Ifos

Abhishek Tripathi (CA IPCC STUDENT) (160 Points)

15 September 2011

Income from Other Sources

Section-56 – Charging Section

Income from: -

(1) Sub-letting of House Property.

(2) Director’s Sitting Fees.

(3) Family Pension.

(4) Income from Undisclosed Sources.

(5) Remuneration received by members of Parliament.

(6) Examination Fees from Non-employer.

(7) Rent from a vacant piece of Land.

(8) Interest on URPF on Employer’s Contribution.

(9) Agriculture Income from land situated outside India.

(10) Guarantee Commission/Underwriting Commission to Directors.

(11) Gratuity received by a Director not as an employee.

(12) Gift Tax: Money (Cash) received by Individual/HUF without consideration from any person(s), if exceeds Rs.50,000 then whole amount shall be taxable.

(13) Award to Profession Sportsman is Taxable. Award to Non-Profession Sportsman is not Taxable

(14) Composite Rent Separable: HP and PGBP, Not separable: Whole in OS.

(15) Lottery Prize: Books Maintain: Accrual Basis, No Books: In the year of Receipt. In another case: Only on receipt basis.

Section-57 – Any revenue expenditure expended to earn income chargeable u/h OS will be allowed as deduction against such income.

Section-56 – Taxation of Gifts

(1) If any sum of money aggregate value of which exceeds Rs.50,000, is received during P.Y. without consideration, by an Indivdual/HUF from any person(s), then the whole of the aggregate of such sum shall be taxable.

(2) Exceptions: -

(a) Gift received in kind is not taxable.

(b) Gift from the following persons is not taxable: -

ü On occasion of Marriage of Individual.

ü Under a Will or by way of Inheritance.

ü In contemplation of death of the payer.

ü Any Local Authority.

ü Trust/Foundation/University/Institution etc. referred u/s-10(23D).

ü Trust/Institution registered u/s-12AA.

ü From a Relative. Relative means: -

· Spouse, Brother/Sister of Spouse, Any lineal ascendant or descendant of the spouse of the Brother/Sister of.

· Brother/Sister of Individual, Brother/Sister of Parents, Any lineal ascendant or descendant of the Individual.

· Spouse of the persons referred above.

Q. D, a lady, received the following gifts during the year ending 31.3.2006:

(a) Rs.30,000 from her elder sister.

(b) Rs.50,000 from the daughter of her elder sister.

(d) Watch valued Rs.60,000.

(e) From Grandfather on Birthday Rs.60,000.

Discuss the taxability or otherwise of these gifts in the hands of D.

Sol.)

Statement showing Taxability of Gifts

(For A.Y. 2009-10)

Gift	Reason & Taxability
Elder Sister Rs.30,000	Relative – Not Taxable
Daughter of her elder sister Rs.50,000	Not a Relative, but not exceeding Rs.50,000 – Not Taxable
Friends on occasion of her marriage Rs.125000	Special Occasion – Not Taxable
Watch Rs.60,000	Gift-in-kind – Not Taxable
Grandfather Rs.60,000	Relative – Not Taxable (lineal ascendant)

Taxability of Family Pension

(1) Taxable u/h Income from Other Sources.

(2) Deduction u/s-57: Least of following: -

(a) 1/3^rd of Gross Pension, or

(b) Rs.15,000.

(3) Exemption u/s-10

(a) Family pension received by family members of Army Personnel who are recipient of gallantry awards (i.e., Param Vir Chakra, Maha Vir Chakra, Vir Chakra etc.) (Pension received by him is also exempt)

(b) Family pension received by the widow, children or nominated heirs of a member of the armed forces (including para-military forces) whose death has occurred in the course of operational duties.

Loss on Maintaining Camels for Races

Ø Cannot be carried forwarded. However, it can be set-off u/s-70 and71.

Ø However, U/s-74A, B/F unabsorbed loss from activity of maintaining race horses can be carried forwarded for 4 assessment years.

Q. A takes loan of 5,00,000 to invest in shares and receive dividend. Interest on Loan Rs.1,00,000. Discuss.

Ans.

Ø Section-14A: In computation of Total Income, the expenditure incurred in relation to income, which does not form part of Total Income, shall not be allowed as deduction.

Ø Since Dividend is exempt u/s-10(34), and hence does not form part of total income. Therefore, interest not allowed as expenditure. (What treatment in Capital Gains?)

Taxation of Dividend

Section-10(34) – Dividend referred in Section 115-O and Deemed Dividend u/s2(22)(a) to (d) is Exempt in hands of SH. Because Company pays Dividend Distribution Tax @ 15% (+10%+3%) on it

Section-2(22) – Deemed Dividend

Dividend Includes: -

(a) Distribution by Company to SH All or any part of Assets.

(b) Distribution to : -

Ø Eq/Pref. SH → Debentures, Debenture-stock, or Deposit Certificates

Ø Pref. SH → Bonus Shares

(d) Any Distribution to Shareholders on Reduction of Capital

ü Exception Buy back u/s77A and In Demerger.

(e) Dividend u/s-2(22)(e) is Taxable in the hands of Shareholders, So No DDT on it by Company. Any Advance or Loan by a Public are NOT Substantially interested to the extent the company possess Accumulated Profits to: -

ü Beneficial Owner having 10% or more Voting Right of the Company.

ü A concern in which above person is Member or Partner and having Substantial interest.

ü To any person on before of or for individual benefit of such shareholder.

v Beneficial Ownership, “Membership/Partnership” in concern to be checked On the Date of Loan & Advance and not after.

v Substantial Interest in Firm – At any time during the P.Y,

v Section-2(22)(e) is applicable even if loan is repaid.

v Arati Debi – If Loan is more than Accumulated Profit, then the entire loan will be deemed dividend u/s2(22)(e).

v Accumulated profits shall include all profits upto the date on which Loans & Advance is given to the Shareholder.

v G. Narasimhan – For the purpose of Section-2(22), Accumulated Profits get reduced by deemed dividend u/s 2(22)(e).

v Exceptions to Section-2(22)(e): -

ü Not deemed dividend if lending money is the substantial part (i.e., >50% of PGBP) of the business of the company and loan made in the ordinary course of business.

ü No DDT on Dividend payable/paid which was set-off by the company against the loan/or pat of loan which was treated as dividend u/s2(22)(e).

Section 2(22)(a) to (d) →

(Applicable on all companies)

To the extent of Accumulated Profits* (whether capitalised or not)

[* – Deemed Dividend u/s2(22)(e)]

Section 2(22)(e) →

(Applicable on Closely Held Companies)

Accumulated Profits (Not Capitalised)

Section-115-O – Tax on distributed profit of Domestic Companies

Ø Dividend Distribution Tax @ 15% (+10%+3%) = 16.995%.

Ø To be paid within 14 Days of Dividend Declared/Distributed/Paid,

Ø On Interim/Final/ Deemed Dividend u/s2(22)(a) to (d) or Otherwise,

Ø Whether out of Current or Accumulated Profits or out of Share Capital.

v No DDT (if Dividend from Current Profits) for Undertakings engaged in developing or developing, operating & maintaining SEZ + Exempt in the hands of Shareholders.

v Dividend u/s-2(22)(e) and Dividend from Foreign Company is taxable in the hands of Shareholds therefore No DDT payable by the company.

v No Deduction for Dividend & CDT as Business Expenses to company.

v Consequences for non-payment of DDT

ü U/s 115P → Interest @ 1% p.m. or part thereof.

ü U/s 115Q → Assessee in default.

ü U/s 271C → “Penalty = Tax”

and

U/s 276B → Rigorous imprisonment from 3 months to 7 years.

Accumulated Profits include

For 2(22)(c) – All profits upto the date of liquidation. In case liquidation is consequent to Compulsory Acquisition by Govt. then Profits upto date of liquidation except 3 successive P.Y.

For Others – All profits upto the date of distribution/payment.

Section-46A – Capital Gain on Buy-Back of Shares

Consideration Received – Cost of acquisition = Capital Gains.

Deferred Dividend taxable when declared.

Dividend from Abroad – Gross Dividend is Taxable (and not net).

Taxation of Political Parties

Section-13A – Following incomes not included in Total Income of Political Party: -

(1) Income chargeable u/h: -

(a) House Property,

(b) Other Sources

(2) Voluntary Contribution: Provided that: -

Ø Books of A/cs and other documents are maintained as would enable AO to properly deduce the income.

Ø Records of (Name & Address) of person if Voluntary Contribution exceeds Rs.20,000.

Ø Accounts audited by Accountant.

Ø No Exemption if Report u/s29C of the Representation of People Act for a F.Y. is not furnished.

Example: Income of Political Party for A.Y. 2009-10

Rent of Property (Exempt u/s-13A)	Nil
Interest on Deposits (Exempt u/s-13A)	Nil
Contributions exceeding Rs.20,000 (Names of persons making contribution not available)	21,00,000
Contributions not exceeding Rs.20,000	Nil
Net Profit of Cafeteria run in Delhi is assessable as Business Income	3,00,000
Total Income	24,00,000

Taxation of Units

Dividend Income from units of UTI or Mutual Fund or Administrator of Specified Undertaking or Specified Company is Exempt u/s-10 in hands of unit-holder.

Sectiob-115-R – Company shall pay tax: -

Money Market Mutual Fund or Liquid Fund:	· 25% of Income Distributed.
Other than MMMF or Liquid Fund	· 12.5% of Income Distributed to Individual/HUF. · 20% for others.
Payment of Tax within 14 days of Distribution/Payment. On or before 15^th September file a “Statement of Income Distributed during P.Y.” in prescribed form.
Note: Equity Oriented Mutual Fund Exempt u/s10 + Exempt u/s-115-R.

Equity Oriented Fund means: -

(1) Units Scheme, 1964 made by UTI (US-64), and

(2) Such Fund where more than 65% of Investible Funds is invested in Equity Shares of Domestic Companies. (65% = Annual Average of monthly average of opening and closing figures).

Capital Gains on Units

(1) Units of US-64

ü STCG/LTCG → Exempt u/s 10(33)

ü If held as Stock-in-trade → Taxable u/h PGBP.

(2) Units of Equity Oriented Fund

Ø LTCG → Exempt u/s 10(33) if sold through Stock Exchange & STT paid.

Ø LTCG → Exempt u/s 10(33) if Sold to Mutual Fund and STT paid.

Ø STCG → Taxable @ 15% u/s 111A where: -

ü Units sold through Stock Exchange & STT paid.

ü Units sold to Mutual Fund and STT paid.

(3) Units other than Equity Oriented Fund

Ø STCG → Taxable at Normal Rates.

Ø LTCG → At rates specified in Section-112 (20% or 10% as the case may be)

Dividend Stripping

Section-94(7) – Where any person: -

(1) Acquires Securities/Units 3 months before Record Date, and

(2) Sells Securities within 3 months/Units within 9 months of Record Date, and

(3) Receives any Dividend which is Exempt u/s10(34) or 10(35)

Then, On Such Sale/Purchase: -

Ø Dividend → Exempt u/s10(34) or 10(35)

Ø Loss → Upto Dividend Income Ignore, Remaining Loss allowed.

(1), (2), (3) must be fulfilled to attract this Section. E.g., If Dividend received is not exempt then this Section shall not be applicable. Section-94(7) is applicable even if shares are purchased as Stock-in-trade.

Example:

Mr. X buys 1000 shares of Reliance @ Rs.300 per share on 30.6.2007. Record Date 1.8.2007. Mr. X receives dividend Rs.20,000 which is exempt u/s10(34). Mr. X sells the shares on 30.9.2007 @ Rs.270 per share.

Sol.) Dividend Exempt u/s 10(34) = Rs.20,000

Capital Gains (2,70,000 – 3,00,000) = – Rs.30,000

Out of STCL of Rs.30,000, loss of Rs.20,000 shall not be allowed to be set-off or carry forward as per the provisions of Section-94(7).