INCOME TAX ACT BY C A M A N I S H S O M A N I B. Com, FCA B A H E T I & S O M A N I Chartered Accountants www.bandsindia.com

basic info BASIC INFORMATION: Income Tax Act classifies Income into following Heads: Salary House Property Income Capital Gain Business Income Income from Other Sources

BASIC INFORMATION:

Income Tax Act classifies Income into following

Heads:

Salary

House Property Income

Capital Gain

Business Income

Income from Other Sources

key info KEY INFORMATION: Income from Salary Key Points: In certain cases, an employee can claim both HRA as well as Interest on Housing Loan. Income from House Property Key Points: If interest paid for property given on rent is less than taxable rent (after standard deduction – 30%), such loss can be set off against income from other heads including Income from Salary. Income from Capital Gains Key Points: Surplus/Deficit from Derivative Contracts is non-speculative.

Key info CAPITAL ASSETS: From 01-04-2008, personal effects would not include: Archaeological collections Drawings Paintings Sculptures Any other work of Art Thus, now any surplus received from sale of these articles would be liable to tax under the head Capital Gain.

CAPITAL ASSETS:

From 01-04-2008, personal effects would not

include:

Archaeological collections

Drawings

Paintings

Sculptures

Any other work of Art

Thus, now any surplus received from sale of these

articles would be liable to tax under the head Capital

Gain.

key info KEY INFORMATION:– SECTION 80C Following amounts claimed as deduction u/s 80C are included in Income of the assessee: Stamp Duty, Registration Charges, Principal repayment amount, if the property in respect of which these claims were made is transferred before the expiry of 05 years from the end of financial year in which possession is obtained. Insurance amounts paid in respect of single premium policy if the policy is terminated within 02 years from the date of commencement of policy. Insurance amounts paid in respect of insurance policy if the policy is terminated before premiums are paid for 02 years. ULIPs are terminated before contributions in respect of such participations have been paid for 05 years.

KEY INFORMATION:– SECTION 80C

Following amounts claimed as deduction u/s 80C are

included in Income of the assessee:

Stamp Duty, Registration Charges, Principal repayment amount, if the property in respect of which these claims were made is transferred before the expiry of 05 years from the end of financial year in which possession is obtained.

Insurance amounts paid in respect of single premium policy if the policy is terminated within 02 years from the date of commencement of policy.

Insurance amounts paid in respect of insurance policy if the policy is terminated before premiums are paid for 02 years.

ULIPs are terminated before contributions in respect of such participations have been paid for 05 years.

COMPLIANCES UNDER INCOME TAX ACT Following are the compliances under Income Tax Act Deduction of Tax from Certain Payments Monthly payment of TDS Monthly filing of Form 17 Quarterly filing of TDS details Annual filing of TDS returns (Currently Quarterly) Quarterly payment of Advance Tax and FBT Annual filing of Income Tax and FBT Return Payment of Dividend Distribution Tax Compliances in relation to Assessment Proceedings

Following are the compliances under Income Tax Act

Deduction of Tax from Certain Payments

Monthly payment of TDS

Monthly filing of Form 17

Quarterly filing of TDS details

Annual filing of TDS returns (Currently Quarterly)

Quarterly payment of Advance Tax and FBT

Annual filing of Income Tax and FBT Return

Payment of Dividend Distribution Tax

Compliances in relation to Assessment Proceedings

important due dates ADVANCE INCOME TAX/FBT DUE DATES 15th Mar 100% 100% 4 Final Installment 15th Dec 60% 75% 3 Third Installment 15th Sept 30% 45% 2 Second Installment 15th June Nil 15% 1 First Installment Others Companies Due Date AGGREGATE TAX PAYABLE UP TO DUE DATE ADVANCE AND FRINGE BENEFITS TAX PAYMENTS

ADVANCE INCOME TAX/FBT DUE DATES

Sec 10aa Special Provisions in respect of New Units in SEZ Setting up of Unit in an approved SEZ on or after 01/04/2006 Deduction under the Income Tax Act: 50% of profits of the undertaking (by way of transfer of transfer of profits to SEZ Reinvestment Reserve Account to be later used for acquisition of plant and machinery) For next 05 years 50% of profits of the undertaking (derived from exports) For next 05 years 100% of profits of the undertaking (derived from exports For first 05 years

Setting up of Unit in an approved SEZ on or after 01/04/2006

Deduction under the Income Tax Act:

Section 14A Section 14A - No Deduction is allowed in respect of expenditure in relation to the income which does not form part of Total Income. Rule 8D – Assessing Officer has power to compute the amount of non-admissible amount. The amount would be aggregate of: Expenditure directly attributable Proportionate Interest not attributable to any particular activity 0.5% of the Avg. value of Investment

Section 14A -

No Deduction is allowed in respect of expenditure in relation to the income which does not form part of Total Income.

Rule 8D – Assessing Officer has power to compute the amount of non-admissible amount. The amount would be aggregate of:

Expenditure directly attributable

Proportionate Interest not attributable to any particular activity

0.5% of the Avg. value of Investment

Sec 32 SPECIAL PROVISIONS UNDER INCOME TAX ACT Sec 32 - Depreciation : Additional Depreciation New machinery or plant (excluding ships and aircrafts) acquired and installed after March 31, 2005 by an assessee engaged in the business of manufacture or production of any article or thing is entitled to additional depreciation of 20%. However no such additional deduction will be allowed in respect of — Machinery or plant used by any other person in India or outside India before its installation. Machinery or plant installed in any office premises or any residential accommodation, including a guest house.

Sec 32 - Depreciation :

Additional Depreciation

New machinery or plant (excluding ships and aircrafts) acquired and installed after March 31, 2005 by an assessee engaged in the business of manufacture or production of any article or thing is entitled to additional depreciation of 20%.

However no such additional deduction will be

allowed in respect of —

Machinery or plant used by any other person in India or outside India before its installation.

Machinery or plant installed in any office premises or any residential accommodation, including a guest house.

Sec 32 SPECIAL PROVISIONS UNDER INCOME TAX ACT Any office appliances or road transport vehicles. Any machinery or plant, the whole of actual cost of which is allowed as deduction in computing income chargeable under the head profit and gain of business or profession of any one previous year. It should be noted that Additional Depreciation is allowed only in the year in which the Plant and Machinery is first put to use.

Any office appliances or road transport vehicles.

Any machinery or plant, the whole of actual cost of which is allowed as deduction in computing income chargeable under the head profit and gain of business or profession of any one previous year.

It should be noted that Additional Depreciation is allowed only in the year in which the Plant and Machinery is first put to use.

Sec 32 SPECIAL PROVISIONS UNDER INCOME TAX ACT Accelerated Depreciation: New commercial vehicle which is acquired on or after the 1st day of January, 2009 but before the 30th day of September, 2009 and is put to use before the 30th day of September, 2009 for the purposes of business or profession , will get 50% depreciation. It should be noted that Commercial has no relevance to business of hiring of vehicles. “Commercial Vehicle” is a term used from Motor Vehicles Act. Commercial vehicle” means “heavy goods vehicle” (12000 kg), “heavy passenger motor vehicle” (12000 kg), “light motor vehicle” (6000 kg), “medium goods vehicle” and “medium passenger motor vehicle” but does not include - “maxi-cab”, “motor-cab”, “tractor ” and “road-roller”.

Accelerated Depreciation:

New commercial vehicle which is acquired on or after the 1st day of January, 2009 but before the 30th day of September, 2009 and is put to use before the 30th day of September, 2009 for the purposes of business or profession , will get 50% depreciation.

It should be noted that Commercial has no relevance to business of hiring of vehicles. “Commercial Vehicle” is a term used from Motor Vehicles Act.

Commercial vehicle” means “heavy goods vehicle” (12000 kg), “heavy passenger motor vehicle” (12000 kg), “light motor vehicle” (6000 kg), “medium goods vehicle” and “medium passenger motor vehicle” but does not include - “maxi-cab”, “motor-cab”, “tractor ” and “road-roller”.

Sec 40A(3) Payment in excess of Rs. 20,000/- by Cash Sec 40A(3) – Cash Payments From 01-04-2009, even aggregate payments made during a day in excess of Rs. 20,000/- would be disallowed. The payment made is deemed to be income Cash payment made against any liability of previous year in excess of Rs. 20,000/- No Deduction (Earlier 20% Disallowance ) Expenditure incurred in excess of Rs. 20,000/- by Cash

Sec 40A(3) – Cash Payments

Sec 41 (1) & Sec 59 Section 41(1) and Sec 59 : Where an allowance or deduction has been made in the assessment year in respect of loss, expenditure or trading liability incurred by the assessee and subsequently during any previous year any benefit is derived by the assessee, then that benefit is chargeable to Income Tax as income from business or profession. Also, if any amount is received in excess of WDV of Block of Asset, then so much of the excess as does not exceed the difference between the actual cost and the written down value shall be chargeable to income-tax as income of the business.

Sec 41(1) & Sec 59 Where an asset representing expenditure of a capital nature on scientific research (Sec 35) is sold, the amount received to an extent of deduction claimed is charged as business Income. Bad Debts recovered are business income. However, remission of Capital Liability is not business income.

80IC Deduction of Income of undertakings from Special Category States Sec 80IC – Deduction of Income of Undertakings from Special Category States: Business of Manufacturing of Articles except as specified in XIII Schedule Commences production between the period – 07/01/ 2003 and 01/04/ 2012 Notified areas of the State of Himachal Pradesh or the State of Uttaranchal Deduction under the Income Tax Act: For first 05 years 100% of profits of the undertaking For next 05 years 30% of profits of the undertaking

Sec 80IC – Deduction of Income of Undertakings from Special Category States:

Business of Manufacturing of Articles except as specified in XIII Schedule

Commences production between the period – 07/01/ 2003 and 01/04/ 2012

Notified areas of the State of Himachal Pradesh or the State of Uttaranchal

Deduction under the Income Tax Act:

For first 05 years 100% of profits of the undertaking

For next 05 years 30% of profits of the undertaking

Sec 145A Valuation of Closing Stock Sec 145A – Valuation of Closing Stock As per Accounting Standards - Para 6 and 7 of AS-2 " Valuation on Inventories" implies that "Cost of Purchases" includes only those taxes, which are not subsequently recoverable by the enterprise from the taxing authorities." As per Income Tax (Section 145A) – Notwithstanding anything to the contrary contained in section 145 , the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head “Profits and gains of business or profession” shall be— (a) in accordance with the method of accounting regularly employed by the assessee; and

Sec 145A Valuation of Closing Stock (b) further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation Reporting Requirements Effect needs to be quantified in the Tax Audit Report. Mum ITAT – Dy. CIT v/s Hitech Plast Containers Pvt. Ltd., it was held that irrespective of the method followed by the assessee for accounting excise duty, adjustments as specified u/s 145A are to be made.

ISSUE MSMED Act, 2006: Interest inadmissible under Sec 23 of MEMED Act, 2006: Notwithstanding anything contained in the Income-tax Act, 1961, the amount of interest payable or paid by any buyer, under or in accordance with the provisions of this Act, shall not, for the purposes of computation of income under the Income-tax Act, 1961, be allowed as deduction. Due Date of Payment Due date as agreed by the buyer and seller in writing If not agreed in writing, due date is 15 days from the date of acceptance In no case, the period agreed in writing shall exceed 45 days

Interest inadmissible under Sec 23 of MEMED

Act, 2006:

Notwithstanding anything contained in the Income-tax Act, 1961, the amount of interest payable or paid by any buyer, under or in accordance with the provisions of this Act, shall not, for the purposes of computation of income under the Income-tax Act, 1961, be allowed as deduction.

Due Date of Payment

Due date as agreed by the buyer and seller in writing

If not agreed in writing, due date is 15 days from the date of acceptance

In no case, the period agreed in writing shall exceed 45 days

ISSUE MSMED Act, 2006: Interest Payable Compound interest with monthly rests at 03 times of the Bank Rate. Disclosure Requirements Principal & Interest Due (Separately) to supplier at year end Amount of Interest Paid u/s 16 & amounts paid beyond appointed date. Amount of interest due and payable for the period of delay in making payment. Amount of interest accrued and remaining unpaid. Amount of further interest remaining due and payable even in the succeeding years, until such date when the interest dues as above are actually paid.

Interest Payable

Compound interest with monthly rests at 03 times of the Bank Rate.

Disclosure Requirements

Principal & Interest Due (Separately) to supplier at year end

Amount of Interest Paid u/s 16 & amounts paid beyond appointed date.

Amount of interest due and payable for the period of delay in making payment.

Amount of interest accrued and remaining unpaid.

Amount of further interest remaining due and payable even in the succeeding years, until such date when the interest dues as above are actually paid.

Issue – Warranty Claims Provision For Warranty Claims: In a recent judgment by Supreme Court of India in “Rotork Controls India Pvt. Ltd., it was held that: For a provision to qualify for recognition there must be a present obligation arising from past events, settlement of which is expected to result in an outflow of resources and in respect of which a reliable estimate of amount of obligation is possible. Thus, if historical trend from the data maintained by the assessee suggests that defects exist in some of the items manufactured and sold, then provision made for warranty in respect of goods sold during the year would be entitled as allowable expenditure.

Provision For Warranty Claims:

In a recent judgment by Supreme Court of India in “Rotork Controls India Pvt. Ltd., it was held that:

For a provision to qualify for recognition there must be a present obligation arising from past events, settlement of which is expected to result in an outflow of resources and in respect of which a reliable estimate of amount of obligation is possible. Thus, if historical trend from the data maintained by the assessee suggests that defects exist in some of the items manufactured and sold, then provision made for warranty in respect of goods sold during the year would be entitled as allowable expenditure.

Issue SEC -43 B CERTAIN DEDUCTIONS – PAYMENT BASIS: G Ltd borrowed a certain sum of money from a public financial institution for 10 years. In the first year itself, it restructured the loan by paying a sum of Rs. 8 Crs. to the institution. The Company claimed the amount as revenue expenditure. AO is of the view that the amount has to be amortized over the period of 10 years. Sec 37(1) and Sec 43B / Delhi High Court Commissioner of Income Tax v/s Gujarat Guardian Ltd.

CERTAIN DEDUCTIONS – PAYMENT BASIS:

G Ltd borrowed a certain sum of money from a public financial institution for 10 years. In the first year itself, it restructured the loan by paying a sum of Rs. 8 Crs. to the institution. The Company claimed the amount as revenue expenditure. AO is of the view that the amount has to be amortized over the period of 10 years.

Sec 37(1) and Sec 43B / Delhi High Court Commissioner of Income Tax v/s Gujarat Guardian Ltd.

New procedure forex payments New Procedure for Remittance w.e.f. 01-07- 2009 (Notification No. 30/2009): Current Procedure: Instructions are given to Bank for payment along with a Certificate obtained from Chartered Accountant regarding applicability of TDS and payment thereof. New Procedure: Certificate to be obtained from Chartered Accountant in Form 15CB Form 15 CA to be filled in and upload on designated Income Tax site for which an Online Acknowledgement would be generated Instructions to be given to Bank along with the Acknowledgement.

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