or not fulfilled in order to determine the residential status of an assessee?

There are three types or status attributed to assessees, which are described in column 1 of the table below. The conditions required to be met in order to categorise the status of the assessee are shown in Column 2 against the status of the assessee.

• What is the effect of the residential status on the tax liability or incidence to tax on the various types of assessees?

The Resident Individual

This assessee is liable to pay taxes on all incomes, whether received or accrued within or outside India.

Resident but not ordinarily resident

This assessee is liable to pay taxes only on:

1. Incomes arising and accruing in India
2. Incomes which are derived outside India by any business set-up within India or with authority or control within India.

• There is no tax incidence if income is generated outside India through business with set-up and control outside India, even though incomes may be subsequently remitted into India.

Non – Resident

Has to pay taxes only on income arising or accruing in or within India.

INCOMES THAT ARE EXEMPT FROM INCOME TAX

• What are the incomes that are not taxable under the Income Tax Act?

INCOME FROM SALARIES

• What constitutes or comprises briefly the Income under the head "Salaries"? What are the exemptions and additions to be made to derive income from Salary?

• Income from salary includes any salary, wages, commission, bonus, dearness allowance, contribution to provident fund, leave salary, overtime, arrears of pay etc. by whatever name called from all employers actually received during the previous year or deemed to have been received in cash or in kind.

• Salary income includes remuneration for services rendered by a person under an express or implied contract of employment i.e. A relationship must exist of employer and employee between the payer and payee.

• Thus L.I.C. pension scheme income or Family pension income received by dependants of deceased Salary earners are to be considered under the head Income from other sources only. If such an income is under any scheme formulated by the employer whether past or present for the direct benefit to any past or present employee, only then shall it be considered to be salary.

• Director's remuneration can be considered as salary if and only if there is a valid contract of employment between the company and the director. Salary of a partner in a firm cannot be taxed under this head. It is fully taxable under the head Income from Business & Profession.

In addition it includes the following allowances and perquisites (these provisions should be read with those under Income totally exempt from tax.

• House Rent Allowance - The least of the following is exempt from tax.

• Amount up to 40 % (50 % in the four major cities) of Salary, Dearness pay and commission put together.

• House Rent Allowance actually received from the employer.

• Excess of rent actually paid over 10 % of salary.

• Concessional accommodation – Valuation is to be made as if Rent-free accommodation is provided. Thereafter, the rent made shall be reduced from the taxable perquisite value.

• Entertainment Allowance - The rule for government and non-government employees is different and is summarised below.

• City Compensatory Allowance – It is fully taxable.

• Perquisite value of car, house, amenities like gas, electricity, water, Domestic and personal services, Children's education –

• Car for office and home use partly (where all the costs are borne by the employer)

1. When the H.P. rating is below 16 - Rs. 7200 + Rs. 3600 for driver if provided.
2. When the H.P. rating is above 16 - Rs. 9600 + Rs. 3600 for driver if provided.

• Car for home use only (where all the costs are borne by the employer or where running and maintenance costs are borne by the employee) – The perquisite value is the amount actually spent on maintenance and running, normal depreciation and drivers remuneration.

• Car for office and home use partly (where all the running and maintenance costs are borne by the employee ) –

1. When the H.P. rating is below 16 - Rs. 2400 + Rs. 3600 for driver if provided.
2. When the H.P. rating is above 16 - Rs. 3600 + Rs. 3600 for driver if provided.

• Motor Cycle, Scooter or other modes of conveyance

1. If only for home use – Amount actually spent on maintenance, running, normal depreciation and driver’s remuneration.
2. If for home and office use - A reasonable proportion of overall expense as estimated by the assessee and certified by employer

• Perquisite value of salary of Watchman, Sweeper, Gardener - The under-noted are the perquisite values stated under the Act ( for amenities provided by employer )

• Salary of servants where the assessee is getting rent-free accommodation owned by the employer.

1. For a Sweeper / Watchman / Gardener –

• If engaged by the Employer – Rs. 1440 p.a. or part thereof per person.
• If engaged by the Employee – Actual salary per person.

1. Any other servant – The Entire salary of such a servant is taxable.

• Salary of servants where assessee does not get rent free accommodation or employee owned accommodation. In such a case the entire salary of the servants is taxable. Also read Section 17(2)(iii) and 17(2)(iv) of the Income Tax act.

• Perquisite value of any facility granted such as medical, social etc. -

• Valuation of medical facilities - Medical expenses borne by employer up to a sum of Rs. 10000 in a year (as reimbursement against bills) is totally exempt from tax. Amount, in excess of this sum is fully taxable. Wherever, the employer has his own medical centre and medical facilities are provided, all amounts are exempt. For expenditure on treatment of any employee outside India, a sum of Rs. 200000 plus the cost of travel abroad of employee and family (includes spouse, children or relatives) or any other higher sum approved by the appropriate authority (RBI) is exempt totally from tax.

• Retirement receipts or benefits on Superannuating – See section 10 i.e. Incomes exempt from tax.

• Provident Fund on retirement - See section 10 i.e. Incomes exempt from tax.

• Leave Salary on retirement - This is exempt from tax only at the time of retirement. For Central / State government employees it is totally exempt without any pre-set limits on retirement from service (superannuation). For others employees it is the least of

• Cash equivalent of leave to one's credit.

• Eight (8) month's average salary.

• After 31/03/95 -Rs.79920, After 30/06/95 –Rs. 130320 & After 01/07/95 – Rs. 135360.

• Amount actually received.

• Gratuity on retirement - It is a benefit on retirement exempt with some limits. For most government employees any amount received is exempt excepting those who are within the purview of Payment of Gratuity Act, 1972 where the following rules shall apply which is the least of the following

• 15 days salary for each completed year of service or part in excess of six months. (Substitute 15 with 7 for establishments working on a seasonal basis)

• Rs. 100000 (Likely to be revised upwards soon)

• Amount actually received

For persons either not Government employees or covered by the Payment of Gratuity Act, 1972; an amount which is least of the following shall be exempted.

• Rs. 250000 (Likely to be revised upwards soon)

• Half months salary for each completed year of service

• Amount actually received

• Packing Allowances/ Service Honours - See section 10 i.e. Incomes exempt from tax.

• Leave Travel Allowance/ Home town Allowance- Any amount actually provided by the employer and actually spent on a journey once in two years (home town) and once in block period of four years (Within or Outside India). The fare utilised should not be in excess of what would be spent on travel by 2nd AC class on Indian Railways by the shortest route available. Excess of fare over and above 2nd AC class fare is fully taxable.

• Shares offered to employee by employer - The difference between the offered price and market value on the date of offer is a taxable perquisite.

• Any Other Allowance by whatever name called – Fully taxable.

• What are the deductions permissible from salary Income?

The following are the deductions that are permitted from salary income.

• Deductions on account of any sum, which is exempt under section 10 and included in the salary.

• Standard Deduction u/s 16(i) is 33.33% of Gross salary subject to a maximum of Rs. 20000.

• Entertainment Allowance allowable u/s 16(ii) (details given on page 8)

• Professional Tax u/s 16(iii) actually recovered by the employer during the year.

INCOME FROM HOUSE PROPERTY

• What are the items that constitute income from house property? What care should be taken before determining such income?

Income from House property includes the Annual rent received or receivable in respect of house property whether it is used as an office, shop, warehouse, godown, factory or residential house etc. It includes all such property let out on rent. The rental income may be termed as licence fee or Service charges or by whatever name called, but has to arise from the letting out of immovable property on hire.

The following points require specific attention before determining the income in this respect:

• The address, location and situation of house property.

• The title and mode of ownership.
• The dates of completion and occupation.

• Mode of occupancy whether self occupied, partly rented or totally rented out.

• What is the method of determining the rent?

The basis for determining the rental income is as follows.

• Step 1 – Determine the Net Annual Value of the property. The Net Annual Value is determined on the basis of:

1. General trends
2. Rent control Act in vogue.
3. Municipal valuation
4. Actual rent received in respect of one or more house property situated in areas where the assessee is gainfully employed but chooses to live in any other house.

• Step 2 – Determine the Net adjusted annual value.

This is determined by reducing the Net Annual Value by the Municipal Taxes actually paid in respect of property from, which rent is derived.

• What are the deductions available against rental income?

There are deductions in respect of one house u/s 23 and u/s 24 for all other cases.

Deductions under section 23 – The annual value of one self-occupied property is considered to be 'NIL'. For those claiming deductions under this section, a further deduction is available u/s 24(1)(vi) for the interest, if a loan has been taken against this property. Deductions in respect of repayment of principal are available under section 88. (Refer deductions under Chapter VIII also).

• What are the items that are classified as Profits and Gains of business or profession?

Net Profit as per Profit And Loss A/c or Excess of Income over expenditure (Losses are negative profits / shortage of Income). Since taxes are on gains and profits, a loss is a negative profit or negative gains. Salary, Bonus, Interest, Commission or remuneration from a partnership firm to a partner separately assessed to tax IS ALSO A SHARE OF PROFIT and is to be classified under this head of income.

• Can you indicate the items that are not allowed as deductions from Business or Professional Income?

These deductions are indicative and not exclusive.

• Item 1 - Amounts which are debited to the Profit and Loss Account but are not allowable as deductions.

• Personal expenditure i.e. medical expenses, drawings, appropriation of profits, expenses which are not incurred in relation to business activity or with third parties (not in the course of business).

• Expenses not necessary for pursuance of business i.e. donations, infructuous payments, purchase of non-business assets and depreciation therein.

• Expenses which are in excess of limits specified or laid down in the Income Tax Act

• Expenses which are prior period, of capital nature, of post and prepayment nature, illegal payments (kindly note that illegal expenses can be deducted against illegal incomes, if the latter is charged to tax). Immoral payments are tax deductible if necessary for conduct of business e.g. payment of tips, baksheesh, bonus etc.

• Expenses charged to business but not having been discharged within reasonable / specified time limits (that is before the due date of filing of return u/s 43 B) i.e. Sales tax, P.F., E.S.I., Excise, Expense credits etc. Statutory collections and payments such as Income Tax, Sales Tax, Excise, and Deposit of collections from employees towards provident fund etc. are also covered here.

• Item 2 - Amounts which are credited to Profit and Loss Account but are not admissible as receipts or to be considered under some other head of income.

• Credits of a personal nature

• Income from non-business activity

• Incomes which are post period or prior period (In those cases where the mercantile system of accounting is followed)

• Statutory collections like Sales tax, Income Tax, Excise, Provident Fund, and E.S.I. Contributions etc.

• Refunds of taxes paid in excess earlier.

• Profits / Losses of a registered partnership firm where the firm is separately assessed to tax and the assessee is a partner.

• Item 3 - Expenditures that are not debited to Profit and Loss Account but are allowable as deductions under the Act e.g. Fuel expenses on vehicle and depreciation if the same is used by the proprietor of a business.

• Item 4 - Incomes that are credited to Profit and Loss Account but are exempt under sections 10, 11, 12 and 13.

• Do accounts of all businesses and profession are required to be compulsorily audited under the tax laws or any other law?

Tax audit under the Income Tax law is compulsory in the following cases.

1. Where the turnover in business exceeds Rs.40 lakhs in 12 months or part thereof.
2. In the case of profession when the gross receipts are in excess of Rs.10 lakhs in 12 months or part thereof.
3. To claim deductions under certain provisions of the Income Tax Act, such as export sales and verification of expenditure. (See provisions under Chapter VI for more information)
4. Application of other laws may, however, require audit. We may note the following.

• Statutory Audit under Section 227(4A) and Cost Audit under section 209(1)(d) read with section 233B of the Companies Act, 1956.
• Audit of a co-operative society under the state / central co-operative society laws.
• Audit of trusts and associations for determining utilisation of grants-in aid under their respective laws.

• Additions / deletions as recommended in the Tax Audit Report should also be taken into consideration while computing business income.

• There are several limits for claiming deduction of expenses under the Income Tax Act? What are they?

• Item 1 - Remuneration permissible by a firm to its partners by way of Salary, Bonus or Commission other than by way of appropriation of profits or reimbursement of actual expenditure.

CAPITAL GAINS

• What are Capital Gains? What are the different types of Capital Gains? Briefly describe each type.

The difference in the sale or transfer value of a Capital asset as compared to its relative value on acquisition or purchase is termed as a Capital Gain.

Capital Gains are classified as Short-term Capital Gains or Long-term Capital Gains.

• Short Term Capital Gains - This construes the income being the difference on the sale of capital assets held for less than a period of 12 months for shares, debentures and some securities. For all other items of a capital nature but not in the nature of interest, commission or brokerage, the amount received or contracted to be received at a future date it is less than 36 months.

• Long Term Capital Gains – This constitutes the income being the difference on the sale of capital assets held for periods more than 12 months for shares, debentures and some securities. In respect of all other items of a capital nature but not in the nature of interest, commission or brokerage; the amount received or contracted to be received at a future date, provided the period is more than 36 months.

• What are items, which are exempted from levy of Capital Gains?

The following shall not be included for the purpose of levy of Capital Gains Tax.

1. Items that are not capital assets.
2. Any stock-in trade, consumable stores or raw materials held for the purpose of business or profession.
3. Personal effects i.e. movable property excluding jewellery.
4. Agricultural Land situated outside areas of the jurisdiction of municipality or cantonment board having population less than 10000 persons or in any other area specified by the Government.
5. 6.5% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or National Defence Gold Bonds, 1980
6. Special Bearer Bonds, 1991.

• What is the method of calculating Capital Gains? What are the exemptions or deductions available?

The method of calculating Capital Gains is simple. Disposal value less the following.

1. U/s 48(i) – Expenditure incurred in connection with transfer of capital asset.
2. U/s 48(ii) – Cost of acquisition of capital asset and any improvement thereto, duly indexed for current value.

In addition, the exemptions / deductions under the act are as under:

1. Exemption U/s 53 & 54 - Investment of consideration from sale proceeds in respect of one house in acquiring another house is fully exempt. Profit on sale of property used for residence (available only if assessee has one house) is exempted if it equals or exceeds the sum total of cost of constructing or purchasing a new house. New house must be purchased either one year prior to or two years after date of transfer. Construction to be done within three years of sale. (There will, however, be a restriction of three years on disposal of new assets acquired )
2. U/s 54 B - Capital gains on sale of agricultural land. Exemptions are similar to those under section 54 above. (There is a restriction of two years on disposal of new assets acquired )

1. U/s 54 D - Capital gains on compulsory acquisition of land and building. Exemptions are similar to those under section 54. (There is restriction of three years on disposal of new assets acquired )
2. U/s 54 EA & 54 EB - Capital gains on sale of capital assets. There is exemption if amount of total consideration is fully utilised for acquiring a new asset or a notified investment. If less than total consideration then capital gains is to be determined as a proportion of cost of asset acquired to total consideration that is, as shown below. Such acquisition of new asset or investment is to be made within six months of sale of old asset. (There is a restriction of three years on disposal of new assets acquired).
3. U/s 54 F - Capital gains on sale of certain capital assets not to be charged in case of investment in residential house. Time limits of construction or purchase U/s 54 shall apply. Mode of determining exemption is in the manner stated U/s 54 F (There is a restriction of three years on disposal of new assets acquired)
4. U/s 54 G - Capital gains on shifting of industrial undertaking from urban areas. Exemption is available if the proceeds are utilised for specified purposes either one year before or three years after the shifting. Exemption is also available in case of deposit in notified scheme before due date for filing income tax returns. Exemption is limited to amount actually utilised or deposited. (Restriction of three years on disposal of new assets acquired )

• What is the cost inflation index? What are the indices for each year?

The cost inflation index is with regard to 75% average rise in Consumer Price Index from the year 1981 as notified by the government each year. The indices help in deriving the current value of the asset being disposed. The methodology is to multiply the cost price of the asset with the indices available for the year of acquisition. The result will be the deduction permissible against indexed cost of capital asset. This helps to equate the acquisition values in terms of intrinsic value as influenced by inflation so that tax is not paid out of capital but only on value additions. For assets acquired prior to 1.4.81 the price as on that date should be determined by valuation and taken as the cost price before applying the indices.

• The figures in the last two columns provide the exact multiplicative factor if the assets subject to capital gains are sold in A. Y. 1997 - 98 and A. Y. 1998 - 99 respectively. This is based on indices that can be safely used with regard to Government of India Notification No. SO 595 (E) dated 5th August 1992 for determining the amount exempt from tax.

• Assets acquired prior to 1981 should be first valued at a price as in 1981 before applying the indexing factor.

• No indexing is required if assets purchased are sold within 12 months of purchase.

• Since the Govt. has used the wholesale Consumer Price, whereas an individual is subject to Retail prices, it is argued that this scheme is faulty. Besides, inflation during the year under review is not taken at all into consideration as indices relate to the year previous to the previous year.

Special tax rates apply to income from capital gains. After determining the net total income the amount of tax with capital gain and without capital gain should be worked out. Thereafter tax at the special rates should be worked out in respect of capital gains and added to the tax on income without capital gains. Rates are given elsewhere in this text. The tax liability will be determined after giving benefit of the rate slabs. Kindly note that for incomes on which surcharge is applicable the manner of calculation would be similar i.e. the tax rate on capital gains may be loaded with the surcharge applicable.

INCOME FROM OTHER SOURCES

• What is constituted as Income under this head?

Income from all other sources not covered in items above is covered under this head; i.e. Income from Salary, Income from House Property, Income from Business or Profession, Capital Gains are not to be taken under this head.

Items such as interest, commission, brokerage, royalty, copyright fees, L.I.C. pension, Family pension (given to spouse or dependants of deceased employees), Consultancy income of a casual nature, income subsidiary to a main source of income etc. of a definitive nature are covered under this head. Income of miscellaneous nature dependent upon chance or on indeterminate and unknown factors viz. lottery; gambling, disclosure under voluntary disclosure scheme, etc. are covered under this head of income.

• What are the deductions permitted under this head of income?

Expenditure in earning such income or deductions within certain specified limits

1. U/s 57(i) – Any sum paid by way of commission or remuneration for the purpose of realising dividend / interest on securities.
2. U/s 57(ia) – Contributions to any provident fund or superannuation fund or funds under ESI Act or any employee welfare fund provided the same is credited before the due date.
3. U/s 57(ii) – Repairs, insurance and depreciation of building, plant and machinery and furniture.
4. U/s 57(iia) - 33.33% of family pension subject to a maximum of Rs. 15000 (Although standard deduction is higher, the government has not maintained parity)
5. U/s 57(iii) - Deduct all expenses such as interest paid, commission, bank charges, depreciation (including depreciation on investment), copyright write-offs as actually incurred for earning or deriving such income e.g. cost of lottery ticket from lottery income, depreciation on computer used for earning consultancy income of a casual nature, bank charges on remitting interest income by demand draft, notional loss due to inability to earn income to an extent which it could be earned etc.

1. U/s 58(1)(a)(i) – Personal Expenses
2. U/s 58(1)(a)(ii) – Interest chargeable to tax that is payable to tax outside India on which no tax has been deducted at source.
3. U/s 58(1)(a)(iii) – Salary payable outside India on which no tax is paid or deducted at source.
4. U/s 58(1A) – Wealth Tax
5. U/s 58(2) – Expenditure referred to U/s 40A(see under Income from Business or Profession)
6. U/s 58(4) – Expenditure in connection with winnings from lotteries, crossword puzzles, races, games, gambling or betting.

• What are the deductions that are available to various assessees under the Income Tax Act?

U/s 80CCC (only individuals)

Scheme: Contribution in notified pension funds such as LIC’s subject to certain conditions.

Rebate: 100% of such investment up to Rs. 10000 per annum.

U/s 80D (only for individuals, HUF and AOP in Goa, Daman & Diu)

Scheme: Expenditure paid by A/c payee cheque / draft to any specified insurance company as Mediclaim premium for self, spouse, minor children, dependent parents and children.

Rebate: 100% of such investment up to Rs.10000 on medical insurance.

U/s 80DD (only individuals / HUF)

Scheme: Expenditure on medical treatment of handicapped dependants if the dependant suffers from a notified permanent physical disability. A registered medical practitioner of a notified government hospital should certify this.

Rebate: Rs.15000 irrespective of actual expenditure, which may be more or less. (Includes food, clothing, medical aid incidental to treatment of handicapped dependent)

U/s 80 DDA (only individuals / HUF)

Scheme: Amount deposited under approved scheme of LIC or UTI for maintenance of notified permanently handicapped dependent.

Rebate: 100% up to Rs. 20000

U/s 80 DDB (only resident individuals / resident HUF)

Scheme: Expenses on medical treatment of specified diseases, conditions and ailments. These may be curable or persistent.

Rebate: 100% up to Rs. 15000

U/s 80 E (only individuals)

Scheme: Amount paid out of taxable income for repayment of loan / interest from financial institution / charitable institution for pursuing higher studies.

Rebate: Amount actually paid up to Rs. 25000 per annum for a period of 8 years

U/s 80G (option for all)

Scheme: Contribution / Donation to certain notified funds or institutions as stipulated by the government / appropriate authority.

Rebate: 100% or 50% of donation / contribution as specified in exemption order is exempt from tax. Deductions are limited to 10 % of Gross total income.

U/s 80GG (only individuals – discontinued from 31.03.97)

Scheme: Deduction for the benefit of self-employed persons who have no house property and have rented out a house or a salaried person with no house and not receiving any house rent allowance

Rebate: Subject to maximum of Rs. 24000 p.a. and least of 25% of Gross total income or excess paid over 10% of total income

U/s 80GGA (option for all)

Scheme: Deduction in respect of certain donations / contributions for scientific research or rural development to a notified institution u/s 35 etc.

Rebate: 100% of such expenditure

U/s 80HH (option for those having business income)

Scheme: Deduction in respect of profits and gains from newly set up industrial undertakings or hotel in backward areas (80HH & 80HHA deductions cannot be availed simultaneously)

Rebate: 20% of such profits for ten years from date of setting up / subject to certification

U/s 80 HHA (option for those having business income)

Scheme: Deduction in respect of profits and gains from newly set up SSI units in rural / notified / backward areas employing not more than 10 / 20 persons with / without the use of power respectively. Further, they should be engaged in manufacture or industrial activity and where the capital employed is less than Rs. 35 lakh after 18.03.85 / Rs. 20 lakhs after 01.08.80 / Rs. 10 lakhs before 31.07.80 (Revision of the limit to Rs. 300 lakhs in view of section 80 IA is under consideration)

Rebate: 20% of such profits for ten years from date of setting up / subject to audit and certification

U/s 80 HHB (option for those having business income)

Scheme: Deduction in respect of profits and gains from projects outside India where the amounts are received in convertible foreign exchange / in soft currency from countries where bilateral agreement exists. And provided 50% of such sums are brought into our country within six months of receipt or extended period as approved by the Chief Commissioner. The moneys shall be utilised for project work and not distributed as dividend.

Rebate: 50% of such profits eligible or amount credited to the Foreign Projects Reserve account or amount brought into India, whichever is less / subject to audit and certification

U/s 80 HHC (option for those having business income)

Scheme: Tax incentive for export of any commodity outside India if amounts are received in foreign exchange / in soft currency from countries where bilateral agreement exists provided such sums are brought into the country.

Rebate: 100% of (Profits of the business x Export turnover / Total turnover) + (90% of Export incentive not being profit on sale of import licences acquired from any other person x Export turnover / Total turnover). This is subject to audit and certification

U/s 80 HHD (option for those having business income)

Scheme: Deduction in respect of earnings in convertible foreign exchange in India from foreign nationals and other earnings in Indian currency attributable to foreign nationals

Rebate: 50% of profits on account of earnings + 100% of amount set aside from profits as a reserve to be utilised for furthering such business activity / subject to certification and audit

U/s 80 HHE (only against specific business incomes)

Scheme: Deduction in respect of profits from export of computer software and where payment is received in foreign exchange in India within six months of receipt

Rebate: 100% of (profits of business x Export Turnover / Total turnover). This is subject to certification and audit

U/s 80 I (only against specific business incomes available to those assessees who have started claiming the benefit prior to 1.4.91 or otherwise eligible to claim under this section before introduction of section 80 IA)

Scheme: Deduction in respect of profits and gains of newly set up industrial undertakings in India where at least 80% of the machinery is new if purchased in India and if engaged in manufacture employs 10 / 20 with / without the aid of power respectively and in case of a hotel the paid-up capital is not less than Rs.5 lakhs (with respective limits for SSI as stated in section 80 HHA)

Rebate: For shipping business 20% of profits for 5 years from set up date. Other activity 25% of profits for 8 (10) years from set up. For Co-operative society 20% (25%) for 10 (12) years from set up. For company (30%) for (10) years from set up

(Kindly note that figures in brackets indicate changes applicable for business set up after 01.04.90). This is subject to certification and audit

U/s 80 IA (only against specific business incomes)

Scheme: Deduction in respect of profits and gains with applicable conditions U/s 80 I but applicable to businesses established after 01.04.91 the only change being that an SSI unit be considered as one with capital less than Rs. 60 lakhs (being revised to Rs. 300 lakhs)

Rebate: This is as per the table below. Deduction subject to audit.

U/s 80 JJ (only against specific business incomes up to 31.03.97)

Scheme: Deduction in respect of profits and gains from business of poultry farming.

Rebate: 33.33 % of profits / subject to certification and audit

U/s 80 L (available only to individuals and HUF / AOP in Goa, Daman & Diu)

Scheme: Deduction for certain types of interest and investment incomes excluding tax-free dividends as per exhaustive list. This list includes mostly interest from government agencies and undertakings, including banks, UTI, Mutual Funds and post office run schemes but excludes almost all forms of debenture interest / interest on bonds and interest from non-governmental agencies and undertakings etc. It includes interest from NDS.

Rebate: 100 % of eligible amount up to Rs. 12000 for all taxable sources plus Rs. 3000 from taxable interest on units of UTI / Mutual Funds / Government securities.

U/s 80 M (available only to companies up to 31.03.97)

Scheme: This is a deduction without pre-set limits and only for dividends that are received by one company from another in respect of investments continued to be held including for the purpose of trading in them, excluding dividend on units under UTI, 1964 scheme.

Rebate: 100% of such dividend received provided the amount of dividend so distributed by this company as pay-out is more or equal to that received by the company claiming the deduction. If shortfall exists between receipt and outflow such difference in amount is taxable. Further 60% of such dividend in respect of financial and banking companies the above ruling of dividend payouts being applicable.

U/s 80 O (option for all)

Scheme: Deduction in respect of royalties from certain foreign Government or enterprises for use of patent, invention, design, registered trademark, technical or professional services. The receipt should be in foreign exchange, is brought within six months of receipt in India and retained in India

Rebate: 50% of such receipt, or brought into India in convertible Foreign exchange. This is subject to certification and audit

U/s 80 P (only for co-operative societies)

Scheme: Deduction against incomes / profits of co-operative societies.

Rebate: Deduction up to Rs. 20000 (flat amount) / Rs. 40000 for consumer co-operative societies (flat amount). In addition receipts by way of interest / dividends from investments in other co-operative societies and the amount of income derived from letting of godowns and warehouses for storage, processing or facilitating the marketing of products, is totally exempt from tax. Besides, the entire profits from supply of milk, seeds, fruits, vegetable i.e. agricultural produce generated by the members of the society shall be fully exempt from tax.

U/s 80 Q (option for all – discontinued after 31.03.97)

Scheme: Deduction in respect of income from business of publication of books

Rebate: 20 % of profits for 5 years from A.Y. 1992-93 after deducting benefits under section 80 HH(and all sub-sections), 80I or 80IA and 80P

U/s 80 QQA (option for authors of text books – discontinued after 31.03.97)

Scheme: Deduction in respect of professional income of authors of text books in Indian languages

Rebate: 25 % of profits for 5 years from A.Y. 1992-93

U/s 80 R (option for authors, professors, teachers or research workers)

Scheme: Deduction in respect of remuneration from certain foreign sources in the case of professors, teachers, etc.

Rebate: 75 % of such income actually brought into India in foreign exchange. Subject to audit.

U/s 80 RR (option for authors, playwright, artist, musician, actor, sportsman)

Scheme: Deduction in respect of professional income from foreign sources

Rebate: 75 % of such income actually brought into India in Foreign Exchange. Subject to audit.

U/s 80 RRA (option for all assessees)

Scheme: Deduction in respect of remuneration received for services rendered outside India of a highly technical / professional nature

Rebate: 75 % of such income actually brought into India in convertible foreign exchange. Subject to audit.

U/s 80 U (available to handicapped individual tax payers)

Scheme: Available to totally blind, physically handicapped resident persons, mentally retarded persons and persons with certain other symptoms of permanent physical disability. Certain prerequisites listed under section 80 DD have to be complied under this section too.

Rebate: Deduction of a flat sum of Rs. 40000

DEDUCTIONS AVAILABLE UNDER CHAPTER VII & VIII

• What are the rebates from the tax payable?

The following is a brief list of rebates from tax payable under Chapter VII and VIII.

U/s 86 (This is not a general rebate)

Scheme: Deduction is available under this section only in respect to avoid double tax liability on an assessee on incomes derived from Share of profits in an unregistered firm or association of persons or a Society or any other body which has already been subject to tax

Rebate: Deduction will be available after the above is calculated and tax liability determined according to provisions contained U/s 67A.

U/s 88 (Available to individuals and HUF)

Scheme: Deduction is available against investment in the following subject to the following conditions

1. Premium on L.I.C. policies (including pension plans like Jeevan Dhara, Jeevan Akshay) of self, spouse, minor children, adult children and married daughter to the extent premium is not in excess of 10% of policy value.
2. Contribution to a recognised or statutory provident fund not in excess of 24% of salary / Contribution to a 15 year Public Provident Fund / Employees contribution in case of any other fund.
3. Contribution to an approved superannuation fund / pension fund etc.
4. Sums deposited in a 10 year or 15 year account under the Post Office Savings Bank Rules,1959
5. Subscription to a notified government security
6. Any subscription to National Savings Certificates and interest thereupon to the extent of accumulated accrued interest for the year.
7. Contribution under ULIP or notified plan of LIC mutual fund
8. Subscription to Home Loan Account Scheme of National Housing Bank
9. Payments towards cost of purchase / construction of a new residential house property up to Rs.10000. This is provided construction is completed and payment is made as an instalment or repayment to a house financing body, development authority, housing board, construction agency, or co-operative society where the assessee has his house and is a member. Further; repayments to the assessees’ employer or a public company providing housing finance are also eligible.
10. Contribution under National savings Scheme as modified.
11. Contribution under notified schemes of mutual funds or UTI up to Rs.10000.

Repayments only in respect of stamp duty, registration fees and transfer fees and construction of initial house is allowable as deduction. Cost of land, right in land, addition, renovation or where a property is let out, unrelated costs, incidental expenditure etc. should not be admissible.

Rebate: Deduction is available at 20% (25% for certain specified professionals) of investment up to Rs. 60000 on payment basis up to a maximum of Rs. 12000 (Rs. 14000 for certain specified professionals). Additional deduction at the rates for Rs. 10000 invested in shares, debentures or units of the infrastructure sector are allowed. Hence, the maximum deduction can be Rs. 14000 (Rs. 17500 in the case of specified professionals). It may be noted that investments claimed as deduction are subject to holding time limits.

U/s 88 B (Only for individual senior citizens)

Scheme: This section envisages a deduction to those tax-paying citizens of our country who have completed 65 years of age as at the commencement of the assessment year.

Rebate: Deduction is available up to a maximum of 40% of tax liability before giving effect to rebates u/s 88, u/s 88B or u/s 89(1) or Rs. 10000, whichever is less.

U/s 89 (1) (Available to individuals receiving advance / arrears of salary income)

Scheme: Under this section it is hoped to grant relief in respect of certain types of income which is either received in advance or in arrears by the salary income group, by way of advance receipt or delayed receipt of any income chargeable under the head income from salaries. The idea involves in following the rules of the mercantile system of accounting for determining tax payments.

How to determine relief –

Rebate: Amount of tax paid in excess on the basis of the workings stated above.

U/s 90 & 91 (Available to all assessees)

Scheme: Deduction under this section is available in respect of incomes, which have been taxed already under any other law in force in any other country. This is at a rate being the difference of taxes of that foreign country and as per Indian tax laws; only taxes being payable on the amount of difference being the excess as per Indian law. This section applies only when there is no double taxation agreement with India by a particular foreign country.

Rebate: Rebate is allowable on production of satisfactory evidence of payment of taxes in the foreign country. Also refer Double Taxation Avoidance Agreements (DTAA) for the provisions in relation to a particular country. Since DTAA is outside the scope of this text, we are not covering the same.

THE TAX RATES AND CALCULATION OF TAX

• What are the various rates of tax under the Income Tax Act?

35% of profits.

30 % of the profits

35% for domestic companies

50% for royalty incomes of a foreign company for agreements entered after 31/03/61 but before 01/04/76

48% for other incomes of a foreign company.

Tax for block period for all assessees – 60%

Tax for all assessees – 40%

Note:

CALCULATION OF INTEREST PAYABLE ON DEFAULTS

• What are the various interest payments required to be made by the assessee?

Notes:

RULES REGARDING DEPRECIATION WITH RATES

• The assets should be "Put to use". Mere acquisition is not sufficient to claim depreciation.

• Depreciation Rates should be applied on the written down value of any asset.

• Assets should be owned and not leased, hired, or loaned for use from its owner. (See answer to question that follows).

• In case of books for use by professionals (regarded as plant), 100% depreciation can be claimed irrespective of the specific or general rates.

• On the sale of any asset, the consideration should be reduced from the total block of such assets (such assets which are of the same category and having same depreciation rate)

• For assets acquired and put to use on or during 1st April to 30th September, the rate of depreciation is for the entire year. For the period between 1st October to 31st March, the rate of depreciation is for half a year.

• What is the concept of Block of Assets? What is its significance?

The term Block of Assets refers to a group of assets falling within a class of assets, being building, machinery, furniture or plant in respect of which the same rate of depreciation is admissible. This concept is applicable on depreciable business assets. Whenever, the asset is acquired the value shall be added to the opening balance of the respective block. Further on disposal of the asset the net consideration will be deducted from the balance value of the block. Only when the balance in the block is insufficient to absorb the deduction or there are no assets left in the block, the residual amount will be charged to revenue. Thus the block consisting of assets can exist even if the book value is zero. However, depreciation on a particular asset will be at the applicable rates and asset-wise records will still be required to be maintained to facilitate other provisions under the law.

• What are Sale and Lease Back transactions? What is the tax treatment?

Transactions involving the sale of assets to another (usually a financier) and leasing or hiring them back on hire charges or lease rent are a Sale and lease back transaction. This kind of a transaction was primarily entered into by companies / entities to (a) Ease their financial status by increasing liquidity and bring in more funds (b) To save on tax by increasing revenue expenses when the block of assets had virtually little to offer by way of depreciation.

Keeping in view the fact that the financier (being the owner) used to claim depreciation on the asset at the acquisition price, the Income Tax Act was amended. Now in case of such transactions, depreciation would be allowed to the buyer at the written down value to the seller (being treated as actual cost) and not the acquisition price.

AGRICULTURAL INCOME

• What is regarded as Agricultural Income under the Income Tax Act?

The following items shall be regarded as agricultural income.

• Any rent or revenue derived from land, which is situated in India and used for agricultural purposes.
• Any income derived from such land by agricultural operations including processing of the agricultural produce, raised or received as rent in kind so as to render it fit for the market, or sale of such produce.
• Incomes from farm house or building in the immediate vicinity of land and used as dwelling house, store house, or other out-building. This is provided the land is assessed to land revenue or a local rate and situated outside urban areas having population in excess of 10000 persons or within 8 kms from a municipality or cantonment board.

• What is the effect of agricultural income on income tax?

Agriculture income is exempt from the levy of Income Tax. Primarily this is because agriculture is a state subject in the Indian Constitution and Indian State legislatures recover taxes in various other forms from agriculturists. However, some types of agricultural income are subject to Income Tax namely,

1. Dividend received from company engaged in growing leaves and tea is fully taxable.
2. In respect of the business of growing tealeaves and its processing, 60% of such income will be considered as tax – free agricultural income, while the balance will be subject to tax. Salary received by persons employed by firms (including partner) in such business will also be treated accordingly.
3. In cases where the assessee (Individual and HUF) have taxable income in excess of Rs. 40000 and agriculture income in excess of Rs. 600, the scheme of partially integrated taxation will be applied.

• In such a case we should aggregate the taxable income from all sources and agriculture income and calculate tax on the same as if the entire income is taxable. However, the agriculture income component will only increase the first slab of income and be subject to 0% tax. Thus if the total income was Rs. 41000 and agriculture income Rs. 20000 the combined total would be Rs. 61000. The tax for income above Rs. 60000 would be Rs. 200 and will be the tax due on this income.
• Deductions under Chapter VIII are available. Losses in agricultural activity can be set-off against agricultural income in succeeding years.
• When the assessees’ taxable income is negative, the net agricultural income will deem to be Rs. Nil.

SPECIAL PROVISIONS

• We hear a lot about MAT? What is it all about?

Minimum Alternative Tax (MAT) is a provision applicable to companies under section 115JA. A similar provision existed in the form of section 115J some years ago in the Income Tax Act. Basically the birth of this provision is caused by the fact that by adopting varying accounting practices in the Companies Act, companies used to show a rosy picture in their Annual Reports and pay out large sums as dividend to shareholders. However, when it came to the tax laws the accounting methodology in tune with the Income Tax Act would be adopted wherein the taxable profits would be negligible or even a loss. The provision is simply as follows.

• 30% of Book Profit as per the annual report (after adjusting certain permissible deductions) should be taken. Tax at the prevailing rate should be worked out and compared with those under normal circumstances. The higher of the two shall be the tax payable.
• The excess paid on account of MAT as compared to normal provisions can be carried forward for 5 years. This can be set-off against the excess of tax determined as per normal provisions as compared to that under MAT, if any in subsequent years.

• What is the tax on distributed profits or dividend tax?

This is a tax at the rate of 10% of the dividend distributed by a domestic company to its shareholders. This is applicable on all forms and types of dividends whether interim or otherwise. This tax is not deductible from the company’s profits. Any dividend distributed in this form is exempt from further levy of tax in the hands of the recipient.

• What are the provisions regarding purchase / transfer of immovable property?

To prevent transfers of property with registered consideration being less than actual certain provisions have been made within the tax laws. This is in order to curb evasion of various taxes. The salient details are as follows:

• For property situated in notified area and specified monetary limits, an agreement to sell must be entered into at least 4 months prior to actual transfer.
• A statement in Form no. 37-I should be filed within 15 days from the date of this agreement with the Income Tax authorities.
• If no objection is received within 3 months of filing the form by the department, the transfer can be proceeded with. Otherwise, the department has the right in case of objection to acquire the same at the price stipulated in the agreement, on behalf of the government. Such an order is passed only when there is significant and material under-valuation.

• It seems that there are some special provisions to determine Income irrespective of Book results. What are they? Is such a system obligatory?

The assessee is open to accept the above method or adopt the actual book results. If the book results are higher than what is derived under these provisions no further information will have to be furnished. However, if the book results are worse off then adequate proofs have to be produced on assessment. The assessment would be completed only after scrutiny.

• Are any methods of accounting recognised under the Act?

The Income Tax Act provides only two methods of accounting u/s 145. Namely,

• Cash Basis – When transactions of income and expenditure are maintained on the basis of their actual receipt and payment.
• Mercantile Basis – Also termed as the accrual basis, this system involves accounting of incomes and expenses on their crystallisation as a asset or liability respectively, whether they be suitably discharged or not. Company assessees may follow only this system, whereas some allowances may be tax deductible only on payment basis. (e.g. Section 43B)

Adoption of a mixed system of accounting is prohibited. The accounting policies are also to be clearly mentioned if it deviates from the norms specified under the Act.

• Since the valuation of opening / closing stocks may alter the book results, is there any fixed basis for the valuation of stocks?

Stocks have to be valued at cost price or market price, whichever is less. The Act does not prescribe any particular method of valuation of stock, but states that the method of valuation should be consistent from year to year. Any change in the method of valuation and the effect on the book results thereupon should be mentioned along with the business results.

• What are incomes from undisclosed sources? Is the source of income important?

It is necessary for the source of the income to be known in order to test its validity and appropriateness for taxing the same. It also helps in detecting partial concealment and diversion of income. The following are treated as income from undisclosed sources.

1. U/s 68 – Cash credit – Amounts credited in books of accounts for which assessee is not in a position to offer further information or details.
2. U/s 69 – Unexplained Investments – Investments made for which the source of funds are not known.
3. U/s 69A – Unexplained money, etc. – Possession of money, bullion, jewellery, valuables etc., the source for acquisition of which is not available.
4. U/s 69B – Investments etc. not fully disclosed in the books of accounts – Investments made for values which are recorded at lower / higher amounts in the books of accounts and the difference is not suitably explained by the assessee.
5. U/s 69C – Unexplained Expenditure – Any expenditure for the incidence of which suitable source of funds cannot be attributed.
6. U/s 69D – Amount borrowed or repaid on Hundi otherwise than by account payee cheque / draft on a banking account.

• Which are the assessees who have to maintain books of accounts? What are the "Books" that are required to be maintained?

Section 44AA of the Income Tax Act specifies the specified professions and non-specified professions for the maintenance of books of accounts.

Specified professions – Engaged in legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, film artist, company secretary or others as notified.

Requirement: The gross receipts exceed Rs. 60000 p.a. (Rs. 80000 in the case of medical practitioners dispensing medicines) in any one of the three years immediately preceding the previous year. In case of new business, if the limit is likely to be surpassed for the year.

Non-specified professions – Any other profession or business other than the specified profession.

Requirement: If their income is likely to cross Rs. 40000 p.a. and turnover / gross receipts are likely to exceed Rs. 500000 in any one of the three years immediately preceding the previous year. In case of new business, if the limit is likely to be surpassed for the year.

However, if any part of the assessees’ income is subject to:

1. Verification or audit for claiming any rebate under the tax laws or
2. The assessee is covered under any of the notified businesses for which special method of determining profits is specified.

In such cases, it will be necessary to maintain proper books of accounts.

The books of accounts and documents prescribed are:

1. A cash book
2. A Journal
3. A Ledger
4. Carbon Copies of bills in excess of Rs. 25 serially numbered
5. Original bills in respect of expenditure exceeding Rs. 50.
6. Medical practitioners have to additionally maintain a daily case register and an inventory of medicines and consumables in stock.

SOME DETAILS WHICH ARE REQUIRED FOR FILING A RETURN OF INCOME

• What are the items or information that one should keep in mind while filing an Income Tax Return?

1. The assessees full name: Say if M. P. Shah it should be in expanded form i.e. Mahendra Pratap Shah. If J. V. Raman it should be expanded i.e. Raman Venkata Jamshedpur, that is, the First name, Middle name and Last name. If any part of the name is not used the same may be skipped. Any aliases or former names should also be made available, if required.
2. The assessees father’s name in full as in the case of the assessee.
3. The Assessment year.
4. The Previous year.
5. The complete residential and office address with pin code and telephone numbers.
6. Permanent Account Number (PAN) or General Index Register Number (GIR no.)
7. Status of the Assessee i.e. Individual / Firm / Hindu Undivided Family / Company / Association Of Persons / Co-operative Society / Trust / Local Authority / Body of Individuals / Legal Representative / Guardian
8. Date of Birth of assessee / Date of incorporation in case of company or firm.
9. Income Tax office and Ward where the assessee is assessed.
10. Due date of filing the return.
11. The actual date of filing the return.
12. The return forms to be used are as per the chart given below and the next page.

ITS 1 - For companies excluding those claiming exemption u/s 11.

ITS 2 - For all assessees having business or professional income.

ITS 2A - For all assessees having salary income less than Rs. 120000 per annum / excluding business income / carried forward or brought forward losses. (Optional – Assessee may use ITS 3 alternatively)

ITS 2B – Not in use now.

ITS 2C – For assesses not having taxable income but fulfilling two of the specific criteria viz. ownership / lease of a motor vehicle, occupation / ownership of prescribed house, Ownership of Telephone, Foreign travel.

ITS 3 - For all assessees not having business or professional income

ITS 3A - For charitable and religious trusts on non commercial basis, Company U/s 11, Non-profit bodies and associations, Local authority.

ITS 4A - For all individual assessees coming under the presumptive tax scheme (Now scrapped).

Notes: for assessees who have not been allotted a permanent account number please fill up form no. 49 A in duplicate and submit to income tax authorities along with your passport size photograph in duplicate.

• How should the computation of total income look like?

There is no legal requirement or specific format for preparing the computation of Income. However, it is prudent to have a systematic format that is concise and yet details the various additions and deductions. One such format is shown below. You can have any other format which suits your convenience, enhances clarity and is objective.

ABOUT ASSESSMENTS

• What are the time limits for filing the return of Income?

• The law further provides that u/s 139(4) a return of income may be filed within the following limits.

1. Within such time specified under a notice issued u/s 142(1),
2. Before the completion of assessment, or
3. Within one year from the end of the relevant assessment year.

• A revised return u/s 139(5) can be filed in the following circumstances.

1. Provided a return has been filed u/s 139(1) or in pursuance of a notice u/s 142.
2. This return is filed to correct any omission or wrong statement.
3. This return should be filed within one year from the assessment year or before completion of assessment.

• What are the various modes of assessment under the Income Tax Act?

• What are the options open to the assessee if there is an error in the return filed or the order of assessment is not to the assessees’ satisfaction? What is the time limit?

1. If there an error is detected in the return of Income, the first option open to the assessee is to file a revised return. This can be filed anytime before one year from the close of the assessment or before completion of assessment, whichever is earlier.
2. If there is any mistake apparent from the records, the assessee can move an application within a period of 4 years from the date of the assessment order u/s 154 for rectification of the mistake. Alternatively, even the department can pass an order on its own accord in case of patently obvious mistakes.
3. The assessee can appeal before the appellate authorities for an order passed u/s 143(3) and u/s 144, intimation u/s 143(1) and u/s 143(1B), u/s 154 and u/s 155 etc. This appeal should be filed within a period of 30 days of (a) Service of intimation / order, or (b) Date of payment of tax under appeal. An appeal can be filed even beyond the time limit if the reasons for delay are justifiable.

• What are penalties for the different defaults committed by the Assessee?

• What are the offences and prosecutions described under the Act?