Income Tax India: Laws
This is a collection of articles archived for the excellence of their content.
Adapted from EconomicTimes March 2014
1) The interest earned on a bank fixed deposit is...Interest on FDs is fully taxable as income at the rate applicable to the taxpayer.
2) Travel insurance policies are not tax deductible for salaried individuals.
3) An individual won't get tax deduction for... employer's contribution to PF.
4) Gifts worth over Rs 50,000 in a year are taxed as income of recipient.
5) Any income of a minor child will be clubbed with that of the parent. HRA is not tax-exempt if you pay rent to... Your minor child.
6) A disabled dependant gets you a deduction under Section 80DD. This is an additional tax benefit
7) f you have a second house lying vacant, you have to...
a. Pay tax on rent not received. b. Include in wealth tax. c. Pay property tax on it. All the three conditions apply on a second house lying vacant.
8) If one earns rent on property, how much of it is taxable? Rental income is eligible for 30% standard deduction.
9) Only those with income below the basic exemption are exempt from filing tax returns.
10) The RGESS deduction is available only to first-time investors in equities.
To boost the habit of savings and investments, the government has allowed every individual taxpayer to invest and buy certain financial products which will allow them to avail of tax deductions. Under section 80C of Income Tax Act 1961, a taxpayer could invest a total of Rs 1.5 lakh per annum in ELSS of mutual fund houses, EPF, PPF, tax-saving FDs, NPS, life insurance products and some other approved financial products, which will reduce the person’s total tax liability. Payment of home loan principal and tuition fee of children also come under this section for tax deductions.
Section 80 D
WHAT ARE SECTION 80D TAX BENEFITS?
Section 80D under the Income Tax Act provides for tax deductions for buying health insurance policies, popularly called mediclaim plans. In an era of increasing healthcare costs, the government, to encourage people to take mediclaim policies, allows taxpayers some sops for these policies. A taxpayer can get claim deductions of up to Rs 25,000 per year for payment towards premium for health insurance plans for the taxpayer, spouse and dependent children. The limit is enhanced up to Rs 30,000 even if either the taxpayer or the spouse is a senior citizen. Within these limits one can also claim deductions of up to Rs 5,000 per year as a cost for preventive health check up. The government also allows mediclaim premium of up to Rs 30,000 for policies taken for parents.
Rates of income tax in India
See the chart on this page
Income tax rates in India: 1995-2015
1949-2017: peak rate of Income Tax
1949-2017: peak rate of Income Tax
We know you absolutely hate a part of your annual income going into to the government's kitty in the form of taxes. After all, you worked hard the whole year and wish the exemption limit would be set higher. Whether that would be done or not will be known till Budget 2018 is presented, but you should take heart from the fact that you pay much less tax than what your grandfather did during his time.
While exemption limit today stands at Rs 2.5 lakh annually, it was Rs 1,500 way back in 1949-50. Though this may seem a meagre amount to you, a back of the envelope calculation shows this works out to be Rs 80,000 in today's terms. So your grandfather started paying tax at annual income of Rs 80,000, while you enjoy tax-free income that is nearly three times more than it.
Tax rates are another reason for you to cheer about. The peak tax rate today stands at 30.9%. But during 1970-71 it was a staggering 93.5%, a massive increase from the 25% Indians paid in 1949-50.
You may find three tax slabs cumbersome for tax calculation, but thank your stars, your parents or grandparents had to deal with as many as 11 tax slabs.
1949, and since 1995: The number of tax slabs
The number of tax slabs in 1949, and since 1995
2015: Appeals only for Rs 10 lakh +
1. The Times of India, Dec 13 2015
2. The Times of India, Dec 13 2015, Rubna Kably
I-T appeals only for Rs 10L and above
In a bid to reduce litigation and spare taxpayers harassment, the Central Board of Direct Taxes has increased from Rs 4 lakh to Rs 10 lakh the threshold for filing an appeal before the Income Tax Appellate Tribunal, reports Rubna Kably.
The threshold limit for an appeal by the I-T department before the high courts has been doubled to Rs 20 lakh. The threshold for I-T department appeals before SC remains at Rs 25 lakh.
To rein in frivolous appeals, CBDT ties I-T hands by raising `tax effect' limit
The Central Board of Direct Taxes (CBDT) continues with its plan to reduce litigation and be more taxpayer-friendly. By significantly increasing the threshold limits for filing of appeals, at various judicial levels, by the Income-tax (I-T) department, the CBDT hopes to mitigate taxpayer harassment and create efficacy in the functioning of the I-T department. At times, the I-T department files appeals with higher courts, with an eye on revenue, when the decision in the lower court is in favour of the taxpayer. Such frivolous litigation adds to the costs for both parties and results in taxpayer harassment.
The threshold limit for filing an appeal before the Income-Tax Appellate Tribunal (ITAT) by the I-T department has now been raised from Rs 4 lakh to Rs 10 lakh. Similarly , the limit for an appeal before the high courts has been doubled to Rs 20 lakh. While such revisions are an annual affair, the recently announced upward revisions are significant.
However, no change has been made in the threshold for appeals filed before the Supreme Court, which remains at Rs 25 lakh. Appeals before the ITAT and courts can now be filed by the I-T department only if the `tax effect' exceeds the threshold limits (see table). This move will help not only corporates, but also high net-worth individuals who find themselves embroiled in I-T litigation.
The CBDT has also clarified, in its circular dated December 10, that the revised limits will apply retrospectively and pending appeals below the specified threshold limits should be withdrawn or not pressed.
The `tax effect', as defined in CBDT's circular, means the difference between the tax on the total income assessed by the I-T department and the tax that would have been charged if the total income of the taxpayer was reduced by the income relating to disputed issues.
The CBDT has also instructed that merit must be the guiding factor while filing an appeal with higher judicial bodies -both the ITATs and courts. “It is clarified that an appeal should not be filed merely because the tax effect in a case exceeds the monetary limits (ie: threshold limits for appeals) prescribed,“ states the circular.
Tax experts view that the increase in threshold limits and withdrawal of pending appeals falling below the revised thresholds will ease litigation. The impact will be more favourable at the ITAT level, which is the first level of appeal. It is learnt that pan-India, 1.06 lakh cases were pending across various ITAT benches as of June 1. The maximum pendency was in Mumbai and Delhi, with 25,039 and 20,499 pending cases. Howev er, the exact number of pend ng cases, which will now fall below the revised threshold imits and be withdrawn, was not available.
However, to safeguard the nterests of the I-T department, certain caveats have been built into the instruc ions. For instance, just because on a particular disputed ssue, the I-T department has not appealed as the tax effect is ow, it does not preclude it from iling an appeal on the same issue for another taxpayer where the tax effect is beyond he prescribed threshold).
Further, the instructions on not filing an appeal if the ax effect is below the prescribed monetary limit will not apply in certain instances. These instances include: where the constitutional val dity of a tax provision is challenged; where the CBDT's circular has been held illegal or even when the audit objection has been accepted by the I-T department.
2017: ‘Higher appeals limit applies to pending cases,’ SC
The Supreme Court has held that the higher monetary threshold limits prescribed for filing of appeals by the income-tax authorities would apply both to appeals filed after the date of the instruction revising the limits and also to all pending matters. This brings respite to taxpayers who feared matters pending on the date of the instruction would be revived and lead to a tiring bout of litigation.
On November 23, the SC upheld the retrospective nature of the Central Board of Direct Taxes (CBDT) instruction setting down the thresholds for I-T appeals.
This order departs from an October order of the apex court which had taken a contrary view. After this decision, individual taxpayers and businessmen facing low denomination disputes had feared that I-T officials would rake up old matters discarded after upward revision of the threshold.
From time to time, CBDT, responsible for tax administration, enhances the monetary limits for filing of I-T appeals. Officials are not permitted to file appeals where the “tax effect” is low (as defined by the monetary limit), except for the few exceptions carved out. It helps cut down litigation, including pending litigation, and saves costs. “Tax effect” denotes the difference between the tax on income determined by I-T officials and the I-T chargeable on the income of the taxpayer after excluding the disputed income.
CBDT’s instruction, the subject matter of litigation before the SC, was dated February 9, 2011. It had provided that appeals cannot to be filed by I-T officials before high courts is the “tax effect” was less than Rs 10 lakh (the earlier circular on March 27, 2000, had pegged it at Rs 4 lakh). It did not change the monetary threshold for appeals before I-T tribunals and the SC, which remained at Rs 3 lakh and Rs 25 lakh, respectively.
Since then, another set of instructions have been issued, which provides that if the tax effect is Rs 10 lakh or less, an appeal cannot be filed even with the tax tribunals. For high courts, the limit is set at Rs 20 lakh and for the SC, it is Rs 25 lakh. Before the SC, the I-T department contended that the CBDT instruction had a prospective effect only. Thus cases pending in high courts on February 9, 2011, could not be dismissed merely based on the instruction. But the SC decided in favour of the taxpayer, SRMB Dairy Farming, a private limited company, by holding that CBDT’s instructions will also apply to all pending matters.
“The SC has rightly pointed out that the interpretation of CBDT’s instruction had to be done in the context of the purpose for which it was issued, which is to reduce litigation that had choked the legal system. Thus the apex court held that the instructions applied to pending matters also, as such an interpretation would facilitate achievement of the objectives of the National Litigation Policy aimed at bringing down the pendency of litigation cases,” said Gautam Nayak, tax partner, CNK & Associates, a firm of chartered accountants.
Interestingly, the latest instruction issued by the CBDT on December 11, 2015, not only significantly hiked the monetary threshold limits but categorically mentioned that: “This instruction will apply retrospectively to pending appeals and appeals to be filed henceforth in courts and tribunals. Pending appeals below the specified tax limits may be withdrawn.”
Nayak said: “This showcases the intent of the instructions and the SC has rightly acted on it.”
‘Fashion designers are artists, eligible for I-T exemption’ Shibu Thomas
Mumbai: A fashion designer is an artist, the Bombay High Court has said and ruled that they are eligible for incometax exemptions available under the category. Ten years after the income-tax department first objected to tax benefits claimed by one of India’s leading fashion designers, Tarun Tahiliani, a division bench of Justice Dhananjay Chandrachud and Justice J P Devadhar on Monday said the designer should get tax privileges extended to the artists.
Tahiliani opened the country’s first fashion boutique, Ensemble, and is credited with being one of the designers who have brought high couture to India. Tahiliani’s IT woes began in October 2000 when he sought tax exemption for his income of Rs 83.90 lakh. Under Section 80 RR of the Income-Tax Act, a resident of India, who is an an author, playwright, artist, musician, actor or sports person can claim exemption of 75% of his income earned from foreign assignments. Tahiliani said that applying the exemptions, his taxable income for that year would be Rs 53.24 lakh.
The tax department, however, refused to accept that the fashion designer was an artist. It also contested deductions sought by sought by Tahiliani on his taxable income for 1999-2000 and 2001-2002. The income-tax appellate tribunal ruled in Tahiliani’s favour, upholding his claim that he was a creative artist. The IT department challenged the order before the high court.
The department’s lawyer contended that a fashion designer didn’t belong to the creative profession as the vocation was classified under applied arts and not fine arts. The IT department said that the benefit of exemption was granted to aid the artists, who represent Indian culture abroad.
The HC dismissed the IT department’s petition and held that fashion designers were entitled to tax exemptions meant for artists.
Corporates’ promotional activities
Pharmaceutical companies’ junkets for doctors
Tribunal Disallows Expenses
The Mumbai bench of the Income-Tax Apellate Tribunal (ITAT) has nipped the `unholy' doctor-pharma nexus whereby medical practitioners are offered various incentives, like overseas trips, to encourage them to prescribe specific medicines or lines of treatment.
It has done so by upholding a disallowance of Rs 76.55 lakh, made by an I-T officer at the assessment stage. The expenditure was incurred by Liva Healthcare (a pharma company specialising in skincare formulations) to wards overseas trips for doctors and their spouses.
The immediate impact of the order is a higher I-T liability for the pharma company for financial year 2008-09, to which this case pertains, as the disallowed expenditure will be added back to the taxable component of income. In addition, the order will act as a reminder to pharma compa nies to adopt practices that are above board. The maximum rate of income tax on companies currently is 30% plus applicable surcharge and cess.
The ITAT's September 12 order observes, “The payment of overseas trips of doctors and their spouses for entertainment, by the pharma company , in lieu of expectation of getting patient re ferrals from doctors for its products so as to generate more business and profits, by any stretch of imagination cannot be accepted as legal.Undoubtedly it is not a fair practice and has to be termed as against the public policy.“
Section 37 of the I-T Act, which is a residual section, permits a business entity to claim as a deduction revenue expenditure incurred by it, `wholly and exclusively for the purpose of the business'.However, an explanation to this section provides that expenses incurred for any purpose which is an offence or is prohibited by law shall not be deemed to have incurred for the purpose of the business.Consequently , such expenditure cannot be allowed as a deduction from taxable income.
The code of conduct prescribed by the MCI debars doctors from receiving favours in return for referring, recommending or procuring of patients for medical, surgical or any other treatment.
Donations to NGOs’ projects
Halved in 2017
Sec 35AC Sunset Clause Will Expire On March 31
Donations made to hundreds of projects carried out by NGOs across the country will no longer be eligible for a 100% income tax (I-T) deduction in the hands of the donor from April 1. While tax savings are not the main purpose, if donations are made in March towards eligible projects, then donors comprising salaried employees could reap an I-T benefit.
At present, donations made for specific projects run by NGOs that have been certified under section 35AC entitle the donor to a 100% I-T deduction under section 80GGA in respect of the donated amount.
However, section 35AC has a sunset clause which expires this March. Section 80GGA is not as widely known as section 80G, which permits a 100% I-T deduction in respect of certain donations (such as PM's National Relief Fund) and a 50% I-T deduction in most other cases (see table).
“Taxpayers who do not earn income under the head `profits and gains of business and profession', such as salaried employees, can claim the benefit of section 80GGA. While the employer cannot consider the donations made, while computing tax to be deducted at source against salary income, the employee can claim the benefit of the same in his I-T return and claim an I-T refund, if applicable,“ says Pradeep Mahtani, director, HelpYourNGO Foundation. A chartered accountant says, “In fact, if there has been a short deduction of tax at source and advance tax has not been paid by the salaried employee, by making donations eligible for I-T deduction up to March 31, the salaried taxpayer could mitigate his I-T penalty . Donors should ensure that they get the appropriate receipt.“
Notifications are issued by the finance ministry from time to time, certifying the projects that are eligible under section 35AC, the period of eligibility and also the total cost of the eligible project. For instance, as regards NGOs registered in Ma harashtra, these include projects by Magic Bus (skill development and livelihood programme), Association of Palliative Care (for a palliative care centre), Foundation of Promotion for Sports and Games (Olympic Gold Quest project) and Mesco (educational scholarships).
HelpYourNGO, an online donation platform, has on its portal 45 NGOs that run 90 projects eligible under section 35AC, These include some well known names such as Akshaya Patra's midday meals, projects by Childline and People for Animals.
In view of the sunset clause, a government-appointed national committee -which approves projects that would be eligible under section 35AC -had ceased to accept requests after December last year. “Donation stems from fundamental reasons, which are deep-rooted among each donor whether that's joy , guilt, remembrance or duty . However, everyone does think of saving I-T after having donated. Just like the insurance and the investment industry , which makes people aware of I-T savings available to them, for donations it is incumbent upon NGOs to make people aware of taxes they can save as a result of the donation they have made,“ says Dhaval Udani, founder of Danamojo, a payments platform for NGOs.
Perhaps awareness of a 100% I-T deduction for donations made to section 35AC-eligible projects has been low. HelpYourNGO did a dipstick sample survey of 12 NGOs, for which data was readily available. It showed that the percenta ge of donations towards 35ACeligible projects as compared to total donations received by NGOs has declined from 14.7% in fiscal 2014-15 to 7.9% in the next fiscal.
Deval Sanghavi, partner and co-founder at Dasra, a strategic philanthropy foundation, points out, “Our experience has shown that donors see the I-T deduction more as a government certification, which in essence states the organisation is compliant with laws and adheres to missiondriven principles vis-à-vis a giver donating more because of the I-T deduction.“
The number of individuals who donate money to charity has shown a rise in India.As many as 203 million Indians donated money during 2015, opposed to just 183 million in 2014, according to the World Giving Index 2016.
Profits not taxable: SC
Mar 19 2015
The Supreme Court has ruled that surplus income earned by educational institutions cannot be taxed, and imparting education not termed a for-profit activity simply because it yielded high returns. Dismissing the revenue department's submission that an educational institution ceased to be a solely scholastic endevaour if it generated high profits, the court noted that their income was exempt from tax under the Income Tax Act.
“Where an educational institution carries on the activity of education primarily for educating persons, the fact that it makes a surplus does not lead to the conclusion that it ceases to exist solely for educational purposes and becomes an institution for the purpose of making profit,“ a bench of Justice T S Thakur and Justice Rohinton F Nariman said.
“A distinction must be drawn between the making of a surplus and an institution being carried on `for profit'. If, after meeting expenditure, a surplus arises incidentally... it will not cease to be one existing solely for educational purposes,“ the bench added.
The court, however, said the government must examine activities of such institutions to ensure that the purpose of education is not taken over by a profit-making motive. “If they are not genuine, or are not being carried out in accordance with all or any of the conditions subject to which approval has been given, such exemption must be withdrawn,“ it said.
The court passed the order on a bunch of petitions filed by Queen Educational Society challenging an Uttarakhand High Court order allowing I-T authorities to tax its surplus income of around Rs 7 lakh for the assessment year 2000-01.
1950: residential palace of erstwhile ruler exempted from IT
Court Raps I-T Dept For Pursuing Case Against Erstwhile Ruler Of Kota
The Supreme Court held that the income earned by erstwhile rulers of a princely state or their heirs by renting out a portion of the residential palace was not taxable and rapped the Income Tax department for pursuing a case despite their income being exempted under IT law.
A bench of Justices Ranjan Gogoi and Abhay Manohar Sapre allowed a plea of the ruler of the former princely state of Kota, now a part of Rajasthan, challenging the high court order for bringing his income from rent in the Income Tax net. The ruler owns extensive properties, including two residential pa laces known as Umed Bhawan Palace and the City Palace. The ruler is using Umed Bhawan Palace for his residence and a portion of it was rented out to the ministry of defence way back in 1976.
Although the Centre had in 1950 declared residential palace of an erstwhile ruler, situated within the state, as his inalienable ancestral property to be exempted from payment of income-tax, the I-T department had in 1984 initiated proceedings for assessment of income earned from renting out a portion of the palace. The Centre had incorporated Section 10(19A) in the IT Act to give exemption to former rulers.
The department contended that IT exemption was given for personal use and income earned from the rent was taxable. Commissioner of Income Tax and Income Tax Appellate Tribunal, however, turned down the plea of the IT department which had moved the Rajasthan HC.
The HC had ruled that as so long as the ruler continued to remain in occupation of his official palace for his own use, he would be entitled to claim exemption but if he let out any part of his palace, he became disentitled to claim benefit of exemption available under Section 10(19A) for the entire palace.
“In such circumstances, he is required to pay income-tax on the income derived by him from the portion let out in accordance with the provisions of the I T Act and the benefit of exemption remains available only to the extent of portion which is in his occupation as residence,“ the HC had said.
Quashing the HC order, the Supreme Court held that Section 10(19A) has used the term “palace“ for considering the grant of exemption to the ruler and income earned from renting out a portion of the palace was also exempted.
“We cannot ignore this distinction while interpreting Section 10(19A) which, in our view, is significant. In our considered opinion, if the Legislature intended to spilt the Palace in part(s), alike houses for taxing the subject, it would have said so by employing appropriate language in Section 10(19A) of the IT Act.We, however, do not find such language employed in the section,“ the bench said.. “Once the assessee is able to fulfil the conditions specified in section for claiming exemption under the Act then provisions dealing with grant of exemption should be construed liberally because the exemptions are for the benefit of the assessee,“ it said.
Scheduled tribes, Sikkimese, agriculture, institutions, hospitals, trusts
I-T laws allow exemptions for various categories of incomes or individuals
Among those are members of ST communities in Nagaland, Manipur, Tripura, Arunachal and Mizoram
A similar exemption is available to all those defined as "Sikkimese"
Among those exempt from paying income tax are members of scheduled tribe communities in Nagaland, Manipur, Tripura, Arunachal Pradesh and Mizoram. Scheduled tribes in North Cachar Hills and Mikir Hills in Assam, the Khasi Hills, Garo Hills and Jaintia Hills in Meghalaya and Ladakh in Jammu & Kashmir also don't have to pay income tax. The exemption applies to income arising from any source in these areas or from dividends or interest on securities from anywhere.
A similar exemption is available to all those defined as "Sikkimese" in the I-T Act. This again is for any income generated from Sikkim itself and for income from dividend or interest on securities generated anywhere. The intent behind these exemptions is to provide fiscal concessions to backward areas and communities. In times like now, it becomes a useful route for people looking to turn undisclosed incomes legitimate.
Apart from these geographically restricted exemptions, there is of course the exemption for agricultural income. That includes any rent or revenue derived from agricultural land.
There are several institutions that are tax exempt under the IT Act. Again, it is not difficult to see why the lawmakers would have decided not to tax them. For instance, income of a public charitable trust or not for profit society established for development of khadi and village industries is exempt from tax. Educational institutions including universities existing solely for educational purposes and not for profit are exempt from paying tax on their incomes under various sub-sections of the IT Act.
Similarly, not for profit hospitals too are exempt, different kinds being covered by different sub-sections.
Income of a charitable institution or fund approved by the prescribed authority is not required to pay taxes on its income either. Nor are public religious or public charitable trusts approved by the prescribed authority. Political parties and electoral trusts are also exempt from tax on their incomes. It is another matter that a major chunk of the money flowing to parties never enters any books anyway.
`Medical relief,' `imparting education' are charitable purposes
Baba Ramdev's Patanjali Yogpeeth (a public charitable trust) has succeeded in its appeal before the Income-tax Appellate Tribunal (ITAT), which has accepted its tax exempt status.
The ITAT (Delhi bench) held that Yoga entails providing medical relief and camps also provide education, and that both `medical relief ' and `imparting education' fall within the meaning of charitable purpose, entitling the trust to claim I-T exempt status under sections 11 and 12 of the Income Tax Act.
“The finding of I-T authorities that propagation of yoga by Patanjali Yogpeeth does not qualify as medical relief or imparting of education is not justified,“ stated the ITAT in its order dated Feburary 9.Even as the litigation settled by the ITAT, relates to the 200809, the ITAT has also referred to subsequent amendment in the I-T Act, which came into effect from April 1, 2016. This amendment specifically inserted `yoga' within the definition of `charitable purpose'. If the exempt status not been upheld by the ITAT, Patanjali Yogpeeth would have been liable to pay income tax. The total income of this trust is not brought out in the ITAT order.
The ITAT also held that corpus donations aggregating to Rs 43.98 crore received by Patanjali Yogpeeth, predominantly for construction of cottages under its Vanprasth Ashram Scheme (which provides accommodation to those attending residential yoga courses), were capital receipts not liable to I-T. Such donations included land donated, whose market value was pegged by I-T authorities at Rs 65 lakh. In its order, the ITAT pointed out that “Corpus donations are not taxable, even in circumstances where the trust is not eligible for I-T exemption“.
Various additions to the trust's income made by the I-T authorities, including a Rs 96 lakh addition made for services made by the trust to Vedic Broadcasting in which Acharya Balkrishnan, a trustee and close aide of Baba Ramdev holds substantial interest were deleted by the ITAT, on the ground that the I-T authorities had not understood the facts.
The ITAT also agreed with the submissions made by the trust and observed that certain inferences by the I-T authorities such as provision of benefits to certain persons or receipt of anonymous donations were made without fully appreciating the facts.
Salary paid in India won’t face tax, if Non-resident
The Authority of Advance Rulings (AAR) has held that the salary income of a nonresident individual for services rendered overseas cannot be taxed in India, even when such salary is paid into a bank account in India.
The ruling stands out because apart from providing relief from double taxation under the Indo-US tax treaty, the AAR additionally held that the sums received in India would not be taxable here under the domestic tax laws.
Unlike a tribunal or court order, a ruling by AAR, a quasi-judicial body, does not set a precedent. But it does have persuasive value and is well-considered. Thus, the ruling may benefit expat workers, in particular the over one lakh Indian workers who work in the US, largely on H1B visas.
Typically, when white-collared workers are ‘seconded’ on an overseas assignment by an Indian company, a split salary arrangement is worked out. Under ‘secondment’, the employee is transferred on the payroll of the overseas parent or group company, which pays the basic salary and certain allowances, in the overseas country. However, the Indian company deposits a part of the salary in the employee’s bank account in India. This enables the employee to meet certain obligations in India—such as repayment of housing loan or household expenses (as the family could be in India).
While an Indian residing abroad is popularly referred to as a non-resident Indian (NRI), the nomenclature is different under tax laws. It is not the country of origin, but the number of days’ stay in India, which determine whether a person will be a resident or non-resident for tax purposes.
Resident individuals are taxable in India on their global income, irrespective of where it was earned. In the case of non-residents, only income that accrues or arises in India (say, bank interest from a savings account in India or rental income from a house in Mumbai) is treated as taxable in India (see table). There is a third category, that is, resident but not ordinarily resident (RNOR), for whom the tax incidence is the same as for non-residents.
“Thus, salary received by non-residents in a bank account overseas for services performed outside India is not subject to tax in India. However, salary received in India is considered as taxable under the Indian domestic tax laws (along with being taxed in the country where they are working as most countries adopt the source method of taxation). Typically, a split salary mechanism results in litigation, as income-tax (I-T) authorities seek to bring to tax the income received in India. In such cases, employees claim relief under a tax treaty, which ensures that the same income is not taxed twice,” says Maulik Doshi, tax partner, SKP Group, a consultancy firm.
In this case, the employee, T N Santhosh Kumar, was seconded by Texas Instruments to Texas Inc, a US company, for a period of two years. As is typically the case, a split salary mechanism was adopted. Kumar was paid monthly a part of the salary and certain bonuses in India by Texas India.
A communique by EY India states: “Based on the India-US tax treaty, the AAR held that the place where the employee performs their duties is what is considered and not where the income is received or where the company providing the remuneration is based. As the salary is paid for work performed in the US, the income would be taxable in the US alone and no tax would be required to be withheld in India.”
“It is interesting to note that the AAR also held that such salary payments received in India by the non-resident would not be taxable in India even under its domestic tax laws,” says Doshi and adds, “in cases where there is no tax treaty (such as with Hong Kong) or in peculiar situations where the taxpayer is unable to access a tax treaty owing to lack of certain documents, this ruling will be very helpful.” In simple terms, the word accrue in India refers to something that is due in India.
Kumar was deputed for a two-year term. In the second year, in which he returned to India (that is, 2012-13) he was a resident of India and liable to tax on his global income. The US would also tax his US source salary income. Here, the AAR held he would be entitled to a tax credit in India for US taxes.
No `gift' tax on property received from individual
`Gift' tax provisions will not apply to property received from an individual by a family trust, according to an amendment made in the Finance Bill passed by the Lok Sabha.
High net worth individuals (HNWI) commonly use family trusts as a tool for succession planning, as it provides an upfront solution to any possible future disputes that may arise, including any challenges to a will by relatives at a later date. Family trusts also ring fence assets from any future liabilities.Shares, immovable property et al are settled (transferred) to the trust for the benefit of spouse, children and other relatives. The trust dis tributes income to the beneficiaries.
The Finance Bill had introduced clause (x) in section 56(2). It provided that receipt of money or property by `any person' (which includes individuals and other entities such as private trusts and companies) without consideration or for inadequate consideration in excess of Rs 50,000 shall be subject to Income-tax (I-T) in the hands of the recipient, under the head `Income from other sources'.“The budget proposals had created uncertainty around family trusts receiving such gifts. The enacted change will bring relief to families intending to create trusts for legitimate succession planning,“ says Pranav Sayta, family business services leader at EY India.
Promotion of film: actor not expected to incur expenditure
It is not an actor's responsibility or obligation to incur expenditure on promotion of his film, the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) ruled recently . It disallowed an expenditure of Rs 5.6 lakh, incurred for promotion of `Gujarish', which was claimed by the lead actor, Hrithik Roshan, as deduction from his income in 2010-11.
While verifying Hrithik's income-tax (I-T) returns, the officer noticed that Hrithik had shown an expenditure of Rs 7 lakh for promotion of his film.The actor said it was paid to seven contestants of `Saregama', a TV show, for promotion his brand image, as he was the lead actor in the film. `Guzaarish' was a 2010 release, composed and directed by Sanjay Leela Bhansali, which also had Aishwarya Rai in the lead role. The officer held that expenditure relating to the film's making, its promotion et all was the producer's responsibility . He disallowed the expenditure claimed by the actor in his I-T computation as a business deduction.
Foreign tax credit (FTC)
The Times of India, Jul 01, 2016
In a bid to reduce litigation, the Central Board of Direct Taxes (CBDT) has made it easier for Indian-resident taxpayers, including large Indian companies having overseas operations, to claim credit for the taxes borne by them abroad. Credit of foreign taxes (referred to as foreign tax credit, or FTC) were allowed under tax treaties with other countries and the Income Tax Act, but the absence of specific rules often led to litigation.Denial of FTC by tax authorities also resulted in double taxation on the same income in the hands of Indian-resident taxpayers.
FTC rules issued by the CBDT provide that credit for foreign taxes can be claimed against taxes paid in India, like income tax (be it personal or corporate), cess and surcharge. Further, Indian companies can also claim FTC against Minimum Alternate Tax (MAT). Taxpayers have to submit proof of the tax paid or deducted at source in the foreign country to claim FTC.
The earlier draft rules, issued in April, had excluded disputed foreign taxes from the ambit of FTC. Now credit can be claimed in respect of disputed foreign taxes, subject to meeting compliance requirements.
Indian-resident taxpayers pay taxes on their global income in India, including on foreign source income which has already been subject to tax overseas (see graphic). FTC eliminates double taxation on the same income. To illustrate: A parent company headquartered in India earns interest on debt given to its Sri Lankan (SL) subsidiary and is subject to a 10% withholding tax. The Indian company will pay tax in India on its global income (including the foreign source interest income). The new rules will make it easier for it to claim an FTC for the 10% tax with held in Sri Lanka.
According to RBI data, India Inc's overseas investments by way of debt and equity amounted to $750 million in May . FTC rules will help Indian companies with global operations get benefit of credits for foreign taxes. The rules will also help high net worth individuals who make overseas investments and bear foreign taxes on their dividend or interest income. “Clarity on grant of FTC against the MAT liability is a big positive as is the move to provide credit for `disputed foreign taxes' upon final settlement of dispute. However, the modus operandi for allowing such credit -especially when the assessments are time-barred -needs to be prescribed,“ says Girish Vanvari, tax leader at KPMG India.
Some hiccups remain.Gautam Nayak, tax partner, CNK & Associates, says, “The rules provide clarity about the extent of FTC available and documents to be submitted for that. However, difficulties faced by certain taxpayers have not been addressed.FTC would not be available for taxes not covered by the relevant tax treaty , such as state taxes paid in the US or branch profits' taxes paid overseas.Besides, the tax credit would be restricted to the rate of tax payable under the tax treaty , even if the actual tax paid as well as the Indian tax payable is higher. So, if excess taxes have been withheld by the foreign payer out of abundant precaution, or on account of their local laws, tax credit would be available only for tax payable under the treaty terms. For example, the US levies a higher rate of withholding of 30% if a foreign entity (say an Indian company) does not have a tax identification number. In such cases, credit in India would be available only to the extent of applicable rate prescribed under the tax treaty.“
Need not be camouflaged remuneration
The income-tax appellate tribunal (ITAT) has rejected the tax department's view that a villa in Dubai gifted to Bollywood actor Shah Rukh Khan a decade ago was a camouflage to evade income tax. The tribunal has held that the value of the villa cannot be treated as the actor's taxable income.
The villa had been gifted to Khan under a formal gift deed in 2007, after he obtained the RBI's approval.
I-T authorities were of the view that the donor, Nakheel PJSC, a Dubai-based company known for the famous Palm Projects, had gifted the villa as it was keen on using the actor's image and brand.The actor is a globally known figure and has endorsed various foreign brands for remuneration running into a few crores. Thus, the gift was seen as remuneration to Khan for utilising his brand image and in lieu of his stage performance at the company's annual day event. In light of this, the I-T authorities sought to tax the value of the villa as income in SRK's hands.
During the assessment for the financial year 200708, I-T officials added the value of the villa -Rs 17.85 crore -to the income of Rs 126.3 crore declared by Khan in his I-T return. The actor would have had to pay I-T on this additional sum. At the first stage of appeal, the commissioner (appeals), agreed with the I-T authorities. Based on a valuation report, though, he reduced the addition to Rs 14.7 crore.
Appealing before ITAT, Khan, through his counsel, said the chairman of the company, Sultan Ahmed Bin Sulayem, was his friend and thus wished to make the gift. He admitted to attending the annual day event, but said he merely addressed the employees and did not perform on stage, which would have amounted to brand endorsement. On taxation of a gift in kind, ITAT pointed out that for the relevant financial year, gifts of immovable property made without any consideration were out of the tax ambit.
Payment of Gratuity(Amendment) Bill 2017
Parliament has passed Payment of Gratuity(Amendment) Bill 2017 paving the way for doubling the limit of tax free gratuity to Rs 20 lakh
The Bill also notifies period of maternity leave as part of continuous service
Parliament passed Payment of Gratuity(Amendment) Bill 2017 paving the way for doubling the limit of tax free gratuity to Rs 20 lakh and empowering the government to fix the ceiling of the retirement benefit through an executive order.
The Rajya Sabha passed the bill, which was approved by the Lok Sabha on March 15. Besides enabling the central government to fix the ceiling of tax free gratuity, the bill will also empower it to fix the period of maternity leave through executive order.
It also notifies the period of maternity leave as part of continuous service and proposes to empower the central government to notify the gratuity ceiling from time to time without amending the law.
Rajya Sabha Chairman M Venkaiah Naidu said in the Upper House that he had met leaders of various parties in the morning and it was decided that the House would take up the crucial Payment of Gratuity (Amendment) Bill as it was of importance to the employees.
Labour Minister Santosh Kumar Gangwar then moved the bill for consideration and passage. It was passed by a voice vote without a debate.
The labour ministry later said in a statement that the Bill also envisages amending the provisions relating to calculation of continuous service for the purpose of gratuity in case of female employees who are on maternity leave from "twelve weeks" to such period as may be notified by the central government from time to time.
Prime Minister Narendra Modi tweeted: "A significant pro-people measure passed in Parliament. Will benefit lakhs of Indians."
After implementation of the 7th Central Pay Commission, the ceiling of tax free gratuity amount for central government employees was increased from Rs 10 lakh to Rs 20 lakh. The unions have been demanding for inclusion of the change in the Act.
At present, formal sector workers with five or more years of service are eligible for Rs 10 lakh tax-free gratuity after leaving job or at time of superannuation. A senior government official had earlier said that the government wants to provide tax-free gratuity of Rs 20 lakh to organised sector workers at par with the central government.
The Payment of Gratuity Act, 1972, was enacted to provide for gratuity payment to employees engaged in factories, mines, oilfields, plantations, ports, railway companies, shops or other establishments. The law is applicable to employees, who have completed at least five years of continuous service in an establishment that has 10 or more persons.
The amendment will also allow the central government to notify the maternity leave period for "female employees as deemed to be in continuous service in place of existing twelve weeks". The proposal comes against the backdrop of the Maternity Benefit (Amendment) Act, 2017 enhancing the maximum maternity leave period to 26 weeks.
House rent allowance
Proof needed of rent paid to kin
The Mumbai income tax appellate tribunal (ITAT) denied a claim on house rent allowance (HRA) by a taxpayer.
She had paid rent in cash to her mother, but was unable to substantiate it. On the other hand, the Ahmedabad ITAT allowed the HRA exemption claimed by a taxpayer who had paid rent to his spouse.
Given that the avenues available to save tax are limited for the salaried class, some employees try and take the `fullest' advantage of the income tax exemption available for HRA by paying rent to a family member with whom they are residing. It is another matter if the rent is actually paid to the relative, or if the rent receipts are genuine.
Where do these seemingly contrary ITAT decisions leave the taxpayer? The bottom line is it isn't illegal to pay rent to a close relative, but it carries a risk of a deeper probe by I-T officials and if genuineness cannot be proved, the claim would be denied, with attendant consequences.
The bottom line is precautions are necessary when paying rent to a relative. For instance, it is better to enter into a leave and licence agreement and make payments via banking channels. Under section 10 (13A) of the I-T Act, a salaried taxpayer can claim exemption on HRA for an accommodation occupied by him, if the property is not owned by him and he has actually incurred rent expenditure on it.
Amarpal S Chadha, partner, people advisory services at EY-India, says: “Payment of rent to a parent or spouse will not impact the eligibility to claim HRA exemption as long as the above mentioned conditions are met and the transaction is genuine.“ “The transaction should not be a mechanism to avoid tax,“ he stresses.
So decisions by the Mumbai and Ahmedabad ITATs -one accepting the tax exemption claim on payment of rent to a relative and the other denying it -may seem contrary , but the orders were based on specific facts in each case.
Rent paid to spouse, HRA claim allowed: In 2013, the Ahmedabad ITAT bench in Bajrang Prasad Ramdharani's case, allowed an HRA exemption claim by the taxpayer, even though rent was paid by him to his spouse. He was living with his wife but paid her rent via bank transfers. The ITAT held that the taxpayer had fulfilled the twin requirement of occupying a house not owned by him and payment of rent.
Rent paid to mother, HRA claim disallowed: But more recently , the Mumbai bench disallowed the HRA claim by Meena Vaswani who had contended that she lived with her aging mother to take care of her and paid rent to her mother in cash. While rent receipts were obtained by her, as the transaction was with her mother, she had not entered into any formal contract. Vaswani was not able to produce proof of cash withdrawals from her bank to substantiate the rental payments. Moreover, the authorities were able to prove that she was not residing with her mother, but in another apart ment nearby with her husband and daughter. The ITAT agreed with I-T authorities that the transaction was a sham to obtain a tax benefit.
The fine print: “There is nothing in the I-T Act to prevent a salaried person from claiming exemption under section 10(13A) on the basis of rent paid to a close relative. However, section 143(2) empowers the I-T officer to examine the genuineness of such expense,“ says Ameet Patel, tax partner at Manohar Chowdhry & Associates, a CA firm. “In the normal course, a taxpayer would not pay rent to his spouse or parent. I personally would never advise any client to enter into such a transaction. It is but natural for the I-T officer to look upon such arrangements with suspicion,“ adds Patel.
The Mumbai ITAT placed reliance on the Indian Evidence Act, 1872, and took the position that the onus of proving that the rental transaction was real lay with the taxpayer.
Income Tax returns
Who has to file income tax returns
Salaried persons earning up to Rs 5 lakh annually
Salaried persons earning up to Rs 5 lakh annually will have to file income tax returns: Central Board of Direct Taxes
PTI | Jul 22, 2013
The CBDT had exempted salaried employees having a total income of up to Rs 5 lakh including income from other sources up to Rs 10,000 from the requirement of filing income tax return for assessment year 2011-12 and 2012-13, respectively.
However, for the assessment year 2013-14 and thereafter, salaried persons earning up to Rs 5 lakh annually will have to file income tax returns, Central Board of Direct Taxes (CBDT) said on Monday.
Earlier in May 2013, the CBDT had made E-filing of income tax return compulsory for the assessment year 2013-14 for persons having total assessable income exceeding Rs 5 lakh.
The CBDT said that the exemption has been not been extended as the facility for online filing of returns has been made "user-friendly with the advantage of pre-filled return forms".
These e-filed forms also get electronically processed at the central processing centre in a speedy manner, it said.
For filing returns, an assessee can transmit the data in the return electronically by downloading ITRs, or by online filing.
Thereafter the assessee had to submit the verification of the return from ITR-V for acknowledgement after signature to Central Processing Centre.
Not filing I-T returns?Imprisonment,fine
Not filed I-T returns? You face jail & fine
TNN | Aug 17, 2013-
MUMBAI: Those defaulting in filing income tax returns are liable to prosecution, the I-T department has said.
If the tax evaded exceeds Rs 25 lakh, the defaulter can be sentenced to a minimum imprisonment of six months and maximum of seven years, besides being asked to pay a fine. If the tax evasion amount is less than Rs 25 lakh, the imprisonment could range between three months to two years in addition to fine.
Recently, the additional chief metropolitan magistrate, New Delhi, sentenced a taxpayer to six months' imprisonment in one assessment year and one year imprisonment in subsequent assessment year for repeating the offence of not filing income tax returns.
2018: Changed format
When you file your income tax (I-T) returns in July, you will have to fill details such as allowances that are not exempt, value of perks, and profits in lieu of salary in the new I-T return forms notified for the assessment year 2018-19.
A one-page simplified ITR Form-1 (Sahaj) can be filed by an individual who is a resident having income up to Rs 50 lakh and who is receiving income from salary, one house property and other income (interest, etc), the I-T department said. The detailed break-up of salary was not part of ITR forms last year but has been added this year.
Similar details have to provided for income from house property. Gender mention requirement has been removed from ITR-1. Non-resident individuals cannot use ITR-1 to file returns and will have to use ITR-2 or -3, depending on their nature of income in India. Tax experts said this could raise their compliance costs.
The ITR-1form is similar to the one for the previous assessment year, which had been used by 3 crore taxpayers who filed their returns using this form. You will also have to provide details of all bank accounts held in the country at any time during the previous year, except dormant accounts.
The requirement of furnishing details of cash deposit made during a specified period as provided in the ITR form for the assessment year 2017-18 has been done away. This provision was added in the aftermath of the demonetisation drive.
ITR Form-2 has also been rationalised by providing that Individuals and HUFs (Hindu Undivided Families), having income under any head other than business or profession, shall be eligible to file returns under this form. The Individuals and HUFs, having income under the head business or profession, shall file either ITR Form-3 or ITR Form-4, the department said.
“There are more than 25 key changes in current year ITR forms in comparison to last year. Some of these changes suggest that the focus of new ITR forms is to get more information from unlisted companies, trusts and taxpayers, who have opted for presumptive taxation scheme,” said Naveen Wadhwa, deputy general manager at Taxman.
“Further, the ITR forms also require the business entities to report the GST transaction, which would help the department to independently reconcile the transactions reported by them in income-tax returns and GST returns,” he said.
In case of non-residents, the requirement of furnishing details of any one foreign bank account has been provided for credit of refund. “There is no change in the manner of filing of ITR forms as compared to last year. All these ITR forms are to be filed electronically,” the department said.
Any individual who is 80-year-old or more has the option to file paper returns as well as an Individual or HUF whose income does not exceed Rs 5 lakh and who has not claimed any refund in the return of income.
Tax experts said additional fields for penalty due to delayed filing have been added in ITR-1 and ITR-2.
“The new Form ITR-1 (Sahaj) for assessment year 2018-19 does not request for the residential status of the individual and it is neither applicable to individuals qualifying as Not Ordinarily resident (NOR) nor to non-residents (NR). So Indian employees who have left India for overseas employment in the first half of the year and qualifying as non-resident would be required to file their India tax returns in ITR-2, even though they have annual taxable income up to Rs 50 lakh,” said Alok Agarwal, senior director at Deloitte.
'Returns can be filed after I-T notice is issued'
Tax benefit claimed by taxpayers in revised income-tax returns cannot be denied byI-T officers because the revised return has been filed after issue of notice
Currently, the time limit for filing a revised return is before the expiry of twelve months from the last day of the financial year or before the completion of I-T assessment, whichever is earlier
A tax benefit claimed by a taxpayer in his revised income-tax return cannot be denied outright by an income-tax (I-T) officer merely because the revised return has been filed after issue of notice, income-tax appellate tribunal (ITAT) has said.
However, the revised return needs to be filed within the time limits set out in the I-T Act. This order of the Mumbai bench of the ITAT, passed on June 20, will provide relief to several taxpayers. When a mistake is made in the original I-T return, such as not disclosing an income correctly or not claiming a tax deduction, section 139 (5) the I-T Act permits a revised return to be filed to correct the errors.
Currently, the time limit for filing a revised return is before the expiry of twelve months from the last day of the financial year or before the completion of I-T assessment, whichever is earlier.
In this case before the ITAT, Mahesh Hinduja had declared a total income of Rs 4.91 lakh in his original return for the financial year 2010-11. He later filed a revised return declaring a total income of Rs 6.24 lakh. In this revised return he also disclosed long-term capital gains (LTCG) of nearly Rs 50 lakh. However, as he had invested 1.15 crore in a new residential house, he claimed a deduction under Section 54 of the I-T Act. Thus, capital gains were not offered for tax.
Under the Act, if an investment is made in another house in India, within the stipulated period of time, then the 'cost of the new house' is deducted and only the balance component of the LTCG is taxable. Thus, if the amount of capital gains is equal to or less than the cost of the new house, the entire sum of LTCG is not taxable.
To ensure that the taxpayer has not underreported his income or paid less tax, the I-T Act empowers I-T officials to issue a notice asking for further evidence. As the revised return was filed by Hinduja after he had received a notice under section 143(2), the I-T official rejected his claim for deduction. The litigation finally reached the level of the ITAT.
The ITAT noted that the I-T official had rejected the revised return of income as invalid but at the same time had accepted the higher income offered in the revised return, including the LTCGs. Only the claim of deduction under Section 54 had been rejected. "The I-T official has adopted a very selective approach in respect of the revised return of income filed by the taxpayer," remarked the ITAT.
The ITAT held that the I-T Act does not bar a taxpayer from filing a revised I-T return after issue of notice under Section 143 (2). Hinduja's case was sent back to the I-T official for examining and allowing the deduction, subject to the fulfilment of conditions prescribed for such claim.
Wrong information in I-T returns
I-T department has said those who file wrong ITR will be prosecuted and their employers will be intimated to take action
The advsiory comes in the backdrop of the investigation wing of the department, in January, unearthing a racket of extracting fraudulent tax refunds by employees
The Central Processing Centre (CPC) of the department in Bengaluru, that receives and processes the Income Tax Returns (ITRs), has issued an advisory specifying such taxpayers should not "fall prey" to unscrupulous tax advisors or planners who help them in preparing wrong claims to get tax benefits.
Calling it a "cautionary advisory" on reports of tax evasion by under-reporting of income or inflating deductions or exemptions by salaried taxpayers, the department said such attempts "aided and abetted by unscrupulous intermediaries have been noted with concern".
"Such offences are punishable under various penal and prosecution provisions of the Income Tax Act," it said.
The advsiory comes in the backdrop of the investigation wing of the department, in January, unearthing a racket of extracting fraudulent tax refunds by employees of bellwether information technology companies based in Bengaluru, in alleged connivance with a tax advisor.
The CBI recently registered a criminal case to probe this nexus.
The tax filing season for salaried class taxpayers has just begun with the Central Board of Direct Taxes (CBDT), that frames policy for the department, recently notifying the new ITRs.
The one-page advisory added that if the department notices any fraudulent claims in their ITRs, such claims "may be punishable under provisions of the IT Act and this may also delay issuance of their refunds."
"Taxpayers, are, therefore strictly advised not to fall prey to false promises or mis-advice by unscrupulous intermediaries and submit wrong claims in their ITRs, which would be treated as cases of tax evasion.
"In the cases of such wrong claims by the government/PSU employees, reference would be made to the concerned vigilance division for action under conduct rules," it added.
The advisory added that the department possesses an "extensive risk analysis system" that is aimed at identifying persons who are non-compliant and aim to subvert the trust based-system "envisioned" while processing of ITRs at the CPC, which it said is automated and devoid of any human interface.
"In all such cases of high risk , the department may examine and verify the details submitted by taxpayers in their ITR subsequent to the processing of returns," it said.
It also asked tax planners and advisors to "confine their advice to taxpayers within the four corners of the IT Act" and warned that the violators will be prosecuted and such instances will also be referred to enforcement agencies like the CBI and the Enforcement Directorate (ED) for criminal prosecution.
Joint I-T liability
Co-ownership of property
The Times of India, Aug 13 2016
If the spouse has not invested in a property and is merely a co-holder, then on sale of such property , she cannot be liable for tax on capital gains, the Mumbai IncomeTax Appellate Tribunal (ITAT) has recently ruled. The ITAT order will help many taxpayers as married couples are increasingly opting for property registration in joint names, even if only one of them is the investor.
Anil Harish, an advocate specializing in real estate, said: “Co-holding of property is popular. Often the name of a spouse (say wife) is added to provide a sense of comfort, to ensure ease of succession on death of the partner or other reasons such as facilitating voting in a general body meeting of the housing society .“
The ITAT gave the order on Wednesday while hearing a case of a medical professio nal, Vandana Bhulchandani.
An I-T officer, based on information in his possession, noted that Bhulchandani had not disclosed the capital gains arising from the Rs 2.12-crore sale of a property in Parel that she jointly held with her husband in her I-T return for the financial year 2008-09.
She informed the I-T officer that her husband had made the entire investment and the property was reflected in his books of accounts--from the date of purchase till the date of sale. The officer also observed that Bhulchandani's husband did not incur any I-T liability on the capital gains arising from the sale--the husband had set off the short-term capital gains arising from the Parel property sale against the short-term capital losses incurred by him on the sale of shares. Under the I-T Act, short-term capital losses can be set off against capital gains arising in the same financial year and only the surplus, if any , is taxable.
But the I-T officer claimed that the entire arrangement was done to avoid tax payment and held Bhulchandani liable for 50% of the total short-term capital gains arising from the property sale and added Rs 45.38 lakh to her taxable income. Short-term capital gains are taxed at the applicable I-T slab rates, which depending on an individual's income varies between 10% and 30% in addition to applicable surcharge and cess.
Bhulchandani approached the commissioner of income-tax (appeals) who directed deletion of the addition.The I-T officer then filed an appeal before the ITAT. But the tribunal took into cognizance that the husband had bought the property , which was duly reflected in his books of accounts, and had also disclosed the details of the sale in his I-T return and thus, dismissed the appeal.
“The ITAT order is clear and correct. It will provide clarity in cases of co-holding of property , where the spouse has not made any monetary investment,“ said Harish.
Notice pay deducted by employer
Cannot be taxed
The Income-tax Appellate Tribunal (ITAT), which adjudicates Incometax (I-T) disputes, has held that an amount deducted by an employer for not serving out a notice period cannot be brought to tax.
In this case, two companies while settling dues had deducted salary for the notice period which the person had not served, but this deduction was not taken into account during tax assessment.However, ITAT (Ahmedabad bench) in its order dated April 18, said only salary received would be taxable, and not portions which were deducted by a company for not serving out a notice period.
Under the I-T Act, salary income is taxable on a due basis, regardless of whether it has been actually paid to an employee or not. And typically, when an employee resigns but does not serve out the notice period (provided for in the employment agreement), the employer deducts salary attributed to this period. However, I-T authorities do not consider such deductions and seek to tax entire salary due (that is, salary before allowing for such deduction). Hence, the order acquires significance.
“The ITAT has recognised the concept of real income, which is well accepted under I-T laws. It held that the salary against which notice pay was adjusted had not become due, as the net amount was paid by the employer. The employee had no right to receive the portion of the salary that had been deducted, under the terms of employment. Thus, the deducted amount could not be held as taxable salary income,“ said Gautam Nayak, tax partner, CNK & Associates.
In this case, which pertains to financial year 2009-10, N Rebello, had resigned from two companies, viz: Reliance Communication and Sistema Shyam Teleservices. Both companies had deducted a notice pay of Rs 1.10 lakh and Rs 1.66 lakh respectively and handed balance salary dues to Rebello. Accordingly in his I-T return, Rebello claimed as a deduction Rs 2.76 lakh from gross salary income, as this amount was not received. I-T authorities, in the course of assessment, denied such deduction. Commissioner (Appeals), which is the first level of appeal for a taxpayer, also upheld the action of the I-T.
The Commissioner (Appeals) pointed out that under section 15 of the I-T Act, tax is triggered when the salary becomes due, irrespective of whether it is paid or not. Secondly , section 16 of the I-T Act does not provide for any deduction made by the employer for the notice period. Thus, the deduction of Rs 2.76 lakh claimed by Rebello was not upheld. This led to Rebello filing an appeal before the ITAT, which decided in his favour.
Residential status determined by no. of days stayed
Tax Residential Status In India Is Determined By No. Of Days Stayed Here
Indians who are on deputa tion overseas or have sett led overseas -whether by way of acquiring a permanent residency such as a green card in the US, or acquiring citizenship of a foreign country -need to be aware of their tax obligations in India.
A recent move seeking details from non-residents of foreign bank accounts in income tax (I-T) returns caused anxiety about whether India was taking steps to tax global income. The Central Board of Direct Taxes (CBDT) subsequently clarified that providing such details was optional and it was to facilitate refunds in those cases where individuals did not have a bank account in India.
Here is a primer explaining the tax incidence for Indians overseas:
1) What determines tax residential status and why is it important?
An Indian residing abroad is popularly referred to as a non-resident Indian (NRI).Under India's tax laws, the reference is to the term `tax resident' or `non-resident'. The country of origin does not determine the taxability . For instance, a UK citizen who is working in Mumbai in the subsidiary of a UK parent company could be a tax resident of India. An Indian who has migrated to Australia on March 20 may in common parlance be an NRI, but for tax purposes for the financial year 2016-17, he is likely to be tax resident of India.
The number of days stay in India, as provided for in the Income Tax (I-T) Act, determines the tax residential status of an individual in India.This status, in turn, determines which income can be taxed in India and what cannot be taxed. Thus, it is important to know which category you fall into.
An individual is considered to be a tax resident of India (also referred to as Indian tax resident) for a financial year (say FY 2016-17) if (i) he has been in India for 182 days or more during that FY, or (ii) he has been in India for 60 days or more during that particular FY and has lived in India for at least 365 days or more during the four years immediately preceding.
Indian citizens taking up employment abroad or crew members of an Indian ship who have left India during a FY or persons of Indian origin (PIOs) visiting India need to note that the period of 60 days mentioned in the above clause is replaced by 182 days. (In the non-tax realm, the PIO scheme has been merged with Overseas Citizen of India scheme and it provides for visa-related relaxations.) Thus, if an Indian citizen has left for overseas deputation during FY 2016-17, he will be considered as a tax resident of India for the year ended March 31, 2017, if he has been in India for 182 days or more during 2016-17. Only , tax residents of India (ROR) are subject to tax on their global income, which would include interest income on overseas bank accounts.
2) Apart from resident and non-resident, is there any other definition in the I-T Act which determines tax in India?
Yes, the I-T Act also defines a `Resident but not ordinarily resident' (RNOR). An RNOR qualifies as a tax resident of India during a particular FY, but satisfies the following criteria: (i) He has been a non-resident of India in nine out of 10 immediately preceding fi nancial years; or (ii) has during the last seven years immediately preceding that particular FY been in India for a period of 729 days or less.
To illustrate: A PIO visits India during 2016-17 and stays for more than 182 days.This would make him a tax resident of India. However, during the last seven years immediately preceding FY201617, he has been in India for 729 days or less, he will be regarded as an RNOR.
3) What is the tax incidence in India of a tax resident (ROR), RNOR and nonresident?
As mentioned earlier, an ROR is subject to tax on his global income in India. RNOR and non-residents are generally subject to tax in India only in respect of India source income (that is, income received, accruing or arising in India or deemed to be received, accrued or arisen in India).
Salary received in India or for services provided in India, ren tal income from a house property in India, capital gains on sale of assets in India -be it shares or house property , income from fixed deposits or savings bank account in India are instances of income which would be taxed in the hands of not just tax residents of India, but also RNORs and non-residents.
NRIs should also note an additional point. They are allowed to hold NRE and FCNR accounts (where foreign earnings are deposited) with banks in India. However, under the I-T Act, interest against such deposits is tax-free.However, interest earned on an NRO account (where Indian source income is deposited) will be taxable in India.
4) What is the role of tax treaties?
If an individual is a tax resident of one country but has a source of income from another country , complexities can arise. Tax treaties ensure that the same income is not taxed twice. Broadly , tax treaties provide that the country from which the income is generated has the right to tax it.
Double taxation is avoided in two ways -either the country of non-tax residence exempts the income earned in the foreign country , or the country of tax residence grants a foreign tax credit for the taxes paid in the other country . India has entered into tax treaties with a hundred-odd countries, including US, UK, Canada, Australia and Germany , which are popular destinations for the Indian diaspora.
For instance, if an expat is a US tax resident, he will pay tax on his global income in the US (this would include tax on India source income). However, for taxes paid in India -say tax withheld at source against fixed deposits in a bank in India -he will get a foreign tax credit (a tax credit for the taxes paid or withheld in India against the US taxes payable by him). This will lower the US tax outgo.
Permanent account number (PAN)
2016: PAN mandatory for…
The Times of India Jan 04 2016
Mandatory PAN requirements
1 With effect from January 1, 2016, it has become mandatory to quote the permanent account number (PAN) for all transactions above `2 lakh for all modes of payment.
2 Only bank accounts opened under the Pradhan Mantri Jan Dhan Yojana have been exempted. But all other bank accounts and all kinds of deposits will have to quote PAN.
3 PAN will be mandatory for purchase of prepaid cards worth `50,000 or more in a year. Pur chase of gold jewellery worth above `2 lakh (`5 lakh current limit) would also need PAN.
4 The limit for quoting PAN for sale or purchase of real estate property has been raised to `10 lakh from `5 lakh.
5 PAN needs to be quoted only for a cash payment for a hotel or restaurant bill and foreign travel or purchase of forex of `50,000 (current limit `25,000).
2016: Required for transactions above Rs 2 lakh
The Times of India, Jun 22 2016
New PAN rule hurts sale of luxury goods
Mails are flying thick and fast at most luxury stores across the country as harried sales staff face a tough time trying to coax people to part with their permanent account number (PAN) details. By the looks of it, they are not accomplishing much, resulting in poor sales of luxury goods. Furnishing of PAN details has been made mandatory by the government for any transaction above Rs 2 lakh in a bid to weed out black money .
However, the move has deterred many wealthy shoppers from spending lakhs of rupees on luxury products such as handbags, watches and writing instruments. “Our bags start at Rs 2 lakh.Sales at our store have been hit badly because our regular customers have stopped coming,“ said a senior executive of a French luxury brand. Earlier, most of them would pay in cash. But now, instead of giving their PAN details, they are opting to shop abroad.“
Most people in the luxury industry TOI spoke to complained about similar issues.For instance, at a store selling high fashion French leather goods in the capital, executives are tearing their well-groomed hair out to convince customers to reveal their PAN card number.
“We have taken a hit of several lakhs of rupees over the last few days but have not been able to figure out a way around the problem,“ said an executive at the store.“The other day , a lady who had come to buy a bag said she wouldn't risk getting her husband into trouble by furnishing his PAN card details.Eventually , she walked out without buying anything.“
Nikhil Mehra, CEO of Genesis Group that has marketing and distribution arrangements for several luxury brands such as Jimmy Choo, Giorgio Armani, Em porio Armani and Tumi among others and is the JV partner for Canali, Burberry and Villeroy and Boch in India, said consumer sentiment here has been affected by this ruling. “However, for most of our brands it is not a challenge because prices are within the Rs 2 lakh limit,“ he said.
The Indian luxury market has been pegged at Rs 16,300 crore in 2015 by market research firm Euromonitor and is expected to touch Rs 39,000 crore by 2020, with an annual growth rate of 19%.
Interest-free loan from employer is taxable
Interest-free loans extended by an employer are taxable in the hands of an employee as a perquisite, the Income Tax Appellate Tribunal (ITAT) has said. However, the valuation of the taxable benefit or perquisite, which forms part of the salary income of the employee, cannot be done in an ad-hoc manner and has to be computed as per the prescribed formula under the Income Tax Act, the tribunal said.
In this case, Neha Saraf had obtained an interest-free loan from her employer, Teej Impex, a private company. During the assessment for the financial year 2010-11, her argument that no employeremployee relationship existed fell through because the company had deducted tax at source, or TDS, on the salary of Rs 24 lakh paid to her.
Thus, the I-T officer assessing her case estimated 15% interest on the loan and added Rs 43.8 lakh to her income as a perquisite value of the interest-free loan.
In the next stage of appeal, the commissioner of I-T (appeals) held that the I-T officer had rightly treated the value of interest-free loan as a taxable perquisite in the hands of the employee. However, he noted that the valuation cannot be done in an ad-hoc manner.
According to I-T Act rules, a perquisite value is based on the rate charged by SBI on April 1 of the financial year in which the employee received the loan.
The commissioner (appeals) reworked the valuation and arrived at a lower perquisite value of Rs 20.65 lakh.
The commissioner (appeals) also rejected Saraf ’s contention that as interest on the loan given to her had already been disallowed in the hands of the company, it cannot be treated as a perquisite in her hands. Unhappy with the outcome, Saraf filed an appeal with the ITAT. However, in its order dated May 16, the ITAT upheld the order of the commissioner (appeals).
In the context of interestfree loans from employers, Puneet Gupta, director of people advisory services at Ernst and Young, says, “The employer is liable to treat an interest-free loan as a taxable perquisite and TDS is to be deducted from salary. An exemption is available if the loan is provided for medical treatment of specified diseases or where the loan amount is petty and does not exceed Rs 20,000.”
“Employees must ensure that the employer deducts TDS on the total salary income, which includes the perquisite value of interest-free loans. If TDS is not deducted, the employee faces several consequences. Not only does he or she have to pay income tax on the perquisite value of the loan, but interest will also be payable for late deposit of advance tax. Further, if such taxable perquisite value is not reported in the I-T returns, the I-T department may levy penalty ranging from 50% to 200% of the tax payable on the under-reported income,” Gupta adds.
Property (house): income from
2018: losses from house property for TDS capped at ₹2 lakh
An employer can set off loss declared by an employee under the head ‘income from house property’ only up to Rs 2 lakh against such employee’s salary to arrive at the amount of tax to be deducted at source (TDS).
The amendment to section 71 of the Income-Tax (IT) Act applies for the first time from 2017-18. If an employee has declared a loss higher than Rs 2 lakh, the excess is to be ignored for calculating the amount of TDS, which is deducted monthly from salary income, the Central Board of Direct Taxes (CBDT) has said.
In a circular issued last month, the CBDT has pointed out key amendments to the I-T Act, which employers who are responsible for TDS against salary income should consider. Issue of such a circular is an annual feature.
An employee is permitted to provide details of other income (say, bank interest) that he or she has earned during a year, together with the tax that has already been deducted (say, TDS deducted by the bank). Similarly, losses can also be declared by the employee. However, only loss from house property can be considered by the employer, as this is allowed to be set off against salary income. The employer has to take into consideration the details of income and loss from house property declared by the employee for the purpose of computing TDS.
Making such a declaration is not mandatory. However, if an employee does so, he or she may not have to separately compute and pay advance taxes, as the employer will be deducting tax at source on the employee’s taxable income based on the details given (and not just salary income).
If an employee had let out his or her house (which typically was the case when a second house was owned), the corresponding interest on home loan is fully allowed as a deduction. This, in many cases, led to a significant loss under the head ‘income from house property’ (which is mainly the difference between the rental income and the interest on the home loan)
2018: owner to decide which property is self-occupied
The Mumbai bench of the Income-tax Appellate Tribunal (ITAT) upheld the right of a taxpayer to change the selection of a house property that would be treated as self-occupied and having a ‘nil’ annual value. Consequently, the notional rent from such a house will not be taxable.
In other words, if the taxpayer has in his Income-tax return declared a particular house property to be self-occupied, he can at a later stage during actual tax assessment of his case substitute this with another house property owned by him, which perhaps is in a more posh location. By doing so, it may be possible for him to reduce the notional rent that has to be offered for tax and lower his I-T outgo.
Under the I-T Act, where an individual owns more than one house, he can only treat any one of his properties as ‘self-occupied and having a nil annual value’. Annual value, in general terms, is the notional rent that the property would ordinarily fetch.
The other house properties, even if they are not given out on rent, are assumed to have been let out and I-T is payable on the notional rent. Certain deductions such as municipal taxes are permitted. Further, a standard deduction of 30% is allowed and I-T is payable on the balance component.
To mitigate I-T liability, taxpayers opt to choose that house property as ‘self-occupied and having a nil annual value,’ which would otherwise have had the highest adjusted annual value and would entail a higher I-T outgo.
“Sometimes, in cases where a dispute arises with I-T authorities on the annual value of a property, the taxpayer, since he has the choice, may change his selection during assessment proceedings, if it is advantageous to do so,” says Gautam Nayak, tax partner at CNK & Associates.
“It’s high time the government reconsiders this taxation. With housing finance being so readily available now, it is not only the rich people who have more than one house,” adds Nayak.
In an ITAT case , Venkatavarthan N Iyengar had three properties at Juhu, Santacruz East and Vasai. In his I-T return, he had declared his Vasai property as ‘self-occupied and having a nil annual value’. Later during course of tax assessment, he opted to substitute the Vasai with Juhu.
The I-T officer held that making a change during tax assessment is not permissible and the dispute reached the ITAT. Iyengar submitted that the I-T Act gives an option to the taxpayer to determine which of his properties he should treat as self-occupied.
The ITAT, in its order of May 23, observed, “The I-T Act nowhere states that the option of selecting a self-occupied property, once exercised, cannot be changed.”
Property (immovable): owned abroad
Notional rent to be included in income tax return
Actor Shah Rukh Khan has to include notional rent from his Dubai villa in his income tax return filed in India, the Income Tax Appellate Tribunal (ITAT) has ruled.
Khan had submitted to the ITAT that under the IndiaUAE tax treaty , income from immovable property in Dubai would be liable to tax in the UAE and, therefore, he had not offered it to be taxed in India.
The ITAT rejected his contention. However, the two member ITAT (Mumbai) bench of Amit Shukla and G S Pannu added: “Credit for taxes paid in the UAE, if any , would be allowed as per the law.“
The ITAT directed the I-T officer to rework the final liability, which would arise in the hands of the actor, under the head “income from house property“. This decision will have wide ramifications for taxpayers having a second home overseas, especially those who fall under the jurisdiction of the Mumbai bench of the ITAT.
“In many instances, I-T authorities have been holding that rental income from overseas residential property (or deemed rental income, if the house is not let out) would be taxable in India. This ITAT decision will strengthen their argument,“ said Shuddhasattwa Ghosh, partner, people advisory services, at EY India.
Under the I-T Act, if a person has two residential properties, only one can be treated as “self-occupied“ and exempt from I-T. The other is taxed under the head “income from house property“ based on the annual value (in general terms deemed rental value or notional rent). Certain deductions are allowed to arrive at the taxable income from the house property , such as a 30% standard deduction and also municipal taxes paid on such property .
The Bollywood actor had been gifted a villa in Dubai and he obtained possession of it on June 18, 2008. For the financial year 2008-09, the I-T officer estimated the deemed rental value to be Rs 96 lakh. After allowing for a 30% standard deduction, he sought to tax Rs 67.2 lakh in the hands of Khan.
According to Ghosh, tax treaties entered into with UK, US and Canada contain similar wordings as the India-UAE tax treaty . “So they should be doubly careful and must include the rental income in the I-T return they file in India. They can claim a credit for taxes paid in such other country , as per the provisions of the relevant tax treaty,“ Ghosh added.
Property (NRI): purchase of
Miscalculations May Land Purchaser In Jail
As income tax sleuths intend to keep a close eye on property purchases from non-residents to ensure buyers have correctly deducted tax at source, extra vigilance is required. If there’s no tax deducted at source (TDS), or wrongly deducted, the I-T department takes action against the buyer and not the nonresident seller. In addition to interest and penalties, the I-T Act prescribes imprisonment of 3 months to 7 years.
An issue that arises is whether the TDS is to be computed against the sale value or the income that is taxable in India in the non-resident’s hands. The latter is technically correct, but has its own challenges. This issue and solutions are analysed below.
TDS risks: 1
How to deduct TDS?
Indore-based chartered accountant Shweta Ajmera says, “According to section 195, which relates to TDS in case of non-residents, tax is deductible on ‘any sum chargeable to tax’. Thus, in case of sale of immovable property by a nonresident, tax is to be deducted on the capital gain amount.”
Chartered accountant Pankaj Bhuta adds, “In the case of GE India Technology Centre, the Supreme Court held that the TDS obligation is limited to the appropriate proportion of income chargeable under the I-T Act, which forms part of the gross sum of money payable to the non-resident. This means that the tax deductible at source is not on the entire sale value but merely on the net income arising from the sale. However, for computing the capital gains against which TDS is to apply, the buyer will have to depend on details provided by the seller — say, the period of holding of the property — and this adds to the risk. Second, if the seller wishes to invest in specified assets, be it a residential property in India or bonds, and save tax on capital gains, it is difficult for the buyer to ascertain that the investment will be made and conditions specified met.”
Gains arising from sale of property held for more than two years (the period of holding was three years prior to the Finance Act 2017) are longterm capital gains subject to tax at the rate of 20% plus applicable surcharge and cess. Typically, non-residents sell their property after this holding period is completed.
But a reader got a notice for short deduction even as he had deducted TDS at 20% plus applicable surcharge and cess. The penalties cost him nearly Rs 2 lakh. The reason: The buyer has to deduct TDS at the slab rate where the property is sold by the non-resident within two years of its purchase. The slab rate of 30% applies for taxable income above Rs 10 lakh.
To do: The buyer or seller can approach the I-T department to obtain a withholding tax order (referred to as a certificate), which gives a finality on the TDS amount. KPMG India tax partner Parizad Sirwalla says, “But this is time-consuming and requires prior planning.” Bhuta adds, “If the application for a withholding order is submitted after payment of advance deposit, such application is rejected (according to CBDT’s circular 774 dated March 17, 1999). Thus, parties should be careful.”
In the absence of such a certificate, it is safer for the buyer to deduct TDS at 20% on the sale value and not the capital gains of the non-resident seller. Generally, this results in the non-resident seller having to seek a refund from the I-T department.
This is the concluding part of our series on purchasing property from non-residents
TDS risks: 2
Individuals who have purchased property from non-residents find themselves grappling with several income tax-related challenges. To begin with, it’s difficult to determine the seller’s tax status (whether he is a resident or non-resident in India according to the I-T Act). This is crucial, as tax is required to be deducted at 20% (in come cases even higher) for property purchased from a non-resident, as opposed to 1% where the seller is a tax resident. In case of wrong deduction, penalties apply, and the buyer can face prosecution.
When property is purchased from a resident, according to section 194-IA, TDS obligations kick in only if the sale consideration is above Rs 50 lakh. In case the purchase is from a non-resident, according to section 195, TDS obligations apply in all cases irrespective of the quantum.
In its July 24 edition, TOI reported that the Central Board of Direct Taxes (CBDT) — in its action plan — asked I-T cadre to closely = : watch : property : purchases from non-residents.
Lay buyers get confused between residency as per tax laws, nationality
Following this, TOI received many emails from readers. The issues faced by them and action points are analysed in a twopart series.
How to identify if the seller is a non-resident?
Lay buyers often get confused between residency according to tax laws, and nationality. Pune-based advocate Harshal Jadhav says, “Typically, the non-resident seller does not reside in Pune, where the property is situated. Communication with the prospective buyers are largely via email or telephone. In some cases, the seller sends the property documents along with a PAN card or Aadhaar card and agrees to meet on a pre-fixed date to complete the sale. These cards mislead the buyer who is a layman. Even otherwise, unless clearly disclosed by the property seller, it becomes difficult to determine his residential status.”
To do: Anil Harish, an advocate specialising in real estate, says, “The first step is to directly ask the seller if he is a non-resident. One can also probe further and ask for his I-T returns or passport details to determine the number of days stayed in India during the relevant period. As sellers may be reluctant to share these documents, the prospective buyer could ask the seller to get a certificate from his chartered accountant of his being a tax resident in India. An undertaking in writing must also be obtained from the seller of his being a resident (this can be part of the sale deed or a separate document). But such declarations will not offer absolute protection.”
Typically, if the seller has given a power of attorney to someone else, it’s likely he is a non-resident, caution experts. KPMG India tax partner Parizad Sirwalla says, “Tax residency in India is determined based on the number of days the individual has spent in India in the relevant financial year as well as a look-back period of four financial years (see box). Stay details in India of the seller, such as copies of passport covering this period, should be obtained.
However, if the transaction is carried out in the earlier part of the financial year, it is slightly difficult to determine residential status conclusively — here, a more conservative approach may be adopted by the buyer.”
Jadhav adds, “Buyers should get the agreement or sale deed verified by an advocate to safeguard their interests from disputes arising out of arrears of income tax liabilities, if any.”
Property, purchase of
Buyers won't lose I-T exemptions by adding kin name
Purchaser Should Get Full Tax Benefits: Tribunal
The Income Tax Appellate Tribunal (Mumbai bench) has, in a recent order, held that if the entire investment for purchase of a new residential house, along with stamp duty and registration charges, has been made by an individual, he should get the full benefit of the relevant income tax (I-T) exemptions.
Merely because the name of a close relative has been added to the newly purchased property (or in other words the new property is jointly held), it should not result in dilution of the I-T exemption in the hands of the individual who has paid for it.
The I-T Act, under various sections, offers tax benefits where sale proceeds (such as sale of residential house) are reinvested in certain assets (such as another residential house or eligible investments).
For instance, under section 54, if on sale of a residential house, the sale proceeds are reinvested in another house in India, within the stipulated period of time, to the extent of such reinvestment an exemption is available in computing capital gains. The taxable component of capital gains is reduced to the extent of the reinvestment, which results in a lower capital gains tax outgo.
If you look up the name plates in your housing society, you may find that several flats are jointly held.
The flat may be in the joint name of a couple, or owned with a parent or a sibling. The co-owner may or may not have contributed towards this purchase and the name of such a relative may have been added for the sake of convenience, such as to prevent family disputes arising in the future.
“The ITAT has upheld the well-established criteria that ownership for I-T purposes is determinant upon who has made the payment and to what extent. Very often, the name of a non-earning spouse, or parent or even sibling is added when a new property is purchased to offer a security net to them.
In those cases, where they have not contributed towards the purchase, the I-T benefit, such as on re-invest ment should flow entirely to the buyer who had made the purchase. This aspect has been reiterated by the ITAT,“ explains Gautam Nayak, tax partner, CNK & Associates.
In this case, decided by the ITAT on April 27, the taxpayer, Jitendra V Faria, had on sale of a residential house incurred capital gains of Rs.43.01 lakh. He reinvested Rs 42.66 lakh in a new residential house and claimed this amount as exempt under section 54 of the I-T Act. On the deficit balance, of Rs 35,000 odd, he paid capital gains tax amounting to Rs 7,376.
However, in the course of assessment, the I-T official noted that the new house that had been purchased was held in the name of two persons -Jitendra Faria with his brother Kunal Faria.Thus, the I-T official held that the exemption claimed by Jitendra Faria should be restricted to Rs 21.33 lakh (which is 50% of the amount claimed as exempt by him under section 54).
When the matter reached the ITAT, the tribunal noted that the name of brother was included only for the sake of convenience. It observed that even the I-T official had confirmed that the entire cost of the new house was borne only by Jitendra Faria. Thus, the ITAT set aside the decision of the I-T authorities and decided in favour of the taxpayer.
In Tamil Nadu
Income tax is a central agency reporting to the present government.
After search and seizure, comes inquiry when I-T dept's investigation wing sends an appraisal report to an assessing officer who sends a notice to the assesse asking him to file returns for the past six years.
Uniformity in post-search formalities, apolitical body to give directions, say experts.
It needed some grit for beleaguered AIADMK leader TTV Dhinakaran to cry 'tax politics'+ while he was still in the eye of an income tax storm. He did it nevertheless, repeating terms such as 'vendetta' and 'witch-hunting' by the Centre.
But, when DMK's working boss M K Stalin sought to know the fate of earlier high-voltage income tax searches in Tamil Nadu, one sat up and took note, because each such case had travelled a distinctly different path, showing inconsistency in approach.
On April 22, 2016, Karur-based contractor C P Anbunathan's houses and godowns were searched by income tax officials, and among the seized materials were about Rs5 crore in cash and currency-counting machines.
Three trucks found carrying Rs570 crore were intercepted by election commission officials near Tirupur in poll-bound Tamil Nadu in mid-May 2016. The trucks remained parked in an open ground for days before being taken to RBI vaults, but income tax officials did not show even an academic interest in the drama.
In July-August 2016, I-T officials searched gutka godowns and fished out a diary containing names of officials and politicians on the payrolls of gutka wholesalers. A chief commissioner of income tax personally met the then TN chief secretary and handed over details. Though nothing came of it, the fact remains that the I-T department took pains to ensure action against suspects.
In December 2016, the office of the then TN chief secretary was searched by I-T officials, with armed men from central police organisation standing guard outside. The prime target was sand mining baron Sekhar Reddy. Sensational searches at a minister's house and recovery of 'proof' of distribution of Rs89 crore as bribe to voters of R K Nagar constituency took place on April 7, 2017. On the basis of IT report, the election commission cancelled the bypoll.
R K Nagar election-time search was huge, till more than 1,500 taxmen swooped on about 180 premises related to V K Sasikala+ , the jailed aide of former chief minister Jayalalithaa.
The inconsistent nature of the raids raises the question — can I-T searches and allegations of political vendetta be separated at all? No, if the target is a politician from an opposition camp. "Income tax is a central agency reporting to the present government. So, whenever it touches an opposition party member, the bogey of political vendetta is raised," says Rabu Manohar, central government standing counsel and counsel for GST and customs.
As for timing of raids, he says untaxed money surfaces mostly on two occasions — during political instability and during price swings of essential commodities, when they could be hoarded. "TN's political scene now is unstable and the agency has chosen the right time to strike," he adds.
But, senior advocate P Wilson, a DMK office-bearer and former additional solicitor-general of India says, "I-T searches have to be taken to a logical conclusion. But, unfortunately, in all recent cases, the proceedings had been abandoned midway. In Anbunathan's case, though the agency had proof of doubtful investments, the information were not forwarded to other agencies for follow up. In gutka case, they took extraordinary interest to ensure action against some officials. In R K Nagar bypoll case they merely sent a report to the election commission, which sent it to city police as complaint."
So, what really happens after 'searches'? After search and seizure, comes inquiry when the investigation wing of I-T department sends an appraisal report to an assessing officer who sends a notice to the assesse asking him to file returns for the past six years. "It is an opportunity for the assesse to amend their earlier returns, and declare undeclared assets," says a senior tax official. "They can also approach the settlement commission to escape penalty and prosecution. An opportunity to compound the offence is then offered after both sides are heard," he adds.
All the post-search processes are strictly between the assesse and income tax official, and so nothing is heard about it, says Manohar. "If Stalin wants to know the fate of such searches, he can utilise judicial forums seeking specific directions or even invoke RTI Act."
Referring to allegations of political vendetta behind raids, advocate V Lakshminarayanan says that to eliminate subjectivity, decisions to search premises must be routed through an apolitical body. Searches could be cleared by an entity to which members are nominated on the lines of chief vigilance commissioner and DGPs, he says. "I-T department should first offer a final self-declaration option, ushering in a measure of transparency besides offering the target a last chance to come clean," he adds.
Reliefs on tax
Education loans to study abroad
The Times of India, Dec 02 2015
Tax relief valid on edu loans to study abroad
In good news for parents whose children study overseas or plan to do so, the Pune income-tax appellate tribunal has held that higher education abroad is no bar for claiming tax relief on educational loans. A deduction for interest paid on such loans will be allowed from the taxable income of a parent, who has taken the loan and is paying interest, even if the child is studying overseas.
However, such a loan must be taken from either financial institutions, banks or from government-approved charitable institutions. Though Section 80E of the I-T Act states a parent is eligible for claiming tax relief on such loans, it has often been a ground for dispute during tax assessment. The term `higher education' has been defined in Section 80E of the I-T Act as: “Any course of study pursued after passing the senior secondary examination (SSE) or its equivalent from any school, board or university recognised by the central government, state government, local authority or any recognised authority .“
“This section does not specify that higher education must be undertaken by the student in India or that the overseas course must be approved by authorities in India. The only requirement is that such higher education should be undertaken by the student after passing SSE or its equivalent from a recognised institution in India,“ says Parizad Sirwalla, tax partner, KPMG.
Even in this case of Nitin Shantilal Muthiyan, which came for hearing before the Pune tribunal, the tax officer had held that deduction under Section 80E is allowable only in cases of higher education pursued in India. He, thus, disallowed the claim of interest of Rs 73,125 made by the taxpayer whose son, who had completed his BE in Electronics from Pune University, was pursuing a course at George Washington University , US. At the first stage of appeal, the commissioner of I-T (appeals) also upheld the action of the tax officer.
The taxpayer then filed an appeal with the income-tax appellate tribunal (ITAT) and obtained a favourable order. The ITAT in its order observed: “Provisions of Section 80E do not contain any stipulation that the higher education should be pursued only in India. If the intent of the legislation was that education should be pursued in India, in order to avail of the interest deduction, it would have stated so. Further, the taxpayer's son had completed SSE or its equivalent, as is required by this section, before pursuing studies overseas.“ Thus, the ITAT allowed the interest deduction claim made by the father during financial year 2008-09.
“The ITAT's decision is welcome, particularly in light of the spiralling cost of overseas education, and more and more Indian students opting for higher studies overseas. In terms of applicability of the decision, an ITAT's decision is binding within its jurisdiction, but carries precedent value in similar disputes for other jurisdictions, which are outside its purview,“ adds Sirwalla.
No tax on rent if none received from 2nd home
India’s second-home market has been quite hot for some time, with some buyers seeking to get away from the crowded city and the stresses of work with a vacation home while others view it as a good real estate investment. However, the negative was that even if the property was empty, one had to fork out tax on notional rent.
No longer. The interim Budget has given relief to second home-owners by exempting the second property from tax on notional rent. Currently, if a taxpayer owns more than one house property, one property at the taxpayer’s choice is treated as selfoccupied and the other is considered as ‘deemed to be let out’. This is taxed at market rental value even if the taxpayer does not earn any income from it.
“Considering the difficulty of the middle class having to maintain families at two locations on account of their job, children’s education, care of parents, etc., I am proposing to exempt levy of income tax on notional rent on a second self-occupied house,” interim Finance Minister Piyush Goyal announced on Friday.
Industry trackers believe the move of exempting tax on notional rent on the second house property will help increase demand for affordable and mid-income housing segment as taxpayers will be encouraged to invest in a second home.
“With improved liquidity, demand across the affordable and mid-income housing segment will rise,” Ramesh Nair, CEO and Country Head, JLL India, said. However, the maximum deduction for interest on housing loans shall continue to remain capped, in the aggregate, at Rs 2 lakh.
While the FM in his speech alluded to the difficulties faced by those who are forced to maintain families at two locations, given the specific provisions of the I-T Act, it appears that no tax on notional rent will be payable if the second house is overseas.
There is one downside. “Taxpayers who had housing loans on their second property were earlier able to claim deduction for full interest on housing loan, against the notional rental income, which could result in a loss. This loss could be set off against rental income from other properties without any limit or could be carried forward for eight years. Now such setoff is limited to Rs 2 lakh,” says Puneet Gupta, director, People Advisory Services at EY India.
2018: Non-compete fees, some compensations are taxable
Staff May Have To Pay Tax On Non-Compete Fees
The Income-tax Act is intricate — sometimes income received by an individual even if it relates to employment, does not fit within the technical definitions of ‘salary’ or ‘profits received in lieu of salary’. Thus, very often, such income could not be taxed.
Budget 2018-19 proposes to change this scenario. A wide range of income received — say non-compete payments (which sometimes did not fit the above definitions of salary or profits in lieu of salary); or compensation when a job offer went awry will now be taxable.
“The proposal perhaps also intends to bring within ambit of tax, payments received in connection with employment but not from the employer. In other words, it covers cases where an employer-employee relationship does not exist between the payer and the receiver. For example, in case of termination of employment with an Indian subsidiary company, any severance pay received from a foreign holding company may be covered under this amendment. It may also cover situations of merger and acquisition where payments are received by employees from the acquiring company or from the investors,” said Puneet Gupta, director, people advisory services at EY India, a business consultancy firm.
The explanatory memorandum to the Finance Bill says: “A large segment of compensation receipts in connection with employment are out of the purview of taxation leading to base erosion and revenue loss”. It therefore
proposes to amend section 56 of the I-T Act. “Any compensation or other payment due or received in connection with the termination of employment or the modification of the terms and conditions relating thereto”, will now be treated as ‘Income from other sources’. Such sums received by individuals will be taxed in their hands at the applicable slab rate. As per the budget proposals, the highest tax rate for an individual (who has a taxable income of more than Rs one crore) is nearly 36%.
This amendment does not cover money received from an employer when handed a pink slip or in cases of VRS, which will continue to be treated as salary income under existing I-T provisions and taxed accordingly.
Gautam Nayak, tax partner at CNK Associates, a firm of chartered accountants, explains: “In various decisions, courts and tax tribunals have held certain receipts to be not taxable, even as they related to employment. This is because such receipts did not fall under the definition of salaries or profits in lieu of salary or because the employer-employee relationship was not in existence. Money received in such instances is now proposed to be taxed.”
In simple terms, receipts are classified into revenue receipts (which are items of recurring nature, such as salary, business profits, interest to name a few) and capital receipts (which are of an isolated nature). “A capital receipt is not income and hence I-T is not levied on it,” states Nayak.
“There are instances, where compensation related to employment, has fallen within the cracks and escaped I-T. Each such case, typically involves compensation of at least Rs. one crore. . Hence, budget amendment is critical,” said a senior I-T officer.
Sexual harassment damages
The city bench of the income-tax appellate tribunal (ITAT), which adjudicates income-tax disputes, has recently passed an order in favour of actress and model Sushmita Sen. A settlement compensation, in lieu of a sexual harassment complaint made by her, which runs into several lakh, has been held as non-taxable.
She had got Rs 95 lakh during financial year 2003-04 as a settlement compensation from Coca-Cola India, following her complaint of being subjected to sexual harassment by an employee of the company.
The ITAT, in its order dated November 14, held this sum was not ‘income’ that could be taxed but was in the nature of a ‘capital receipt’. Further, the penalty of Rs 35 lakh which was imposed on her for concealment of income (as she had not offered Rs 95 lakh to I-T) was ordered to be set aside.
Sushmita’s contract ended prematurely
Sushmita Sen had entered into a commercial contract aggregating to Rs 1.5 crore with Coca-Cola India to endorse its products; however, this contract was terminated prematurely by the company. The actress had disputed this termination as being mala fide and dishonest. She asserted that the termination of the commercial contract was meant to punish her as she had rightly resisted sexual harassment by an employee of the company. She had held Coca-Cola India, and its US-based parent, liable for all consequences flowing from such sexual harassment and for failing to discharge its statutory duty of providing her with a safe workplace environment. Subsequently, a settlement was reached between her and the company.
As per the terms of the commercial contract, in case of termination only a sum of Rs 50 lakh was due to her from Coca-Cola India. As against this, under the terms of the settlement, she received Rs 1.45 crore, of which she had offered Rs 50 lakh to income-tax. She had held that the balance of Rs 95 lakh was in the nature of compensation, which was not taxable.
In a relief to global energy and petrochemical giant Shell, the Bombay high court on Tuesday ruled that the firm is not liable to pay tax in a transfer pricing case of 2009-10. The potential tax demand on Shell by the I-T authorities was $240 million. The ruling comes after Vodafone’s recent win in the HC in a similar case. The I-T authorities in Mumbai had alleged that there was underpricing of shares which the company had issued to an overseas group entity Shell Gas BV in March 2009.
The company said it had issued 87 crore shares at Rs 10 per share, but the I-T department assessed the value at Rs 180 per share and said there was thus a Rs 15,000-crore under pricing in the transaction, an amount on which tax could be levied. The Bombay HC has now held that these share premiums are not taxable. In case of Vodafone, the HC had then held that issuance of shares in a capital financial transaction did not amount to taxable income. The cellular service major had challenged an order of Income Tax authority in a transfer pricing case.
Several global giants are involved in transfer pricing litigation with the government, whose stand has been criticized.
Investors have been critical of the way the tax department went about slapping notices over the past few years.
“We welcome the High Court decision. Shell has always maintained that equity infusion by a foreign parent company into an Indian subsidiary cannot be taxed as income,’’ said a Shell spokesperson after the verdict was pronounced. “ This is a positive outcome which should provide a further boost to the Indian government’s initiatives to improve the country’s investment climate”.
Small businesses, professionals
Presumptive tax scheme
The Times of India, Mar 02 2016
For small biz & professionals, a way to save money, and a tax headache
The Budget presented for 2016-17 has come under fire for the move to tax EPF but there's one proposal that is sure to bring cheer to small businesses and professionals, and that's the presumptive tax scheme. This scheme covers small businesses with gross turnover up to Rs 2 crore -up from the existing ceiling of Rs 1 crore. It has also been extended to professionals with gross income up to Rs 50 lakh.
So what exactly is presumptive taxation?
As per Section 44AA of the Income-tax Act, 1961, a person engaged in business is required to maintain regular books of account. However, a person adopting the presumptive taxation scheme can declare income at a prescribed rate of 8% and, in turn, is relieved from the tedious job of maintaining books of account.
However, in case income earned is at a rate higher than 8%, then the higher rate can be declared.
And with the inclusion of professionals, a new Section 44ADA is proposed to be inserted in the Act to provide for estimating the income of an assessed who is engaged in any profession referred to in sub-section (1) of Section 44AA such as legal, medical, engineering, architecture, accountancy, technical consultancy, interior decoration or any other profession as is notified by the board in the official gazette and whose total gross receipts does not exceed Rs 50 lakh in the previous year. For the purpose, 50% of the total receipts of the professional during the financial year will be considered as profit and get taxed under the income-tax head “profits and gains of business or profession“.
If you look at the table, it's clear that the assessee not only saves on record-keeping headaches, he also saves a considerable amount in taxes. Yes, there can be a few counters to this -mainly that the taxable income could be much below the presumptive taxation rate of 8% and 50% of receipts respectively . And if that is the case then the individual has no option but to maintain the books of accounts.
To further keep the compliance burden minimum, those using presumptive taxation scheme are also allowed to pay advance tax by March 15 of the financial year, as against the normal practice of paying the advance tax in four installments.
However, the taxpayer needs to be careful when opting for this as he or she has to remain in that scheme for 5 years to avail the benefits.
TDS (tax deducted at source)
Head of religious congregation to certify names
In an important ruling, the Madras HC has said no tax could be deducted at source from the salaries and other monetary benefits of persons who are members of religious congregation such as nuns, monks and priests.
Justice T S Sivagnanam, passing orders on a batch of 74 writ petitions, further said it would be sufficient if the head of the institution concerned certifies the names of staff members.
The order has offered immediate relief to nunsfatherspriests working in various teaching institutions, established and administered by religious congregation such as Institute of the Fransican Missionaries of Mary , which was one of the 74 petitioners.
They had moved the court after the I-T department passed an order on October 7, 2015 saying catholic nuns among teaching and non-teaching staff in these institutions were liable for TDS.
Online rectification in ITR simplified, 2015
The Times of India, Dec 10, 2015
I-T Dept simplifies online rectification of TDS in ITR
The finance ministry said a new facility has been provided for pre-filling of TDS schedule
Aimed at making life easier for tax payers, the I-T department today said it has simplified the process of online rectification of incorrect details of tax deducted at source (TDS) filed in the income tax return (ITR). Earlier, taxpayers were required to fill in complete details of the entire TDS schedule while applying for rectification on the e-filing portal of the I-T Department.
To avoid this, the finance ministry said a new facility has been provided for pre-filling of TDS schedule while submitting online rectification request on the e-filing portal to facilitate easy correction or updating of TDS details. "This is expected to considerably ease the burden of compliance on the taxpayers seeking rectification due to TDS mismatch," an official statement said. Errors due to incomplete TDS details in rectification applications were leading to delays in processing of such applications, thereby causing hardships to taxpayers, it added.
Penal interest can be waived in some cases
The Central Board of Direct Taxes (CBDT) in its circular issued on March 24 has empowered tax authorities to reduce or waive penal interest for non-deduction of tax at source (TDS) in certain circumstances, including owing to a retrospective amendment in law.
Interest can also be reduced or waived where tax could not be deducted as the books of a taxpayer were seized in a search operation.
CBDT's circular will also apply where tax was not deducted or deducted at a lower rate on payments made to non residents, and the matter was settled under the mutual agreement procedure between the authorities of the two countries, under the relevant tax treaty . To avail of this benefit, the taxpayer would be required to pay the principal tax sum demanded or make arrangements to pay the same. However, restrictive conditions in this order are unlikely to benefit taxpayers in indirect transfer cases, say experts. Vodafone International Holdings, for instance, faces a demand of Rs 14,200 crore, which, according to the income-tax department, is due to the $ 11-billion acquisition of Hutchison's India telecom business. Tax authorities had held that Vodafone ought to have deducted tax in India, even if the sale carried outside India was of shares of a non-resident company , as it related to an asset in India (telecom business in India).
To avail of the benefit of a waiver on interest (either partial or full), the condition imposed by CBDT is that the taxpayer did not deduct tax at source owing to a favourable high court order. Subsequently owing to an SC order on a retrospective amendment, it became liable to deduct tax at source. “The circular will have very limited applicability and usefulness in an indirect transfer tax kind of situ ation (where retrospective amendment was made in the I-T Act) as no positive jurisdictional high court decision on the subject as such is available on which reliance could have been placed by taxpayers,“ says Punit Shah, partner, Dhruva Advisors.
The reasoning is simple.Vodafone won a favourable decision from the Supreme Court on January 20, 2012. A month later, the Finance Bill, 2012, through a retrospective amendment made indirect transfers taxable in India. Thus, there is only a window of approximately one month available to taxpayers to have relied on a favourable decision of the Supreme Court and not deducted tax at source.This limits applicability of the CBDT circular, says a corporate counsel.
2019: nine issues in interim budget
Interim Budget Decoded
• Standard deduction for salaried taxpayers raised from Rs 40,000 to Rs 50,000. This will result in a maximum tax saving of Rs 3,588, if you apply the maximum marginal tax rate of 35.88%.
• If you are a resident taxpayer earning taxable income (after all applicable deductions) up to Rs 5 lakh, you will get full tax rebate. Earlier, the tax liability was of up to Rs 13,000, inclusive of health and education cess. If your gross income is up to Rs 6.5 lakh, you may not be required to pay any tax if you make investments in Provident Fund, specified savings, insurance, etc, which are eligible for deduction under Section 80C.
• No notional rental income will be added to the taxable income for a second house property owned that is not let out. This will allow you to own up to two houses without notional rent on the second property being added to the taxable income.
• Tax exemption on long-term capital gain on sale of a residential house will be available for investment in up to two residential house properties located in India against one earlier. The option is available only once in a lifetime for individuals or HUFs where capital gains on sale of house property is up to Rs 2 crore. This will allow individuals or HUFs to sell one house property and make investment in two without paying any capital gains tax.
• Threshold for TDS on interest income from deposits with banks and post offices increased from Rs 10,000 to Rs 40,000. The limit for a senior citizen payee continues to be Rs 50,000. In some cases, individuals earning interest income from fixed deposit exceeding Rs 10,000 were filing income-tax return to claim tax refund for TDS even when their net taxable income was lower than the exemption limit (Rs 2.5 lakh). Now, such individuals will not be required to file return if interest income from such deposits does not exceed Rs 40,000.
• Threshold for TDS on rent paid by any person (other than individual or HUF not subject to tax audit) to a resident increased from Rs 1.8 lakh per year to Rs 2.4 lakh per year. This will provide administrative relief to small taxpayers (landlords), if they have let out their flats to companies. However, if a tenant is a small individual taxpayer, then the TDS will apply only if the rent payout is more than Rs 50,000 per month.
• The I-T department plans to be more taxpayer-friendly by processing income-tax returns within 24 hours and issuing refunds simultaneously.
• It plans to conduct all verification and scrutiny assessment of returns electronically. This will be done by an anonymous back office, manned by tax experts and officials, eliminating personal interface between taxpayers and officials.
Googly To Watch Out For
• On December 10, 2018, the finance ministry announced a proposal to increase the tax exemption limit for lump-sum withdrawal from the National Pension System to 60% of the total amount. With this, the entire lump sum withdrawal from NPS, which is limited to 60% of the accumulated corpus, would have been exempt from tax. However, this proposal has not been notified in the Finance Bill, 2019, and, hence, the current tax exemption limit of 40% of the total amount remains unchanged.
(Note: The full-fledged Budget could revise the tax rates and provisions)
Income Tax India: Laws
Income Tax India: Statistics: this page includes historical details of income tax rates and tax exemption limits over the years; how many Indians pay I Tax; how the income of women has risen over the years; the extent of tax arrears...