Category: Bangalore University B.com Notes

When accounting process ends, auditing begins, for the purpose of determining the true and fair picture of books of accounts. It is an activity of record keeping and preparation & presentation of the financial statement. Accounting is used by the firms for keeping a track of their monetary transactions. It is the language the business understands, as it is the tool for reporting financial statement of the business entity.

Conversely, Auditing is an activity of verification and evaluation of financial statement. It aims at checking and comfirming the authenticity of financial books prepared by the accounting staff of the enterprise. Thus, it determines the validity and reliability of accounting information.

Accountancy

It is the process of recording, classifying, summarising and interpreting all the financial transactions.

Accounting

Accounting is a specialised language of business, which helps to understand the economic activities of the entity. It is an act of orderly capturing the day to day monetary transactions of the business and classifying them into various groups along with that, the transactions are summarized in a way that they can be easily referred at the time of urgency, thereafter analyzing and understanding the results of the financial statement and finally communicating the results to the interested parties.

The main function of accounting is to provide material information, especially of a financial nature for decision making. Cost Accounting, Management Accounting, Tax Accounting, Financial Accounting, Human Resource Accounting, Social Responsibility Accounting are the fields of Accounting. The primary objectives of Accounting are as under:

Proper record keeping through Journal, Subsidiary Books, Ledger and Trial Balance

Determination of the results (profitability position) from the records maintained through Trading and Profit & Loss Account

Showing the financial position of the entity through Balance Sheet

Providing necessary information about solvency and liquidity position to the interested parties.

Auditing

The audit is a methodical procedure of independently examining the financial information of an entity with the aim of giving an opinion on true and fair view. Here organization refers to all the entities, regardless of their size, structure, nature and form.

Auditing is a critical, unbiased investigation of each and every aspect of the transaction, i.e. vouchers, receipts, account books and related documents are verified, in order to spot the validity and reliability of the financial statement. Moreover, errors and frauds or deliberate manipulation in accounts or misappropriation etc. can also be detected through detailed scrutiny.

The auditor will inspect the accuracy and transparency of the financial information, compliance with the accounting standards and taxes are properly paid or not. After the complete inspection of accounting books and financial records, he will give an opinion in the form of a report. The reporting on the true and fair view shall be made to the person who appoints the auditor. There are two types of Audit Report, they are:

(i) Unmodified

(ii) Modified

• Qualified
• Adverse
• Disclaimer

The audit can be conducted internally and externally. The task of internal audit is conducted by an internal auditor who is appointed by the management of the organization for improving its internal control systems and accounting system. External Auditor is appointed by the shareholders of the company.

Differences between Accountancy and Auditing

Conclusion

Accounting and Auditing both are specialized fields, but the scope of auditing is wider than accounting as it needs a thorough understanding of various acts, tax rules, knowledge of accounting standards and standards on auditing as well as communication skills are also required.

Apart from that, confidentiality, integrity, honesty and independence are the basic requirements that is to be maintained while performing the audit procedure. The reports submitted by the auditor are helpful for the users of the financial statement like creditors, shareholders, investors, suppliers, debtors, customers, government, etc. for rational decision making.

Although Accounting is not less, it also requires complete knowledge of the accounting standards, principles, conventions and assumptions as well as Companies Act rules and tax laws. The procedure of auditing is conducted only when the accounting is done properly so; it cannot be neglected.

Gross interest [i.e., Net Interest + TDS (Tax Deducted at Source] is Taxable.

Net interest is grossed up in the hands of recipient if tax is deducted at source by the payer.

Net interest (if tax is deducted at source) in the hands of the recipient should be grossed up by multiplying it by the following fraction:

Net Interest x 100 ÷ [100 – Rate of TDS (tax deduction at source)]

Grossing up is required in the case of the following securities:

• 8% Saving (Taxable) Bonds if the amount of interest payable exceeds Rs.10,000 (these Bonds have now been withdrawn. New 7.75% Government of India Savings (Taxable) Bonds, 2018 have been issued);
• Securities issued by a statutory corporation or a local authority or by any company.

Grossing up mechanism specifies that the payer must ensure complete payment of the amount due to the recipient, which precisely means that the payer must cover the tax deduction costs of the payee.

Gross interest, which is derived after adding net interest with tax deducted at source, is taxable. Net interest is grossed up in the hands of the recipient if the payer deducts tax at source. Net interest is grossed up by using the following formula:

100/ (100 – Rate of tax deduction at source)

A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages, the term “security” is commonly used in day-to-day parlance to mean any form of financial instrument, even though the underlying legal and regulatory regime may not have such a broad definition. In some jurisdictions the term specifically excludes financial instruments other than equities and fixed income instruments. In some jurisdictions it includes some instruments that are close to equities and fixed income, e.g., equity warrants.

Securities may be represented by a certificate or, more typically, “non-certificated”, that is in electronic (dematerialized) or “book entry” only form. Certificates may be bearer, meaning they entitle the holder to rights under the security merely by holding the security, or registered, meaning they entitle the holder to rights only if he or she appears on a security register maintained by the issuer or an intermediary. They include shares of corporate stock or mutual funds, bonds issued by corporations or governmental agencies, stock options or other options, limited partnership units, and various other formal investment instruments that are negotiable and fungible.

In the United Kingdom, the national competent authority for financial markets regulation is the Financial Conduct Authority; the definition in its Handbook of the term “security” applies only to equities, debentures, alternative debentures, government and public securities, warrants, certificates representing certain securities, units, stakeholder pension schemes, personal pension schemes, rights to or interests in investments, and anything that may be admitted to the Official List.

A security is a tradable financial asset of any kind. Securities are broadly categorized into:

• Debt securities (e.g., banknotes, bonds and debentures)
• Equity securities (e.g., common stocks)
• Derivatives (e.g., forwards, futures, options, and swaps).

The company or other entity issuing the security is called the issuer. A country’s regulatory structure determines what qualifies as a security. For example, private investment pools may have some features of securities, but they may not be registered or regulated as such if they meet various restrictions.

Securities are the traditional way that commercial enterprises raise new capital. These may be an attractive alternative to bank loans depending on their pricing and market demand for particular characteristics. Another disadvantage of bank loans as a source of financing is that the bank may seek a measure of protection against default by the borrower via extensive financial covenants. Through securities, capital is provided by investors who purchase the securities upon their initial issuance. In a similar way, a government may issue securities too when it needs to increase government debt.

Types of Securities

1. Equity securities

Equity almost always refers to stocks and a share of ownership in a company (which is possessed by the shareholder). Equity securities usually generate regular earnings for shareholders in the form of dividends. An equity security does, however, rise and fall in value in accord with the financial markets and the company’s fortunes.

2. Debt securities

Debt securities differ from equity securities in an important way; they involve borrowed money and the selling of a security. They are issued by an individual, company, or government and sold to another party for a certain amount, with a promise of repayment plus interest. They include a fixed amount (that must be repaid), a specified rate of interest, and a maturity date (the date when the total amount of the security must be paid by).

Bonds, bank notes (or promissory notes), and Treasury notes are all examples of debt securities. They all are agreements made between two parties for an amount to be borrowed and paid back with interest at a previously-established time.

3. Derivatives

Derivatives are a slightly different type of security because their value is based on an underlying asset that is then purchased and repaid, with the price, interest, and maturity date all specified at the time of the initial transaction.

The individual selling the derivative doesn’t need to own the underlying asset outright. The seller can simply pay the buyer back with enough cash to purchase the underlying asset or by offering another derivative that satisfies the debt owed on the first.

A derivative often derives its value from commodities such as gas or precious metals such as gold and silver. Currencies are another underlying asset a derivative can be structured on, as well as interest rates, Treasury notes, bonds, and stocks.

Derivatives are most often traded by hedge funds to offset risk from other investments. As mentioned above, they don’t require the seller to own the underlying asset and may only require a relatively small down payment, which makes them favorable because they are easier to trade.

When the seller retains the right to receive the interest or dividend; the transaction is called “Ex-Interest” or “Ex-Dividend” purchase or sale. In other words, when the price quoted is exclusive of accrued interest/dividend, the price so quoted is treated as the capital cost of investment, that is, the buyer has to pay accrued interest due from the last interest date to the date of transaction to the seller along with the cost price of investment.

Interest on debentures is generally paid half-yearly to the holders on certain specified dates, e.g., 30th September and 31st Mach every year. If debentures are purchased exactly on these specified dates, it involves no problem. In such a case, interest is payable to the holders of debentures. But, where debentures are purchased at a date before the specified date of payment of interest the question which naturally arises is whether the price paid for such debentures includes the interest for the expired period (i.e. from the previous date of payment of interest up to the date of purchase) or not.

For this purpose it is important to note whether the price paid for the debentures is quoted as “Cum-interest” or “Ex-interest”. If the purchase price for the debentures includes interest for the expired period, the quotation is said to be “Cum-interest”. If, on the other hand, the purchase price for the debentures excludes the interest for the expired period, the quotation is said to be “Ex-interest”. In case of Ex-interest quotation, interest has to be paid to the holders for the expired period in addition to the price paid for the debentures. In any case, the company must pay interest for the expired period and while making entry in its books at the time of purchase of the debentures, the amount paid by way of interest should be treated separately from the price actually paid for the debentures. For example, if a company purchases 10 of its 9% Debentures of 100 each at 95 each on 1st August, 2014 the dates of payment of Interest being 30th September and 31st March, the treatment of the same for “Cum-interest” and “Ex-interest” quotations will be as follows:

N.B. If nothing is stated, purchase and sale of debentures and government securities should be taken to be on ex-interest basis. That of shares should be presumed to be on cum-dividend basis.

(1) In case of cum-interest quotation: If the purchase price of 95 is taken to be the cum-interest price, it implies that this includes the interest for the expired period of 4 months (i.e. from 1st April, 2014 to 31st July, 2014 which amounts

Bond Washing Transactions

Bond washing transactions are the transactions in Securities which leads to shift in income. Now one may think that the provision of shifting may lead to the provision of clubbing. But, what about transfer in case transfer is made to friend? The Clubbing provisions do not apply. For such cases Section 94 of Income Tax Act 1961, comes into picture.

Section 94 aims at preventing avoidance of tax by an assessee where there is a transfer of securities before the due date of payment of interest and re-acquisition thereof after due date. Such transfer avoids tax or shifts the burden of tax to some other person. As per Section 94, the income of the securities transferred shall be deemed to be that of the transferor and shall be assessable in his hands accordingly and therefore bond washing transactions shall have null effect.

For example, Mr. Ram holds 12% debentures of Rs. 1 crore of Company “A”. Company “A” provides interest half-yearly say on 30^th June and 31st December.

On 28th June 2018, Mr. Ram sells the said debentures of Rupees 1 crore to his friend Mr. Shyam and re-acquires those debentures on 1^st July 2018. Now interest of rupees 6 lakhs received by Mr. Shyam shall not be taxable in hands of Mr. Shyam but shall be taxable in the hands of Mr. Ram by virtue of Section 94 of the Act.

However, Section 94 shall not apply and the said interest shall not be taxable in hands of Mr. Ram:

• If Mr. Ram proves that the interest is taxable in hands of Mr. Shyam at the same rate as it would have been taxable in his hands i.e. proves that there is no avoidance of income tax or
• Mr. Ram proves that he sold debentures on 28th June 2018 as he was in urgent need of money and there has been no such Bond washing transaction in any of the three previous year ending 31st March 2018.

Explanation to Section 94(1) provides that if transferor re-acquires similar type of securities, then his tax burden shall not be greater than or less than what would have been if he had sold original securities.

Accordingly if Mr. Ram buy backs on 1^st July 2018 shares of Company “B” with interest of 11%, then still the amount that will be added to Mr. Ram’s income would be Rs. 6 lakhs (1cr * 12% * 6 / 12) and not Rs.5.5 lakhs ( 1cr * 11% * 6 / 12).

So, Bond Washing Transactions can be done, provided the person produces the evidence showing urgency of money or that there is no tax avoidance.

1. Section 80C

Deductions on Investments

You can claim a deduction of Rs 1.5 lakh your total income under section 80C. In simple terms, you can reduce up to Rs 1,50,000 from your total taxable income, and it is available for individuals and HUFs.

Filing your Income Tax Return. The Income Tax Department will refund the excess money to your bank account.

2. Section 80CCC – Insurance Premium

Deduction for Premium Paid for Annuity Plan of LIC or Other Insurer

Section 80CCC provides a deduction to an individual for any amount paid or deposited in any annuity plan of LIC or any other insurer. The plan must be for receiving a pension from a fund referred to in Section 10(23AAB). Pension received from the annuity or amount received upon surrender of the annuity, including interest or bonus accrued on the annuity, is taxable in the year of receipt.  

3. Section 80CCD – Pension Contribution

Deduction for Contribution to Pension Account

1. Employee’s contribution under Section 80CCD (1)

You can claim this if you deposit in your pension account. Maximum deduction you can avail is 10% of salary (in case the taxpayer is an employee) or 20% of gross total income (in case the taxpayer being self-employed) or Rs 1.5 lakh – whichever is less.

Until FY 2016-17, maximum deduction allowed was 10% of gross total income for self-employed individuals.

1. Deduction for self-contribution to NPS – section 80CCD (1B)A new section 80CCD (1B) has been introduced for an additional deduction of up to Rs 50,000 for the amount deposited by a taxpayer to their NPS account. Contributions to Atal Pension Yojana are also eligible.
2. Employer’s contribution to NPS – Section 80CCD (2)Claim additional deduction on your contribution to employee’s pension account for up to 10% of your salary. There is no monetary ceiling on this deduction.

4. Section 80 TTA – Interest on Savings Account

Deduction from Gross Total Income for Interest on Savings Bank Account

If you are an individual or an HUF, you may claim a deduction of maximum Rs 10,000 against interest income from your savings account with a bank, co-operative society, or post office. Do include the interest from savings bank account in other income.

Section 80TTA deduction is not available on interest income from fixed deposits, recurring deposits, or interest income from corporate bonds.  

5. Section 80GG – House Rent Paid

Deduction for House Rent Paid Where HRA is not Received

1. Section 80GG deduction is available for rent paid when HRA is not received. The taxpayer, spouse or minor child should not own residential accommodation at the place of employment
2. The taxpayer should not have self-occupied residential property in any other place
3. The taxpayer must be living on rent and paying rent
4. The deduction is available to all individuals

Deduction available is the least of the following:

1. Rent paid minus 10% of adjusted total income
2. Rs 5,000/- per month
3. 25% of adjusted total income*

*Adjusted Gross Total Income is arrived at after adjusting the Gross Total Income for certain deductions, exempt income, long-term capital gains and income related to non-residents and foreign companies.

An online e-filing software like that of ClearTax can be extremely easy as the limits are auto-calculated. So, you do not have to worry about making complex calculations.

From FY 2016-17 available deduction has been raised to Rs 5,000 a month from Rs 2,000 per month.

6. Section 80E – Interest on Education Loan

Deduction for Interest on Education Loan for Higher Studies

A deduction is allowed to an individual for interest on loans taken for pursuing higher education. This loan may have been taken for the taxpayer, spouse or children or for a student for whom the taxpayer is a legal guardian.

80E deduction is available for a maximum of 8 years (beginning the year in which the interest starts getting repaid) or till the entire interest is repaid, whichever is earlier. There is no restriction on the amount that can be claimed.

7. Section 80EE – Interset on Home Loan

Deductions on Home Loan Interest for First Time Home Owners

FY 2017-18 and FY 2016-17 This deduction is available in FY 2017-18 if the loan has been taken in FY 2016-17. The deduction under section 80EE is available only to home-owners (individuals) having only one house property on the date of sanction of the loan. The value of the property must be less than Rs 50 lakh and the home loan must be less than Rs 35 lakh. The loan taken from a financial institution must have been sanctioned between 1 April 2016 and 31 March 2017.There is an additional deduction of Rs 50,000 available on your home loan interest on top of deduction of Rs 2 lakh (on interest component of home loan EMI) allowed under section 24.

FY 2013-14 and FY 2014-15 During these financial years, the deduction available under this section was first-time house worth Rs 40 lakh or less. You can avail this only when your loan amount during this period is Rs 25 lakh or less. The loan must be sanctioned between 1 April 2013 and 31 March 2014. The aggregate deduction allowed under this section cannot exceed Rs 1 lakh and is allowed for FY 2013-14 and FY 2014-15.

8. Section 80CCG – RGESS

Rajiv Gandhi Equity Saving Scheme (RGESS)

The deduction under this section 80CCG is available to a resident individual, whose gross total income is less than Rs.12 lakh. To avail the benefits under this section the following conditions should be met:

1. The assessee should be a new retail investor as per the requirement specified under the notified scheme.
2. The investment should be made in such listed investor as per the requirement specified under the notified scheme.
3. The minimum lock in period in respect of such investment is three years from the date of acquisition in accordance with the notified scheme.

Upon fulfillment of the above conditions, a deduction, which is lower of the following is allowed.

• 50% of the amount invested in equity shares; or
• Rs 25,000 for three consecutive Assessment Years.

Rajiv Gandhi Equity Scheme has been discontinued starting from 1 April 2017. Therefore, no deduction under section 80CCG will be allowed from FY 2017-18. However, if you have invested in the RGESS scheme in FY 2016-17, then you can claim deduction under Section 80CCG until FY 2018-19.  

9. Section 80D – Medical Insurance

Deduction for the premium paid for Medical Insurance

You (as an individual or HUF) can claim a deduction of Rs.25,000 under section 80D on insurance for self, spouse and dependent children. An additional deduction for insurance of parents is available up to Rs 25,000, if they are less than 60 years of age. If the parents are aged above 60, the deduction amount is Rs 50,000, which has been increased in Budget 2018 from Rs 30,000.

In case, both taxpayer and parent(s) are 60 years or above, the maximum deduction available under this section is up to Rs.1 lakh.

Example: Rohan’s age is 65 and his father’s age is 90. In this case, the maximum deduction Rohan can claim under section 80D is Rs. 100,000. From FY 2015-16 a cumulative additional deduction of Rs. 5,000 is allowed for preventive health check.  

10. Section 80DD – Disabled Dependent

Deduction for Rehabilitation of Handicapped Dependent Relative

Section 80DD deduction is available to a resident individual or a HUF and is available on:

1. Expenditure incurred on medical treatment (including nursing), training and rehabilitation of handicapped dependent relative
2. Payment or deposit to specified scheme for maintenance of handicapped dependent relative.
3. Where disability is 40% or more but less than 80% – fixed deduction of Rs 75,000.
4. Where there is severe disability (disability is 80% or more) – fixed deduction of Rs 1,25,000.

To claim this deduction a certificate of disability is required from prescribed medical authority.From FY 2015-16 – The deduction limit of Rs 50,000 has been raised to Rs 75,000 and Rs 1,00,000 has been raised to Rs 1,25,000.  

11. Section 80DDB – Medical Expenditure

Deduction for Medical Expenditure on Self or Dependent Relative

1. For individuals and HUFs below age 60

A deduction up to Rs.40,000 is available to a resident individual or a HUF. It is available with respect to any expense incurred towards treatment of specified medical diseases or ailments for himself or any of his dependents. For an HUF, such a deduction is available with respect to medical expenses incurred towards these prescribed ailments for any of the HUF members. 

1. For senior citizens and super senior citizens

In case the individual on behalf of whom such expenses are incurred is a senior citizen, the individual or HUF taxpayer can claim a deduction up to Rs 1 lakh. Until FY 2017-18, the deduction that could be claimed for a senior citizen and a super senior citizen was Rs 60,000 and Rs 80,000 respectively. This has now become a common deduction available upto Rs 1 lakh for all senior citizens (including super senior citizens) unlike earlier.

1. For reimbursement claims

Any reimbursement of medical expenses by an insurer or employer shall be reduced from the quantum of deduction the taxpayer can claim under this section.

Also remember that you need to get a prescription for such medical treatment from the concerned specialist in order to claim such deduction. Read our detailed article on Section 80DDB.

12. Section 80U – Physical Disability

Deduction for Person suffering from Physical Disability

A deduction of Rs.75,000 is available to a resident individual who suffers from a physical disability (including blindness) or mental retardation. In case of severe disability, one can claim a deduction of Rs 1,25,000.

From FY 2015-16 – Section 80U deduction limit of Rs 50,000 has been raised to Rs 75,000 and Rs 1,00,000 has been raised to Rs 1,25,000.  

13. Section 80G – Donations

Deduction for donations towards Social Causes

The various donations specified in u/s 80G are eligible for deduction up to either 100% or 50% with or without restriction. From FY 2017-18 any donations made in cash exceeding Rs 2,000 will not be allowed as deduction. The donations above Rs 2000 should be made in any mode other than cash to qualify for 80G deduction.

1. Donations with 100% deduction without any qualifying limit

• National Defence Fund set up by the Central Government
• Prime Minister’s National Relief Fund
• National Foundation for Communal Harmony
• An approved university/educational institution of National eminence
• Zila Saksharta Samiti constituted in any district under the chairmanship of the Collector of that district
• Fund set up by a State Government for the medical relief to the poor
• National Illness Assistance Fund
• National Blood Transfusion Council or to any State Blood Transfusion Council
• National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities
• National Sports Fund
• National Cultural Fund
• Fund for Technology Development and Application
• National Children’s Fund
• Chief Minister’s Relief Fund or Lieutenant Governor’s Relief Fund with respect to any State or Union Territory
• The Army Central Welfare Fund or the Indian Naval Benevolent Fund or the Air Force Central Welfare Fund, Andhra Pradesh Chief Minister’s Cyclone Relief Fund, 1996
• The Maharashtra Chief Minister’s Relief Fund during October 1, 1993 and October 6,1993
• Chief Minister’s Earthquake Relief Fund, Maharashtra
• Any fund set up by the State Government of Gujarat exclusively for providing relief to the victims of earthquake in Gujarat
• Any trust, institution or fund to which Section 80G(5C) applies for providing relief to the victims of earthquake in Gujarat (contribution made during January 26, 2001 and September 30, 2001) or
• Prime Minister’s Armenia Earthquake Relief Fund
• Africa (Public Contributions — India) Fund
• Swachh Bharat Kosh (applicable from financial year 2014-15)
• Clean Ganga Fund (applicable from financial year 2014-15)
• National Fund for Control of Drug Abuse (applicable from financial year 2015-16)

1. Donations with 50% deduction without any qualifying limit

• Jawaharlal Nehru Memorial Fund
• Prime Minister’s Drought Relief Fund
• Indira Gandhi Memorial Trust
• The Rajiv Gandhi Foundation

1. Donations to the following are eligible for 100% deduction subject to 10% of adjusted gross total income

• Government or any approved local authority, institution or association to be utilized for the purpose of promoting family planning
• Donation by a Company to the Indian Olympic Association or to any other notified association or institution established in India for the development of infrastructure for sports and games in India or the sponsorship of sports and games in India

1. Donations to the following are eligible for 50% deduction subject to 10% of adjusted gross total income

• Any other fund or any institution which satisfies conditions mentioned in Section 80G(5)
• Government or any local authority to be utilized for any charitable purpose other than the purpose of promoting family planning
• Any authority constituted in India for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns, villages or both
• Any corporation referred in Section 10(26BB) for promoting the interest of minority community
• For repairs or renovation of any notified temple, mosque, gurudwara, church or other places.

14. Section 80GGB – Company Contribution

Deduction on contributions given by companies to Political Parties

Section 80GGB deduction is allowed to an Indian company for the amount contributed by it to any political party or an electoral trust. Deduction is allowed for contribution done by any way other than cash.  

15. Section 80GGC – Contribution to Political Parties

Deduction on contributions given by any person to Political Parties

Deduction under section 80GGC is allowed to an individual taxpayer for any amount contributed to a political party or an electoral trust. It is not available for companies, local authorities and an artificial juridical person wholly or partly funded by the government. You can avail this deduction only if you pay by any way other than cash.  

16. Section 80RRB – Royalty of a Patent

Deduction with respect to any Income by way of Royalty of a Patent

80RRB Deduction for any income by way of royalty for a patent, registered on or after 1 April 2003 under the Patents Act 1970, shall be available for up to Rs.3 lakh or the income received, whichever is less. The taxpayer must be an individual patentee and an Indian resident. The taxpayer must furnish a certificate in the prescribed form duly signed by the prescribed authority.

17. Section 80 TTB – Interest Income

Deduction of Interest on Deposits for Senior Citizens

A new section 80TTB has been inserted vide Budget 2018 in which deductions with respect to interest income from deposits held by senior citizens will be allowed. The limit for this deduction is Rs.50,000.

No further deduction under section 80TTA shall be allowed. In addition to section 80 TTB, section 194A of the Act will also be amended so as to increase the threshold limit for TDS on interest income payable to senior citizens. The earlier limit was Rs 10,000, which was increased to Rs 50,000 as per the latest Budget.

18. Deductions-Summary

Section 80 Deduction Table

Section	Deduction on	Allowed Limit (maximum) FY 2018-19
80C	Investment in PPF – Employee’s share of PF contribution – NSCs – Life Insurance Premium payment – Children’s Tuition Fee – Principal Repayment of home loan – Investment in Sukanya Samridhi Account – ULIPS – ELSS – Sum paid to purchase deferred annuity – Five year deposit scheme – Senior Citizens savings scheme – Subscription to notified securities/notified deposits scheme – Contribution to notified Pension Fund set up by Mutual Fund or UTI. – Subscription to Home Loan Account scheme of the National Housing Bank – Subscription to deposit scheme of a public sector or company engaged in providing housing finance – Contribution to notified annuity Plan of LIC – Subscription to equity shares/ debentures of an approved eligible issue – Subscription to notified bonds of NABARD	Rs. 1,50,000
80CCC	For amount deposited in annuity plan of LIC or any other insurer for a pension from a fund referred to in Section 10(23AAB)	–
80CCD(1)	Employee’s contribution to NPS account (maximum up to Rs 1,50,000)	–
80CCD(2)	Employer’s contribution to NPS account	Maximum up to 10% of salary
80CCD(1B)	Additional contribution to NPS	Rs. 50,000
80TTA(1)	Interest Income from Savings account	Maximum up to 10,000
80TTB	Exemption of interest from banks, post office, etc. Applicable only to senior citizens	Maximum up to 50,000
80GG	For rent paid when HRA is not received from employer	Least of : – Rent paid minus 10% of total income – Rs. 5000/- per month – 25% of total income
80E	Interest on education loan	Interest paid for a period of 8 years
80EE	Interest on home loan for first time home owners	Rs 50,000
80CCG	Rajiv Gandhi Equity Scheme for investments in Equities	Lower of – 50% of amount invested in equity shares; or – Rs 25,000
80D	Medical Insurance – Self, spouse, children Medical Insurance – Parents more than 60 years old or (from FY 2015-16) uninsured parents more than 80 years old	– Rs. 25,000 – Rs. 50,000
80DD	Medical treatment for handicapped dependent or payment to specified scheme for maintenance of handicapped dependent – Disability is 40% or more but less than 80% – Disability is 80% or more	– Rs. 75,000 – Rs. 1,25,000
80DDB	Medical Expenditure on Self or Dependent Relative for diseases specified in Rule 11DD – For less than 60 years old – For more than 60 years old	– Lower of Rs 40,000 or the amount actually paid – Lower of Rs 1,00,000 or the amount actually paid
80U	Self-suffering from disability : – An individual suffering from a physical disability (including blindness) or mental retardation. – An individual suffering from severe disability	– Rs. 75,000 – Rs. 1,25,000
80GGB	Contribution by companies to political parties	Amount contributed (not allowed if paid in cash)
80GGC	Contribution by individuals to political parties	Amount contributed (not allowed if paid in cash)
80RRB	Deductions on Income by way of Royalty of a Patent	Lower of Rs 3,00,000 or income received

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 :

Types of Losses	Intra Head Adjustment	Inter Head Adjustment	Carry Forwarded	Brought Forward Losses to be Set Off against	Time Limit to carry forward	Man datory filing of return of income
Loss from House Property	Allowed	Allowed, upto Maximum of Rs. 2,00,000 from AY 2018-19	Allowed	Income from House Property	8 Years	No
Loss from Speculative Business	Only against Speculative business income	Not Allowed	Allowed	Income from Speculative Business	4 Years	Yes
Loss from Specified Business	Only against Specified business income	Not Allowed	Allowed	Income from Specified Business	Unlimited	Yes
Other Business Losses	Allowed	Allowed, except from Salary Income	Allowed	Income from Normal Business		Yes
Short Term Capital Loss	Only against STCG & LTCG	Not Allowed	Allowed	STCG & LTCG	8 Years	Yes
Long Term Capital Loss	Only against LTCG	Not Allowed	Allowed	LTCG	8 Years	Yes
Loss from Owing & Maintaining Race Horses	Only against income from Owing & Maintaining Race Horses	Not Allowed	Allowed	Income from Owing & Maintaining Race Horses	4 Years	Yes
Other Loss under ‘Other Sources’	Allowed	Allowed	Not Allowed	N/A	N/A	N/A
Loss from Salary	Loss from Salary Not Possible

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

Particular	Amalgamation	Demerger	Conversion of Firm / Proprietary into Company	Conversion of Unlisted Co. into LLP
Accumulated Business Loss	Amalgamating Co.	Demerged Co.	Firm / Proprietary	Unlisted Co.
Can be carry forward by	Amalgamated Co.	Resulting Co.	Successor Co.	LLP
Time Limit to carry forward	Fresh 8 years	Remaining 8 years	Fresh 8 years	Fresh 8 years

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.