/ TDS

Guidelines on Section 194R of the Income Tax Act

194R

Introduction to Section 194R

Section 194R was introduced to streamline the deduction of Tax Deducted at Source on benefits or perquisites provided in the course of business or profession. This section mandates that any person providing a benefit or perquisite to a resident must deduct tax at a rate of 10% on the value of such benefit or perquisite. Section 194R of the Income Tax Act, addresses the deduction of tax at source on any benefit or perquisite provided to a resident arising from business or profession. Section 194R introduces a structured framework for the deduction of TDS on benefits or perquisites provided in the course of business or profession. Compliance requires careful identification, valuation, and timely deduction of TDS to avoid penalties and ensure adherence to the Income Tax Act. Businesses and professionals should familiarize themselves with the guidelines and integrate them into their financial processes. Below details for TDS on reimbursements to service providers under this section:

Scope & Coverage of Section 194R

  • Applicability:
    • Who is Covered? Applies to any person (deductor) providing benefits or perquisites to a resident (deductee) arising from business or profession. The section covers all benefits or perquisites, whether in cash or in kind, provided to a person, if these are part of their business or profession.
    • Types of Benefits or Perquisites:
      • Wholly in Cash
      • Wholly in Kind
      • Partly in Cash and Partly in Kind
      • Capital Assets: Benefits can include capital assets like cars, land, etc.
  • Liability:
    • The deductor does not need to verify whether the benefit or perquisite is taxable in the recipient’s hands.
    • There is no requirement to check the taxability of the amount itself.
    • Applies to benefits or perquisites paid or credited on or after July 1, 2022.
  • Purpose of Section 194R:
    • It requires the deduction of tax at 10% on the value of any benefit or perquisite provided to a resident in the course of business or profession.

TDS on Reimbursements:

  1. TDS Rate u/s 194R
    • Standard Rate: 10% TDS on the total value of gifts or perquisites provided to a recipient during a FY.
    • Threshold Limit: Tax Deducted at Source is applicable only if the total value exceeds INR 20,000 per recipient in a FY.
  • Invoice in the Name of the Recipient: If the invoice for the expenses (such as travel or accommodation) is issued directly in the name of the service recipient, it is treated as the service recipient’s own expense. In this case, no Tax Deducted at Source is required u/s 194R, as no benefit or perquisite has been provided by the service recipient to the service provider.
  • No TDS u/s 194R on Directly Invoiced Expenses: If the reimbursement of expenses is billed directly to the service recipient (i.e., the invoice is made in the name of the service recipient), no TDS is required u/s 194R as there is no benefit or perquisite being provided to the service provider.

TDS on Reimbursements

    • As per Circular No. 12/2022, if a person incurs expenses on behalf of another in the course of business or profession, it is considered a benefit or perquisite. Hence, Tax Deducted at Source at 10% applies on such reimbursements. Examples:
      • Travel Expenses: If a service provider incurs travel expenses while performing services and these are reimbursed by the recipient, TDS u/s 194R is applicable on the reimbursed amount.
      • Invoice in Recipient’s Name: If the expense invoice (e.g., travel, accommodation) is issued directly in the name of the service recipient, it is treated as the recipient’s own expense. No Tax Deducted at Source u/s 194R is required.

  • Additional Clarifications (Circular No. 18/2022, dated 13-09-2022):

    • Consolidated Invoices: If reimbursement expenses are included in the same invoice as the primary service or goods, and TDS has been deducted under another section (e.g., 194C, 194J), no additional Tax Deducted at Source u/s 194R is required.
    • Directly Invoiced Expenses: No Tax Deducted at Source u/s 194R if reimbursement expenses are billed directly to the recipient.
    • This circular provided additional clarification regarding the application of Section 194R on reimbursements. If the expenses are already included in the invoice for services or goods (such as u/s 194C or 194J), and Tax Deducted at Source has been deducted under those sections, there is no need for further TDS deduction u/s 194R.
    • Consolidated Invoice: If out-of-pocket expenses are included in the same invoice as the primary service or supply of goods, and TDS is deducted under another applicable section (e.g., Section 194C for contracts or Section 194J for professional services), no additional TDS is required u/s 194R.

  1. Valuation of Benefits or Perquisites

    • Fair Market Value: The Fair Market Value of the benefit or perquisite is generally used for Tax Deducted at Source calculation.
    • Exceptions:
      • Purchased Benefits: If the provider purchased the benefit, the purchase price is used for Tax Deducted at Source.
      • Manufactured Benefits: If the provider manufactures the benefit, the price charged to other customers is used for Tax Deducted at Source .
    • Exclusions:
    • GST is not included in the valuation for Tax Deducted at Source purposes.

  1. Specific Considerations for Section 194R

  • Social Media Influencers:
      • Returned Products: No benefit; no Tax Deducted at Source u/s 194R.
      • Retained Products: Treated as a benefit or perquisite; Tax Deducted at Source applicable.
  • Reimbursement of Out-of-Pocket Expenses:
    • General Rule: If a person incurs expenses as part of their business and these are reimbursed, it is considered a benefit or perquisite. TDS at 10% applies.
    • Exception: No TDS if travel bills are in the recipient’s name, paid by the consultant, and reimbursed by the client.
  • Dealers’ Conferences:
      • Non-TDS Scenarios: Expenditure for dealer/business conferences aimed at education, product launches, obtaining orders, teaching sales techniques, addressing queries, or reconciling accounts.
      • TDS Applicable: If the conference includes incentives or benefits to select dealers/customers based on targets, Tax Deducted at Source is applicable.
      • Leisure Components: Expenses for leisure trips, sponsoring family members, priority stays, or overstays are liable for Tax Deducted at Source.
  • Benefits Provided to Employees of Recipient Entity:
    • Benefits to employees, directors, or their relatives who are not engaged in business or profession require TDS by the deductor. Example: A company provides free medicine samples to a doctor employed by a hospital. The company must deduct Tax Deducted at Source u/s 194R in the hospital’s name.
  • Benefits Provided by Employer to Employees:
    • Treated as perquisites u/s 17.
    • TDS u/s 192: Employers must deduct Tax Deducted at Source u/s 192 for employee benefits and can claim credit by furnishing tax returns.
  • Benefits Provided to Consultants:
    • Option 1: Deductor treats the entity as the beneficiary and deducts Tax Deducted at Source u/s 194R. The entity can further deduct TDS for the consultant.
    • Option 2: Deductor can directly deduct Tax Deducted at Source for the consultant.
  1. Handling GST in Valuation
    • Exclusion of GST: GST is not included in the valuation of benefits or perquisites for Tax Deducted at Source purposes u/s 194R.
  1. Managing TDS When Benefit Is in Kind or Partly in Kind
    • Insufficient Cash for TDS: If the benefit is in kind or partly in kind, and the cash component is insufficient to cover the 10% TDS, the deductor has two options:
      • Advance Tax Payment by Recipient: The recipient pays the tax as advance tax. The deductor relies on the recipient’s declaration and a copy of the advance tax challan.
      • Grossing Up: The deductor deducts TDS by grossing up the benefit, treating the TDS as an additional benefit to the recipient.
  1. Computing the Rs. 20,000 Threshold
    • Inclusion Period: Include benefits or perquisites provided on or before June 30, 2022, to assess the threshold for benefits provided on or after July 1, 2022.
    • No TDS on Pre-July 1, 2022 Amounts: No TDS is required on amounts paid from April 1, 2022, to June 30, 2022.

Applicability of Section 194R on Lucky Draw Award Money:

  • Section 194R of the Income Tax Act, 1961, deals with the TDS on benefits or perquisites arising from business or profession. It covers both monetary and non-monetary benefits provided to a resident.
  • Key Phrase – “Arising from Business or Profession”: The applicability of Section 194R hinges on whether the benefit or perquisite arises in the course of business or the exercise of a profession. This is a critical factor for deciding if TDS should be deducted.
  • Lucky Draw and Personal Achievements: If award money is provided for a personal reason such as winning a lucky draw or a personal achievement that is not related to the individual’s business or professional activities, it is not connected to business or profession.
  • In such cases, the award does not fall under the ambit of Section 194R. Therefore, TDS would not be applicable under this section, as the benefit is purely personal and does not arise from a business or professional relationship. However, other sections, such as Section 194B (which deals with winnings from lotteries or games), may apply depending on the nature of the prize.

Practical Steps for Compliance of  Section 194R

    • Identify Benefits or Perquisites: Assess all benefits or perquisites provided to residents in the course of business or profession.
    • Determine Valuation: Calculate the FMV or applicable purchase/manufacture price, excluding GST.
    • Check Threshold: Aggregate benefits per recipient for the FY & Apply TDS only if the total exceeds Rs 20,000.
    • Deduct TDS: Deduct 10% TDS on the value exceeding the threshold. Ensure proper documentation and compliance with procedural requirements.
    • Deposit and Report: Deposit the deducted TDS with the government. Report the Tax Deducted at Source in the appropriate returns.
    • Maintain Records: Keep detailed records of all benefits or perquisites provided and TDS deducted.

TDS-Section-194R-1

Frequently Asked Questions on section 194R

  • Do we need to check if this perquisite is taxable in the hands of the payee?

Answer: No. Tax Deducted at Source must be deducted irrespective of the taxability of the benefit or perquisite in the recipient’s hands. All benefits provided in the course of business or profession are deemed taxable.

  • Should we deduct TDS on discounts or offers given to our customers?

Answer: No. Sales discounts, cash discounts, rebates, and similar offers do not attract TDS u/s 194R. However, free samples provided to customers are subject to Tax Deducted at Source.

  • Can the recipient claim depreciation on the asset received as a benefit?

Answer: Yes. The recipient can claim depreciation based on the fair market value (excluding GST) of the asset, on which taxes have been paid.

  • Is TDS applicable on cash discounts?

Answer: No. Cash discounts, rebates, and similar offers are excluded from Section 194R. Only benefits or incentives other than discounts or rebates (e.g., cars, electronics) attract TDS.

  • Does a company manufacturing capital goods need to deduct Tax Deducted at Source u/s 194R on 2-year free maintenance services provided to the buyer?

Answer: No. Section 194R applies only when an actual benefit or perquisite is provided, not merely for providing maintenance services unless such services constitute a perquisite or benefit as defined under the Act.

  • How should the valuation of benefit or perquisite be carried out?

Answer:

      • Purchased Benefits: Use the purchase price.
      • Manufactured Benefits: Use the price charged to other customers.
      • Exclude GST from the valuation.

Summary Section 194R:

TDS-Section-194R.

  • TDS at 10% u/s 194R applies when a service provider incurs expenses and those are reimbursed by the recipient, as it constitutes a benefit or perquisite.
  • No Tax Deducted at Source u/s 194R if:
    • The expense invoice is in the recipient’s name (i.e., it is their liability directly).
    • Reimbursement expenses are included in the same invoice as the service or goods provided, and Tax Deducted at Source has already been deducted under another section (e.g., 194C or 194J).
  • The provider of the benefit does not need to ascertain if the amount is taxable u/s 28(iv) before deducting Tax Deducted at Source.
  • Section applies even if the benefit is in cash or partially in kind.
  • TDS applies even if the benefit is in the form of a capital asset.
  • Sales discounts, cash discounts, and rebates are not considered benefits under this section.
  • The valuation of benefits should be done based on the fair market value of the perquisite provided.
  • Social media influencers provided with products to promote on social platforms are considered to have received a benefit.
  • Reimbursement of out-of-pocket expenses is not considered a benefit.
  • Dealer conferences for educating dealers about products are not considered benefits if they are purely educational and do not involve any leisure or recreational elements.
  • If the benefit is in kind and there is no cash available for Tax Deducted at Source, the provider must ensure that Tax Deducted at Source has been deposited before releasing the benefit.
  • Threshold is calculated for the entire financial year, including transactions before and after 1st July 2022, when the section became applicable.
/ NRI

Residential Status U/s  6 of the Income Tax Act Act in short

Residential-status-of-Individuals-Section-6

Residential Status U/s  6 of the Income Tax Act Act in short

The taxability of an individual in India is determined by their residential status for a specific financial year. An Indian citizen may or may not be a resident of India based on specific criteria.

Classification of Taxable Persons:

residential status income tax.

An individual’s residential status is classified into three categories:

    • Resident and Ordinarily Resident (ROR)
    • Resident but Not Ordinarily Resident (RNOR)
    • Non-Resident (NR)
  • Resident and Ordinarily Resident (ROR): An individual is considered a resident of India u/s 6(1) of the Income Tax Act if they satisfy any of the following:
    • Stay in India for 182 days or more in a fiscal year, or
    • Stay in India for 60 days or more in a fiscal year and 365 days or more in the four years immediately preceding that fiscal year.

To be classified as “ordinarily resident,” the individual must also meet these additional conditions under Section 6(6):

    • Spent 730 days or more in India in the seven preceding years.
    • Has been a resident for at least 2 out of 10 previous years before the current year.
  • Resident but Not Ordinarily Resident : An individual is classified as RNOR if:
    • They meet the basic residence conditions (as in ROR) but do not satisfy the additional conditions under Section 6(6) regarding 730 days of stay or residency in 2 of the past 10 years.
  • Non-Resident: If an individual does not satisfy any of the conditions mentioned under the resident category, they are classified as a non-resident.

Residential-status-determination.

Amendments Made in Finance Act 2020:  

I : Non-Residents now include individuals of Indian origin who:

    • Earn income exceeding ₹15 lakhs from India,
    • Have stayed in India for less than 120 days,
    • Do not have their global income taxed in any other country.

II : RNOR category now includes individuals of Indian origin who:

    • Stay in India for more than 120 days but less than 182 days,
    • Do not have their global income taxed in any other country.

Residential Status of Other Entities: 

  • Residential Status of a Company: A company is considered a resident of India if:
    • It is an Indian company, or
    • The place of effective management (PoEM) during the previous year is in India. This refers to the place where key management and commercial decisions are made.
  • Hindu Undivided Family (HUF):
    • Resident HUF: Managed by members residing in India.
    • RNOR HUF: If the Karta (manager) fulfills the following:
      1. Resident for at least 2 out of 10 previous years.
      2. Stay of 730 days or more in the preceding 7 years.
  • Firms, LLPs, AOPs, BOIs, Local Authorities, Artificial Juridical Persons:
    • Similar to HUF: Residential status depends on where the management is located.
  • Additional Notes on Residential Status
    • Crew Members: In the case of Indian citizens who are part of a ship’s crew, the period of stay does not include time spent on an eligible voyage, determined by the Continuous Discharge Certificate.
    • Foreign Companies: A foreign company can be considered a resident if its effective management is proven to be conducted from India for the preceding year.

Key Points on Residential Status Under Section 6 of the Income Tax Act

  1. Stay in India:
    • Includes stays in territorial waters of India (12 nautical miles from the coastline).
    • Stay does not have to be continuous or active.
    • Both date of arrival and departure are counted in determining days stayed in India.
  2. Citizenship and Residence:
    • Residential status is independent of citizenship, place of birth, or domicile.
    • An individual can be a resident in more than one country while having only one domicile.

Important Terminologies relation to Residential Status in income tax act : 

  • Income from Foreign Sources: Income earned outside India, excluding income sourced from a business or profession in India.
  • Non-Resident Indian (NRI): An NRI is an Indian citizen or of Indian origin who is not a resident as per Section 6 of the Act.
  • Person of Indian Origin (PIO): A person is considered of Indian origin if they, their parents, or grandparents were born in undivided India.

Taxability Based on Residential Status

residential status of a person

    • Resident and Ordinarily Resident: Taxable on global income, i.e., income earned both inside and outside India.
    • Resident but Not Ordinarily Resident: Not required to pay tax on: Income earned and received outside India.
    • Non-Resident : Taxed only on: Income received in India or sourced from India. And Income earned outside India that has no connection with India is not taxable.

FAQs on Residential Status Under Section 6 of the Income Tax Act

individual residential status

  1. When does a person become a resident in India?
    • If the individual stays for 182 days or more in a year, or
    • 60 days in a year and 365 days in the preceding 4 years.
  2. When does a person become a Resident and Ordinarily Resident (ROR)?
    • Resident for 2 years out of the previous 10 years, and
    • Stayed in India for 730 days or more in the preceding 7 years.
  3. Who is a deemed resident?
    • An Indian citizen with income over ₹15 lakhs (excluding foreign sources) and not taxable in any other country due to residence or domicile is a deemed resident and will be treated as an RNOR.
/ INCOME TAX

Summarization of ITR Forms Under Income Tax Act

Kind of ITR Return

Summarization of ITR Forms Under Income Tax Act

ITR

FORMS

 ELIGIBLE ASSESSEE INCOME FROM SALARY EXEMPT INCOME CAPITAL GAIN INCOME FROM HOUSE PROPERTY BUSINESS INCOME INCOME FROM OTHER SOURCES
ITR-1 RESIDENT INDIVIDUAL AND HUF YES YES, PROVIDED AGRICULTURE INCOME IS UP TO RS. 5000. NO YES, FROM ONLY ONE HOUSE PROPERTY. NO NO
ITR-2 HUF AND INDIVIDUALS. YES YES NO YES NO YES
ITR-3 INDIVIDUALS AND PARTNERS OF FIRMS AND HUFS YES YES NO YES YES YES
ITR-4 FIRM, HUF AND INDIVIDUALS YES YES, PROVIDED AGRICULTURE INCOME IS UP TO RS. 5000. YES YES, FROM ONLY ONE HOUSE PROPERTY. YES, PROVIDED INCOME DECLARED UNDER PRESUMTIVE TAXATION YES
ITR-5 LLPS, PARTNERSHIP FIRMS, AOP AND BOI. NO YES NO YES YES YES
ITR-6 COMPANIES NO YES NO YES YES YES
ITR-7 TRUSTS NO YES NO YES YES YES

ITR FORMS

PROCEDURE

Once the taxpayer identifies the applicable ITR form, they are required to furnish the details asked in the form. Once the details are furnished, follow the following steps –

    1. Download the TDS certificate in Form 26AS and match the amount of TDS deducted, with the amount filled in the ITR form. In case of any mismatch, validate the same accordingly.
    2. Once all the details are furnished and tallied, the taxpayer can calculate their total income for the particular Financial Year.
    3. In the last step, the software will calculate the Tax Liabilities of the assessee, based on the inputs provided by them.

17 updates in the latest ITR Forms for FY 2023-24!

Here’s a detailed breakdown of the key changes:

1. Filing Deadlines: Taxpayers now have a new column in Forms ITR 3, 5 and 6 where they specify the deadline for filing returns.

2. Online Gaming Winnings Taxation: Schedule OS has been amended to include reporting of income from online gaming in form ITR 2, 3, 5 and 6.

3. Adjustment of Unabsorbed Depreciation: The new provisions allow for the adjustment of unabsorbed depreciation in Form ITR 3 and 5.

4. LEI Details: Legal Entity Identifier (LEI) disclosure is now mandatory for refunds exceeding INR 50 crores in Form ITR 2, 3, 5 and 6.

5. Political Party Contributions: Schedule 80GGC will require detailed disclosure of political party contributions in Form ITR 2, 3, 5 and 6.

6. Cash Receipts Reporting: A new column for cash receipts reporting has been added to claim an enhanced turnover limit in Form ITR 3, 4 and 5.

7. Start-up Deduction Details: New Schedules for claiming deductions under Sections 80-IAC and 80LA have been introduced in Form ITR 5 and 6.

8. Dividend Income Reporting: dividend income received from a unit in an International Financial Service Centre shall be taxed at a reduced tax rate of 10% instead of 20%. Schedule OS has been amended in new ITR forms to incorporate such change in Form ITR 2, 3, 5 and 6

9. ESOP Tax Benefits: Enhanced reporting requirements for Employee Stock Option Plans (ESOPs) needs disclosure of PAN and DPIIT Registration Numbers in Form ITR 2and 3.

10. EVC for Tax Audits: Individuals and HUFs under tax audits (ITR 3) can now verify returns using Electronic Verification Code (EVC). This simplifies the verification process and enhances ease of compliance.

11. Reasons for Tax Audit: Additional details are required from audited companies in Form ITR 3, 5 and 6 regarding the circumstances necessitating tax audits. This change enhances transparency and accountability in tax reporting.

12. Business Trust Sums Reporting: A new column under Schedule OS allows for reporting sums received by unitholders distributed by business trust to avoid non-taxation in Form ITR 2, 3 and 5.

13. Bank Account Disclosure: Taxpayers must now disclose all bank accounts held, except dormant accounts in Form ITR 2, 3 and 5.

14. CGAS Reporting: Detailed disclosure of deposits in the Capital Gains Accounts Scheme is now required in Form ITR 2, 3, 5 and 6.

15. Deduction under Section 80CCH: A new column is introduced to claim deductions under Section 80CCH for Agniveer Corpus Fund in Form ITR 1, 2, 3 and 4.

16. New Schedule 80U: Schedule 80U is added for claiming deductions for persons with disabilities, seeking detailed information in Form ITR 3.

17. Schedule 80DD: Similar to Schedule 80U, Schedule 80DD is added to claim deductions for maintenance and medical treatment of dependents with disabilities in Form ITR 2 and 3.

These updates aim to simplify reporting, enhance transparency, and align with evolving tax regulations. Save this comprehensive overview for future reference and share it with your peers to help them navigate the tax filing process effectively.

Income Tax Slab Rates for Residents for Financial Year 2023-2024 for Salary Income under Section 192 & Pension Income under Section 194P

income tax slab

Guide to select correct Income Tax Return. 

Guide to select correct ITRGuide to select correct ITR.

Important Alert in Taxation of RENTAL INCOME- B𝐮i𝐥𝐝𝐢𝐧𝐠 𝐚𝐥𝐨𝐧𝐠𝐰𝐢𝐭𝐡 F𝐮𝐫𝐧𝐢𝐭𝐮𝐫𝐞, F𝐢𝐱𝐭𝐮𝐫𝐞𝐬

  • Income received 𝐑𝐞𝐧𝐭𝐚𝐥 𝐢𝐧𝐜𝐨𝐦𝐞 from 𝐥𝐞𝐭𝐭𝐢𝐧𝐠 out of 𝐛𝐮i𝐥𝐝𝐢𝐧𝐠 𝐚𝐥𝐨𝐧𝐠𝐰𝐢𝐭𝐡 𝐟𝐮𝐫𝐧𝐢𝐭𝐮𝐫𝐞, 𝐟𝐢𝐱𝐭𝐮𝐫𝐞𝐬, 𝐞𝐭𝐜., would be taxable under the head ‘𝐢𝐧𝐜𝐨𝐦𝐞 𝐟𝐫𝐨𝐦 𝐨𝐭𝐡𝐞𝐫 𝐬𝐨𝐮𝐫𝐜𝐞𝐬’ &  𝐚𝐜𝐜𝐨𝐫𝐝𝐢𝐧𝐠𝐥𝐲, 𝐝𝐞𝐩𝐫𝐞𝐜𝐢𝐚𝐭𝐢𝐨𝐧 𝐰𝐨𝐮𝐥𝐝 𝐛𝐞 𝐚𝐥𝐥𝐨𝐰𝐚𝐛𝐥𝐞 as expense in terms of provisions of section 57(iii) of the Act.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances; Hope the information will assist you in your Professional endeavors. For query or help, contact: singh@caindelhiindia.com or call at 9555555480

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/ INCOME TAX

Implication of Cash Transaction Under Income Tax Act

Implication of Cash Transaction Under Income Tax Act.

Implication of Cash Transaction Under Income Tax Act, 1961

BRIEF INTRODUCTION

Over the years there are lots of changes happening in terms of advancement and digitization within the business world. Digitization provides convenience and ease in doing business, along with, provides for keeping a check on the black money circulation, being practiced by many. Evasion practices or transactions in black money markets mostly happen in cash and digitization of such transactions is the best mode to avoid it. These practices adversely affect government revenues and shut the way for investment in productive fields.

The government is making all the efforts to push electronic transactions by providing various tax incentives and discouraging cash transactions by imposing various penalties or increasing tax compliances for cash transactions. Over the period of more stringent provisions are introduced under income tax Act associated with cash transactions.

In this article we’ll discuss various provisions of the income tax Act associated with cash transactions.

Disallowance of Expenses incurred in Cash

Disallowance of Expenses Incurred in Cash

  • As per Section 40A (3) of income tax Act, if payment for any expenditure exceeding Rs. 10,000 has been made in cash, i.e., otherwise than by an account payee cheque or account payee draft or ECS, then no deduction would be available in respect of such expenditure.
  • However, where the payment has been made in respect of plying, hiring or leasing of products carriage, then the said limit of Rs. 10,000, stand increased to Rs. 35,000.
  • Consequences of Non-Compliance: It is to be noted that no specific penalty has been prescribed for the above expense. However, no deduction for such expense shall be allowed from taxable income and it’ll end in increased tax liability.

Disallowance of Depreciation 

  • As per Section 43(1), if any payment or part payment for purchase of fixed asset is formed in cash exceeding Rs. 10,000 in an exceedingly day then such a part of cost shall be disallowed for the purpose of computation of “Actual Cost” of the said fixed asset.
  • Consequently, no depreciation shall be allowed on such part and it’ll lead to increased taxation liability.

Disallowance of Donation to Political Parties

  • As per Section 13A of income tax Act, any income of an organisation by way of voluntary contributions received from any individual shall not subject to income tax.
  • However, political parties aren’t allowed to receive donations exceeding Rs.2,000 in cash and such donations shall be subject to tax.

Disallowance of Expense Incurred For Specified Business

Section 35AD

  • As per Section 35AD, 100% or 150% of the deduction is allowed with relevancy certain expenditures of capital nature, incurred for specified business.
  • However, it is to be noted, that no deduction shall be available in respect of expenses exceeding Rs.10,000, being made in cash.

Disallowance on acceptance of money loans, deposits etc.

As per section 269SS

  • As per section 269SS, the acceptance of loan or deposit or any other specified sum has been prohibited, if received in excess of Rs.20,000 in cash.
  • Herein, the word “Specified sum” means the amount receivable, in relation to transfer of an immovable property, whether actually transferred or not.

Consequences for Non-Compliance

  • If any loan or deposit or specified sum is accepted in contravention of Section 269SS then a penalty adequate to the quantity of such loan or deposit or specified sum shall be levied u/s 271D.

Disallowance On Repayment of Loan In Cash

Disallowance On Repayment of Loan In Cash

  • No person, including banks, co-operative banks, companies etc., would be allowed to make the repayment of their loan or deposit or any specified advance received, in cash in excess of Rs. 20,000.
  • Herein, the word “Specified Advance” means any amount receivable, in relevancy to transfer of an immovable property, whether actually transferred or not.

Consequences for Non-Compliance

  • If any loan or deposit or specified sum is repaid in contravention of Section 269T then a penalty adequate the number of such loan or deposit or specified sum shall be levied u/s 271E.

NON-APPLICABILITY OF SECTION 269SS AND 269T

NON-APPLICABILITY OF SECTION 269SS AND 269T.

However, provisions of Section 269SS and 269T don’t seem to be applicable loans or advance or specified sum is received from or repaid to:

  • Government;
  • Banking company, post office savings bank or co-operative bank;
  • Corporate entity, established by Central, State or Provincial Act;
  • Government company, being defined in section 617 of the Companies Act, 1956;
  • Any other institutions, associations or bodies or class of institutions, associations or bodies, being notified by Central Government from time to time.

Disallowance on Receipt of Amount In Cash

When-to-say-NO-to-CASH..

Section 269ST clearly provides for disallowance of receipt of amount received in excess of Rs. 2,00,000 in cash, in respect of following transactions:

  • In aggregate from someone in an exceedingly single day. It includes any amount received from an individual during a single day no matter the actual fact that such amount is received in multiple instalments in an exceedingly day or received against multiple invoices.
    • In respect of a particular transaction.
    • Transactions involving any particular event or occasion from an individual.

Non-Applicability of Section 269ST

Non-Applicability of Section 269ST

The provision of section 269ST would not be applicable to following entities –

  • Any amount received by the govt. or any banking company, co-operative bank or, post office saving bank.
    • Transaction of the character which are laid out in section 269SS (Mode of taking or accepting certain loans, deposits and specified sum)
    • Certain specified persons, as may be notified by the Central Government.

Penalty Consequences for Non-Compliance

  • The government provides for hefty penalty, being leviable on persons not complying with the provisions of section 269ST.
  • If any individual receipts amount in contravention of provisions of Section 269ST then a penalty corresponding to the amount received in cash shall be levied u/s 271DA.

Audit Aspect on cash transaction 

  • Under Section 44AB of income tax Act, every one, whose total sales, turnover or gross receipts in business exceeds INR 1 Crore in any previous year then he’s required to induce his accounts audited under section 44AB of taxation Act.
  • However, where a person satisfies the below mentioned conditions, then the limit of Rs. 1 Crore would be increased to Rs. 10 Crores
    • Aggregate of all amounts received during the year in cash, including amount received for sales, doesn’t exceed 5% of the said amount and
    • Aggregate of all payments made in cash during the year, including amount incurred for expenditure, in cash, doesn’t exceed 5% of the said payment.
    • Hence, where the aggregate of receipts and expenditure, being received in case, exceeds 5% of total receipts and expenditure, then the exemption limit for Audit would be Rs. 1 Crore.

TDS Implications on Cash Withdrawal

Bank-Post-offices-required-to-deduct-TDS.

  • To discourage cash transactions, the govt has introduced a replacement section 194N wherein if an individual withdraws aggregate cash exceeding INR 1 Crore during the year from his one or multiple bank account then Bank (Private or Public Sector), a co-operative Bank or a post office shall deduct TDS @2% on amount withdrawn in far more than INR 1 Crore.
  • However, the provisions of Section 194N would not be applicable to the following –
  • the Government;
  • Banking concern or co-operative society, being engaged in in the business of banking or a post office;
  • Business correspondent to that of a banking company or co-operative society, being carrying out activities in accordance with the applicable rules;
  • any white label ATM operator of a banking concern or co-operative society engaged in carrying on the business of banking, in accordance with the authorisation issued by the reserve bank of India.

Prohibited Deduction Under Chapter-V

  1. Payment for Health Insurance Premium
    • As per Section 80D, for the aim of claiming deduction from Gross Taxable Income, assessee is required to form payment of medical premium or other eligible deductions u/s 80D in any mode aside from cash.
    • It is to be noted, that only the payments for preventive health check-ups would be allowed to be made in any mode including cash.
  1. Donations made in cash
    • Deduction for donations u/s 80G shall be allowed providing payment of donations are made in any mode aside from cash.
    • No deduction shall be allowed in respect of donation of any sum exceeding INR 2,000 unless such sum is paid by any mode apart from cash.

CONCLUSION

  • Government of India introduced various rules and provisions, in order to tackle down the tax evasion activities and to make Indian economy grow with the correct use of its finances.
  • The above provisions are introduced as a tenet that each taxpayer is required to fits all the provisions of the tax Act for better and clean books of accounts.
  • It has been provided that the entities, complying with all the provisions, would be able to reap many benefits, in terms of deductions, better planning of future, and no legal disputes.
  • Also, a taxpayer is advised to maximize their digital transaction instead of cash transactions, in order to curb down the black money and increase the efficiency of their own working.
/ Audit

FAQ’s on Tax Audit  Under Income Tax Act 1961

FAQ’s on Tax Audit  Under Income Tax Act

FREQUENTLY ASKED QUESTIONS ON TAX AUDIT  UNDER INCOME TAX ACT 

Q-1.  What provision is stated in section 44AB?

Ans. This provision specifies that taxpayers must perform an audit of their company or profession in order to provide an audit report for taxes purposes.

Q-2.  Who does tax audits?

Ans. A tax audit is performed by a practicing chartered accountant or the appropriate authorities.

Q-3. What is the consequence for failing to comply with Section 44AB?

Ans. If you fail to comply with Section 44AB, you will be fined 0.5 percent of your entire sales, turnover, or gross revenues, or Rs. 1.5 lakh, whichever is less.

Q-4. Who is exempt from having a tax audit performed?

Ans. The following individuals are exempt from having a tax audit performed:

  • Any assessee whose income is derived from section 44B.
  • If an assessee’s books of accounts are audited under other laws, he or she is not required to have another tax audit performed under section 44AB. A tax report, in particular, must be filed in Form 3CA, Form 3CB, or Form 3CD.
  • Any assessee whose income is derived from section 44BBA.

Q-5. Who is not eligible to be a tax auditor?

Ans. There are several restrictions on the appointment of tax auditors, which are listed below:

  • Any member who works part-time is unable to undertake tax audits.
  • A chartered accountant cannot audit the accounts of someone to whom he owes more than Rs.10,000.
  • Statutory auditor will be considered professional misconduct if he or she accepts the appointment of a Public Sector Undertaking/Government Company/Listed Company and other Public Company with a turnover of Rs 50 crores or more in a year and accepts any other work, assignment, or service in relation to the same.

Undertaking/company on a compensation that exceeds the amount charged for carrying out the same undertaking/statutory company’s audit

  • The Chartered Accountant tasked with preparing and maintaining the assessee’s books of account should not audit such accounts.
  • Any partner or employee of a professional firm of Chartered Accountants is not permitted to audit the firm’s accounts.
  • Assessee’s internal auditor cannot be appointed as a tax auditor.
  • An auditor may not take more than 45 tax audit jobs in a fiscal year.

Q-6. Who is not eligible to be a tax auditor?

Ans. There are several restrictions on the appointment of tax auditors, which are listed below:

  • Any member who works part-time is unable to undertake tax audits.
  • A chartered accountant cannot audit the accounts of someone to whom he owes more than Rs.10, 000.
  • Statutory auditor will be considered professional misconduct if he or she accepts the appointment of a Public Sector Undertaking/Government Company/Listed Company and other Public Company with a turnover of Rs 50 crores or more in a year and accepts any other work, assignment, or service in relation to the same.

Undertaking/company on a compensation that exceeds the amount charged for carrying out the same undertaking/statutory company’s audit

  • The Chartered Accountant tasked with preparing and maintaining the assessee’s books of account should not audit such accounts.
  • Any partner or employee of a professional firm of Chartered Accountants is not permitted to audit the firm’s accounts.
  • An assessee’s internal auditor cannot be appointed as a tax auditor.
  • Auditor may not take more than 45 tax audit jobs in a fiscal year.

Q-7.  What exactly is an audit report?

Ans : A tax auditor must submit his report in a prescribed form, which could be Form 3CA or Form 3CB, depending on whether the person carrying on business or profession is already mandated to have his accounts audited under another law.

Form No. 3CB is required to submit when the person engaged in the business or profession is not mandated to have his accounts audited under another law.

The tax auditor must provide the specified particulars in Form No. 3CD, which is part of the audit report, in the event of either of the aforementioned audit reports.

Q-8. When and how should tax audit reports be provided?

Ans : The tax auditor must submit a tax audit report online using his login credentials as a Chartered Accountant. Taxpayers must also provide CA information in their login portal.

  • Once the tax auditor submits the audit report, the taxpayer should accept or reject it using their login site. If the audit report is refused for any reason, all steps must be repeated until the taxpayer accepts the audit report.
  • You must file the tax audit report on or before the due date of the income tax return. It is the 30th of November of the following year if the taxpayer has entered into an overseas transaction, and the 30th of September (extended to the 30th of November for AY 2021-22) of the following year for all other taxpayers.

Q-9. What happens if a person is compelled to have his or her accounts audited under another legislation, such as mandatory audits of businesses under company law provisions?

  • In such circumstances, the taxpayer is not required to have his accounts audited for income tax reasons again. It is sufficient if the accounts are audited under such other legislation before the return’s due date. Under income tax legislation, the taxpayer may provide this specified audit report.

Q-10. What is the difference between sales turnover and gross receipt in a tax audit?

Sales Turnover– The aggregate amount for which an enterprise affects sales is referred to as sales turnover.

  • Gross Receipts– the Income Tax Act does not define this word. Gross revenues comprise all receipts derived from the practise of a profession.

Q-11.  How do you measure a commission agent’s sales turnover?

  • The turnover of a commission agency or a person selling items on consignment is defined by the transfer of ownership risk or reward. If the property in goods or all substantial risks and benefits of goods ownership remain with the principle, the relevant selling price will not be included in the commission agent’s turnover.
  • However, when the commission agent owns the products, bears considerable risk, and reaps the benefits of ownership, the selling price received/receivable is included in his turnover.

Q-12. How do you determine a stockbroker’s sales turnover?

  • When a stockbroker purchases stocks on behalf of a customer, the securities are not transferred into his name but are delivered in the customer’s name.
  • This is also valid in the case of sales. The stockbroker holds delivery on behalf of his client. The ownership of securities is not transferred to share brokers. Only brokerage must be included when calculating the value of the turnover.

Q-13. How do you calculate sales turnover when you have numerous businesses?

  • If an assessee operates more than one business, the sale turnover or gross revenues from all businesses will be aggregated; however, if the assessee chooses the presumptive tax scheme, the turnover of such business will be omitted when calculating total sales turnover or gross receipts.

Q-14. How can I provide the Income Tax Department with a tax audit report?

  • A Chartered Accountant can electronically file the audit report with the income tax department. The tax auditor would instantly post the report to the income tax’s official website. The assessee must authorise and appoint a Chartered Accountant from his e-filing account in order to provide the report.
  • The date of the taxpayer’s approval of the report would be deemed the date of submission of the audit report. If the assessee does not accept or approve the tax audit report, it will be considered pending as if it had not been filed.

Q-15.  How many tax audit reports may a Chartered Accountant sign?

  • A practising CA can perform up to 60 tax audits throughout an assessment year. The Institute of Chartered Accountants of India clarified that audits specified under statutes that require assessees to provide audit reports will not be counted toward the specified number of tax audit assignments if the auditee’s turnover is less than the turnover limit specified in section 44AB of the IT Act.

Q-16. Is it possible to amend a tax audit report?

Generally, an audit report under section 44AB should not be amended, but a member can do so on the following grounds:

Revision of a company’s accounts following its acceptance in an AGM;

    • A change in the law;
    • Shift in interpretation.
    • As a result, the audit report, once filed, might be amended on the aforementioned grounds.

Q-17. Is there a penalty for submitting an audit report late?

  • If a person fails to have his accounts audited or fails to provide the audit report, the assessing officer may order him to pay a penalty equivalent to the lesser of 0.5 percent of the total sale, turnover/gross revenues or 1,50,000 rupees.
  • It should be stressed, however, that there would be no punishment if the failure was due to a justifiable cause.

Q-18.  Is Form 3CD reporting performed according to books of account or after modification in accordance with Income Computation and Disclosure Standards?

  • According to the preamble to the Income Computation and Disclosure Standards, ICDS is applicable for income computation chargeable under Profit and Gains of Business or Profession or Income from Other Sources, but not for bookkeeping.

Q-19. Should the audit report include the addresses of all locations?

  • If books of account are held in various locations, the auditor must supply the addresses of all sites as well as the information of the books of account preserved at each location.
  • In the case of a company assessee, the auditor must confirm that Form AOC-5 has been submitted with the ROC under the Companies Act for the keeping of books of account at a location other than the registered office.
  • The auditor’s responsibility is not only to provide a list of books of accounts, but also to analyse the books of accounts.

Q-20. Is it necessary to disclose the nature of the assessee’s businesses and any changes to them?

  • Clause 10 of Form 3CD requires the assessee to disclose the nature of each business or profession carried out by him or her during the preceding year. Any changes in the nature of the business should be stated explicitly. A transition from manufacturer to trader is one example of a change that necessitates reporting.
  • Any addition to, or permanent discontinuation of, a line of business is another example of a change that necessitates reporting. However, a temporary stoppage of operations may not constitute a change and so does not need to be notified.

Q-21. What types of documents should taxpayers keep in order to comply with the requirement to keep books of account?

The following papers should be kept:

  • A cash book
  • Journal, if books of accounts are kept in accordance with the commercial accounting system.
  • Ledgers.
  • Copies of invoices and carbon copies or counterfoils of receipts produced by the assessee for more than 25 rupees.
  • Original bills given to the assessee and receipts for expenditures spent by him;
  • Signed vouchers, if no invoices or receipts are given and the spending amount is less than 50 rupees, if the cash book does not have enough details about these expenditures.

Q-22. How many tax audits can a CA sign off on?

  • Chartered Accountants are limited to a specific number of tax audits each year, as determined by the ICAI. Here are the specifics regarding the ICAI-mandated Tax Audit limit for CAs.

CA TAX AUDIT LIMIT 

The audit is carried out by a Chartered Accountant or a company of chartered accountants in accordance with tax audit regulations. A single person can only undertake 60 audits in a fiscal year. In the event of a partnership firm, this restriction applies to each partner who is a chartered accountant.

Q-23.  What is the tax audit limit ?

Income Tax Audit Applicability & Application in India

Income Tax Audit Applicability & Application in India

  • If a taxpayer’s sales, turnover, or gross revenues surpass Rs. 1 crore in a fiscal year, he or she must have a tax audit performed. The Rs. 1 Crore threshold limit for a tax audit is planned to be enhanced to Rs. 5 Crore from AY 2020-21 (FY 2019-20) if the following two requirements are met:

(i) The entire amount received in cash during the preceding year, including sales, turnover, or gross receipts, does not exceed 5% of total turnover/gross receipts; and

(ii) The total of all cash payments made during the preceding year, including the amount paid for expenditure, does not exceed 5% of the total payment.

Q-24. What is treatment of cash payment or receipt under the income tax Act ?

Generally, an audit report under section 44AB required to be report the cash transaction exceed more than certain limit. a member can do so on the following grounds:

treatment of cash payment.

Q-25  what is Difference between Gross Total Income and Total Income?

Difference between Gross Total Income and Total Income

I hope the FAQs have answered at least some of your questions. Tax audits are not anything to be concerned about if you conduct your business properly and file returns on time. Assure that if you fall into the category of taxpayer, you follow all compliances on time.

Popular Articles related to Tax Audit : 

/ INCOME TAX

Read All About Royalty Taxatio Under Income Tax Act

TAXATION ROYALTY UNDER INCOME TAX
TAXATION ROYALTY UNDER INCOME TAX

READ ALL ABOUT ROYALTY TAXATION UNDER INCOME TAX ACT, 1961

BRIEF INTRODUCTION

Royalty refers to the payment made in any kind and the same is received as consideration for the utilization of any intangible property like patent, copyright, design or model, secret formula or process, trademark, name or for information concerning industrial, commercial or scientific experience.

Royalty ensures that its owner of possess the domain knowledge of the intangible asset and thus, only permits for the utilization of the said intangible property.

Ownership of intangible assets are legally secured. Where intangible property is legally secured, there are certain test which needs to be applied, in case of transfer of rights in property. But where the owner of intangible asset is also the economic owner, the character of rights enjoyed would be dependent on the provisions provided in the domestic law.

Although the concept of economic ownership is not recognized in reality in India, royalty contracts are generally made under licensing agreements. The consideration of for such agreements are determined as a percentage of gross or income to be derived by utilizing the said asset.

Transfer pricing regulations have been introduced in order to provide for arm’s length pricing of international transactions. These transactions also involve payment in respect of royalties and the same shall be determined by comparing the results or conditions of controlled transactions to the results available under comparable uncontrolled transactions.

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Picture6

OBJECTIVE

  • Simplification and rationalization of non-resident taxation
  • Reduce administrative difficulties and uncertainties.
  • Ensuring gross income of basis of tax for NRI, instead of net profit basis of tax.
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EXPLANATION UNDER FINANCE ACT 2014

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EXEMPTED ROYALTY

Royalty payment made in respect of computer software shall be exempt provided –

  • Lump consideration is made by a resident.
  • For transfer of all or any rights regarding computer software supplied together with a computer or computer-based equipment
  • By a non-resident manufacturer
  • The same has been transferred under any approved scheme of Policy on Computer Software Export, Software Development and Training, 1986 of the govt. of Indi

ROYALTY – INTERPRETATION ISSUES UNDER ITA

ISSUE IN INTERPRETATION CLARIFICATION REFERENCE TO RULING PROVIDED
MEANING OF ‘IMPARTING OF INFORMATION CONCERNING TECHNICAL, INDUSTRIAL, COMMERCIAL OR SCIENTIFIC KNOWLEDGE, EXPERIENCE OR SKILL’ (‘KNOW-HOW’) EVERY INFORMATION CONCERNING THE INDUSTRIES OR COMMERCIAL VENTURES DOES NOT QUALIFY AS ROYALTY. EXPERTISE AND SKILL REQUIRED TO SOME EXTENT. CONFIDENTIALITY/ SECRECY & EXCLUSIVITY IS REQUIRED TO SOME EXTENT. THE SAME  NOT BE SOMETHING READILY AVAILABLE IN THE MARKET. (CIT VS. HEG LTD. (263 ITR 230) (MP)
ALLOWING ACCESS AND DOWNLOADING BUSINESS INFORMATION REPORTS, WHICH IS A COMPILATION OF PUBLICLY AVAILABLE COMMERCIAL INFORMATION IS NOT ROYALTY. (DUN & BRADSTREET ESPANA SA (272 ITR 99) (AAR)
DEFINITION OF USE THE APPLICATION OR EMPLOYMENT OF SOMETHING; A LONG-CONTINUED POSSESSION AND EMPLOYMENT OF A THING FOR THE PURPOSE FOR WHICH IT IS ADAPTED (BLACK LAW DICTIONARY) CRITERIA FOR DETERMINATION OF RIGHT TO USE OR USE OF EQUIPMENT (OECD TAG REPORT)

  • CUSTOMER SHALL BE HAVING THE PHYSICAL CONTROL / POSSESSION OVER THE ASSER.
  • CUSTOMER BE HAVING SIGNIFICANT INTEREST IN THE SAID ASSET.
  • PROVIDER SHALL NOT GUARANTEE ITS REVENUES.
  • PROVIDER NOT TO USE THE SAID PROPERTY IN ORDER TO PROVIDE SERVICES TO OTHERS.
  • USE OR RIGHT TO USE DEPENDS ON THE RELATION WHICH EXISTS AS A MATTER OF FACT BETWEEN THE PERSON AND THE PROPERTY (TOURAPARK PTY LTD V FCT [12 ATR 842])
 (TOURAPARK PTY LTD V FCT [12 ATR 842])
THE WORD ‘USE’ (OF COPYRIGHT) SHALL NOT BE INTERPRETED IN GENERIC SENSE. THE EMPHASIS HAS BEEN MADE ON ‘USE OF COPYRIGHT OR THE RIGHT TO USE IT’. THUS, WHERE THE EXCLUSIVE RIGHTS, WHICH THE OWNER OF COPYRIGHT HOLDS, IS PRIVIDED TO THE CUSTOMER, EITHER PERMANENTLY OR FOR A FIXED DURATION OF TIME AND THE PERSON MAKE A BUSINESS OUT OF IT, THE SAME SHALL BE EXCLUDED WITHIN THE AMBIT OF USE OR RIGHT TO USE THE COPYRIGHT. (FACTSET RESEARCH SYSTEMS INC [182 TAXMAN 268])

EXCEPTION OF CAPITAL GAIN

The definition of royalty excludes any consideration which might be income of the recipient chargeable under the pinnacle ‘Capital gains.

  • Clause (i) and (iv) of the definition of royalty provides that transfer of all or any rights in respect of patent, invention, model, design, secret formula or process or trade mark, copyright, literary, artistic or scientific work, etc. would constitute royalty.
  • Definition of ‘transfer’ includes extinguishment of any rights within the asset as per section 2(47) of the Act.
  • Whether the transfer of all or any rights in patent, copyright, etc. may be treated as extinguishment of any right within the asset thereby chargeable under the top ‘Capital Gains’.
  • Tests to work out whether transfer of all or any rights in asset would constitute royalty.
  • Ownership of the patent, copyright, etc. isn’t transferred [HCL Limited (ITA nos. 93/2002 & 120/2008), Delhi Trib.]
  • The asset is appearing within the books of transferor.
  • The income received by the transferor is treated as revenue receipt [Koyo Seiko Co. Ltd 233 ITR 421 (Andhra Pradesh HC)]
  • The transferor doesn’t forego his right to use the patent, copyright, etc. even after the rights are granted/ transferred to the transferee. [Dr. K.P. Karanth 139 ITR 479 (AP High Court)]
  • The transferee doesn’t get enduring benefit out of the rights transferred.
  • The transferee treats the payment made for rights as revenue expenditure.

DEEMING RULES UNDER THE ITA

Income by way of royalty payable by—

  1. the Government; or
  2. the individual shall be an Indian resident, except for the cases, where the royalty has been paid in respect of any right, property or information used or services, being utilized for the purpose of any business or profession carried on by such person and the same is carried out outside India or is used for earning any income from any source outside India; or
  3. the individual, being a non-resident, and the royalty has been paid in respect of any right, property or information used or services utilized for the purpose of running a business or profession in India or for the needs of constructing or earning any sough of income from any source in India:

A.:

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Picture A

 

B. :

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Picture B

 

C.:

Picture C

 

Deduction for any income received as a result of a patent royalty- Deduction of Patent Royalty (Under Section 80RRB):

Under Section 80RRB any royalty income received on or after April 1, 2003, under the Patents Act 1970, is eligible for a deduction of up to Rs.3 lakh or the income received, whichever is less. The taxpayer must be a single patentee who is also an Indian resident. A certificate in the required form, duly signed by the prescribed authority, must be provided by the taxpayer.

80RRB Deductions on Income by way of Royalty of a Patent Lower of INR 3 lakhs or income received

SUMMARY

PAYER OF ROYALTY UTILIZATION* TAXABLE IN INDIA
GOVERNMENT – YES
INDIAN RESIDENT IN INDIA YES
OUTSIDE INDIA NO
NON-RESIDENT IN INDIA YES
OUTSIDE INDIA NO

 

/ INCOME TAX

All about Section 139 of Income Tax Act 1961,

All about Section 139 of Income Tax Act 1961

All about Section 139 of Income Tax Act 1961

Section 139 of Income Tax Act 1961:

  • According to the rules and regulations of our constitution, everyone in India who works and earns a substantial income is required to pay income tax. Knowledge of the various aspects of Income Tax is also essential. As a result, educating oneself on this subject should be regarded as important.

Introduction:

  • The Income Tax Department of India has divided an Indian citizen’s income into five major categories based on the sources of income. Salary, residential property, business, capital gains, and other sources are the key components of these five categories. Every individual with a source of income is required to pay income tax to the government. Everyone is required to file their tax returns by a specific deadline. Every Indian citizen is encouraged to follow these recommendations, which are grouped into many categories to deal with various forms of returns.
  • Several subsections of Section 139 of the Income Tax Act of 1961 define rules and regulations for various scenarios and circumstances. The following section will go into greater detail about them.

Section 139(1) – Mandatory and Voluntary Returns- Normal Income Tax Returns:

Section 139(1) addresses the mandatory return policies that must be followed when filing the Income Tax Return. The entities listed below must file their tax returns.

  • Anyone whose total income exceeds the exemption level is required to file an income tax return by the specified deadline.
  • Any private, public, domestic, or foreign entity based in India or conducting business there.
  • Firms, such as LLPs (Limited Liability Partnerships) or ULPs (Unlimited Liability Partnerships) (Unlimited Liability Partnership).
  • Residents with assets located outside of India, or any entity with authority over an account located outside of India.
  • If their income exceeds the prescribed exception limit, every HUF (Hindu Undivided Family), AOP (Association of Persons), and BOI (Body of Individuals) must file an Income Tax Return.
  • Voluntary Tax Returns are those in which individuals or entities are not required to file a return.
  • Certain classes of people who meet a certain condition are exempt from filing a tax return under Section 139(1c). When sessions are held immediately following the notification, the issued notice should be placed before each House of Parliament for 30 days. The notification will only be effective if both Houses agree.

Section 139(3) – Filing Income Tax Return in case of Loss

In the event of a loss, you must file an income tax return.

Section 139(3) of the Income tax Act governs the filing of income tax returns in the event of a loss. When there are losses, it is normally beneficial to file a return because the loss can be carried over, lowering the tax bill in subsequent years. The following are cases that have been specifically specified.

  • If the loss occurred in the prior fiscal year, an Individual Taxpayer is not required to file a tax return. In the case of a loss in a company or organization, however, a tax return for a loss is required.
  • If a company’s loss comes under the heading of “Profits and Gains of Business and Profession” or “Capital Gains,” filing a tax return is required if the company wants to carry forward the loss and offset it with future income. Only if the tax return is filed by the due date is this option available.
  • Other losses filed under Section 142(1), with the exception of “House and Property,” cannot be carried forward, leaving out the unabsorbed depreciation value.
  • Alternatively, if a loss is offset against income in another category for the same year, offset is allowed even if the return is filed after the due date.
  • Losses from previous years can be carried forward if the return is filed by the due dates after the losses have been assessed.

 Section 139(4) – Late Income Tax Return- Belated Income Tax Return

  • It is recommended that a taxpayer, whether an individual or a business, file their tax return by the due date specified in Section 139(1) of the act.
  • If the return file is still late, there is still the option of filing a belated return for prior years until the expiry date of the current applicable year of assessment or before the fiscal year is completed. Nonetheless, if the taxpayer fails again, a 5,000 rupee penalty is imposed under Section 271F of the IT Act, 1961. If the income did not necessitate mandatory filing as defined in Section 139(1) and the return was filed after the due date, the penalty can be avoided.

Section 139(5) – Revised Return- Income Tax Return Revised:

  • It is possible that the Income Tax Return was filed on time, but errors occurred. Section 139 allows the taxpayer to correct any errors in the file for revising the income tax return (5).
  • It can be filed at any point during the relevant assessment year or before the evaluation is completed, whichever comes fIncome tax Dept. t. There is no limit to how often you can revise your tax return file as long as you stay inside the deadline. Revising can be done in the same form or by submitting a different return form. Once the new return is filed, the original return will be considered withdrawn.
  • It should be noted that Section 139(5) applies only to “omissions and incorrect statements,” not “concealment or false statements.” As a result, only unintentional errors can be corrected; otherwise, the penalty is imposed.

Section 139(4a) – ITR of Charitable and Religious Trusts

Charitable Trusts:

  • Some individuals get their money from property that is legally obligated to be used for religious or charitable purposes, either entirely or partially. It can also be voluntary contribution income, as defined in subsection 2(24). (iia).
  • If the gross total income exceeds the maximum allowable amount that is not taxable under income tax, the tax return must be filed under Section 139(4A) in both cases.

Section 139(4b) – Political Party to Furnish the ITR’s –Political Parties:

  • Section 139(4B) requires political parties to file an income tax return if their total income is made up primarily of voluntary contributions from the general public–exceeds the maximum allowable tax-free threshold The Chief Executive Officer or Secretary is in charge of filing the tax return by the due date.

Section 139(4c) & Section 139(4d) – ITR’s of entities claiming Exemption U/s 10

Exemption U/s 10 with relation to ITR:

  • There are certain institutions that can claim certain benefits under Section 10 of the Income Tax Act of 1961, and for their tax returns, Section 139(4C) and Section 139(4D) must be used.
  • Section 139(4C) includes institutions for which a tax return is required if the maximum allowable limit exceeds the maximum cap of tax exemption, which shall exclude other exemption benefits enjoyed by the institution.

These institutions are primarily the following organizations and agencies.

  • Associations engaged in scientific research
  • Institutions or associations under Section 10(23A)
  • News agencies
  • Institutions under Section 10(23B)
  • Educational and Medical Institutions, Universities and Hospitals

Return file is not applicable to all colleges, universities, and institutions under Section 139(4D), and they are not required to file tax returns of income and loss under any specific provision in this section. Sections 31(1)(ii) and 35(1)(iii) of the IT Act are covered by this section.

Section 139(9) – Defective Returns- Defective Income Tax Returns

If documents are missing, a tax return may be deemed defective under Section 139(9). A defective return must be determined by the taxpayer, and the taxpayer must be notified in writing. A fifteen-day window will be set aside to resolve the issue and produce the missing documents. The period may also be extended at the taxpayer’s request if valid reasons are provided. As a result, you must keep the following documents in mind for your file to avoid being deemed defective.

  • A statement displaying the amount of taxes owed.
  • Filed a tax return in the proper format.
  • Proofs of all tax-paying claims.
  • A report is provided prior to filing the return. This auditing report is required under Section 44AB.
  • Copies of the audit report, balance sheet, and auditor’s profit and loss accounts in the event that the tax payer’s account is audited.
  • In the case of a cost audit, the relevant report.
  • If the taxpayer does not keep an accounting book, a statement indicating gross receipts, turnover amount, bank balance, stocks, cash, debtors or creditors information, expenses and net profit, etc. is required.
  • If the taxpayer keeps a book of accounts, these mandatory copies are required.
  • All profit and loss accounts, manufacturing accounts, trading accounts, balance sheet, and income and expense accounts.
  • In the case of partnership firms, personal accounts of partners
  • All members must produce their personal accounts for AOP/BOI.
  • Personal account of the proprietor

All the ITR Forms notified by Income Tax India

All the ITR Forms notified by Income Tax India

Deadlines for Income tax return U/s 139

Due to the fact that various people earn money in different ways, Section 139 has established due dates for the specific necessity of filing income tax reports. The following are the dates:

  • July 31st- Several people and entities do not require an audit report to validate their accounts. Every assessment year, these individuals and entities must file their income tax returns by July 31. A paid employee, a self-employed or professional, a freelancer, or a consultant are examples of these entities.
  • September 30th- Various other entities are required to have their accounting books audited, and they have until September 30th to file their tax returns. This category includes a business entity and a working partner employed by a firm or consultant who has an audit performed on their accounting books.

Form ITR 7 Related to Section 139

For all people and companies required to file a return under the income tax Dept. t four portions of Section 139, the Income Tax Department has produced form ITR-7. It is recommended that taxpayers use Form 26AS or the Tax Credit Statement to match their tax numbers of paid and deducted amounts.

To file the Form ITR-7 with the IT Department, use one of the procedures listed below:

  • Paper form
  • E-Form using a digital signature
  • Data delivery through electronic means, followed by submission and verification of the Form ITR-V return.
  • Sub -Section 4E of the 139 provides for the filing of a return for the income of other business trusts that are not required to provide profit and loss statements.

e verification

Conclusion:

  • Certain amendments to Section 139 of the Income Tax Act have been made in recent years. These mostly consist of adjustments to clauses and statements to facilitate information exchange.
  • There are various provisions to conveniently review defective forms for various taxpayers and also for revision of scope. The due date and the extension provided should be aware, if applicable.
  • The special provisions must also be noted in their separate categories and all documents must be produced for the acceptance of the form.
  • This essential task has now been made easier and convenient by the latest online portals so that someone can check their entire accounts at once and perform the tax payment duties quite easily.
/ Company Law Compliances

INCOME TAX ACT UPDATE ON NOV 17, 2015

INCOME TAX ACT UPDATE ON NOV 17, 2015

INCOME TAX ACT

SECTION 9

INCOME – DEEMED TO ACCRUE OR ARISE IN INDIA

Liaison Office of foreign MNC established in India for sourcing goods for exports to its overseas customers as per their requirements will not be treated as PE under the DTAA merely because it engages in activities necessary for purchase such as identifying a competent manufacturer, negotiating a competitive price, helping in choosing material to be used, ensuring compliance with quality of the material and getting material tested to ensure quality. Nor will the LO lose tax exemption under Explanation 1(b) to section 9(1)(i) which is available to non-residents purchasing goods in India for the purposes of export – [2015]  240 (Karnataka)

SECTION 32

DEPRECIATION – UNABSORBED DEPRECIATION

Where once amount realized by assessee by sale of building, plant and machinery was treated as income arising out of profits and gains from business by virtue of sub-section (2) of section 41 notwithstanding fact that assessee was not carrying on any business during relevant assessment year, provision contained in sub-section (2) of section 32 would become applicable and, consequently, set-off had to be given for unabsorbed depreciation allowances of previous year brought forward in terms of said provision – [2015]  239 (Karnataka)

SECTION 40(a)(ia)

BUSINESS DISALLOWANCE – INTEREST, ETC., PAID TO A RESIDENT WITHOUT DEDUCTION OF TAX AT SOURCE

Reassessment : No reassessment due to TDS default on royalty payment if its details were available at assessment stage – [2015]  16 (Calcutta)

SECTION 69A

UNEXPLAINED MONEYS

Jewellery : In terms of section 69A, assessee would be treated in possession of jewellery, from date of opening of locker, i.e., when jewellery was found and seized by revenue, and would be added to his income accordingly –[2015]  51 (Bombay)

SECTION 80-IB

DEDUCTIONS – PROFITS AND GAINS FROM INDUSTRIAL UNDERTAKINGS OTHER THAN INFRASTRUCTURE DEVELOPMENT UNDERTAKINGS

Housing Project : Where certain amount was received for booking flat in house project developed by assessee and assessee did not have any other business activity during year under consideration, Assessing Officer was not justified in holding that said amount was income from other sources and deduction was to be allowed under section 80-IB(10) on said sum – [2015]  132 (Ahmedabad – Trib.)

SECTION 92C

TRANSFER PRICING – COMPUTATION OF ARM’S LENGTH PRICE

Comparables and adjustment/Adjustment-Reimbursement : Where assessee was not incurring any expenditure in respect of services claimed to be received from AE, assessee’s claim that it was outsourcing services was acceptable and no transfer pricing adjustment was called for – [2015]  57 (Jaipur – Trib.)

SECTION 158BD

BLOCK ASSESSMENT IN SEARCH CASES – UNDISCLOSED INCOME OF ANY OTHER PERSON

Period of limitation : Where assessee, was issued with notice under section 158BD in respect of assessment of other persons, in a year after completion of assessment, notice could not be held to be a valid notice as same was to be issued immediately.

SECTION 164

TRUST/TRUSTEES – CHARGE OF TAX WHERE SHARES OF BENEFICIARIES UNKNOWN

Others : Where assessee-trust claimed that pursuant to provisions of sections 61 to 63 income earned by it had been included in returns of income of beneficiaries of trust and offered to tax directly by them and, therefore, effective income taxable in its hands was to be considered as nil, Assessing Officer was wrong in concluding that assessee and beneficiaries constituted an association of persons and assessing assessee as an association of persons – [2015]  86 (Bangalore – Trib.)

SECTION 195

DEDUCTION OF TAX AT SOURCE – PAYMENT TO NON-RESIDENT

Advertisement charges : Advertisement payment made to resident company is covered under section 194C and not section 195C – [2015]  57 (Jaipur – Trib.)

SECTION 269SS

DEPOSITS – MODE OF TAKING/ACCEPTING

Illustrations : Where assessee accepted and repaid loan exceeding Rs. 20,000 in cash from/to money lender repeatedly, even when transaction took place in a major city and offered no explanation regarding urgency or compulsion, levy of penalty was in consonance with law – [2015]  72 (Madras)

SECTION 271(1)(c)

PENALTY – FOR CONCEALMENT OF INCOME

Disallowance of claim, effect of : Where assessee furnished all information relating to increase in share capital in regular proceedings, levy of concealment penalty was unjustified – [2015]  122 (Delhi – Trib.)

COMPANIES ACT

SECTION 111

TRANSFER OF SHARES – POWER TO REFUSE REGISTRATION AND APPEAL AGAINST REFUSAL

Where respondent group had furnished succession certificate as well as transfer deed executed in their favour, they were clearly entitled to have rectification made by getting shares registered in their favour – [2015]  241 (SC)

SECTION 446

WINDING UP – SUITS STAYED ON WINDING UP ORDER

Where allegations of cheating and fraud had been levelled against partners of company, regarding which FIR had been registered in Delhi, Delhi Court had summoned accused and Magistrate at Delhi had taken cognizance of matter, petitioners could not have approached a different High Court for quashing of complaint – [2015]  127 (Punjab & Haryana)

COMPETITION ACT

SECTION 3

PROHIBITION OF AGREEMENTS – ANTI-COMPETITIVE AGREEMENTS

Where appellant alleged that respondent No. 1 along with two other bidders had indulged in cartelization and was guilty of bid rigging, however, he did not produce any document to prima facie prove that all three entities were owned by one person or same family, Commission rightly observed that no case for ordering an investigation into allegations contained in complaint was made out – [2015]  54 (CAT – New Delhi)

SECTION 53B

APPELLATE TRIBUNAL – APPEAL TO

Where no reasonable explanation had been given by appellant for condoning delay in filing appeal, there was absolutely no justification for exercise of power by Tribunal under proviso to section 53B(2) – [2015]  54 (CAT – New Delhi)

SERVICE TAX

SECTION 86

APPEALS – BY DEPARTMENT ON REVIEW OF ORDERS – APPELLATE TRIBUNAL

Tribunal cannot examine validity of review order, beyond factum as to whether or not a decision has been taken by a Committee of Commissioners/Chief Commissioners to institute appeal; if decision has been taken, Tribunal cannot examine why and how was said decision taken, as such a review is an administrative act – [2015]  118 (Delhi)

CENTRAL EXCISE ACT

SECTION 2(f)

MANUFACTURE – GENERAL MEANING

Mere cutting of lengthy conveyor belt into smaller sizes would not amount to manufacture; more so, as revenue failed to show that as a result of said cutting, it was transformed into a new product which was a marketable product – [2015]  119 (SC)

SECTION 11A

RECOVERY – OF DUTY OR TAX NOT LEVIED/PAID OR SHORT-LEVIED/PAID OR ERRONEOUSLY REFUNDED

Scope of Show-cause notice : Merely because fraudulent availment of exemption/bond is of great magnitude and is admitted does not mean that recovery can be made at any time; recovery can be made within 5 years from relevant date and there is no provision to consider ‘date of knowledge of department’ as relevant date –[2015]  121 (Bombay)

CUSTOMS ACT

SECTION 28

RECOVERY – OF DUTY OR TAX NOT LEVIED/PAID OR SHORT-LEVIED/PAID OR ERRONEOUSLY REFUNDED

Scope of Show-cause Notice : Mere passing reference to a section in show-cause notice, without any supporting omissions or commissions by assessee supporting invocation of said section, cannot validate demand under said section – [2015]  47 (Madras)

CST & VAT

SECTION 17 OF THE WEST BENGAL SALES TAX ACT, 1994

CLASSIFICATION OF GOODS

Hexidine and Hexigel : Products ‘Hexidine’ and ‘Hexigel’ were drugs and medicines falling under Entry No. 24(iv) of Part A of Schedule IV of West Bengal Sales Tax Act, 1994 – [2015]  45 (WBTT)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances; Hope the information will assist you in your Professional endeavors. For query or help, contact:info@caindelhiindia.com or call at 011-23343333

/ INCOME TAX

FAQ ON COMPUTATION OF AGRICULTURAL INCOME AS PER INCOME TAX ACT

FAQ ON COMPUTATION OF AGRICULTURAL INCOME AS PER INCOME TAX ACT-

 Do Interest on arrears of rent qualify as Agricultural Income and will this be exempt from tax?

Sometimes, a tenant could slip up on rent or revenue payments (either in cash or kind) and have to pay arrears. If the landlord charges interest on such arrears, the income would not be considered agricultural income, but would be deemed income by way of interest and would, hence, be chargeable to tax. While `rent’ presupposes periodical and pre-determined payment (either in cash or kind), `revenue’ implies a sharing arrangement that depends on the actual agricultural produce. In either case, ownership of agricultural land or interest in such land is essential. Which means, the owners of agricultural land, tenants who are given a sub-lease, and people who are mortgagees of agricultural land, all enjoy tax-free agricultural income.

  1. if agricultural produce is processed to make it marketable at a place other than the agriculture land then amount charged for such processing will be agriculture income or not ?
  2. Any processing done on Agricultural produce to make it marketable is a part of agricultural operations and such amount recovered will be treated as agricultural income only. Say for example trashing of wheat, mustard, etc is part of agricultural operations only and the amount recovered will be treated as agricultural income only no matter processing takes place on the land itself or some other place.

But in certain cases like in the case of tea, coffee, sugarcane where a major processing is being done then some part of the processed produce (tea, coffee & sugar) is taxed as non-agricultural income and rest is exempt as agricultural income.

  1. What if agriculture operation is carried on urban land?
  2. No Matter whether the land is urban or rural agricultural land. If agricultural operations are carried out on land the income derived from sale of such agricultural produce shall be treated as agricultural income and will be exempt from tax.
  1. If any industrial organization grow crops and sale half of the goods as raw material in market and remaining further processed and sold as finish goods what will be the tax treatment?
  2. Agricultural income is exempt from income tax. no matter agricultural operations are done by an industrial organization or an individual.If any industrial organization grow crops and sale half of the goods as raw material in market and remaining further processed and sold as finish goods the income earned on first half of produce which is sold in market as raw material is totally exempt from tax.

The second half of the produce which is further processed in this case scheme of presumptive taxation is applicable. Rule 7,7A,7B & 8 of Income tax rules deals with such type of income. Rule 7A deals with Income from manufacture of rubber, 7B deals with Income from manufacture of coffee and Rule 8 deals with Income from manufacture of tea. . Rule 7 deals generally wich says that in cases in which income is partially agriculture and partially from business the market value of the agricultural produce which has been raised by the assessee or received by him as rent in kind and which has been utilized as a raw material shall be deducted from the sale receipts and will be treated as agriculture income. Remaining will be treated as non agricultural income.

  1. in my agriculture farm I am operating 5 cow in Pune, Maharashtra. this is not by product, only product of milk. So is this income is agriculture income or taxable income? (This milk is sold to dairy product plant in nearest co-op society).
  2. dairy farming is not an agricultural income.
  1. why rent on land treated as agricultural income? what difference is there if the land is in specified area?
  2. Rent received from agricultural land used from agricultural purpose is treated as agricultural income. This is the law.
  1. I HAVE business income of Rs 1,95,000 and agricultural income of Rs 2,95,000. These figures relate to the assessment year 2009-10. How will my tax liability be computed?
  2. Agricultural income is exempt under Section 10(1) of the Act so long as the income is derived from agricultural land situated in India. This income is, however, included merely for rate purposes and rebate is allowed on the same in accordance with the Finance Act. No Tax is payable if total Income of an individual do not exceed 1,50,000/- . The inclusion of agricultural income for rate purposes is only required where the total income exceeds Rs 1,50,000.
PARTICULARS RUPEES
Business Income 5,95,000/-
Agricultural Income 2,95,000
Income Including Agricultural Income 4,90,000
Tax on 4,90,000/- 53,000/-
Less: Rebate on Agricultural Income
(Tax on 2,95,000+ 1,50,000 being basic Exemption) 44,000/-
Net Tax Payable 9,000/-
Add: Education Cess 3% 270/-
Total tax Payable 9,270/-

 The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances; Hope the information will assist you in your Professional endeavors. For query or help, contact:info@caindelhiindia.com or call at 011-23343333

/ INCOME TAX

AGRICULTURE INCOME IS EXEMPT UNDER INCOME TAX ACT

Online utility of Traces(TDS), income tax, GST, ESI, PF

AGRICULTURE INCOME IS EXEMPT UNDER THE INDIAN INCOME TAX ACT.

Agricultural Income :Agriculture income is exempt under the Indian Income Tax Act. This means that income earned from agricultural operations is not taxed. The reason for exemption of agriculture income from Central Taxation is that the Constitution gives exclusive power to make laws with respect to taxes on agricultural income to the State Legislature. However while computing tax on non-agricultural income agricultural income is also taken into consideration.

What does the term Agricultural Income mean?

As per Income Tax Act income earned from any of the under given three sources meant Agricultural Income;

(i)     Any rent received from land which is used for agricultural purpose: Assessees do not have to pay tax on rent or revenue from agricultural land. Such land should, of course, be assessed to land revenue in the country or be subject to a local rate. Further, there must be a direct link between the agricultural land and the receipt of income by way of rent or other revenue (for instance, a landlord could receive revenue from a tenant).

(ii)   Any income derived from such land by agricultural operations including processing of agricultural produce, raised or received as rent in kind so as to render it fit for the market, or sale of such produce.

(iii)   Income attributable to a farm house subject to the condition that building is situated on or in the immediate vicinity of the land and is used as a dwelling house, store house etc. Income from such farm houses is considered agricultural income. The definition of `farm houses’ covers buildings owned and occupied by both cultivators of agricultural land and assessees who receive rent or revenue from agricultural land. The sole purpose of such farmhouses should be for use as dwellings for the cultivators or use as store houses. Normally, the annual value of a building is taxable as `income from house property’. However, in the case of a farm house, the annual value would be deemed agricultural income and would, thus, be exempt from tax.

(iv) Income earned from carrying nursery operations is also considered as agricultural income and hence exempt from income tax.

 In order to consider an income as agricultural income certain points have to be kept in mind:

(i)  There must me a land.

(ii)  The land is being used for agricultural operations:- Agricultural operation means that efforts have been induced for the crop to sprout out of the land. The ambit of agricultural income also covers income from agricultural operations, which includes processing of agricultural produce to make it fit for sale. Like the people who receive passive agricultural income in the form of rent or revenue, the people who actually carry out agricultural operations are also eligible for tax-free agricultural income.

(iii) Land cultivation is must:– Some measure of cultivation is necessary for land to have been used for agricultural purposes. The ambit of agriculture covers all land produce like grain, fruits, tea, coffee, spices, commercial crops, plantations, groves, and grasslands. However, the breeding of livestock, aqua culture, dairy farming, and poultry farming on agricultural land cannot be construed as agricultural operations.

(iv)  If any rent is being received from the land then in order to assess that rental income as agricultural income there must be agricultural activities on the land.

(v)   In order to assess income of farm house as agricultural income the farm house building must be situated on the land itself only and is used as a store house/dwelling house.

(vi) Ownership is not essential. In the case of rent or revenue, it is essential that the Assessee have an interest in the land (as an owner or mortgagee) to be eligible for tax-free income. However, in the case of agricultural operations it isn’t necessary that the person conducting the operations be the owner of the land. He could be just a tenant or a sub-tenant. In other words, all tillers of land are agriculturists and enjoy exemption from tax. In some cases, further processes may be necessary to make a marketable commodity out of agricultural produce. The sales proceeds in such cases are considered agricultural income even though the producer’s final objective is to sell his products.

  Certain income which is treated as Agriculture Income;

(a)   Income from sale of replanted trees.

(b)   Rent received for agricultural land.

(c)    Income from growing flowers and creepers.

(d)   Share of profit of a partner from a firm engaged in agricultural operations.

(e)    Interest on capital received by a partner from a firm engaged in agricultural operations.

(f)    Income derived from sale of seeds.

Certain income which is not treated as Agricultural Income;

(a)    Income from poultry farming.

(b)   Income from bee hiving.

(c)    Income from sale of spontaneously grown trees.

(d)   Income from dairy farming.

(e)    Purchase of standing crop.

(f)    Dividend paid by a company out of its agriculture income.

(g)   Income of salt produced by flooding the land with sea water.

(h)   Royalty income from mines.

(i)     Income from butter and cheese making.

(j)     Receipts from TV serial shooting in farm house is not agriculture income.

(k) Income from Plantation companies:- Many plantation companies have launched schemes that offer tax-free agricultural income. These schemes are of various types: while some give investors leasehold rights to the land, some give rights to trees a certain level above the ground, even as others offer rent. If the scheme gives rise to ownership or leasehold interest in the land, then the income is considered to be rent or revenue in the hands of the investor. In the absence of ownership or leasehold rights, income from plantation companies is either considered interest or non-agricultural income chargeable to tax.

 Certain points to be remembered;

(a)   Agricultural income is considered for rate purpose while computing tax of Individual/HUF/AOP/BOI/Artificial Judicial Person.

(b)   Losses from agricultural operations could be carried forward and set off with agricultural income of next 8 assessment years.

(c)   Agriculture income is computed same as business income.

 Exceptions: – If a person just sells processed produce without actually carrying out any agricultural or processing operations, the income would not be regarded as agricultural income. Likewise, in cases where the produce is subjected to substantial processing that changes the very character of the product (for instance, canning of fruits), the entire operations cannot be regarded as agricultural operations. The profit from the sale of such processed products would have to be apportioned between agricultural income and business income. Further, the income from trees that have been cut and sold as timber is not considered agricultural income since there is no active involvement in operations like cultivation and soil treatment.

 Tax on Sale of agricultural land:- 

 Before 1970, profit on the sale or transfer of all agricultural land was considered rent or revenue derived from the land. Such profit was, therefore, tax-exempt as agricultural income. There were several favorable judgments of various High Courts on the issue. However, via a retrospective amendment that took effect from April 1, 1970 LAND qualifies to be agricultural land if it is not situated in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee or by any other name) or a cantonment board, and which does not have a population of 10,000 or more according to the last preceding census which has been published before the 1st day of the previous year in which the sale of land takes place, and it is not situated less than eight kilometers from the local limits of any municipality or a cantonment board.

If, by the test above, the land is agricultural land, it will not form part of the definition of a capital asset and so there will be no capital gains on the sale of such land.

Agricultural land not forming part of the above will be a capital asset and sale of which will attract capital gains tax subject to Section 54B, which is explained below.

Section 54B – Capital gain on transfer of land used for agricultural purposes not to be charged in certain cases.

The agricultural land should have been used for agricultural purposes.

It must have been used either by the assessee or his parents in the two years immediately preceding the date on which the transfer of land took place.

The assessee should have purchased another land, which is being used for agricultural purposes, within a period of two years from the date of sale.

The whole amount of capital gain must be utilized in the purchase of the new agricultural land. If not, the difference between the amount of capital gain and the new asset will be chargeable as capital gains and the tax will be computed accordingly.

The new asset purchased should not be sold within a period of three years.If sold, the cost of the new asset will be reduced by the amount of capital gain for the purpose of computing capital gains tax.

Where the amount of capital gain is not utilized by the assessee for the purchase of the new asset before the due date of furnishing his return of income, he may deposit it in the Capital Gains Account Scheme (CGAS) of any specified bank.

The return of income of the assessee should be accompanied by the proof of such deposit. In such a case, the cost of the new asset shall be deemed to be the amount already utilized by the assessee for the purchase of the new asset together with the amount deposited in the CGAS. If the deposited amount is not utilized for the purchase of the new asset within the specified period, then the unutilized amount shall be charged in the year in which the period of two years from the date of sale of the original asset expires.

Tax after including agricultural income in total income:- 

Although agricultural income is fully exempt from tax, the Finance Act, 1973, introduced a scheme whereby agricultural income is included with non-agricultural income in the case of non-corporate assessees who are liable to pay tax at specified slab rates. The process of computation is as follows:

(a) Income tax is first calculated on the net agricultural income plus the assessee’s total income from non-agricultural sources.

(b) Income tax is then calculated on the basic exemption slab increased by the assessee’s net agricultural income.

(c) The difference between (a) and (b) is the amount of tax payable by the assessee.

This process of computation is, however, followed only if the assessee’s non-agricultural income is in excess of the basic exemption slab.

Clearly, despite agricultural income being tax-exempt, assessees have to be extra careful while dealing with such income. They must make sure that they aggregate agricultural income with their total income to avoid interest payments and possible penalties for concealment of income. Assessees must also maintain credible records to provide the tax authorities with proof of ownership of agricultural land and evidence of having earned agricultural income.

 Income from Film Shooting on Agricultural land is not Agricultural Income:- 

 Supreme Court of India in the case of CIT v Raja Benoy Kumar Sahas Roy (32 ITR 466) laid down the following three propositions to decide as to what constitutes agricultural income – (a) some basic operation, prior to germination, involving expenditure of human skill and labour on the land itself and not merely on the growths from the land, is essential to constitute agriculture. Illustrative instances of such basic operations are tilling of the land, sowing or disseminating of seeds, and planting; (b) subsequent operations, i.e., operations performed after the produce sprouts from the land, e.g. weeding, digging the soil around the growth, removal of undesirable undergrowths, tending, pruning, cutting, felling and preservation of the plants from insects, pests and other animals by themselves would not constitute agriculture. However, in cases where the subsequent operations are combined with basic operations, the subsequent operations would also constitute part of the integrated activity of agriculture; (c) activities not involving any basic operation on the land would not constitute agriculture merely because they have relation to or connection with the land. This point was considered by the Madras High Court in B. Nagi Reddi v CIT ((2002) 125 Taxman 20). In this case, the assessee had shown certain income from film-shooting in his premises, which was known as Vijaya Gardens, and he used to recover charges for the same. The assessee claimed that those charges amounted to agricultural income as the said premises were used for agricultural activities also. The assessing authority, however, treated it as business income. The assessee, therefore, filed three separate appeals before the Tribunal.

The Tribunal held against the assessee on the basis of the earlier orders passed that the income earned by the assessee by way of film-shooting charges did not amount to agricultural income. On a reference, the High Court observed that the assessee used to grow agricultural produces like paddy and derived income from fruit-yielding trees, etc. He earned income from rice, vegetables, fruits, etc., and, incidentally, he had also permitted film-producers to shoot their films in the said garden on payment of hire charges. It was the case of the assessee that had it not been for the vegetation, there would not have been any occasion for the producers to shoot films in the garden and, it was because of that, that the income earned from those shooting charges amounted to agricultural income. The High Court considered whether the income earned by the assessee by permitting film producers to shoot their flms in his garden could amount to agricultural income within the meaning of section 2(1-A) of the Income-tax Act, 1961.

The Court referred to the aforesaid decision of the Supreme Court in the case of Raja Benoy Kumar Sahas Roy in which it was emphasized that certain basic operations should be carried out alongwith subsequent operations. The Supreme Court observed that if the integrated activity of the agriculturist, viz., agriculture, which includes the basic operations and the subsequent operations, is undertaken and performed in regard to any land, that land can be said to have been used for agricultural purposes and the income derived therefrom can be said to be agricultural income derived from the land by agriculture. In the very same judgment, the Supreme Court also considered the other activities in relation to the land or having connection with the land including breeding and rearing of live-stock, dairy-farming, butter and cheese-making, poultry-farming, etc.

The Supreme Court observed and considered that this extension was based on the dictionary meanings of the term and the definitions of “agriculture” in Whartons Law Lexicon. The Supreme Court then went on to hold that the mere fact that an activity has some connection with or is in some way dependent on land is not sufficient to bring it within the scope of the term “agriculture”.

Applying the aforesaid principles, the Madras High Court held in Nagi Reddi’s case that income earned by the assessee by way of shooting-hire charges by permitting film producers to shoot their films in his garden was not agricultural income. The shooting of films is an activity which has no nexus whatsoever with agricultural operations, or with the land, except that the shooting is done on land which may be or has been agricultural land yielding some agricultural income. The nexus, as claimed by the assessee, was non-existent, far-fetched and illusory. To conclude, there is enough scope for taxing income from activities which are non-agricultural in nature. In fact, it is well known that agriculturists themselves do not have taxable income, taking into account the fact that when it is divided amongst family members who are involved in agricultural operations, each one of them would have income within the exemption limit. However, there are hundreds of thousands of middlemen like wholesalers, retailers, distributors, etc. who earn substantial income from trading in agricultural produce as well as fruits, flowers, etc. Such income or profits are fully taxable under the present law and, therefore, if concerted efforts are made by the Tax Department to recover tax from them, the need for widening the tax base to rope in agriculturists and farmers, would be eliminated.

TAX TABULATOR

Although agricultural income is not taxable, it must be included with non-agricultural income in the case of  non-corporate assessees who pay tax at prescribed slab rates. Resultantly, the rate of tax on non-agricultural income is higher for such assessees. Take the case of Tushar Singh, who earned an agricultural income of Rs 1,50,000 and non-agricultural income of Rs 2 lakh during the year ended March 31, 2009. Singh’s tax liability is to be calculated as follows:

(a) Agricultural income (Rs 1,50,000) plus non-agricultural income (Rs 2 lakh) = Rs 3.5 lakh.

(b) Income tax on Rs 3.5 lakh = Rs 25,000

(c) Tax on agricultural income of Rs 1,50,000 plus basic exemption of Rs 1.50,000 = Rs 15,000.

(d) Tax payable = (b) – (c) = Rs 10,000/-

Singh would have ended up paying Rs 5,000 in taxes on a non-agricultural income of Rs 2 lakh if it wasn’t for the provision governing inclusion of agricultural income for rate purposes. Following the inclusion clause, he pays an additional tax of Rs 5,000 on non-agricultural income.

Capital gain on Sale of Agricultural land 

Section 54B Income Tax Act ke tahat, agricultural land ki sale par jo capital gain hota hai, usse relief mil sakta hai, agar kuch specific shartein puri ki jaati hain. Aapke points bilkul sahi hain, aur inhe thoda aur detail mein samajhte hain:

Section 54B ki applicability

  • Eligible asset: Yeh sirf agricultural land par lagu hota hai, jo assessee ya uske parents dwara pichhle 2 saalon tak agricultural purpose ke liye use ki gayi ho.
  • Capital gains exemption: Agar aap sale ke 2 saalon ke andar naye agricultural land kharidte hain, toh aap apne capital gains ka exemption le sakte hain.

Long-Term Capital Gains (LTCG)

  • LTCG ka calculation:
    • Agar land 2 saal se zyada time tak rakhi gayi ho, toh transfer se hone wale profit ko LTCG maana jaayega.
    • LTCG ka formula: LTCG=Sale Price−(Indexed Cost of Acquisition+Transfer Expenses)\text{LTCG} = \text{Sale Price} – (\text{Indexed Cost of Acquisition} + \text{Transfer Expenses})
    • Is case mein aap Section 54B ke tahat naye agricultural land ki kharidari ke liye exemption claim kar sakte hain.

Short-Term Capital Gains (STCG)

  • STCG ka calculation:
    • Agar land 2 saal se kam samay ke liye rakhi gayi ho, toh usse hone wala profit STCG ke roop mein tax ke liye charge hoga.
    • STCG ka formula: STCG=Sale Price−(Cost of Acquisition+Transfer Expenses)\text{STCG} = \text{Sale Price} – (\text{Cost of Acquisition} + \text{Transfer Expenses})
    • STCG par Section 54B ka benefit available nahi hai.

Important conditions for Section 54B

  • New agricultural land ki purchase:
    • Aapko capital gains ke amount se naye agricultural land ko purchase karna hoga.
    • Purchase ka timeframe:
      • Transfer ke 2 saal ke andar nayi agricultural land kharidni hogi.
  • Lock-in period:
    • Nayi agricultural land ko kam se kam 3 saal tak hold karna hoga. Agar aap ise 3 saal ke andar bechte hain, toh pehle liya gaya exemption wapas taxable ho jaayega.

Required details and compliance

  • Transfer ki gayi agricultural land ki location, area, aur sale date furnish karna zaroori hai.
  • Sale se prapt consideration amount aur naye land ki purchase ki details furnish karni hogi.
  • Exemption claim karte samay ITR file karte hue proper calculation aur supporting documents attach karne honge.

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