DIRECT TAX LAWS assessment year 2014-15

FINAL COURSE STUDY MATERIAL

PAPER 7

Direct Tax Laws

Assessment Year 2014-15

[Relevant for May 2014 and November 2014 Examinations]

Volume I

BOARD OF STUDIES THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

The Institute of Chartered Accountants of India

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This study material has been prepared by the faculty of the Board of Studies. The objective of the study material is to provide teaching material to the students to enable them to obtain knowledge and skills in the subject. Students should also supplement their study by reference to the standard text book(s). In case students need any clarifications or have any suggestions to make for further improvement of the material contained herein they may write to the Director of Studies.

All care has been taken to provide interpretations and discussions in a manner useful for the students. However, the study material has not been specifically discussed by the Council of the Institute or any of its Committees and the views expressed herein may not be taken to necessarily represent the views of the Council or any of its Committees.

Permission of the Institute is essential for reproduction of any portion of this material.


All rights reserved. No part of this book may be reproduced, stored in a retrieval system, or transmitted, in any form, or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior permission, in writing, from the publisher.

Edition : October, 2013

Website : www.icai.org

E-mail : [email protected]

Department/ : Board of Studies Committee

ISBN No. :

Price : `

Published by : The Publication Department on behalf of The Institute of Chartered Accountants of India, ICAI Bhawan, Post Box No.7100, Indraprastha Marg, New Delhi-110 002,India.

Typeset and designed at Board of Studies.

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SYLLABUS

PAPER 7 : DIRECT TAX LAWS (One paper Three hours 100 Marks)

Level of Knowledge: Advanced knowledge

Objectives:

(a) To gain advanced knowledge of the provisions of direct tax laws,

(b) To acquire the ability to apply the knowledge of the provisions of direct tax laws to various situations in actual practice.

Contents:

I. The Income-tax Act, 1961 and Rules thereunder (90 marks)

II. The Wealth-tax Act, 1957 and Rules thereunder (10 marks)

While covering the direct tax laws, students should familiarise themselves with considerations relevant to tax management. These may include tax considerations with regard to specific management decisions, foreign collaboration agreements, international taxation, amalgamations, tax incentives, personnel compensation plans, inter-relationship of taxation and accounting, with special reference to relevant accounting standards and other precautions to be observed to maximise tax relief. Further, they should have a basic understanding about the ethical considerations in tax management and compliance with taxation laws.

Note If new legislations are enacted in place of the existing legislations relating to income tax and wealth tax, the syllabus will accordingly include such new legislations in the place of the existing legislations with effect from the date to be notified by the Institute.


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A WORD ABOUT STUDY MATERIAL

Direct Tax Laws is one of the core competence areas of the Chartered Accountants. A thorough knowledge of direct tax laws is, therefore, necessary for the students of the CA Final course. In the Final course, Direct Tax Laws constitutes Paper 7. Students are expected to acquire advanced knowledge of the provisions of direct tax laws after undergoing this course and apply such knowledge to various situations in actual practice.

The first part of this Study Material deals with income-tax. There are 28 chapters under income-tax. The second part of this Study Material is on wealth-tax. There are 3 chapters under wealth-tax. The subject matter in this Study Material is based on the law as amended by the Finance Act, 2013, and applicable for A.Y.2014-15. In this Study Material, efforts have been made to present the complex direct tax laws in a lucid manner.

The Study Material on Direct Tax Laws is made in three volumes for ease of handling by the students. Volume I contains Chapters 1-14 of Income-tax, and Volume II contains Chapters 15-28 of Income-tax and Chapters 1-3 of Wealth-tax. Volume III is the Practice Manual.

The taxation laws in our country undergo many amendments. In order to help the students to update their knowledge relating to the statutory and judicial developments in the field of direct and indirect tax laws, the Board of Studies brings out, every year, two publications, namely Supplementary Study Paper and Select Cases in Direct and Indirect Tax Laws. This is an essential read for all our students.

A word of advice to the students please make it a habit of referring to the bare acts as often as possible. This will not only facilitate the process of understanding the law and the sequence of sections in these Acts, but will also equip them with the professional expertise that is expected.

The main features of this edition of the Study Material are -

The amendments made by the Finance Act, 2013 and incorporated in this Study Material have been tabulated chapter-wise with the corresponding section reference and given as Significant Additions/Amendments in this Edition in the next four pages.

In the Study Material, the latest amendments i.e., the amendments made by the Finance Act, 2013 and notifications and circulars issued between 1.7.2012 and 30.4.2013 have been given in bold and italics. Tabular presentations and diagrams have been inserted at the relevant places for explaining the amendments.

The new illustrations as well as the illustrations which have undergone changes due to these amendments have been given in shaded background.


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Certain sections of the Income-tax Act, 1961 contain references to specific provisions of the Companies Act, 1956. The corresponding sections under the Companies Act, 2013 have been given as a footnote at the relevant places in this Study Material solely for the information of the students, since the Income-tax Act, 1961 is yet to be amended to incorporate references to the sections under the Companies Act, 2013.

Feedback form is given at the end of the Study Material. The students are encouraged to give their feedback/suggestions.

These features would aid the students in the learning process. Finally, we would welcome suggestions to make this book more helpful and student-friendly. In case you need any further clarification/guidance, you may send your queries at [email protected]

Happy Reading and Best Wishes!


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DIRECT TAX LAWS

SIGNIFICANT ADDITIONS / AMENDMENTS IN THE EDITION

Chapter No.

Particulars Section

Income-tax 1. Basic Concepts Rebate of up to ` 2,000 for resident individuals having total

income of up to ` 5 lakh 87A & 87

3. Incomes which do not form part of total income Exemption under section 10(10D) not available in respect

of any sum received by any person under keyman insurance policy assigned to keyman before maturity

10(10D)

Exemption of any income of a securitization trust from the activity of securitization

10(23DA) & 10(35A)

Exemption of income of Investor Protection Fund set up by depositories

10(23ED)

Certain Alternative Investment Funds (AIFs) recognized by SEBI to enjoy pass-through status, subject to satisfying certain conditions

10(23FB)

Exemption of income received by an investor on account of buy-back of unlisted shares of a domestic company

10(34A)

Scope of exemption of income received in India in Indian currency by a foreign company expanded

10(48)

Exemption in respect of income of National Financial Holdings Company Ltd.

10(49)

Clarification on issues relating to export of computer software

10AA

Rules governing functioning of an electoral trust for claim of exemption under section 13B

Rule 17CA

Electoral Trusts Scheme Notified

6. Profits and gains of business or profession Manufacturing companies investing more than ` 100 crore in

new plant and machinery during the period from 1.4.2013 to 31.3.2015 entitled to investment allowance@15%

32AC


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Deduction in respect of bad debts written off to be allowed to the extent the same is in excess of the credit balance in the provision for bad and doubtful debts made under section 36(1)(viia), irrespective of whether the same relates to rural advances or urban advances

36(1)(vii)

Deduction for commodities transaction tax paid in respect of taxable commodities transactions

36(1)(xvi)

Inadmissibility of expenses incurred in providing freebees to medical practitioner by pharmaceutical and allied health sector industry

37(1)

Trading in commodity derivatives not a speculative transaction

43(5)

Disallowance of royalty, licence fee, service fee etc. levied exclusively on State Government Undertakings by the State Government

40(a)(iib)

Stamp duty value of land and building to be taken as the full value of consideration in respect of transfer, even if the same are held by the transferor as stock-in-trade

43CA

7. Capital Gains Modification in parameters defining scope of land falling

outside the ambit of Agricultural land and consequently, within the definition of Capital Asset and related amendment in the definition of agricultural income

2(14) & 2(1A)

Cost Inflation Index for F.Y.2013-14 notified 48

8. Income from other sources Immovable property received by an individual or HUF for

inadequate consideration taxable if the difference between the stamp duty value and actual consideration exceeds ` 50,000.

56(2)(vii)

Manner of determination of FMV of unquoted equity shares for the purposes of section 56(2)(vii)/(viia)/(viib)

Rules 11U & 11UA

11. Deductions from Gross Total Income

Life insurance premium up to 15% of minimum capital sum assured to qualify for deduction under section 80C, in respect of policies issued on or after 1.4.2013, where the insurance is on the life of a person with disability or severe disability or a person suffering from disease or ailment

80C & 10(10D)


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Deduction under section 80CCG to be available for three consecutive years to a resident individual, being a new retail investor having gross total income upto ` 12 lakh, for investment in listed equity shares as well listed units of equity oriented fund as per notified scheme

80CCG

Deduction to be available in respect of contribution to CGHS and such other schemes within the overall limit specified thereunder

80D

Additional deduction in respect of interest on loan taken for acquisition of residential house property

80EE

Donation to National Childrens Fund to qualify for 100% deduction

80G

Cash donations to political parties and electoral trusts not to qualify for deduction

80GGB & 80GGC

Extension of sunset clause for tax holiday under section 80-IA for power sector undertakings

80-IA(4)(iv)

Only Indian companies deriving profits from manufacture of goods in a factory to be eligible for deduction under section 80JJAA in respect of additional wages paid to new regular workmen employed in such factory

80JJAA

13. Assessment of various entities

Income-tax@25% in case of royalty and fees for technical services received by a non-corporate non-resident or a foreign company under an agreement entered into after 31.3.1976

115A

Dividends received by Indian companies from specified foreign companies to be entitled to concessional rate of tax for one more year

115BBD

Dividend received from a foreign subsidiary on which tax is payable under section 115BBD by the domestic holding company to be reduced from the amount declared, distributed or paid by way of dividend by it, for levy of additional income-tax

115-O

Levy of additional income-tax on distributed income of a domestic company on account of buy-back of unlisted shares

115QA/115QB/ 115QC

Rationalisation of rates of additional income-tax on income distributed by mutual funds

115R


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Levy of additional income-tax on income distributed by securitization trusts

115TA/115TB/ 115TC

Tax due, for the purposes of recovery from partners of LLPs and directors of private companies in liquidation, respectively, to include interest, penalty or any other sum payable under the Income-tax Act, 1961

167C & 179

Note: In the above table the amendments/additions have been indicated against the chapters where they have been primarily dealt with at length. Some of the amendments may have also been referred to or discussed in other related chapters. In addition, the illustrations in each chapter have been modified to give effect to the amendments by the Finance Act, 2013. New illustrations have also been added to explain the application of some of the amendments.


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STUDY PLAN KEY TO EFFECTIVE LEARNING Direct Tax Laws is one of the core competence areas of the chartered accountants. It is considered to be the most dynamic subject of the chartered accountancy course. The tax laws of the country undergo significant changes every year on the passing of the annual Finance Act. Apart from these major amendments which take place every year, notifications and circulars are issued by the CBDT from time to time to implement the provisions of the Act and clarify issues regarding the meaning and scope of certain provisions. Further, decisions are pronounced by various courts interpreting the provisions of law. As a student, coming out successfully in the paper on Direct Tax Laws with a good score is indeed a challenging task. Planning your study in a methodical manner well in advance of your examination is very crucial for success in examination. Adherence to the study plan is equally important. Ultimately, it is the level and depth of your preparation which will determine how well you perform in the examination. Know your syllabus and expected level of knowledge Before starting your preparation, it is important that you are aware of the scope of syllabus and the level of knowledge expected. The syllabus of Final Paper 7: Direct Tax Laws covers the Income-tax Act, 1961 and Rules thereunder and the Wealth-tax Act, 1957 and Rules thereunder. You are expected to have acquired advanced knowledge of the provisions of direct tax laws as well as the ability to apply the knowledge of the provisions of direct tax laws to various situations in actual practice. The division of marks is 90 for income-tax and 10 for wealth-tax. The requirement of advanced knowledge implies that you have to perfect your logical and analytical reasoning, as well as interpretation of the relevant legal provisions. You have to look at the provisions and their application from several angles. You should prepare yourself to attempt complex questions and problems based on application and interpretation of provisions of law, including recent amendments, and case laws. Be informed of the Finance Act and Assessment Year relevant for your examination The Finance Act of a particular year would be applicable for the May and November examinations of the next year. For instance, the Income-tax Act, 1961 and Wealth-tax Act, 1957 as amended by the Finance Act, 2013 would be applicable for May, 2014 and November 2014 examinations. The relevant assessment year for May 2014 and November 2014 examinations is, therefore, A.Y.2014-15. You are expected to be updated with the notifications, circulars and other legislative amendments made upto 6 months prior to the examination. For May examination, such amendments made upto 31st October of the previous year would be relevant and for November examination, such amendments made upto 30th April of that year would be relevant.


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Draw up a detailed study plan and allocate time for each topic/chapter of the subject Preparing a comprehensive study time table well in advance would be of great help in organizing your study in an effective manner. Allocate sufficient number of hours every week for the subject of Direct Tax Laws. The next step is to estimate the time to be allocated for each topic/chapter of the subject. The scope of syllabus, the contents of each chapter in the Study Material and Practice Manual would help you to broadly assess the time which each topic of the subject would consume. Of course, you have to keep some percentage margin over and above the time assessed by you to take care of possible difficulty in understanding or interpreting concepts, particularly relating to international taxation and certain aspects of procedural law. Make full use of all the knowledge inputs of BOS The Board of Studies brings out various publications from time to time with a view to assist the students in education. You are advised to make full use of the Study Material and other educational inputs provided to you. These educational inputs are also hosted at the BOS Knowledge Portal under the students section of the Institutes website www.icai.org. The intention of creation of this portal is primarily to ensure free and unrestricted flow of knowledge and information to the students across the country by way of easy access to the latest publications of the Institute. Our efforts will, however, bear fruit only if you make it a habit to browse the portal as often as possible and assimilate the knowledge inputs contained therein. It is of utmost importance that you read these knowledge inputs to attain conceptual clarity, to remain updated with the developments in all the subjects and also to acquire the ability to apply the concepts to solve practical problems. Some of the important publications of BOS in the area of Direct Tax Laws are -

Publication Objective Key Features Study Material The aim of the Study Material

is to build a strong conceptual base by explaining the complex direct tax laws in a lucid manner. The October, 2013 edition of the Study Material is based on the provisions of law as amended by the Finance Act, 2013 and applicable for A.Y.2014-15. This edition is, therefore, relevant for May 2014 and November 2014 examinations.

The chapters relating to substantive and procedural law are organised in a logical sequence for clear comprehension;

The provisions of law have been explained in a lucid manner to facilitate easy understanding;

Illustrations have been given, wherever possible, to explain the provisions of law;

New illustrations and illustrations which have undergone a change due to amendments in law have been given in shaded background.

The latest amendments have been indicated in bold italics;


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The Circulars/Notifications issued by the CBDT have been discussed along with the respective sections to which they relate.

Supplementary Study Paper

This is a very important knowledge input in the area of Direct Tax Laws explaining the amendments made by the relevant Finance Act and latest circulars and notifications issued by CBDT. The Supplementary Study Paper-2013 explains the amendments made by the Finance Act, 2013 and significant circulars and notifications issued between 1.7.2012 and 30.4.2013. This publication is relevant for May 2014 and November 2014 examinations.

The Supplementary Study Paper is also divided into chapters, so that you can co-relate the same with the Study Material;

Illustrations have been given, wherever possible, for better understanding of the amendments;

Related sections are grouped together and explained to facilitate interlinking and reading of interconnected provisions;

In respect of each notification, the relevant provision of the Act which confers the power to issue such notification is described briefly, so that you can relate the notification to the appropriate provisions of the Act.

Select Cases in Direct and Indirect Tax Laws An Essential Reading for the Final Course

Significant Court rulings are reported to help you understand the interpretation of the provisions of law by judicial forums. The September 2013 edition of this publication is relevant for May 2014 and November 2014 examinations.

Important decisions of the Supreme Court, High Court and Authority for Advance Rulings are reported for an insight on the interpretation of the specific provisions of law;

The case laws are grouped chapter-wise to enable you to co-relate the same with the provisions contained in the parallel chapter of the Study Material;

The case laws, when read in conjunction with the Study Material, will enable you to appreciate the issues involved in interpreting and applying the provisions of law to practical situations.

Practice Manual

The Practice Manual has also been grouped chapter-wise and contains a variety of problems in each topic for the

The questions in each chapter of the Practice Manual are taken from the past 13 years question papers set at the Final level. In addition, other


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better understanding and application of the concepts explained in the Study Material. In the October 2013 edition of the Practice Manual, the questions and answers are based on the provisions of law as amended by the Finance Act, 2013 and are hence, relevant for May 2014 and November 2014 examinations. The relevant assessment year is A.Y.2014-15.

questions from past RTPs etc. are also included;

The questions are adapted as per the provisions of law as amended by the latest relevant Finance Act;

Answers to the questions are based on the provisions of law as amended by the latest relevant Finance Act;

Revision Test Papers (RTP)

The RTPs are prepared with the twin objective of (1) updating you on the

latest developments on the statutory and judicial front.

(2) helping you to self-assess the effectiveness of your study and revision by solving the questions given in Part III independently and comparing the same with the answers given.

The RTP is divided into three parts Part I : Statutory Update Latest Notifications & Circulars Part II : Judicial Update Latest Case Laws Part III : Questions & Answers - A Self-assessment test. The questions in Part III are framed to test your awareness and understanding of the provisions of income-tax law and wealth-tax law, particularly the latest developments, both on the statutory as well as on the judicial front, as well as your ability to analyse and interpret the provisions of law.

Suggested Answers

As the name depicts, this publication contains the questions set at the CA examination, as well as the suggested answers to such questions.

The answers are prepared with a view to assist the students in education;

The Suggested Answers generally represent the ideal manner in which questions should be answered;

Therefore, it contains references to case laws, sections (including sub-sections and clauses), notifications and circulars issued by the CBDT;


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In solutions to computational problems, the reasons for treatment of items are explained by way of Notes, giving reference to the related provisions of law and/or court rulings.

Step I Study the Study Material for conceptual clarity Be clear with the concepts Ideally, when you take up any topic for study, you must first go through the relevant chapter of the Study Material for building a strong conceptual base. Make sure you read the Study Material updated on the basis of the provisions of law as amended by the Finance Act relevant for your examination. In case you have the earlier edition of the Study Material, then, you must go through the Supplementary Study Paper, which explains the amendments made by the Finance Act relevant for your examination. Refer the Bare Acts Do keep the Bare Acts i.e., Income-tax Act, 1961 and Wealth-tax Act, 1957 by your side for reference purposes. This will facilitate understanding of the language of law and the logical sequence of the sections. Jot down key points for easy revision Make it a habit to jot down the key points, if any, in each topic, and particularly, in your problem areas. This would facilitate revision, especially when you have a limited time of just one day before each examination. Read the related provisions together While reading the chapters in the Study Material, you should keep in mind that each chapter cannot be read on a stand-alone basis. Moreover, for proper appreciation of the income-tax law, inter-linking and combined reading of sections is an essential pre-requisite. The provisions contained in a chapter, say, Assessment of Various Entities, have to be read along with the provisions relating to business taxation, capital gains, deductions from gross total income etc., which are discussed in separate chapters of the Study Material. Step II Stay current with the Supplementary You are advised to update yourself with the help of Supplementary Study Paper which is brought out every year. In this publication, the amendments made in direct tax laws by the Finance Act of that year are categorized chapter-wise and explained with the aid of illustrations and tabular presentations to facilitate easy understanding. The related sections are grouped together and discussed at one place in the Supplementary Study Paper and therefore, you would not face any difficulty in combined reading and understanding of the interconnected provisions. Further, the latest notifications and circulars issued by the CBDT are also explained in the Supplementary Study Paper. Accordingly, the Supplementary Study Paper-2013 explains the


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amendments made by the Finance Act, 2013 and significant notifications and circulars issued between 1.7.2012 and 30.4.2013. Even if you have the latest Study Material, we would still advise you to go through the Supplementary Study Paper, since the amendments are discussed in detail therein. It would also help you understand and assimilate the recent amendments in a more effective manner. Step III Apply the concepts to solve practical problems in the Practice Manual After reading each chapter in the Study Material and the corresponding chapter of the Supplementary Study Paper, try to work out the problems in the parallel chapter of the Practice Manual on your own, and thereafter compare your answers with the answers given therein. This would help you to identify your mistakes and also learn from your mistakes. Further, this process would help in revision of the concepts and principles contained in each chapter of the Study Material and application of the same while solving practical problems. In the Practice Manual, the problems are solved with complete working notes and reasoning for treatment of various items by way of notes following the main solution. Court rulings have also been adequately discussed in the answers to case law based questions. You should carefully study the rationale of the court rulings in connection with the issue raised in the question. Once you complete study of all the topics in the syllabus, try solving the problems in the Practice Manual once again to test if you are clear with all the concepts or whether there are still any grey areas which require further understanding. Step IV Update & Revise with the aid of the RTP Update yourself on the statutory front The Study Material is generally updated on the basis of the Finance Act of that year and notifications and circulars issued upto a particular date, i.e., 30th April of that year. The Study Material, so updated, would be relevant for May and November examinations held in the following year. However, for the May examination to be held in the following year, the significant notifications and circulars issued upto 31st October of the previous year are relevant. The RTP for May examination, therefore, contains the significant notifications and circulars issued between 1st May and 31st October of the previous year. Likewise, for the November examination of the following year, the significant notifications and circulars issued upto 30th April of that year are relevant. The RTP for November examination would, therefore, contain the significant circulars and notifications issued between 1st May of the previous year and 30th April of the year. For instance, the October 2013 edition of the Study Material is updated on the basis of the amendments made by the Finance Act, 2013 and circulars and notifications issued upto 30th April, 2013. This edition of the Study Material is relevant for May 2014 and November 2014 examination. However, for May 2014 examination, the amendments made by circulars and notifications issued between 1st May, 2013 and 31st October, 2013 are also relevant, and hence, the same would be given in the RTP for May 2014 examination. Likewise, for November 2014 examination, the amendments made by circulars and notifications issued


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between 1st May, 2013 and 30th April, 2014 would be relevant, and the same would be given in the RTP for November 2014 examination. Update yourself on the judicial front It is very important that you understand the rationale of court rulings vis--vis the relevant provisions of law. The publication Select Cases in Direct & Indirect Tax Laws An Essential Reading for the Final Course is a compilation of select recent significant judicial decisions, which, when read in conjunction with the Study Material will enable you to appreciate the significant issues involved in interpreting and applying the provisions of tax laws. Revise what you have learnt Appropriately, the first round of study should be concluded at least three months before the examination; the initial round/rounds of revision should be done in the penultimate two months prior to the examination and the final revision in the last month before the examination wherein all the loose ends should be sorted out. Solving the questions and problems in the Revision Test Papers would help you to self-assess the effectiveness of your study and revision. Step V - Check your level of preparation Solve past years question papers and compare with Suggested Answers You should also make an honest attempt to solve the immediately preceding examination papers within a time span of three hours and compare your answers with the Suggested Answers published by the Board of Studies. This will help you to identify the areas where you are deficient and enable you to take corrective steps to avoid such mistakes in your examination. However, remember that Suggested Answers are prepared on the basis of the provisions applicable for the assessment year relevant for that particular examination. For example, the Suggested Answers for May 2013 examination are based on the provisions applicable for A.Y.2013-14. In case you are appearing for the examination in May 2014 or November 2014, the relevant assessment year would be A.Y.2014-15. Therefore, while checking your answers with the answers given in the Suggested Answers, you should keep in mind that your answer would vary to the extent of amendments made by the Finance Act, 2013 and notifications and circulars issued after 31.10.2012. Solve Mock Test Papers You may also try attempting Mock Test Papers hosted on the Institutes website www.icai.org to complete the process of revision. You may also appear for the Mock Tests conducted at the regional offices and branches of the Institute and check your level of progress. Face the examination with confidence Having prepared well for the examination, it is also important that you approach the examination with a positive attitude. Do keep in mind the following points to score well in this paper - (i) Answer the questions with due emphasis on provisions of the law - Support your

answers/conclusions with proper reasoning. Answers should be based on relevant legal provisions or judicial decisions rather than a mere common sense and/or guess work.


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(ii) Support your treatment with provisions of law and/or case laws - In respect of computational problems, the reasoning for treatment of various items should be given in your answer. The length and depth of reasoning to be given would depend on the marks allotted for the question. For example, in case of a problem on computation of total income of a firm or company, where the question specifically requires treatment of various items, you are expected to give the reasons for treatment of each item supported by the relevant provisions of law and/or case law, by way of notes below the main solution depicting the additions and deductions to arrive at the total income.

(iii) Supplement your computation with Working Notes - Give complete working notes while solving computational problems. For example, if you are computing allowable salary of working partners as part of computation of total income of a firm, the working note should specify the limits under section 40(b)(v) for allowability of salary based on book profits of the firm. The book profit to be taken into consideration for calculating these limits should also be worked out.

(iv) Relate and apply ratio of court rulings to case-law based questions - While answering case-law based questions, you must first relate the facts and the issue raised in the question with the facts and issue raised in the case decided by the Court. Thereafter, you may briefly discuss the rationale of the court ruling (giving reference to the appropriate provisions of law) and apply the ratio to the case on hand. Finally, write the conclusion to the issue raised in the question. For example, if the question requires you to examine the correctness of the contention of the Assessing Officer, then, your conclusion must address this question i.e. whether or not the contention of the Assessing Officer is correct applying the ratio of the court ruling to the facts given in the question.

(v) Try to quote/cite relevant section numbers/case laws Quoting section numbers and citing case laws would definitely add value to your answers. However, it is better not to quote than to quote a wrong section number/case law.

(vi) State your assumptions/views clearly - Since the provisions of tax laws are subject to different interpretations by various courts, there are possibility of alternate views in the tax treatment of a particular item of income or expense or loss or deduction. Sometimes, there may be different points of view even on procedural law based provisions. As a student, you should state your view/assumption clearly and proceed to answer the question on that basis.

(vii) Avoid using short forms Use of short forms like AO, ITO, IT Act, WT Act etc. should be avoided. Write the full names of the statutes, like, Income-tax Act, 1961 or Wealth-tax Act, 1957.

(viii) Present your answers well - Make sure that your handwriting is neat and legible. Answer all parts of a question one after the other. Do not answer different parts of the same question at different places.

(ix) Follow instructions given on the cover page of answer paper- Pay heed to the instructions given on the cover page of the answer paper.


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Volume 1 INCOME TAX

CONTENTS

CHAPTER 1 : BASIC CONCEPTS

1.1 Overview of Income-tax law in India ............................................................... 1.1

1.2 Charge of income-tax .................................................................................... 1.2

1.3 Rates of tax .................................................................................................. 1.2

1.4 Concept of income ......................................................................................... 1.7

1.5 Total income and tax payable ......................................................................... 1.8

1.6 Important definitions ................................................................................... 1.13

1.7 Other basic concepts .................................................................................. 1.26

CHAPTER 2 : RESIDENCE AND SCOPE OF TOTAL INCOME

2.1 Residential status ......................................................................................... 2.1

2.2 Scope of total income ................................................................................... 2.6

2.3 Deemed receipt and accrual of income in India .............................................. 2.7

2.4 Meaning of Income received or deemed to be received ................................ 2.7

2.5 Meaning of income accruing and arising .................................................. 2.7

2.6 Income deemed to accrue or arise in India ...................................................... 2.8

CHAPTER 3 : INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME

3.1 Introduction ................................................................................................... 3.1

3.2 Incomes not included in total income ............................................................. 3.1

3.3 Tax holiday for newly established units in SEZ .............................................. 3.60

3.4 Charitable or religious trusts and institutions ................................................ 3.66

3.5 Tax Exemption to Political Parties ................................................................ 3.84

3.6 Exemption for Voluntary Contributions Received by Electoral Trusts .............. 3.85


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CHAPTER 4 : INCOME FROM SALARIES

4.1 Salary .......................................................................................................... 4.1

4.2 Definition of salary ......................................................................................... 4.2

4.3 Basis of charge ............................................................................................. 4.3

4.4 Place of accrual of salary ............................................................................... 4.3

4.5 Profits in lieu of salary ................................................................................... 4.3

4.6 Advance salary .............................................................................................. 4.4

4.7 Loan or advance against salary ...................................................................... 4.5

4.8 Salary arrears ............................................................................................... 4.5

4.9 Annuity ......................................................................................................... 4.5

4.10 Gratuity ......................................................................................................... 4.5

4.11 Pension ........................................................................................................ 4.5

4.12 Leave salary.................................................................................................. 4.6

4.13 Retrenchment compensation ......................................................................... 4.6

4.14 Compensation received on voluntary retirement ............................................. 4.6

4.15 Provident fund ............................................................................................... 4.6

4.16 Approved superannuation fund ..................................................................... 4.10

4.17 Salary from United Nations Organisation ...................................................... 4.11

4.18 Allowances .................................................................................................. 4.11

4.19 Perquisites .................................................................................................. 4.12

4.20 Valuation of perquisites ............................................................................... 4.18

4.21 Deductions from salary ................................................................................ 4.36

4.22 Deduction under section 80C ....................................................................... 4.38

4.23 Relief under section 89 .4.38

CHAPTER 5 : INCOME FROM HOUSE PROPERTY

5.1 Chargeability ................................................................................................. 5.1

5.2 Conditions for chargeability ............................................................................ 5.1

5.3 Composite rent .............................................................................................. 5.2


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5.4 Income from house property situated outside India .......................................... 5.3

5.5 Determination of annual value ........................................................................ 5.3

5.6 Deductions from annual value ....................................................................... 5.7

5.7 Computation of Income from house property for different categories of property .................................................................................................... 5.8

5.8 Inadmissible deductions ............................................................................... 5.17

5.9 Taxability of recovery of unrealised rent & arrears of rent received ................ 5.17

5.10 Treatment of income from co-owned property ............................................... 5.17

5.11 Treatment of income from property owned by a partnership firm .................... 5.18

5.12 Deemed ownership ...................................................................................... 5.18

5.13 Cases where income from house property is exempt from tax ........................ 5.19

CHAPTER 6 : PROFITS AND GAINS OF BUSINESS OR PROFESSION

6.1 Meaning of Business, Profession and Profits ........................................... 6.1

6.2 Income chargeable under this head ............................................................... 6.2

6.3 Speculation business .................................................................................... 6.4

6.4 Computation of income from business ........................................................... 6.6

6.5 Admissible deductions .................................................................................. 6.7

6.6 Inadmissible deductions .............................................................................. 6.74

6.7 Expenses or payments not deductible in certain circumstances .................... 6.79

6.8 Profits chargeable to tax ............................................................................. 6.85

6.9 Special provisions for deduction in case of business for prospecting etc. for mineral oil ....................................................................................... 6.86

6.10 Changes in rate of exchange of currency ..................................................... 6.87

6.11 Certain deductions to be allowable only on actual payment .......................... 6.88

6.12 Special provisions for computation of cost of acquisition of certain assets ..... 6.90

6.13 Stamp Duty Value to be taken as full value of consideration on transfer of land held as stock-in-trade ........................................................................... 6.91

6.14 Special provisions in case of income of Public Financial Institutions ............. 6.93

6.15 Insurance business ..................................................................................... 6.93


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6.16 Special provisions in the case of certain associations ................................... 6.93 6.17 Compulsory maintenance of accounts .......................................................... 6.94 6.18 Audit of accounts of certain persons carrying on business or profession......... 6.96 6.19 Special provision for computing profits and gains of business on

presumptive basis ...................................................................................... 6.97 6.20 Special provision for computing profits and gains of business of

plying, hiring or leasing goods carriages ...................................................... 6.98 6.21 Special provision for computing Profits and gains of shipping

business of non-residents ........................................................................... 6.99 6.22 Provisions for computation of taxable income from activities

connected with exploration of mineral oil .................................................... 6.100 6.23 Special provision for computing profits and gains from business

of operation of aircraft by non-residents ...................................................... 6.100 6.24 Profits and gains of foreign companies engaged in the business of civil construction etc. in certain turnkey power projects ...................................... 6.102 6.25 Special provisions for computing income by way of royalties etc. in case of non-residents ....................................................................................... 6.102 6.26 Method of computing deduction in the case of business reorganisation of co-operative banks ........................................................... 6.103 6.27 Computation of business income in cases where income is partly

agricultural and partly business in nature ..................................................... 6.106

CHAPTER 7 : CAPITAL GAINS 7.1 Introduction ................................................................................................... 7.1 7.2 Capital asset ................................................................................................. 7.1 7.3 Short-term and long-term capital assets.......................................................... 7.4 7.4 Transfer: what it means ................................................................................. 7.5 7.5 Scope and year of chargeability .................................................................... 7.6 7.6 Capital gains on distribution of assets by companies in liquidation ................ 7.10 7.7 Capital gains on buyback, etc. of shares ...................................................... 7.10 7.8 Transactions not regarded as transfer .......................................................... 7.11 7.9 Important definitions .................................................................................... 7.16 7.10 Withdrawal of exemption in certain cases ..................................................... 7.17 7.11 Mode of computation of capital gains ............................................................ 7.18 7.12 Ascertainment of cost in specified circumstances .......................................... 7.20


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7.13 Cost of improvement .................................................................................... 7.25 7.14 Cost of acquisition ....................................................................................... 7.28 7.15 Computation of capital gains in case of depreciable asset ............................. 7.34 7.16 Capital gains in respect of slump sales ......................................................... 7.35 7.17 Special provision for full value of consideration in certain cases .................... 7.35 7.18 Fair Market Value of the capital asset on the date of transfer to be taken as sale consideration in cases where the consideration is not determinable ....... 7.36 7.19 Advance money received ............................................................................. 7.36 7.20 Exemptions of capital gains.......................................................................... 7.38 7.21 Reference to valuation officer ....................................................................... 7.49 7.22 Short term capital gains tax in respect of equity shares/units of an

equity oriented fund ..................................................................................... 7.50 7.23 Tax on long-term capital gains ..................................................................... 7.51 7.24 Exemption of long term capital gains on sale of equity shares/units

of an equity oriented fund ............................................................................ 7.51

CHAPTER 8 : INCOME FROM OTHER SOURCES 8.1 Introduction ................................................................................................... 8.1 8.2 Incomes chargeable under this head ............................................................. 8.1 8.3 Bond washing transactions and dividend stripping ......................................... 8.14 8.4 Applicable rate of tax in respect of casual income ........................................ 8.15 8.5 Deductions allowable ................................................................................... 8.15 8.6 Deductions not allowable ............................................................................. 8.16 8.7 Deemed income chargeable to tax ................................................................ 8.17 8.8 Method of accounting ................................................................................. 8.17

CHAPTER 9 : INCOME OF OTHER PERSONS INCLUDED IN ASSESSEES TOTAL INCOME 9.1 Clubbing of income - An introduction .............................................................. 9.1 9.2 Transfer of income without transfer of the asset .............................................. 9.1 9.3 Income arising from revocable transfer of assets............................................. 9.1 9.4 Exceptions where clubbing provisions are not attracted even in case

of revocable transfer ...................................................................................... 9.2 9.5 Clubbing of income arising to spouse ............................................................. 9.2


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9.6 Transfer of assets for the benefit of the spouse ............................................... 9.5 9.7 Income arising to sons wife from the assets transferred without

adequate consideration by the father-in-law or mother-in-law .......................... 9.5 9.8 Transfer of assets for the benefit of sons wife ............................................... 9.5 9.9 Clubbing of minors income ............................................................................ 9.6 9.10 Cross transfers .............................................................................................. 9.7 9.11 Conversion of self-acquired property into the property of a HUF ...................... 9.7 9.12 Income includes loss ..................................................................................... 9.7 9.13 Distinction between section 61 and section 64 ................................................ 9.8 9.14 Liability of person in respect of income included in the income

of another person .......................................................................................... 9.8

CHAPTER 10 :SET-OFF AND CARRY FORWARD OF LOSSES 10.1 Aggregation of income ................................................................................. 10.1 10.2 Concept of set off and carry forward of losses ............................................... 10.1 10.3 Inter source adjustment ............................................................................... 10.1 10.4 Inter head adjustment .................................................................................. 10.2 10.5 Set-off and carry forward of loss from house property.................................... 10.3 10.6 Carry forward and set-off of business losses ................................................. 10.4 10.7 Carry forward and set-off of accumulated business losses and unabsorbed

depreciation allowance in certain cases of amalgamation/demerger, etc. ....... 10.5 10.8 Set-off of losses of a banking company against the profits of a banking

institution under a scheme of amalgamation ................................................. 10.8 10.9 Provisions relating to carry forward and set-off of accumulated losses and

unabsorbed depreciation in business reorganisation of co-operative banks .... 10.9 10.10 Losses in speculation business ................................................................... 10.11 10.11 Carry forward and set-off of losses by specified business ............................. 10.11 10.12 Losses under the head capital gains .......................................................... 10.12 10.13 Losses from the activity of owning and maintaining race horses ................... 10.13 10.14 Carry forward and set off of losses in case of change in

constitution of firm or succession ................................................................ 10.14 10.15 Carry forward and set-off of losses in case of closely held companies ........... 10.14 10.16 Order of set-off of losses ............................................................................ 10.15


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CHAPTER 11 : DEDUCTIONS FROM GROSS TOTAL INCOME

11.1 General Provisions ..................................................................................... 11.1

11.2 Deductions in respect of payments .............................................................. 11.3

11.3 Deductions in respect of incomes ............................................................... 11.31

11.4 Other deductions ........................................................................................ 11.61

CHAPTER 12 : INTER-RELATIONSHIP BETWEEN ACCOUNTING AND TAXATION

12.1 Recognition of accounting principles by judicial forums while settling tax disputes ...................................................................................................... 12.1 12.2 Accounting Standards and Income-tax law - Convergence and divergence ..... 12.2

12.3 Treatment of income-tax expense under Accounting Standards ..................... 12.5

12.4 Relevance of method of accounting under the Income-tax Act, 1961 ............. 12.11

12.5 Valuation of inventory [Section 145A vs. AS-2]............................................. 12.17

12.6 Relevance of profit and loss account prepared in accordance with the provisions of part II of Schedule VI to the Companies Act, 1956

for computing book profit for levy of MAT ..................................................... 12.19

12.7 Conclusion ................................................................................................. 12.20

CHAPTER 13 : ASSESSMENT OF VARIOUS ENTITIES

13.1 Assessment of Companies ........................................................................... 13.1

13.2 Assessment of Other Entities ...................................................................... 13.45

13.3 Liability in Special Cases ............................................................................ 13.77

CHAPTER 14 : TAX PLANNING AND ETHICS IN TAXATION

14.1 Basic concepts ........................................................................................... 14.1

14.2 Tax planning considerations in respect of salary income ............................. 14.20

14.3 Tax planning considerations in relation to business ..................................... 14.23

14.4 Ethics in Taxation ....................................................................................... 14.43

CHAPTERS 15 28 of Income Tax and CHAPTERS 1 3 of Wealth Tax are available in Volume 2.


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DIRECT TAX LAWS assessment year 2014-15