EXEMPT INCOME

AGRICULTURE INCOME

As per section 10(1) Income is exempt from Tax if its from agriculture land in India.

As per section 2(1A), Agriculture land means-

Note 1: Rule 7- Sale of agriculture Produce.

Sale in Raw Form – Total agriculture income is exempt under such case.

Sale after optional process-

Agriculture Income (exempt)

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PGBP Income (Taxable)

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SPECIAL RULES FOR TEA, COFFEE & RUBBER

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Example: Mr. Amar grows sugarcane and uses the same for the purpose of manufacturing in his factory. 40% of sugarcane produce is sold for Rs. 12 Lakhs, and the cost of cultivation of such sugarcane is Rs. 6 Lakhs. The cost of cultivation of the balance sugarcane (60%) is Rs. 15 Lakhs and the market value of the same is Rs. 25 Lakhs. After incurring Rs. 1.5 lakhs in the manufacturing process on the balance sugarcane, the sugar was sold for Rs. 30 lakhs.

Calculate Amar’s business income and agriculture income.

Answer:

COMPUTATION OF BUSINESS AND AGRICULTURE INCOME OF MR. AMAR

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PARTIAL INTEGRATION IN CASE OF AGRICULTURE INCOME

Agriculture income is exempt from tax but for computation of tax it shall be considered if the following conditions are satisfied: –

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COMPUTATION OF TAX LIABILITY

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SECTION 14A

For computing total income under the five heads of income, No deduction shall be allowed in respect of expenditure incurred by the assessee in relation to exempt income.

Manner of computation of disallowance: Rule 8D

Rule 8D: Expenditure relating to Exempt Income

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Notes:

Kribhco (2012) (Delhi): Section 14A is applicable only if an income is exempt as per Chapter III of the Income Tax Act 1961.

No Disallowance can be made u/s 14A in respect of income included in the total income in respect of which deduction is allowable u/s 80C to 80U.

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Example: Mr. Kumar invested in securities & expenditure related to such investment is Rs. 2,00,000. Out of above securities, income from some securities is exempt & from other securities it is taxable. Expenditure directly attributed to exempt securities is Rs. 30,000. Investment value in securities from which income is exempt: Rs. 6,00,000 (Monthly Average of opening and closing & after that annual average). Calculate the expenses allowed to exempt income?

Answer: Expenditure related to Exempt Income is as Follows: –

Conclusion: So, in this question Rs. 1,10,000 expenditure is allowed as deduction.

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FOREIGN TAX CREDIT & CONVERSION RULES

WHAT IS FOREIGN TAX CREDIT?

Foreign tax credit (FTC) is tax paid in foreign country on income derived in foreign country by an assessee. It can also be tax deducted at source in the foreign country on the source of income generated by a resident in foreign country. Such amount of tax which is paid/ deducted in foreign country can be claimed as credit against the tax liability in the country of resident. (Section 90, 90A, 91).

IN WHICH YEAR THE CREDIT IS AVAILABLE?

The credit of FTC is available in the year in which the income corresponding to such tax has been offered to tax in India. In case the income corresponding to such tax is offered to tax in India in multiple years, the FTC shall be claimed across these years in the same proportion in which the income is offered to tax.

AGAINST WHICH LIABILITY CREDIT CAN BE CLAIMED?

The FTC can be claimed against the amount of Income Tax, Surcharge and cess liability. It, however, cannot be claimed against any liability on account of interest, fee or penalty payable under the Income Tax Act.

If foreign tax paid is disputed in any manner, the same will be allowed in the year of offering income only if the assessee within 6 months from the end of month in which dispute is settled, furnishes evidence of settlement of dispute, payment of disputed tax.

WHAT IS THE MECHANISM TO COMPUTE THE AMOUNT OF FTC AVAILABLE?

The FTC shall be computed for each source of income arising from each country. The credit allowable shall be lower of tax payable under the Income Tax Act on such income and actual foreign tax paid on such income. In case where the foreign tax paid exceeds the amount of tax payable according to the DTAA, such excess shall be ignored.

WHAT DOCUMENTS ARE REQUIRED TO CLAIM FTC?

A statement of computation of Income of that country outside India and foreign tax deducted or paid on such income in Form No. 67;

A certificate or statement specifying the Nature of Income and the manner of tax deducted therefrom or paid by the assessee from-

In such case, the assessee also need to provide Acknowledgement of online payment of tax or challan for payment of tax where the payment has been made by the assessee

WHETHER THE FTC CAN BE CLAIMED IF TAX IS PAYABLE UNDER MAT OR AMT?

Yes, FTC shall be allowed against tax payable under MAT/ AMT in the same manner as it is allowable under normal provisions of the Income Tax Act.

However, where the FTC available against tax payable under MAT/ AMT exceeds the tax credit available under normal provisions of the Act, the excess shall be ignored.

WHAT CONVERSION RATE SHOULD BE ADOPTED?

For the purpose of converting foreign currency into Indian Rupees, TTBR of SBI on the last day of the previous month in which the tax has been paid or deducted shall be adopted.

WHAT IS THE TIMELINE TO SUBMIT THE CLAIM OF FTC?

Form No. 67 and a certificate or statement as referred above shall be furnished online up to due date of u/s 139(1).

Provided that where the return has been furnished u/s 139(8A), the statement in Form No. 67 and the certificate or the statement to the extent it relates to the income included in the updated return, shall be furnished on or before the date on which such return is furnished.

CONVERSION OF FOREIGN INCOME INTO INDIAN CURRENCY

Rule 115: Rate of exchange for conversion into rupees of income earned in foreign currency shall be the TTBR as on the specified date.

Specified date means: –

Note: Provided that the specified date, in respect of income referred to in (a) to (f) payable in foreign currency and from which tax has been deducted at source under rule 26, shall be the date on which the tax was required to be deducted under TDS chapter.

Rule 26- Rate of exchange for the purpose of TDS at source on income payable in foreign currency

For the purpose of deduction of tax at source on any income payable in foreign currency, the rate of exchange for the calculating of the value in rupees of such income payable –

Shall be the TTBR of such currency as on the date on which the tax is required to be deducted at source under the TDS chapter by the person responsible for paying such income.

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TONNAGE TAXATION

If any Indian Company (has place of effective management in India) engaged in business of operating ships can compute its income on the basis of tonnage tax scheme if company owning at least one qualifying ship.

QUALIFYING COMPANY (SECTION 115VC)

QUALIFYING SHIPS (SECTION 115VD)

EXCLUSION FROM THE DEFINITION OF QUALIFYING SHIPS

MANNER OF C0OMPUTATION OF INCOME UNDER TONNAGE TAX SCHEME (SECTION 115VE)

COMPUTATION OF TONNAGE INCOME – (SECTION 115VG)

TRANSFER OF PROFIT TO TONNAGE TAX RESERVE ACCOUNT (SECTION 115VT)

An amount not less than 20% (percent) of the book profit derived from the business of qualifying ships shall be credited to the Tonnage Tax Reserve Account.

Further, please note that, the amount credited to the Tonnage Tax Reserve Account shall be utilized by the company before the expiry of a period of eight years next following the previous year in which the amount was credited: –

MINIMUM TRAINING REQUIREMENT FOR TONNAGE TAX COMPANY (SECTION 115VU)

A tonnage tax company shall comply with the minimum training requirement specified by the Director General of Shipping and notified in the official Gazette by the Central Government.

AVOIDANCE OF TAX (SECTION 115VZB)

EXCLUSION FROM TONNAGE SCHEME (SECTION 115VZC)

FEW OTHER POINTS

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EQUALISATION LEVY

SECTION 163: EXTENT, COMMENCEMENT AND APPLICATION

This chapter extends to the whole of India except the state of Jammu & Kashmir.

Note: Provided that the consideration received or receivable for specified services and for e-commerce supply or services shall not include the consideration, which are taxable as royalty or FTS in India under the Income Tax Act, read with the arrangement notified by the CG u/s 90/90A.

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SECTION 165: CHARGE OF EQUALISATION LEVY ON SPECIFIED SERVICE

Equalisation Levy @ 6% applicable if payment for specified service (ads) received/ receivable by Non – resident from: –

Notes:

SECTION 165A: CHARGE OF EQUALISATION LEVY ON E-COMMERCE SUPPLY OR SERVICES

Equalisation Levy @ 2% applicable of the consideration received or receivable by an e-commerce operator from e-commerce supply or services made or provided of facilitated by it: –

Equalisation levy not applicable: –

*Specified Circumstances means: –

Consideration received or receivable from e-commerce supply or services shall include: –

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SECTION 166: COLLECTION AND RECOVERY OF EQUALISATION LEVY ON SPECIFIED SERVICES

Every Resident person carrying on Business or profession or a NR having P.E. in India shall deduct the equalisation levy u/s 165 from the amount paid/ payable to NR @ 6%. If aggregate amount of consideration for specified service is more than Rs. 1,00,000 in P.Y.

Notes:

SECTION 166A: COLLECTION AND RECOVERY OF EQUALISATION LEVY ON E-COMMERCE SUPPLY AND SERVICE

Equalisation levy u/s 165A, shall be paid by every e-commerce operator to the Central Government for the quarter of the F.Y ending within the following time limit:

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SECTION 171: PENALTY FOR FAILURE TO DEDUCT OR PAY EQUALISATION LEVY

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SECTION 167: FURNISHING OF STATEMENT

DOUBLE TAXATION RELIEF (DTAA)

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Double Taxation means the same income is getting taxed twice in hands of the assessee. Any country taxes income on the basis of two rules i.e. Residence Rule & Source Rule. Double taxation is possible when assessee is Resident of one country and derives income from another country.

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Suppose Mr. Kamal is Resident of India and deriving income from U.S, then India will tax such income on the basis of Residence Rule and U.S will tax such income on the basis of Source Rule.

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There are two types of Double taxation relief:

Under Tax exemption method, income is taxed in only source country and exempted in the residency country. Under Tax credit method Income is taxable in both countries in accordance with their respective tax laws read with double taxation avoidance agreement. The country of residence of tax payer, allows him credit for the tax charged thereon in the country of source. India follows credit method in majority of its DTAAs.

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SECTION 90: AGREEMENT WITH FOREIGN COUNTRIES (DTAA):

Central Government, may enter into agreements with Governments of foreign countries or specified territory outside India:

Notes:

However, the assessee may not be required to provide the information or any part thereof, if the information or any part thereof, as the case may be, is already contained in the TRC.

Section 91: DOUBLE TAXATION RELIEF IF THERE IS NO DTAA

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Amount of Relief:

Step 1: Compute Net Taxable Income (Indian plus foreign income).

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Step 2: Find out Gross Tax (before claiming TDS/ TCS, MAT/ AMT credit, Advance tax but after adding surcharge & HEC).

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Step 3: Find out “Average rate of tax” on NTI.

Average rate of tax = (Gross Tax * 100)/NTI.

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Step 4: Find out rate at which tax paid/ deducted in foreign country

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Step 5: Find out lower rate from step 3 & 4

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Step 6: Relief u/s 91 = Foreign income * rate in step 5

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TAXATION OF BUSINESS PROCESS OUTSOURCING (BPO) UNITS IN INDIA (CBDT CIRCULAR NO. 5/2004)

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GENERAL ANTI-AVOIDANCE RULES (GAAR)

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The General Anti Avoidance Rule (GAAR) in India aims to stop businesses and individuals from finding ways to pay less tax by exploiting loopholes or aggressive tax avoidance strategies. The article will explore the GAAR meaning and discover its provisions and applicability.

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SECTION 95: APPLICABILITY OF GAAR

GAAR provides that an agreement entered into by an assessee may be declared to an impermissible avoidance agreement (IIA) and the consequences in relation to tax arising there from may be determined as the provisions of this chapter.

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The section starts with a non obstante clause which means, if there is a conflict with provisions in other sections, then this section shall prevail over other conflicting provisions.

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SECTION 96: IMPERMISSIBLE AVOIDANCE AGREEMENT

Impermissible avoidance agreement means an arrangement which satisfies two conditions:

1. Main purpose/ one of the main purposes of which is to obtain a tax benefit; and

2. It:

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BASIC NOTES:

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SEARCH & SEIZURE

WHO CAN AUTHORIZE SEARCH (ISSUE SEARCH WARRANT)

According to Section 132(1) of Income Tax Act, the

May authorize:

To conduct an Income Tax Raid.

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WHEN SEARCH CAN BE AUTHORIZED

If Income Tax authority has reason to believe that:

Note: However, the reason to believe, as recorded by the Income Tax Authority, shall not be disclosed to any person or any authority or the Appellate Tribunal (ITAT).

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POWER OF AUTHORIZED PERSON IN COURSE OF SEARCH

Notes:

1. Deemed/ constructive seizure: where it is not possible/ practical to take physical possession of any asset due to volume, weight, nature etc. then authorized officer may serve an order on the owner of the person who is in immediate possession thereof, that he shall not remove/ deal with/ part with such asset without the approval of Authorized officer.

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2. Prohibitory order/ order of restraint: where it is not practical to take physical possession of any Books of Accounts or other assets for reason other than mentioned in Note-1 above, then authorized officer may serve an order on the owner of the person who is in immediate possession that he shall not remove/ deal with/ part with such asset without approval of Authorized officer. This order is valid for maximum 60 days.

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3. Presumption (Assumption) under Search: Where any Books of Accounts other documents, money, bullion, jewellery etc. found in possession of any person, it may be presumed: –

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4. Section 132A: Reacquisition: Where a search has already been conducted by any Authority under any other law e.g. GST, CBI, Election commission etc. or search was conducted by Income Tax Authority but Books of Accounts or assets with any other authority then the authorized officer shall require such other authority (FEMA/CBI) to deliver such books of accounts, assets seized, as early as possible.

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5. Section 132(9A): Where the authorized officer has no jurisdiction over the person searched by him, the books of accounts or any money, bullion, jewellery etc. shall be handed over by authorized officer to the Assessing Officer having jurisdiction over such other person within period of 60 days from the date on which search was completed.

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6. Section 132(9B) Provisional Attachment: During the course of search/ within 60 days from the date of conclusion of search, the search party, may, provisionally attach any property belonging to assessee. However, before doing so,

Provisional attachment so made shall be operational for 6 months, after which it shall be automatically vacated (Section 132(9C)).

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7. Section 132(9D) Valuation Officer: During the course of search/ within 60 days of conclusion of search the authorized officer, may make a reference to Valuation Officer or any other person/ entity/ registered valuer approved by Principal Chief Commissioner of Income Tax, Chief Commissioner of Income Tax or Principal Director General of Income Tax or Director General of Income Tax, Valuation officer or any other person/ entity/ registered valuer shall estimate the Fair Market Value (FMV) of the property. Report shall be submitted in 60 days of receipt of such reference.

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8. Conclusion of Search or Requisition

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PENALTIES AND PROSECUTION UNDER INCOME TAX ACT

PENALTIES UNDER INCOME TAX

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PROSECUTION UNDER INCOME TAX

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DEEMED INCOME (SECTION 68 TO 69D)

SECTION 68: CASH CREDIT

Where any sum is found credited in the books of the assessee and the assessee offers no explanation about the nature and source or the explanation offered is not satisfactory in the opinion of the Assessing Officer, the sum so credited may be treated as the income of the assessee of the Previous Year.

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However, where the sum so credited consists of loan or borrowing or any such amount, by whatever name called, any explanation offered by the assessee shall not be deemed to be satisfactory, if, the person in whose name such credit is recorded also offers no explanation about the nature and source or explanation not satisfactory.

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Further, any explanation offered by a closely held company in respect of any sum credited as share application money, share capital, share premium or any such amount, in the a/c’s of such company shall be deemed to be not satisfactory, if, the resident person, in whose name such credit is recorded in the books of such company also not explains about the nature and source of sum or explanation is not satisfactory.

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These additional conditions would not apply if the person, in whose name the sum is recorded, is a venture capital fund or venture capital company registered with SEBI.

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NOTE: Income mentioned as above u/s 68 will be taxable @ 60% (+25% Surcharge + 4% HEC i.e. 78%).

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SECTION 69: UNEXPLAINED INVESTMENT

Where in the Previous Year, the assessee has made investments which are not recorded in the Books of Accounts and the asseesee offers no explanation about the nature and the source of investments or explanation is not satisfactory in the opinion of the Assessing Officer, the value of the investments are taxed as deemed income of the assessee of that Previous Year.

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NOTE: Income mentioned as above u/s 69 will be taxable @ 60% (+25% Surcharge + 4% HEC i.e. 78%).

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SECTION 69A: UNEXPLAINED MONEY, ASSETS ETC.

Where in any Previous Year, the assessee is found to be the owner of any money, bullion, jewellery or other valuable article and the same is not recorded in the Books of Accounts and the assessee offers no explanation about the nature and source of acquisition of such money, bullion, jewellery etc. or the explanation is not satisfactory in the opinion of the Assessing Officer, the money and the value of bullion, Jewellery etc. may be deemed to be the income of the assessee of that Previous Year.

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NOTE: Income mentioned as above u/s 69A will be taxable @ 60% (+25% Surcharge + 4% HEC i.e. 78%).

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SECTION 69B: AMOUNT OF INVESTMENT, OTHER ASSETS ETC. NOT FULLY DISCLOSED IN THE BOOKS OF ACCOUNTS

Where in any Previous Year, the assessee has made investments or is found to be the owner of any bullion, jewellery or other valuable articles and the Assessing Officer finds that the amount spent on making such investments or in acquiring such articles exceeds the amount recorded in the Books of Accounts by the assessee and he offers no explanation for the differences or the explanation is unsatisfactory in the opinion of the Assessing Officer, such excess may be deemed income of the assessee of that Previous Year.

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NOTE: Income mentioned as above u/s 69B will be taxable @ 60% (+25% Surcharge + 4% HEC i.e. 78%).

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Example: Suppose a taxpayer purchases a property worth Rs. 50 lakhs, but only shows an investment of Rs. 20 lakhs in the books of accounts. In such a case, the remaining Rs. 30 lakhs could be treated as deemed income under Section 69 of the income tax act if the assessee is not able to explain the source of income for remaining Rs. 30 lakhs or the Assessing Officer founds the explanation not satisfactory.

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SECTION 69C: UNEXPLAINED EXPENDITURE

Where in any Previous Year, an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or the explanation is unsatisfactory in the opinion of the Assessing Officer, then the Assessing Officer can treat such expenditure as the income of the assessee for such Previous Year. Such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as deduction under any head of income.

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NOTE: Income mentioned as above u/s 69C will be taxable @ 60% (+25% Surcharge + 4% HEC i.e. 78%).

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SECTION 69D: AMOUNT BORROWED OR REPAID ON HUNDI

Where any amount is borrowed on a hundi or any amount due thereon including interest on such loan is repaid other than through an account payee cheque drawn on a bank, the amount so borrowed or repaid shall be deemed to be the income of the person borrowing or repaying for that Previous Year in which the amount was borrowed or repaid, as the case may be.

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However, where any amount borrowed on a hundi has been deemed to be the income of any person, he will not be again liable to be assessed in respect of such amount on repayment of such amount. The amount repaid shall also include interest paid on the amount borrowed.

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NOTE: If amount is borrowed or repaid through other financial institutions then this section cannot be invoked.

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NOTE: Income mentioned as above u/s 69C will be taxable @ 60% (+25% Surcharge + 4% HEC i.e. 78%).

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269ST OF INCOME TAX ACT

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WHAT IS SECTION 269ST?

Any person should not receive an amount of Rs. 2,00,000 or more except by specified means:

Notes:

SPECIFIED MODES OF TRANSACTION

As per income tax rules, the specified modes to do transactions as per Section 269ST are as follows:

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EXCEPTION TO SECTION 269ST:

Section 269ST is not applicable in the following cases:

Notification No. 28 & 57/2017 (exempt transaction from 269ST)

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PENALTY U/S 271DA:

If assessee fails to follow Section 269ST of the Income Tax Act, then penalty u/s 271DA will be levied @ 100% of such receipt. It shall be imposed by Joint Commissioner.

However, no penalty shall be levied if that person proves that there were good & sufficient reasons for the contravention.

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EXAMPLES:

Example 1: Mr. Hari buys gold chain worth Rs. 2 lakhs and pays the amount by cash to Mr. Rahul on a single day in 4 equal installments of Rs. 50,000 each, does this amount to violation of Section 269ST?

Ans: As Mr. Rahul has accepted the payments in cash worth Rs. 2,00,000 from a single person in a single day. Hence, this amounts to violation of Section 269ST and Mr. Rahul will be liable to pay penalty of Rs. 2,00,000 as per Section 271DA.

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Example 2: Mr. Kejriwal goes through a surgery and the hospital charges him a bill of Rs. 4 lakhs. Kejriwal clears the bill in 4 installments of Rs. 1 lakh each on four different dates. Hence, the cash receipts got by hospitals are less than Rs. 2 lakhs and have been received on different dates. Whether the transactions violate 269ST?

Ans: Yes, Hospital has to pay the penalty because, they received the payments with respect to single bill/ transaction as spitting of payments over several days is prohibited. Hence, hospital has violated the provision of Section 269ST and as result hospital is liable to pay a penalty of Rs. 4 lakhs under Section 271DA.

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NOTE:

If a person has done work of different nature in a marriage of his customer, say, given hall on rent for marriage reception, given tent house services, done decoration, and has issued three different bills of Rs. 1.5 lakhs each for each separate service totaling to Rs. 4.5 lakhs, then he can only receive less than Rs. 2 lakhs from his customer in cash, made in respect of all the 3 bills/ transactions. If entire Rs 4.5 lakhs are taken in cash or any other way other than the specified means stated above then even though the limit of per transaction and also limit per day per entity is not crossed, he shall be liable to pay penalty as per Section 271DA i.e. 100% of the amount involved and since all the transactions are related with the single occasion of a marriage, then the total limit of less than Rs. 2 lakhs will be a consolidated limit for all the related transactions.

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DIFFERENCE BETWEEN 269SS AND 269ST?

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