Kalpesh Classes

Business Income

High value exam topics

• Taxation of companies with tax liability​​ calculations and dividend tax

• Taxation of firms

• Taxation of charitable trust / private trust with tax liability calculations

• Taxation of AOP with tax liability calculations

• Capital gains exemptions

• Powers and full procedure and advance tax calculations

• International taxation (DTAA / Special rates / Transfer pricing / GAAR) particularly tax liability and penalty calculation in all the cases.

28 (iv)

Value of benefit or perquisite out of carrying on of business or profession. With the taxation of gifts​​ section 56.

28 / 58

Any consideration for termination / modification of contract / services is taxable. If contract is employment contract then IFOS.

35AD

Full computation of specified business.

35AD, 28(vii), 50B, 56, 43(i) & 73A

172 / 44B

Shipping business of Non-resident actually comes in international taxation, however there is presumptive way of calculating income as 7.5 % of gross voyage. However for shipping companies every time it comes for voyage assessment will be done like a foreign company thus rates of foreign company will apply however at end of the year it has option to go for regular assessment. In case regular assessment the rates of taxes of assessee (if individual then individual rates of taxes) will apply.

Sale of business assets

If the assets forming part of depreciable block is sold then the sale price is adjusted from cost of block i.e. wdv. However there are also other situations like sale of those assets used for scientific research, sale of those assets covered by 35AD, sale of Telecom Rights etc. The general way of understanding treatment is that to the extent deduction taken in the past will be treated as business income and excess over cost if any will be taxed as capital gains.

40(a) (i)(ia)(iii)

Payment to non-residents,​​ residents and outside India. TDS compliance to be effected.​​ 

40A(3)

Cash expense or outflow is not allowed as deduction if it is in excess of 10000 per day per payee.

40(b)

Tax treatment for partnership firms. Read with 184, 185 etc. also treatment when​​ partner is a partner in representative capacity. Full computation with revised limit of remuneration.

(LLP)

LIMITED LIABILITY PARTNERSHIP (LLP) –​​ 

SECTIONS 2(23), 140 & 167C

33AB

Where assessee is sin growing and manufacture of Tea / Coffee / Rubber then​​ computation format should be in the following sequential manner only.

Profit as per P/L

Add / less all adjustment

33AB treatment

Agricultural income adjustment

Set off if any

44AD,​​ 

44ADA,​​ 

44AE

If the assessee maintains the books of accounts (although​​ not required by law) and its actual profits are more than presumptive income then assessee must return higher income for being eligible for the scheme.

If the scheme of presumptive income is applicable then officer should not ask for explanation regarding​​ business transactions like source and application of business transaction, cash transaction details etc. Officer should not make additions u/s 68, 69 etc. provisions.

Bad debts

In case of banks and financial institutions the special deduction of bad debts​​ have been given by creating reserve @ specified % provided in law. The adjustment for such assessee is special and all the bad debts as per books should be added and as per the limits of income tax the amount shall be deduced. Similar to book depreciation​​ add and tax depreciation less.

Business Income

Should know the full computation like​​ 

• Assessee with agricultural income and non-agricultural income

• Assessee with specified incomes of 33AB (Tea / Rubber development account)

• Bad debts for banks / financial​​ institution / foreign banks

• Correct application of presumptive incomes

• Specific treatment of specific provisions like telecom rights / 35AD business.

• Detailed concepts of Firms and LLP vis-a-vis what if HUF is a partner in partnership firms together with​​ remuneration and tax liability calculations.

• Computation of income when there is loan given to specified shareholder / there is change in shareholding pattern of company with tax liability calculation with dividend tax liability computations.

Assessment​​ of entities

HUF

Assessment of HUF. As much as tax treatment of partition is concerned. Also daughters (whether married or not) are now co-parceners.

Trust

Assessment of trust. Tax treatment of inter trust donations.

• Treatment for depreciation in​​ computing trust income.

• Treatment for 11(2) over accumulation​​ 

• Treatment for Expl to 11 where monies are accrued but not received

• Capital gains for Charitable trust

• Tax liability where violation of section 13 has encountered.

• Inter trust donations.

• Full computation of trust with reference to anonymous donation and full tax liability computation should be studied.

• Tax liability difference between private and public trust.

12(2), 13(6)

The value of services being medical, or educational granted by trust​​ running hospital or educational institution to specified person shall be taxable as income of the trust. Trust shall not loose exemption only because such benefit are extended to specified persons.​​ 

Private trust

As per section 160 to 166, the assessment​​ of private trust is done similar to as that of beneficiary. Suppose if beneficiary of trust is a company then the tax rate of company will be applicable in the assessment of trust. Responsible persons will be trustees of trust. If the trust has business income then it will be subject to maximum marginal rates of taxes.

AOP

If any situation of 167B is applicable then AOP will be taxed at maximum marginal rates of taxes and share of profits from AOP will be exempt from tax in the hands of members. (Similar to partnership firm).

However if the MMR or higher rates are not applicable to AOP then AOP will pay tax as per individual rates of taxes and members share will be included in their personal computation for the rate purposes.

Firms

Students must know variety of situation of firms

• Firm with presumptive income of 44AD or 44ADA or 44AE

• Firm with set off adjustment r.w. 40(b)

• Firm with retirement of partner and set off adjustment of 78. Where partner retires from the firm to the extent of retiring partners​​ share is not allowed to be set off in the hand of the firm.

• Firm with HUF as one of the partner and remuneration to HUF.

• Firm with 35AD deduction and AMT

• Firm with different clauses in partnership deed for remuneration and interest

• Firm with NR partner and​​ payment of remuneration and interest. Where a partner is non-resident and any taxable income is paid like interest / remuneration to partners then it should be subject to TDS.

Corporate taxation

Generally computation of companies will involve following issues prominently

• Dividend tax on loan advanced to specified shareholder

• Tax treatment of dividend in the hands of specified shareholder (115BBDA)

• 115BBDA do not apply to domestic companies and dividend type of 2(22)(e)

• In case of private limited companies​​ set off 51 % shareholding condition of section 79

• Deemed speculative transactions of section 73 where a company is having business and doing shares transaction.

Dividend Tax

Any loan to specified shareholder of 2(22) (e) will be subject to dividend tax and no grossing up to be done for this type of dividend. Loan provided if can be set off against subsequent payment of dividend if at that time loan remains outstanding and that can reduce the dividend tax obligations.

Dividend from Indian or foreign subsidiary will be allowed as set off while calculating dividend for dividend tax.

Dividend paid new pension trust is not subject to dividend tax.

If the company pays dividend tax then such dividend is exempt in the hands of shareholder.

Capital Gains

Indexation

Listed shares (Long term) No Indexation

Un Listed shares (Long term) No Indexation for Non-residents

Un Listed shares (Long term) Indexation available for residents

45(3) (4)

Taxation of firm’s capital gains where assets are withdrawn from firm​​ in ordinary course and firm is a going concern. Where assets are distributed to partner upon the dissolution or otherwise then it gives rise to capital gains.

45(5)

Computation capital gains in case of reduction of compensation. Also tax treatment in case of advance compensation paid by the land acquisition collector without passing the order of purchase.​​ 

46

Capital gains for company in liquidation. Particularly where the agricultural land is subject matter of division. Remember the dividend tax obligation with respect to companies in liquidation.

48

NR computation for sale of shares covered by Prov. 1 to 48. (Exchange fluctuation to be taken in to account for capital gains for sale of shares and debentures.)

Slump sale

Cost in case of slump sale is Asset – Liabilities = net assets, however if the assets are depreciable then WDV is considered for the cost. No indexation is allowed in case of slump sale and holding period of undertaking / business is considered for deciding whether it is long term or short term.

54

Investment in more than one residential house. (Including treatment on temporary residential house). Tax treatment of renovation expense of the new asset. Payment to tenant to vacate the premises after the acquisition of property is done.

54F

The condition of exemption relaxed. Where assessee owns one house on the date of transfer than also exemption is available. However assessee cannot acquire house other than one specified in the section.​​ 

54G / 54GA / 54D

Provision relating to compulsory​​ acquisition and shifting of Industrial undertaking. Specially covering the treatment for violation of holding period of new asset.

Capital gains

Students must be familiar with

• Treatment of stamp duty value / compulsory acquisition.

• Slump sale transaction

• ​​ All the exemptions particularly where 54 / 54F combine exemption for one transaction to be given.

• Students must clearly know the combine interpretation of 50C / 50CA / 43CA / 56 for under valuation of transaction in hands of seller and buyer.

• Students must also know the valuation principles for valuation assets as per Rule 11U and 11UA.

Other Provisions

56 / 43CA / 50C

At various places stamp duty value is adopted as fair value for the purpose of taxation. These points to be remembered

• 5 % tolerance​​ level is provided (so marginal difference in valuation will be tax neutral)

• Stamp duty value can be taken on date of agreement if at time of agreement some advance payment was received by banking channel.

• Purchaser of the property if subject to tax on stamp duty value then cost of the assets to him will be stamp duty value.

56

Taxation if gifts / without consideration is to be studied very precisely. Remember that now 56(2)(x) is applicable to all the persons. Thus situation like amounts received by​​ private trust for benefit of child will be also be covered by 56.​​ 

68,69 etc.

Certain cases of deemed income. For the gifts also genuineness to be proven apart from the movement of funds. This type of additions generally taken as IFOS and thus in case of​​ firm the remuneration or interest deduction against such deemed incomes shall not be allowed to assessee.

• 115BBE there is special rate of tax = 60 %

• Special surcharge of 25 % on above tax is provided by finance act

• 271AAC penalty will be provided if the additions are made by officer in assessment.

73

Tax treatment of carry forward and set off the speculative business loss. And interpretation of Expl. 1 to 73 as much as it relates to the deemed speculative loss. In certain situation shares transaction by business doing companies will be deemed speculative.

94(7)

Dividend stripping provision must be known to students.

94(8)

Bonus stripping provisions must be known to students.

Procedure and Powers

132

Powers of income tax authority. In case of search​​ stock cannot be seized. Together with assessment in case of search. I.e. 153A, 153B, 153C.​​ 

132B

Limitation of assets seized. Assessee can apply to officer in 30 days for release of assets if any assets have been seized and officer on satisfied with reason should release the assets in 120 days.

133A

Powers of survey. Survey can be done any time of business operations.

142A

Powers of officer to make reference to valuation officer.

142(2A)

Provisions relating to special audit.​​ 

143(3) & 153

Scrutiny​​ assessment. In certain cases of presumptive income there is compulsory scrutiny. Newer time limit for completion of assessment. 153.

263

Powers of CIT for making revision. Intimation cannot be covered by 263.

264

Concept of partial merger should be​​ known.

Merger of orders

Suppose in assessment there were 2 additions, and one of those additions is appealed to CIT (A) then other point which was not appealed can be rectified by assessing officer. This is called as partial merger of orders with higher authority orders, also called as point wise jurisdiction. In other words orders of higher authority cannot be rectified by lower level authority.

This concept of partial merger is applicable to 147,154 and 263.

However u/s 264 there is no such concept of partial merger. I.e. if one point was appealed then another point cannot be applied to CIT u/s 264.

Appeals​​ 

Important points about appeals is

• Concept of additional evidence (normally additional evidence is not allowed by appellate authority however on merits it can be allowed.)

• Concept of additional grounds (normally additional grounds is not allowed by appellate authority however on merits it can be allowed.)

• For ITAT special powers of stay is available and stay will automatically get vacated if matter is​​ not decided in 6 months of time.

• For ITAT all decisions are taken by majority of member’s, if the members are equally divided then president will have the final vote.

Tax recovery measure and other provisions

TDS

Generally institute is asking questions​​ based on amendments in TDS.

270A

Penalty calculations with respect to under reporting of income and mis-reporting of income. Students must know full tax liability calculation and relevant penalties.

Students must know special adjustment in term of penalty​​ where income represent the tax paid money of past year but no penalty is imposed in past year but now it will be imposed in current year.

Equilisation levy

Computation of levy to be paid to government for specified services of NR service provided not having any PE in India @ 6 %.

Black Money Act

Student should note that this act has good potential from exam point of view​​ particularly from the valuation of the assets under the BM act. Student should be familiar with valuation of different assets form (value of interest in firm / AOP) and tax liability calculations.

• Valuation of bank account

• Valuation of interest in firm

• Valuation of un-quoted equity shares

• Valuation of other assets

• Scope of cost of asset.

NR tax liability​​ 

Students must remember​​ 

• Non-resident senior citizen do not get higher basic exemption limit.

• 87A rebate do not apply to non-residents.

• Non-resident​​ assessee do not higher limit of 80D deductions

• Non-resident assessee do not get basic exemption limit for 11A,112,112A type of income. However resident assessee do get. For example if LTCG is 20,000 then non-resident will pay tax @ 20 % (plus cess) however​​ in same situation resident assessee tax liability will be Nil.

• 80G deduction some of them apply to transactions done by resident only.

• Similarly there are some typical difference for application of law for resident and non-residents that must be studied properly.

TDS

Where any payment is made to non-resident and non-residents income is chargeable to tax in Indian then tax is always deductible from such payments. If the payment to non-resident is net of tax then for tax purposes it should be grossed up.

9

Students must know correct scope of Business connection.​​ 

• With respect to substantial presence in India​​ 

• With respect to Indirect Transfer of shares.​​ 

• Students must know the difference between treatment of commission / royalty / TF / service charge​​ transaction.

111A / 112 / 112A XII etc.

Students must be familiar with all the tax liability calculations like​​ 

• Special tax rate and income calculations for many situation of chapter XII and XII A

• All different special rates for special incomes should be​​ known.

• Deductions or allowance with respect to income covered by special rates of taxes under chapter XII or XIIA

• All the working methods should be known precisely and should have practiced the computations thoroughly in writing. If students are just you tubing the learning module orally remember you are doing a big mistake.

• For the incomes covered by special rates of taxes generally No basic exemption, No expense, No VIA deductions and No Prov 1 and Prov 2 to section 48.

Dividends​​ 

Dividend Income from​​ Domestic company

Exempt subject to 115BBDA

Dividend Income from foreign company

Taxable and if it foreign subsidiary then special rates of tax of 115BBD will apply.

XIIA

Capital gains and other incomes for non-residents Indians. NRI and NR difference in computation of tax liability should be known. NRI chapter XIIA is optional thus student must do alternate computation of tax liability when computation of tax is asked for NRI.

115A

Thorough interpretation of Royalty / TF / Interest with rates of taxes. Students should know that whether deductions are allowed against Royalty / TF / Interest or not. Where non-resident or foreign company is having a PE (example branch) in India and from PE the services for Royalty / TF is provided then it is not covered by 115A (r.w. 44DA) i.e. special rates of taxes for such income will not apply.

90

DTAA treatment with different methods of elimination of Double taxation. Like for how the double taxation will be eliminated with DTAA or without DTAA. Entire tax liability​​ calculations must be known to students.

These are the types of question that can be set in exam

Where India and that country is having DTAA

• Foreign income is not taxable in India however it is included for rate purpose

• Foreign income is taxable in India and foreign tax credit partial / full is available.

Where India and that country is having not having DTAA

• Foreign country is income

• Foreign country one source is income and other source is loss however in that country loss is not allowed set off but India allows that set off.

• Foreign country is agricultural income and that country is taxing agricultural income.

• Foreign country source of income is Share of profit from firm which is exempt in that country but taxable in India

• Specified royalty income where​​ India allow chapter VIA deduction but there is no such provisions in that country.

92A

144C

Transfer pricing provision students must be familiar with

• Scope of TP income

• Which is correct method of applying valuation where there is multiple methods​​ applicable.

• When multiple ALP for same transaction is available for example if there are 10 ALP for one transaction then statistical method to be used to arrive at ALP.

• Calculation of penalty due to transfer pricing adjustment

• Transfer pricing restriction​​ of interest expense its carry forward and set off

• Treatment of multiple ALP for one transaction

• Treatment for transaction with entity in notified jurisdictional area with TDS application

92CA / 153

TPO procedure should be studied well, powers of TPO and time limit for completion of assessment when reference is made to TPO. Extension of time limit with reference to period of limitation should be known.

115BBA

Tax treatment for Non-resident / Non-citizen sports person should be known.

Entertainer like Joker, dancer or person doing stand-up comedy is also covered by 115BBA.

Chapter VIA deductions can be allowed against 115BBA income.

There is no need to file return of income in India if 115BBA income is the only income and tax required to be deducted is already deducted there on.

AAR

Students should know

• Who is applicant and what is the binding force?

• Can resident apply to AAR?

• What are the circumstance in which application to be rejected compulsorily?

GAAR

Entire scope of GAAR and its implication.

44B

Non-resident / FC, shipping business @ 5 % presumptive income (MAT provisions do not apply if this section is followed.)

44BB

Non-resident / FC, Oil exploration service @ 10 % presumptive income (MAT provisions do not apply if this section is followed.)

44BBA

Non-resident / FC, aircraft business @ 5 % presumptive income (MAT provisions do not apply if this section is followed.)

44BBB

FC, Turnkey power projects @ 10 % presumptive income (MAT provisions do not apply if this section is followed.)