All About DIRECT TAXATION

INCOME TAX LAW

Income Tax Law comprises of:

1. Income Tax Act, 1961
2. Income Tax Rules, 1962
3. Notifications  & Circulars issued by CBDT
4. Annual Finance Acts (contains rates of income tax); andJudicial pronouncements by Supreme Court and High Courts.

The Income-Tax Act, 1961 empowers the CBDT to formulate rules for implementing the provisions of the Act.

Income Tax Law - Interpretation

Inclusive definition: ‘Previous Year’ definition u/s 3 uses the word ‘means’ . Here the definition is restrictive, exhaustive and inclusive;

Extensive definition: ‘Income’  definition u/s 2(24) uses the word ‘includes’ that means it covers extensively;

Proviso is a clause which is appended to a provision making some condition, stipulation, exception or limitation;

Explanations are added to a provision to make clear the implication of the provision;

Schedules are appended to a statute and form part of it. The division of law into sections and schedules is a mere matter of convenience. Inconsistency between them, the sections shall prevail.

Circulars, Notifications have considered by courts unless they do not go against the spirit of statute under which they are issued;

Tax Law – Prospective v. Retrospective

1. Article 20 of the Constitution guarantees rights against ex-post facto laws;
2. Except levy of a penalty, it does not prohibit a civil liability retrospectively 
3. Whether a new tax can be levied with retrospective effect? 
4. No. However, clarificatory amendments in law can be made with retrospective effect, which have this effect of additional tax liability.

Retrospective Amendment  Example

Service tax was levied on 'commercial training or coaching' in 2003. This covered courses run by 'commercial training or coaching institutes' except courses leading to a recognised degree or certificate. Many decisions and orders of the Tribunal set aside demands of service tax on non-recognised courses offered by registered charitable societies, on the ground that there was no profit motive and therefore these were not 'commercial'. The law was amended retrospectively in 2011 to say that any course run for a fee is considered commercial. This brought all the disputed cases under the purview of the tax.

Incidence of Tax

Residential status of companies
Indian company: Always resident in India
Foreign company: Residential status of a foreign company depends upon place of effective management (POEM) say, where meetings of Board of Directors are held of its business affairs.

Residency in India and Tax incidence - Illustration.

Illustration 1

ABC Ltd. is a company registered in India under the Companies Act, 2013. All its business activities are conducted outside India during relevant previous year 2014-15. Further, all the meetings of the Board of directors are held outside India. Determine the residential status of ABC Ltd. for the AY 2015-16.

Solution: ABC Ltd. is an Indian company as it is registered under the Companies Act, 2013 and is therefore Resident in India as Indian companies are always resident in India.

Illustration 2

ABC Inc. a company incorporated in USA, is carrying out certain business activities in India. During the financial year 2014-15 all its decisions are taken in India except one decision which has been taken outside India. Determine the residential status of ABC Inc. for the AY 2015-16.

Solution: ABC Inc. is resident in India as key management and commercial decisions made in India.

As per amendment to Section 6 in 2015

INCOME

Income cannot be taxed twice i.e. if charged to tax accrual basis it cannot taxed again on receipt basis;

Income should be real and not fictional:

1. A person cannot make a profit of trading with himself; 
2. Similarly income does not arise in transaction between head office and branch office, even if goods are invoiced at a price higher than the cost price; 
3. Likewise, income does not accrue or arise at the time of revaluation of assets.

There is no deferred income concept in income tax Act. [Sterling Holiday India Ltd. v CIT (2008)111 ITD 116 (Chennai)];

Revenue Receipt v Capital Receipt: A revenue receipt is taxable as income, unless it expressly exempt under the Act. On the other hand, a capital receipt is generally exempt from tax, unless it is expressly taxable under section 45;

Death compensation: In Geeta Jethani & others V. Airport Authority of India & others, it was held by The National Consumer Disputes Redressal Commission (NCDRC), that the compensation is by way of damages. The damages paid for the death of a person cannot be equated with income as such. Consequently, the opposite party (AAI) is directed to pay the TDS amount along with interest of 9 per cent per annum," the bench presided by Justice J M Malik said.;

Depreciation in Income tax (Rates, WDV Method Etc.,)

Click here for read Depreciation Rates and Methods

RECENT GLOBAL TAX TRENDS

1.Wold is moving to BEPS:

Alignment of taxable income to economic activities and value creation, rather than about increasing overall tax burden;

2.New emerging tax trends:

New Indirect Transfer Tax Rules in China; 
Diverted Profits Tax in the UK 
There is a tax on the money which is kept outside the US;

3.Countries are targeting to increase their share of taxes.

RECENT DOMESTIC TAX TRENDS

Attempt to transform: business friendly & stable tax regime;

Widening of tax base:

• tax collection / GDP ratio from 10.8 (2012) to 17.7; 
• Move to unearth the black money: held overseas as well as domestic;

1. Govt. not to contest HC orders favouring Vodafone and Shell;
2. Team strengthening of  AAR, DRP and ITAT
3. Focus on job creation & entrepreneurship [Sec. 80JJAA];
4. Road map to low corporate taxes from 30% - 25% in 4 years;
5. The exemptions and deductions will be phased out;
6. GAAR deferred to align with BEPS project;
7. Investment from 01-04-2017 covered under GAAR;
8. Non-applicability of MAT on FIIs w.e.f. 01-04-2015;
9. MAT on FIIs: FM stated to amend IT law retrospectively i.e. pre-April 2015;
10. Clarification on Indirect transfers through Expl. 6 & 7 to section 9(1) [circular 4/2015].

Challenges

1. Only 14 APAs signed vs. 400+ applications filed till July 2015; 
2. Disposal of tax disputes worth ₹4.50 lakh crores

NEW LAW TO DEAL WITH BLACK MONEY

1. Black Money (Undisclosed Foreign Income And Assets) And Imposition Of Tax Act, 2015 
2. Undisclosed foreign income & asset taxable @30% u/s 3; 
3. Will full evasion of tax: rigorous imprisonment up to 10 years, a penalty @300% of tax & no Settlement Commission route; 
4. All assessees liable for prosecution and penalty; 
5. Holder of foreign asset to file returns, irrespective of taxable income; 
6. Non-filing / filing of return with inadequate disclosures – rigorous imprisonment up to 7 years;

Domestic black money

1. Any sum paid / received > INR.20,000 towards sale / purchase of immovable property should be only through banking channels, else penalty shall be payable [Sec. 269SS & 269T]; 
2. The unexplained credits, money, investment, expenditure, etc., which has been deemed as income under section 68, 69, 69A, 69B, 69C or 69D, are chargeable @ 30% (plus surcharge and cess as applicable). [Sec. 115BBE];

Corporate Tax

1. Residential status of the company to be determined based on the POEM during any time of the Financial Year; 
2. Tax rate on royalty and FTS in case of non-residents is reduced from 25% to 10%; 
3. Deduction u/s 80JJAA: No. of employees condition reduced from 100 to 50; 
4. Incentives for investment in backward areas of Andhra Pradesh & Telangana, Bihar and West Bengal; 
5. Order of the AO deemed to be erroneous and prejudicial to the revenue in certain circumstances [Sec. 263];

Private Equity

1. Tax pass through is available for AIFs Category I & II except business income i.e. pass through is available for capital gains & interest income; 
2. Fund Managers in India not to constitute business connection of offshore funds [New Sec. 9A inserted]; 
3. Rental income of REIT taxable in the hands of the investors; 10% TDS is applicable while payment to resident investors [Sec. 194LBB]; No TDS u/s 194I from rent payment to REITs; 
4. Tax withholding @ 5% applicable to FIIs on rupee bonds extended up to 30-06-2017 [Sec. 194LD]; 
5. Interest payable by an Indian Branch of a foreign bank to its HO or other branch deemed to accrue or arise in India and shall subject to TDS [Sec. 194A];

Transfer pricing

1. Domestic Transfer pricing (TP) exemption threshold enhanced to ₹20 crores; 
2. BEPS covers anti abuse clauses to prevent tax avoidance and aggressive tax planning by corporates groups – GAAR deferred to align with BEPS

HEADS OF INCOME    

Section 15 – 17 : Salaries

Section 22 – 27 : House property

Section 28 – 44 : Business or profession

Section 45 – 55 : Capital gains

Section 56 – 59 : Income from other sources

Section 15 – 17 : Salaries

INCOME FROM SALARY NOTES

INCOME-TAX DEDUCTION FROM SALARIES

Salary Theory, FAQ and MCQ

Section 22 – 27 : House property

Income from letting out of property that is derived by a company in the business of letting out property or by a company that holds as an investment property (refer AS 13) is chargeable under the head income from house property.

A deduction of 30% on annual value and a deduction for interest paid on loan obtained for acquiring the property are available.

Also Read
HOUSE PROPERTY-SHORT NOTES
HOUSE PROPERTY- FULL INFORMATION

Section 28 – 44 : Business or profession

1. The books of account determines the net Income according to the method of accounting followed; 
2. All assessees, following the mercantile system of accounting, for computing income-tax under the heads “business / profession” or “other sources” required to follow the standards notified by CBDT with effect from AY 2016-17.

Business / Profession - Losses

1. Losses arising from business operations in an assessment year may be set off against income from any source in that year except salaries; 
2. A business loss may be carried forward and set off against future business profits in the next eight assessment years; 
3. Closely held companies must satisfy a 51% “continuity of ownership” test to qualify for a business loss carry forward; 
4. Losses may be carried forward only if the return of income filed within due date; 
5. Unabsorbed depreciated can be carried forward indefinitely, even if return of income is not filed within the due date;

Expenditure

Section 30 – 38 : Deductions expressly allowed against expenses / allowances
Section 40, 40A & 43B :  Expenses not deductible

Business / Profession - certain issues

1. Interest on funds borrowed for expansion of an existing business /  profession is not allowed as deduction [Proviso to Sec. 36(1)(iii)]; "Instead it must be capitalized with the cost of the asset and is eligible for depreciation;"
2. Fee paid to ROC for increase of authorised share capital is not allowed u/s 37 but deductible u/s 35D in 5 years; "As per EAC of ICAI such amount shall be expensed during the year."
3. Expenditure on in-house scientific research facility (other than cost of land or building) as approved by the prescribed authority (DSIR), a weighted deduction of 200% of the expenditure is available [Sec. 35(2AB)]."Expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority under any Central, State or Provincial Act and filing an application for a patent under the Patents Act, 1970 shall be excluded."

Certain business deductions

1. Deduction of 100% of profits for a specified period are available, subject to certain conditions, for certain business activities (e.g. generation / distribution of power, development of SEZ, manufacture or production of eligible articles, collection and processing or treatment of biodegradable waste etc. [Sec. 80-IA]; 
2. A company engaged in the manufacturing of goods in a factory and that employs new regular workers (50) may qualify for a deduction of 30% of additional wages paid to new regular workers in the year of employment and in the following 2 years [Sec. 80JJAA]; 
3. Interest, royalties and fees for technical services paid outside India to overseas affiliates or in India to non-residents may be deducted, provided tax is withheld [Sec. 40(a)(i)]; 
4. Rate of tax on royalties and fees for technical services reduced from 25% to 10% [Sec. 115A]; 
5. Payments to employees under voluntary retirement schemes may be deducted over five years [Sec. 35DDA]; 
6. Securities transaction tax paid may be deducted [Not covered u/s 40(a)]; 
7. Business losses may set off against incomes; 
8. No deduction available on general reserve for bad debts; 
9. Specific debts when written off will be allowed as deduction; 
10. No deduction is allowed for expenditure incurred on income that is not taxable [Sec. 14A]; 
11. No deduction is allowed for payments incurred for purposes that are an offense or prohibited by law [Expl. 1 to Sec. 37(1)]; 
12. No deduction is allowed for expenses incurred for corporate social responsibility [Expl. 2 to Sec. 37(1)]; It is application of income and is not incurred wholly and exclusively for the purposes of carrying on business
13. No deduction for advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party [Sec. 37(2B)]. 
14. Amounts contributed to a charitable organisation are deductible to the extent of 50% of the contribution, or 100% of the contribution if the company has positive taxable income [Sec. 80G].

Also Read

SHORT NOTES: “INCOME FROM BUSINESS AND PROFESSION"

Section 45 – 55 : Capital gains

1.  Gains derived from the sale of capital assets are subject to capital gains tax; 
2. Gains may be long term or short term; 
3. Gains are considered long term if the assets are held for more than 36 months. 12 months in case of shares (excluding unlisted shares), securities/ bonds and units of mutual funds; 
4. Short term capital gains on listed shares and units of an equity oriented mutual fund where STT is paid are taxed @ 15%+ applicable surcharge and cess; 
5. Long term capital gains where STT paid are exempt [Sec. 10(38)];

Also Read

SHORT NOTES - CAPITAL GAINS

Section 56 – 59 : Income from other sources

“Other income” is the residuary category under which income is taxable if not chargeable under any other specified head of income. The expense wholly or exclusively incurred for the purpose of earning the income are deductible.

Incomes such as dividends, interest, income from assets let on hire are taxable under this head if not chargeable as business income. 

Advance received for transfer of a capital asset subsequently forfeited are taxable now. Consideration received by a closely held company (other than a VCU or VCC or other specified company) for issue of shares in excess of the fair market value of the shares also taxable under this head.

Also Read

SHORT NOTES - INCOME FROM OTHER SOURCES

Incentives to AP and Telangana

1. A new Sec. 32AD inserted to provide for an additional investment allowance of 15% of the actual cost of new asset (P&M) acquired and installed in notified backward areas of states of AP, Telangana, Bihar, and WB; This deduction shall be available over and above the existing deduction available under section 32AC of the Act.
2. Additional depreciation of 35% instead 20% for new units commences on or after 01-04-2015 in notified backward areas of states of AP, Telangana, Bihar, and WB [first proviso to Sec. 32(1)(iia)];

Double taxation relief

1. A resident assessee that receives income from non-tax treaty country is eligible for a credit for the foreign income tax paid; 
2. The credit is granted on a country by country basis and is limited to lower of income received from foreign country concerned and foreign tax paid on that income; 
3. In case of treaty countries, grants relief by credit method or by a combination of credit and exemption method; 
4. A non-resident tax payer is required to furnish a TRC from the authorities in its country of residence along with a new Form 10F.
5. Other points to remember
6. Section 92BA amended to rise the aggregate of specified transactions to INR.20 crores (from INR. 5 crores) to fall under ‘specified domestic transaction’; 
7. Abolition of levy of wealth-tax under Wealth-tax Act, 1957; 
8. PAN and TAN can be applied for a new company being incorporated vide Form INC 7; 
9. Obtaining TAN u/s 203A of the Act shall not apply to the notified deductors or collectors (Sec. 194-IA & 195 for individuals & HUF); 
10. 100% deduction for National Fund for Control of Drug Abuse u/s 80G; 
11. 100% deduction for Swachh Bharat Kosh & Clean Ganga Fund u/s 80G
12. Amount of share of the assessee ‘company’ in an AOP or BOI, on which no income-tax is payable u/s 86, if such amount is credited to P&L a/c shall excluded while computing book profits u/s 115JB; 
13. Only transporters falls u/s 44AE after submission declaration & copy of PAN are subject Nil rate of TDS u/s 194C; 
14. A new section 192A inserted for a deduction of tax at the rate of 10% on pre-mature withdrawal from EPFS if payment exceeds INR.30,000; 
15. A self-declaration for non-deduction of tax u/s 197A of the Act may be filed i.e. an employee can give a declaration in Form No. 15G; Employees at higher slab rates i.e. 20% or 30% may request new employer to deduct the balance tax.
16. In case of Non-resident company, if its place of effective management (POEM), at any time in that year, is in India it is said to be resident [Sec. 6(3) wef 2015-16]; 
17. Certain CAs not to give reports/certificates (To ensure the independence of auditor); 
18. Grossing up of tax on computation of DDT u/s 115-O and 115-R (wef 2014-15); 
19. Extension of the deduction available u/s 32AC of the Act for investment made in P&M up to 31.03.2017; 
20. To make medium size investments in P&M, eligible for deduction u/s 32AC of the Act, it is allowed, if the ‘company’ on or after 1st April, 2014 invests more than INR.25 crore in P&M in a previous year; 
21. Extension of the sunset date under section 80-IA for the power sector up to 31-03-2017 (i.e. till the end of 12th five year plan); 
22. Sum received towards advance for transfer of a capital asset is taxable, if the same was forfeited [Sec. 56(2)(ix)]; 
23. Cash cannot be accepted / repaid (> 20,000) in relation transfer of an immovable property, whether or not the transfer takes place [Sec. 269SS/ 269T]; 
24. Exemptions u/s 54 & 54F are available if the investment is made in one residential house situated in ‘India’; 
25. The unexplained credits, money, investment, expenditure, etc., which has been deemed as income under section 68, 69, 69A, 69B, 69C or 69D, are chargeable @ 30% (plus surcharge and cess as applicable). [Sec. 115BBE];  In order to curb the practice of taking advantage of basic exemption limit this amendment was brought wef FY.2012-13
26. Share issue money received in excess of fair market value is taxable in case of closely held companies [Sec. 56(2)(viib)]; 
27. Weighted deduction of 150% of the expenditure (not in the nature of cost of any land or building) incurred on agricultural extension project is available [Sec. 35CCC read with rule 6AAD]; 
28. Weighted deduction of 150% of expenses (not being expenditure in the nature of cost of any land or building) incurred on skill development project is available [Sec. 35CCD read with rule 6AAF & 6AAG]; Applicable only to companies

General anti avoidance rule (GAAR)

> Till date India does not have a GAAR;
> The GAAR provisions deferred till 01-04-2017 instead from 01-04-2015;
> The GAAR empowers the tax authorities to declare an arrangement an impermissible avoidance agreement if it was entered into with the main purpose of obtaining a tax benefit; and 

1. It creates rights or obligations that normally would not be created between the persons dealing at arm’s length; 
2. It results, directly or indirectly, in misuse or abuse of Income Tax Act; 
3. It lacks commercial substance or is deemed to lack commercial substance; and 
4. It is carried out in a manner that would not be used for bona fide purposes. 

Once GAAR is invoked, tax treaty benefits may be denied for the arrangement.

Classification of head of “Income Tax”

• Income tax collection is classified into two heads: 

1.  Corporate Tax; and 
2. Non-Corporate tax 

> Non-corporate tax revenue is shared by central and state governments.
> Corporation tax is not divisible with States [Article 270(4)(a)].

Fill separate TDS challans for corporate deductees and non-corporate deductees.

Goods & Service Tax (GST)

Salient Features

1. Subsumes most of the indirect taxes except customs duty; 
2. The final consumer will bear only GST charged by last dealer with set off benefits at all the previous stages; 
3. Petroleum products, alcohol for human consumption, tobacco kept outside GST purview; 
4. Two components: Central and State GST; 
5. Central GST levied is divisible between and Centre and the State; 
6. An additional tax not exceeding 1% on inter state trade for two years; 
7. Going to implement from 01-04-2016; 
8. New service tax rate under GST would be 16%.