Month: July 2020

An income tax assessee is a person who pays tax or any sum of money under the provisions of the Income Tax Act, 1961. The term ‘assessee’ covers everyone who has been assessed for his income, the income of another person for which he is assessable, or the profit and loss he has sustained.

Normal Assessee

An individual who is liable to pay taxes for the income earned during a financial year is known as a normal assessee. Every individual who has earned any income earned or losses incurred during the previous financial years are liable to pay taxes to the government in the current financial year.

All individuals who pay interest/penalty or who are supposed to get a refund from the government are categorised as normal assessees. Say, Mr A is a salaried individual who has been paying taxes on time over the past 5 years. Then, Mr A can be considered as a normal assessee under the Income Tax Act, 1961.

Representative Assessee

There may be a case in which a person is liable to pay taxes for the income or losses incurred by a third party. Such a person is known as representative assessee.

Representatives come into the picture when the person liable for taxes is a non-resident, minor, or lunatic. Such people will not be able to file taxes by themselves. The people representing them can either be an agent or guardian.

Consider the case of Mr X. He has been residing abroad for the past 7 years. However, he receives rent for two house properties he owns in India. He takes the help of a relative, Mr Y, to file taxes in India. In this case, Mr Y acts as a representative assessee. If assessing officer plans to investigate the tax filing, Mr Y will be asked to provide the necessary documents as he is the guardian of the property and represents Mr X.

Deemed Assessee

An individual might be assigned the responsibility of paying taxes by the legal authorities and such individuals are called deemed assessees. Deemed assessees can be:

• The eldest son or a legal heir of a deceased person who has expired without writing a will.
• The executor or a legal heir of the property of a deceased person who has passed on his property to the executor in a writing.
• The guardian of a lunatic, an idiot, or a minor.
• The agent of a non-resident Indian receiving income from India.

For example, Mr P owns a commercial building from which he earns rent income. He has prepared and signed a will stating the property should be handed over to his niece after his death. Upon his death, his niece will be considered as the executor of the property, i.e. deemed assessee. She will be responsible for paying tax on the rental income thereon.

Assessee-in-default

Assessee-in-default is a person who has failed to fulfil his statutory obligations as per the income tax act such as not paid taxes to the government or not file his income tax return.

For example, an employer is supposed to deduct taxes from the salary of his employees before disbursing the salary. He is, then, required to pay the deducted taxes to the government by the specified due date. If the employer fails to deposit the tax deducted, he will be considered as an assessee-in-default.

Every assessee, who earns income in excess of the basic exemption limit in a Financial Year (FY), must file a statement containing details of his income, deductions, and other related information. This is called the Income Tax Return. Once you as a taxpayer file the income returns, the Income Tax Department will process it. There are occasions where, based on set parameters by the Central Board of Direct Taxes (CBDT), the return of an assessee gets picked for an assessment.

The various forms of assessment are as follows:

1. Self Assessment

The assessee himself determines the income tax payable. The tax department has made available various forms for filing income tax return. The assessee consolidates his income from various sources and adjusts the same against losses or deductions or various exemptions if any, available to him during the year. The total income of the assessee is then arrived at. The assessee reduces the TDS and Advance Tax from that amount to determine the tax payable on such income. Tax, if still payable by him, is called self assessment tax and must be paid by him before he files his return of income. This process is known as Self Assessment.

2. Summary Assessment

It is a type of assessment without any human intervention. In this type of assessment, the information submitted by the assessee in his return of income is cross-checked against the information that the income tax department has access to. In the process, the reasonableness and correctness of the return are verified by the department. The return gets processed online, and adjustment for arithmetical errors, incorrect claims, disallowances etc are automatically done. Example, credit for TDS claimed by the taxpayer is found to be higher than what is available against his PAN as per department records. Making an adjustment in this regard can increase the tax liability of the taxpayer.

After making the aforementioned adjustments, if the assessee is required to pay tax, he will be sent an intimation under Section 143(1). The assessee must respond to this intimation accordingly.

3. Regular Assessment

The income tax department authorizes the Assessing Officer or Income Tax authority, not below the rank of an income tax officer, to conduct this assessment. The purpose is to ensure that the assessee has neither understated his income or overstated any expense or loss or underpaid any tax.

The CBDT has set certain parameters based on which a taxpayer’s case gets picked for a scrutiny assessment.

• If an assessee is subject to a scrutiny assessment, the Department will send a notice well in advance. However, such notice cannot be served after the expiry of 6 months from the end of the Financial year, in which return is filed.
• The assessee will be asked to produce the books of accounts, and other evidence to validate the income he has stated in his return. After verifying all the details available, the assessing officer passes an order either confirming the return of income filed or makes additions. This raises an income tax demand, which the assessee must respond to accordingly.

4. Best Judgement Assessment

This assessment gets invoked in the following scenarios:

• If the assessee fails to respond to a notice issued by the department instructing him to produce certain information or books of accounts
• If he/she fails to comply with a Special Audit ordered by the Income tax authorities
• The assessee fails to file the return within due date or such extended time limit as allowed by the CBDT
• The assessee fails to comply with the terms as contained in the notice issued under Summary Assessment
• After providing the assessee with an opportunity of being heard, the assessing officer passes an order based on all the relevant materials and evidence available to him. This is known as Best Judgement Assessment.

5. Income Escaping Assessment

When the assessing officer has sufficient reasons to believe that any taxable income has escaped assessment, he has the authority to assess or reassess the assessee’s income. The time limit for issuing a notice to reopen an assessment is 4 years from the end of the relevant Assessment Year. Some scenarios where reassessment gets triggered are given below.

• The assessee has taxable income but has not yet filed his return.
• The assessee, after filing the income tax return, is found to have either understated his income or claimed excess allowances or deductions.
• The assessee has failed to furnish reports on international transactions, where he is required to do so.

Assessment, in the case of some taxpayers, could close quickly while for some, it could prove to be quite gruelling. In case you are not comfortable dealing with income tax officers, it is suggested that you take the help of a Chartered Accountant to help you with your case.

The Income Tax Act, 1961 and rules made there under relating to Set Off and Carry Forward of Losses. This is a complete guide to set off and carry forward the losses including the set off of losses from business and profession from presumptive income.

There are two types of adjustments under set off of losses:

1. Intra Head Adjustment (section 70): It means loss from one source of income can be set off against income from another source but in the same head of income.
2. Inter Head Adjustment (section 71): It means loss under one head of income can be set off against income from another head of income but in same previous year*.

Exceptions :

1. Speculative business loss can be set off against speculative business income only.
2. Specified business loss (u/s 35AD) can be set off against specified business income only.
3. Long term capital loss can be set off against long term capital gainonly.
4. Loss from owing & maintaining race horses can be set off against income from owing & maintaining race horses.
5. Short term capital loss can be set off against Short term capital gain and Long term capital gain only.
6. Loss from business cannot be set off against salary income.

*  In case of carry forward losses Inter Head adjustment Not Allowed.

1. Set Off & Carry Forward of Losses :

Timely filing of Income Tax Return

In order to carry forward the losses of current assessment year it is mandatory to file Income Tax Return within the timelines specified u/s 139(1) of the Act.

However, the provisions apply only in case of losses of current assessment year and not on the brought forward losses of previous assessment years which are still unutilized and required to be carried forwarded. Also, the losses are allowed to be set off against the income even if the return is filed after due date.

For Example : If a person has Losses of Rs. 1,00,000 brought forwarded from AY 2017-18 and incur losses of Rs. 6,00,000 in current AY 2019-20 and he filed his return of income after the due date of return filing then he is allowed to carry forward Rs. 1,00,000 pertaining to loss of AY 2017-18 but he is not allowed to carry forward the current year loss of Rs. 6,00,000 however, he can set off this loss from the eligible income in the current AY only.

Exception :

House Property loss & Unabsorbed Depreciation can be carry forwarded even if return filed after due date.

Brought Forward Loss & Presumptive Income

In case a person has brought forwarded losses from the business or profession and in the current assessment year the person files the return of income declaring his income under presumptive scheme specified u/s 44AD or 44ADA or 44AE then he is allowed to set off the brought forward losses from the presumptive income.

In such a case the person is required to file return of income under form ITR-3 declaring his income on presumptive basis under table 61 to 64 of “Part A P & L” of the form and declaring the brought forward losses under “Schedule-CYLA”.

Carry Forward of Losses in case of Amalgamation/ Demerger

Notes:

1. Only business losses (except speculative business loss) can be carry forwarded by successor.
2. Unabsorbed Depreciation can be carry forwarded by Amalgamating Co./ Resulting Co./ Successor Co./ LLP for unlimited period.
3. The Carry forward of losses by successors are subjected to some conditions specified under the Act.

Basis of Charge of an Income lets us know that on what grounds Income earned by a person is chargeable to tax. It specifically defines whether Income so received is tax chargeable on receipt basis or accrual basis, or in case of variations in accounting method how tax should be charged. All five heads of Income have different Basis of Charge which you will come to know as you surf through each head of Income.

Salary Income is chargeable to tax on ‘DUE OR RECEIPT BASIS WHICHEVER IS EARLIER’

Income Tax Act however specifically states that where any salary in advance is included in the total income of any person for any previous year it shall not be included again in the total income of the person when the salary becomes due. It is also worthwhile to note that the Accounting Method employed by the Assessee is absolutely irrelevant to violate the chargeability rule as stated above in bold.

Let’s go through the following examples to gain more clarity on this rule:

You being an employee of a MNC are faced with the following alternative situations during the P.Y. 2009-10 (A.Y. 2010-11)

1) You received your annual salary of Rs. 9,00,000/- due & receivable by you in the previous year.

The salary of Rs. 9,00,000/- will be chargeable to tax in P.Y. 2009-10 in your hands.      

2) An Annual salary due to you of Rs. 9,00,000/- out of which only Rs. 5,50,000/- was received during the P.Y. 2009-10 and rest was received by you in the next P.Y. i.e., 2010-11.

The whole salary amount of Rs. 9,00,000/- will be chargeable to tax in your hands in the P.Y. 2009-10 i.e., A.Y. 2010-11. The salary of Rs 3,50,000/- received in P.Y. 2010-11 will not be chargeable to tax again in P.Y. 2010-11 i.e., A.Y. 2011-12 since it has already been taxed earlier.

3) Advance salary received during the P.Y. 2009-10 pertaining to P.Y. 2010-11 of Rs. 2,50,000/-.

The salary received of Rs. 2, 50,000/- will be chargeable to tax in the P.Y. 2009-10 instead of P.Y. 2010-11 since the rule specifically says due or receipt whichever is earlier, however it will not be charged to tax again in P.Y. 2010-11.

4) Arrears of salary pertaining to P.Y. 2008-09 received in P.Y. 2009-10 amounting to Rs. 4,00,000/-.

The amount so received of Rs. 4,00,000/- will not be tax chargeable in your hands in P.Y. 2009-10 since it must had been already taxed in your hands in P.Y. 2008-09, i.e., A.Y. 2009-10.

“Capital asset” Means: 

Property of any kind, whether fixed or circulating, movable or immovable, tangible or intangible. Besides,

It includes the following:

1. Any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever.
2. Property of any kind held by an assessee (whether or not connected with his business or profession).
3. Any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the SEBI Act.

Does Not Include:

1. any stock-in-trade [other than the securities referred to in sub-clause (b) above], consumable stores or raw materials held for the purposes of his business or profession,
2. Personal effects, that is to say, movable property (including wearing apparel and furniture), held for personal use by the assessee or any member of his family dependent on him. However, the following assets shall not be treated as personal effects though these assets are moveable and may be held for personal use:
   • Jewellery
   • Archaeological collections
   • Drawings
   • Paintings
   • Sculptures
   • Any work of art

• Agricultural land in India, which is not an urban agricultural land. In other words, it must be a rural agricultural land;

1. Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued under Gold Monetisation Scheme, 2015 notified by the Central Government.
2. Types of Capital Assets:

Capital assets are of two types:

1. Short-Term Capital Asset (STCA)
2. Long-Term Capital Asset (LTCA)

(1) Short-Term Capital Asset – STCA [Section 2(42A)]:

A capital asset held by an assessee for Not more than 36 months immediately preceding the date of its transfer is known as a short term capital asset.

Exceptions:

1. The following assets shall be treated as short-term capital assets if they are held for Not more than 12 months (instead of 36 months mentioned above) immediately preceding the date of its transfer:
   1. a security including shares (other than unit) listed in a recognised stock exchange in India
   2. a unit of an equity oriented fund
   3. a zero coupon bond
2. The following assets shall be treated as short-term capital assets if they are held for Not more than 24 months (instead of 36 months/12 months mentioned above)immediately preceding the date of its transfer:
   1. Share of a company (not being a share listed in a recognised stock exchange in India)
   2. An immovable property being land and building or both.

Hence, if unlisted share or immovable property is transferred after 24 months from the date of its acquisition, the gain arising from the transfer of share or immovable property shall be treated as long-term capital gain.

(2) Long-Term Capital Asset – LTCA [Section 2(29A)]:

It means a capital asset which is not a short-term capital asset.

Capital gains are calculated differently for assets held for a longer period and for those held over a shorter period.

Full value consideration: The consideration received or to be received by the seller as a result of transfer of his capital assets. Capital gains are chargeable to tax in the year of transfer, even if no consideration has been received.

Cost of acquisition: The value for which the capital asset was acquired by the seller.

Cost of improvement: Expenses of a capital nature incurred in making any additions or alterations to the capital asset by the seller. Note that improvements made before April 1, 2001, is never taken into consideration.

NOTE: In certain cases where the capital asset becomes the property of the taxpayer otherwise than by an outright purchase by the taxpayer, the cost of acquisition and cost of improvement incurred by the previous owner would also be included.

Calculation of Short-Term Capital Gains

Step 1: Start with the full value of consideration

Step 2: Deduct the following:

• Expenditure incurred wholly and exclusively in connection with such transfer
• Cost of acquisition
• Cost of improvement

Step 3: This amount is a short-term capital gain

Short term capital gain = Full value consideration Less expenses incurred exclusively for such transfer Less cost of acquisition Less cost of improvement.

Calculation of Long-Term Capital Gains

Step 1: Start with the full value of consideration

Step 2: Deduct the following:

• Expenditure incurred wholly and exclusively in connection with such transfer
• Indexed cost of acquisition
• Indexed cost of improvement

Step 3: From this resulting number, deduct exemptions provided under sections 54, 54EC, 54F, and 54B

Long-term capital gain= Full value consideration

Less: Expenses incurred exclusively for such transfer

Less: Indexed cost of acquisition

Less: Indexed cost of improvement

Less: Expenses that can be deducted from full value for consideration*

(*Expenses from sale proceeds from a capital asset, that wholly and directly relate to the sale or transfer of the capital asset are allowed to be deducted. These are the expenses which are necessary for the transfer to take place.)

As per Budget 2018, long term capital gains on the sale of equity shares/ units of equity oriented fund, realised after 31st March 2018, will remain exempt up to Rs. 1 lakh per annum. Moreover, tax at @ 10% will be levied only on LTCG on shares/units of equity oriented fund exceeding Rs 1 lakh in one financial year without the benefit of indexation.

In the case of sale of house property:

These expenses are deductible from the total sale price:

1. Brokerage or commission paid for securing a purchaser
2. Cost of stamp papers
3. Travelling expenses in connection with the transfer – these may be incurred after the transfer has been affected.
4. Where property has been inherited, expenditure incurred with respect to procedures associated with the will and inheritance, obtaining succession certificate, costs of the executor, may also be allowed in some cases.

In the case of sale of shares:

You may be allowed to deduct these expenses:

1. Broker’s commission related to the shares sold
2. STT or securities transaction tax is not allowed as a deductible expense

Where jewellery is sold:

Here, and a broker’s services were involved in securing a buyer, the cost of these services can be deducted.Note that expenses deducted from the sale price of assets for calculating capital gains are not allowed as a deduction under any other head of income tax return, and you can claim the only once.

Business refers to any kind of economic activity done by an assessee for earning profits.

The term business/economic activity includes “any trade, commerce, manufacturing activity or any adventure or concern in the nature of trade, commerce and manufacture”.

There are two types of business, speculative and non-speculative.

• Speculative business income: Income from intraday equity trading is considered a speculative business income. Intraday trading simply means the buying and selling of financial instruments on the same day.
• In other words, the amount (net amount from it) is not fixed and it can change from time to time. For example, share trading business.
• Non-speculative business income: It is the income from trading Futures & Options is taken as a non-speculative business. F&O is also considered as non-speculative as these instruments are used for hedging and also for taking/giving delivery of the underlying contract.
• In other words, the amount (net profit/loss from it) is fixed and does not change for a period of time. For example, any manufacturing/trading or any business.

It is not compulsory to have a series of permanent transactions in a business. In other words, the repetition or continuity of business transactions is not essential.

‘Profession’

A profession is a kind of job that requires special expertise, skill and knowledge like that of C.A., Lawyer, Doctor, Engineer, Architect etc. In other words, he/she utilizes either his/her intellectual or manual skills to earn the livelihood.

The term “profession” is about his/her declared accomplishments, in special knowledge distinguished from mere skill.

Income from business and profession

The term ‘Income from business and profession’ means any income shown in profit and loss account after taking into account all the allowed expenditures by an assessee.

The income also includes both positive (profit) and negative incomes (loss). In other words, ‘profit and gains’ represent plus income while ‘loss’ represents minus income. So, both legal and illegal business incomes are taxable in nature.

The income earned by the assessee from the previous year is taxable. An assessee involved in the business/profession should file his/her income on or before 31 July of an assessment year.

The word “profession” & “vocation” have not been defined in the Act while as per section 2(36) of the Income Tax Act, 1961, “profession” includes vocation. The word “vocation” is a word of wider import than the word ‘profession”.

The words “business” and “vocation” are not synonymous, Upon a proper construction of the words “business” and “vocation” in the context of the Indian Income-tax Act, there must be some real, substantive and systematic course of business or conduct before it can be said that a business or vocation exists the profits of which are taxable as such under the Act (Upper India Chamber of Commerce, Cawnpore vs. CIT (1947) 15 ITR 263 (All).

Also it was observed in Addl CIT vs. Ram Kripal Tripathi (1980) 125 ITR 408 (All) that the expression “profession” involves the idea of an occupation requiring purely intellectual skill or manual skill controlled by the intellectual skill of the operator, as distinguished from an occupation or business which is substantially the production or sale, or arrangements for the production or sale, of commodities. “Profession” is a word of wide import and includes “vocation” which is only a way of living and a person can have more than one vocation, and the vocation need not be for livelihood nor for making any income nor need it involves systematic and organised activity.

It was observed in Dr. P. Vadamalayan vs. CIT (supra) at page 96) that the term “business” as used in the fiscal statute cannot ordinarily be understood in its etymological sense. According to the Shorter Oxford Dictionary, “business” includes a state occupation, profession or trade; profession in a wide sense means any calling or occupation by which a person habitually earns his living.

Even so, “trade” is explained as the practice of some occupation, business or profession habitually carried on. As is not unusual several jurists and eminent judges while attempting to define the limits of one or the other of the words “business”, profession and trade”, entered the “labyrinth together but made exits by different paths”.

The Supreme Court in Narain Swadeshi Weaving Mills vs. Commissioner of Excess Profits Tax (1954) 26 ITR 765 (SC), said that the word “business” connotes some real, substantial and systematic or organised course of activity or conduct with a set purpose. Venkatarama Aiyar J.,speaking for the court in Mazagaon Dock Ltd. vs. CIT (1958) 34 ITR 368 at page 376 (SC), explained “business” as a word of wide import and in fiscal statutes it must be construed in a broad rather than a restricted sense.

Following Losses are Deductible from Business Income

• Loss of stock-in-trade as a result of enemy action, or arising under similar circumstances.
• Loss of stock-in-trade due to destruction by an act of God.
• Loss arising on account of failure on the part of the assessee to accept delivery of goods.
• Depreciation in funds kept in foreign country for purchase of stock-in-trade.
• Loss due to exchange rate fluctuations of foreign currency held on revenue account.
• Loss arising from sale of securities held in the regular course of business.
• Loss of cash and securities in a banking company on account of dacoity (maybe after banking hours.) Loss incurred on realisation of amount advanced in connection with business.
• Loss of security deposited for the purposes of acquisition of stock-in-trade.
• Loss due to forfeiture of a deposit made by the assessee for properly carrying out of contract for supply of commodities.
• Loss on account of embezzlement by an employee.
• Loss incurred due to theft or burglary in factory premises during or after working hours.
• Loss of precious stones or watches of a dealer while bringing them from business premises to his house.
• Loss arising from negligence or dishonesty of employees.
• Loss incurred on account of insolvency of banker with which current account is maintained by the assessee.
• Loss incurred due to freezing of the stock-in-trade by enemy action.
• Loss incurred by a sugar manufacturing company by foregoing advance made to sugarcane growers who used to sell sugarcane crop exclusively to the company.
• Loss on account of non-recovery of advances given by the assessee-company (engaged in the business of financing its subsidiaries) to its 100 per cent subsidiary company.
• Loss incurred by a holding company which has guaranteed a loan taken by its subsidiary company.
• Loss arising as a result of seizure and confiscation of illegal stock-in-trade is allowable as a business loss against income from illegal business
• Loss arising as a result of rejection of goods by the importer (as goods are unfit for human consumption).

Following Losses are Not Deductible from Business Income

• Loss which is not incidental to trade or profession, carried on by the assessee.
• Loss incurred due to damage, destruction, etc., of capital assets.
• Loss incurred due to sale of shares held as investment.
• Loss of advances made for setting up of a new business which ultimately could not be started.
• Depreciation of funds kept in foreign currency for capital purposes.
• Loss arising from non-recovery of tax paid by an agent on behalf of the non-resident.
• Anticipated future losses.
• Provision made by assessee in respect of non-performing assets.
• Loss relating to any business or profession discontinued before the commencement of previous year.