DIRECT TAXATION INTERMEDIATE - ICMAI
7SYLLABUS-2016INTERMEDIATE : PAPER -DIRECT TAXATIONSTUDY NOTESThe Institute of Cost Accountants of IndiaCMA Bhawan, 12, Sudder Street, Kolkata - 700 016INTERMEDIATE
First Edition : January, 2018Revised Edition : June, 2018Revised Edition : January, 2019Edition : August, 2019Published by :Directorate of StudiesThe Institute of Cost Accountants of India (ICAI)CMA Bhawan, 12, Sudder Street, Kolkata - 700 016www.icmai.inPrinted at :M/s. Sap Prints Solutions Pvt. Ltd.28A, Lakshmi Industrial Estate,S.N. Path, Lower Parel (W)Mumbai - 400 013, MaharashtraCopyright of these Study Notes is reserved by the Institute of CostAccountants of India and prior permission from the Institute is necessaryfor reproduction of the whole or any part thereof.
Syllabus - 2016PAPER 7 : DIRECT TAXATIONSyllabus StructureAIncome Tax Act Basics10%BHeads of Income and Computation of Total Income and Tax Liability70%CTax Management, Administration Procedure and ICDS20%C20%A10%B70%ASSESSMENT STRATEGYThere will be wirtten examination paper of three hours.OBJECTIVESTo gain knowledge about the direct tax laws in force for the relevant previous year and to provide an insight intoprocedural aspects for assessment of tax liability for various assessees.Learning AimsThe syllabus aims to test the student’s ability to : Understand the basic principles underlying the Income Tax Act, Compute the taxable income of an assessee, Analyze the assessment procedureSkill sets requiredLevel B : Requiring the skill levels of knowledge, comprehension, application and analysis.Note : Subjects related to applicable statutes shall be read with amendments made from time to time.Section A : Income Tax Act Basics1.Introduction to Income Tax Act, 19612.Income which do not form part of Total Income (Section 10, 11 to 13A)Section B : Heads of Income and Computation of Total Income and Tax Liability3.Heads of Income and Computation of Total Income under various heads4.Clubbing Provisions, Set off and Carry forward of Losses, Deductions5.Assessment of Income and tax liability of different personsSection C : Tax Management, Administrative Procedures and ICDS6.TDS, TCS and Advance Tax7.Administrative Procedures8.ICDS10%70%20%
Paper 7 : Direct Taxation (DTX)Section A : Income Tax Act Basics (10 Marks)1.Introduction to Income tax Act, 1961a. Constitutional Validityb. Basic Concepts and definitionsc. Capital and Revenue Receiptsd. Basis of charge and scope of total incomee. Residential status and incidence of tax (excluding section 9A)2.Income, which do not form part of total income [Sec. 10, 11 to 13A]Section B : Heads of Income and computation of total income and tax liability [70 marks]3.Heads of income and computation of total income under various headsa. Salariesb. Income from House Propertyc. Profits and Gains of Business or Profession (excluding 42 to 44DB but including sections 43A, 43B, 43AA,44AB, 44AD, 44ADA and 44AE)d. Capital Gainse. Income from Other Sources4.Clubbing Provisions, set off and carry forward of losses, deductionsa. Income of other persons included in assessee’s total incomeb. Aggregation of income and set off and carry forward of lossesc. Deductions in computing total incomed. Rebate and Reliefse. Applicable Rates of tax and tax liability5.Assessment of income and tax liability of different personsa. Taxation of individual (including AMT but excluding non-resident)b. HUFc. Firms, LLP and Association of Personsd. Co-operatives SocietiesSection C : Tax Management, Administrative Procedure and ICDS [20 Marks]6.TDS, TCS and Advance Taxa. Tax Deduction at Source (excluding sections relevant to non-residents)b. Tax Collected at Sourcec. Advance Tax7.Administrative Proceduresa. Return & PANb. Intimationc. Brief concepts of Assessment u/s 140A, 143 and 1448.ICDSa. Basic Concepts of ICDS
ContentsSection A - INCOME TAX ACT BASICSStudy Note 1 : Basic Concepts3-231.1Introduction31.2Direct Tax & Indirect Tax41.3Constitutional Validity of Taxes51.4Administration of Tax Laws51.5Sources of Income Tax Law in India51.6Basic principles for charging Income Tax [Sec. 4]61.7Assessment Year (A.Y.) [Sec. 2(9)]71.8Previous Year [Sec.3]71.9Assessee [Sec 2(7)]81.10Person [Sec. 2 (31)]81.11Income [Sec. 2(24)]121.12Heads of Income [Sec. 14]131.13Gross Total Income (GTI) [Sec. 80B(5)]141.14Rounding-off of total income [Sec. 288A]141.15Rounding-off of tax [Sec. 288B]141.16Capital -vs.- Revenue151.17Tax Planning, Tax Evasion and Tax Avoidance171.18Diversion & Application of Income19Study Note 2 : Residential Status25-402.1Introduction252.2General points to be kept in mind regarding residential status of a person262.3Determination of Residential Status262.3.1Individual [Sec. 6(1)]262.3.2Exceptions to the above rule272.3.3Additional conditions to test whether resident individual is ‘Ordinarily resident or not’ [Sec. 6(6)]282.4Hindu Undivided Family (HUF) [Sec. 6(2)]312.5Company [Sec. 6(3)]322.6Firm or an Association of Persons (AOP) or Body of Individuals (BOI) [Sec. 6(4)]322.7Any other person322.8Incidence of Tax [Sec. 5]322.9Income received in India342.10Income deemed to be received in India342.11Income deemed to accrue or arise in India [Sec. 9]35Study Note 3 : Agriculture Income41-463.1Meaning413.2Instances of Agricultural (Agro) Income43
3.3Instances of Non-agricultural (Non-agro) Income433.4Treatment of Partly Agricultural & Partly Non-Agricultural Income [Rule 7]443.5Impact of agricultural income on tax computation46Study Note 4 : Income, which do not form part of Total Income4.147-64Income which don’t form part of Total Income47Section B - HEADS OF INCOME AND COMPUTATION OFTOTAL INCOME AND TAX LIABILITYStudy Note 5 : Income under Head Salaries67-1365.1Basic Elements of Salary685.2Definition of Salary [Sec. 17(1)]695.3General Notes705.4Basis of charge [Sec.15]705.5Computation of Salary, at a glance725.6Gratuity735.7Leave Salary Encashment785.8Pension [Sec. 17(1)(ii)]815.9Retrenchment Compensation835.10Compensation received at the time of voluntary retirement [Sec. 10(10C)]835.11Annuity [Sec. 17(1)(ii)]845.12Salary received in lieu of notice period855.13Profits in lieu of salary [Sec. 17(3)]855.14Allowances855.15Perquisite [Sec. 17(2)]955.16Insurance premium payable by employer1065.17Valuation of sweat equity shares allotted or transferred to the assessee1075.18Valuation of perquisites in respect of Motor Car [Rule 3(2)]1085.19Valuation of Perquisite in respect of Vehicle other than Motor Car1135.20Valuation of perquisite in respect of Free Domestic Servants [Rule 3(3)]1145.21Gas, electricity or water facility [Rule 3(4)]1155.22Valuation of perquisite in respect of free education [Rule 3(5)]1155.23Valuation of perquisite in respect of Free Transport [Rule 3(6)]1165.24Valuation of perquisite in respect of interest free loan or concessional rate of interest [Rule 3(7)(i)]1165.25Travelling/Touring/Holiday Home expenditure on Holiday [Rule 3(7)(ii)]1175.26Valuation of perquisite in respect of free meals [Rule 3(7)(iii)]1175.27Gift, voucher or token given by employer [Rule 3(7)(iv)]1185.28Credit Card [Rule 3(7)(v)]1185.29Club Expenditure [Rule 3(7)(vi)]119
5.30Valuation of perquisite in respect of use of movable assets [Rule 3(7)(vii)]1205.31Valuation of the perquisite in respect of movable assets sold by an employer [Rule 3(7)(viii)]1205.32Medical Facility [Proviso to Sec. 17(2)]1225.33Leave Travel Concession [Sec. 10(5)]1255.34Other Perquisites1265.35Provident Fund1275.36Standard Deduction [Sec. 16 (ia)]1315.37Entertainment Allowance [Sec. 16 (ii)]1315.38Tax on employment or professional tax [Sec. 16(iii)]132Study Note 6 : Income under Head House Property137-1696.1Chargeability [Sec. 22]1376.2Some special cases1406.3Exempted properties1426.4Computation of Income1436.5Let out property [Sec. 23(1)]1436.6Taxes levied by local authority (Municipal Tax) [Proviso to Sec. 23(1)]1506.7Deductions u/s 241516.8Self-occupied property [Sec. 23(2)(a)]1566.9Unoccupied property [Sec. 23(2)(b)]1606.10Deemed to be let-out house property [Sec. 23(4)]1616.11Partly self-occupied and partly let-out [Sec. 23(3)]1636.12Recovery of unrealised rent and Arrears Rent [Sec. 25A]167Study Note 7 : Income under Head Profits and Gains of Business or Profession171-2527.1Meaning of Business & Profession1737.2Income chargeable under the head Profits & gains of business or profession [Sec. 28]1737.3Incomes not taxable under the head Profits and gains of business or profession1757.4Expenditures allowed as deduction1767.5Specific Deductions1767.6Rent, rates, taxes, repairs & insurance for building [Sec. 30]1767.7Repairs & insurance of machinery, plant & furniture [Sec. 31]1777.8Depreciation [Sec. 32]1777.9Additional depreciation [Sec. 32(1)(iia)]1827.10Treatment of Slump sale1857.11Depreciation in case of Power Units1857.12Actual cost of assets [Sec. 43(1)]1877.13Consequence of changes in rate of exchange of currency [Sec. 43A]1917.14Taxation of foreign exchange fluctuation [Sec. 43AA]1917.15Unabsorbed depreciation [Sec. 32(2)]1927.16Mandatory provision of Depreciation1927.17Depreciation in case of amalgamation, demerger or succession192
7.18Investment in new plant or machinery in notified backward area [Sec. 32AD]1947.19Special deduction for assessee engaged in Tea, Coffee or Rubber growing & manufacturingbusiness [Sec. 33AB and Rule 5AC]1957.20Site Restoration Fund [Sec. 33ABA & Rule 5AD]1977.21Scientific Research [Sec. 35]1997.22Deduction in respect of expenditure on specified business [Sec. 35AD]2037.23Amortisation of telecom-licence fee [Sec. 35ABB]2077.24Payment to associations and institutions for carrying out rural development programmes [Sec. 35CCA]2107.25Expenditure on agricultural extension project [Sec. 35CCC]2107.26Expenditure on skill development project [Sec. 35CCD]2117.27Amortisation of preliminary expenses [Sec. 35D & Rule 6AB]2117.28Deduction of expenses incurred in case of amalgamation or demerger [Sec. 35DD]2137.29Amortisation of expenditure incurred under VRS [Sec. 35DDA]2137.30Insurance premium for stocks & stores [Sec. 36(1)(i)]2147.31Insurance premium for life of cattle [Sec. 36(1)(ia)]2147.32Insurance premium for health of employees [Sec. 36(1)(ib)]2147.33Bonus or commission to employees [Sec. 36(1)(ii)]2147.34Interest on borrowed capital [Sec. 36(1)(iii)]2157.35Discount on issue of Zero Coupon Bonds (ZCB) [Sec. 36(1)(iiia)]2167.36Contribution towards RPF & Superannuation Fund [Sec. 36(1)(iv)]2167.37Contribution towards Notified Pension Scheme U/s 80CCD [Sec. 36(1)(iva)]2167.38Contribution towards approved gratuity fund [Sec. 36(1)(v)]2177.39Employee’s contribution towards staff welfare scheme [Sec. 36(1)(va)]2177.40Allowance in respect of dead or useless animals [Sec. 36(1)(vi)]2177.41Bad Debts [Sec. 36(1)(vii)]2187.42Provision for Bad Debts [Sec. 36(1)(vii)]2197.43Deduction is respect of Special Reserve [Sec. 36(1)(viii)]2197.44Expenditure on promotion of family planning among employees [Sec. 36(1)(ix)]2207.45Expenditure incurred by a corporation or a body corporate [Sec. 36(1)(xii)]2207.46Credit Guarantee Fund Trust [Sec. 36(1)(xiv)]2207.47Securities Transaction Tax [Sec. 36(1)(xv)]2207.48Commodities Transaction Tax [Sec. 36(1)(xvi)]2217.49Purchase of Sugarcane [Sec. 36(1)(xvii)]2217.50Loss as per ICDS [Sec. 36(1)(xviii)]2217.51General deductions [Sec. 37(1)]2217.52Advertisement in souvenir etc. of a political party [Sec. 37(2B)]2227.53Disallowed Expenditure [Sec. 40]2227.54Payment made to relatives in excess of requirement [Sec. 40A(2)]2247.55Consequences of payment exceeding 10,000/- otherwise than by account payee chequeor demand draft [Sec. 40A(3)/(3A)]2267.56Provision for Gratuity [Sec. 40A(7)]2287.57Certain contributions not deductible [Sec. 40A(9)]2287.58Expenditures allowed on cash basis [Sec. 43B]229
7.59Deemed profit chargeable to tax as business Income2317.60Maintenance of books of account [Sec. 44AA & Rule 6F]2327.61Tax Audit [Sec. 44AB]2337.62Method of accounting in certain cases [Sec. 145A]2347.63Taxability of certain income [Sec. 145B]2347.64Computation of Professional Income on Presumptive Basis [Sec. 44ADA]2377.65Business of plying, leasing or hiring goods carriage [Sec. 44AE]2377.66Computation of income from construction and service contracts [Sec. 43CB]2397.67Consequences of undisclosed income or investment2407.68Assessment of firm2427.69Deduction u/s 40(b)242Study Note 8 : Income under Head Capital Gains253-3288.1Basis of Charge2548.2Capital Asset [Sec. 2(14)]2558.3Types of Capital Asset2578.4Period of holding2578.5Transfer [Sec. 2(47)]2588.6Transactions not regarded as transfer (Sec. 46 & 47)2608.7Computation of Capital Gains [Sec. 48]2648.8Computation of Long Term Capital Gain (LTCG)2668.9Deemed or Notional Cost of Acquisition [Sec. 49(1)]2688.10Notional sale consideration2728.11Treatment of Advance money received and forfeited [Sec. 51]2728.12Treatment of compensation paid by the transferor2728.13Capital gain in case of insurance claim [Sec. 45(1A)]2738.14Capital gain on conversion of capital assets into stock in trade [Sec. 45(2)]2758.15Computation of Capital gain in case of depreciable assets [Sec.50]2768.16Transfer of security by depository [Sec. 45(2A)]2768.17Capital gain on transfer of capital assets by a partner/member to Firm/AOP/BOI as capitalcontribution[Sec. 45(3)]2778.18Capital gain on transfer of capital assets by a firm/AOP/BOI to part-ner/member by wayof distribution on its dissolution [Sec. 45(4)]2788.19Capital gain on transfer by way of compulsory acquisition [Sec. 45(5)]2798.20Capital gain on Joint Development Agreement [Sec. 45(5A)]2828.21Capital gain on distribution of assets by companies in its liquidation [Sec. 46]2828.22Capital Gain on buy back of own shares or other specified securities [Sec. 46A]2858.23Transfer in case of total or partial partition of HUF [Sec 47(i) & 49(1)]2858.24Withdrawal of exemption in case of transfer by a holding company to its 100% subsidiarycompany and vice versa u/s 47(iv)/(v) [Sec. 47A(1)]2868.25Withdrawal of exemption u/s 47(xiii)/47(xiv) [Sec. 47A(3)]2888.26Withdrawal of exemption u/s 47(xiiib) [Sec. 47A(4)]2888.27Capital gain on transfer of shares of amalgamating company in lieu of shares ofamalgamated company in case of amalgamation [Sec. 49(2)]289
8.28Capital gain on conversion of debentures into shares [Sec. 49(2A)]2908.29Zero Coupon Bond2908.30Employee Stock Option Plan (ESOP) [Sec. 49(2AA)]2918.31Capital gain on transfer of shares in demerged company or resulting company [Sec. 49(2C)/(2D)]2938.32Capital gain on transfer of shares / debentures by a non-resident [First proviso to Sec. 48 and rule 115A]2938.33Capital gains in case of slump sale [Sec. 50B]2958.34Valuation of consideration in case of land or building or both [Sec. 50C]2978.35Valuation of consideration in case of unquoted shares [Sec. 50CA]2998.36Capital gain in the case of self-generated assets [Sec. 55(2)(a)]2998.37Capital gain in case of bonus share [Sec. 55(2)(aa)(iiia)]3018.38Bonus Stripping [Sec. 94(8)]3028.39Capital gain in case of transfer of right share and right entitlement [Sec. 55(2)(aa)]3048.40Capital gain on transfer of equity share allotted at the time of corporatisation of a recognized stockexchange [Sec. 55(2)(ab)]3058.41Conversion of inventory into capital assets3068.42Deduction from capital gain on sale of residential house property [Sec. 54]3128.43Deduction from capital gain on transfer of agro land [Sec. 54B]3148.44Deduction from capital gain on compulsory acquisition of land and building forming part of industrialundertaking [Sec. 54D]3158.45Deduction from capital gain on acquisition of certain bonds [Sec. 54EC]3178.46Deduction from capital gain on investment in units of a specified fund [Sec. 54EE]3188.47Deduction from capital gain on transfer of capital assets other than residential houseproperty [Sec. 54F]3188.48Deduction from capital gain on transfer of capital assets in case of shifting of industrialundertaking from urban areas [Sec. 54G]3218.49Deduction from capital gain on transfer of capital assets in case of shifting of industrialundertaking from urban areas to Special Economic Zone [Sec. 54GA]3248.50Deduction from capital gain on transfer of residential property for investment in eligiblecompany [Sec. 54GB]3258.51Exemption under more than one provision3278.52Extension of time for acquiring new asset or depositing or investing amount of capital gain [Sec. 54H]3278.53Reference to Valuation Officer [Sec. 55A]327Study Note 9 : Income under Head Income from other Sources329-3569.1Basis of Chargeability [Sec.145]3319.2Casual Income: Winning from lotteries, crossword puzzles, etc. [Sec. 56(2)(ib)]3319.3Method of grossing up of income / Conversion of income received into gross income incase of casual income3329.4Income from machinery, plant or furniture let on hire [Sec. 56(2)(ii)]3329.5Income from machinery, plant or furniture let on hire along with building(Composite Rent) [Sec. 56(2)(iii)]3339.6Deductions allowed against income u/s 56(2)(ii) & 56(2)(iii) [Sec. 57(ii) & (iii)]3339.7Family pension3339.8Gift [Sec. 56(2)(x)]3349.9Share premium in excess of fair market value of share [Sec. 56(2)(viib)]343
9.10Income by way of interest received on compensation or on enhancedcompensation [Sec.56(2)(viii)]3459.11Interest on Securities [Sec. 56(2)(id)]3459.12Avoidance of tax by certain transaction in securities [Sec. 94]3469.13Loss on transfer of securities adjusted with income on securities [Dividend Stripping] [Sec. 94(7)]3489.14Bonus Stripping [Sec. 94(8)]3499.15Dividend [Sec. 2(22)]3499.16Specific disallowance [Sec. 58]3539.17Deemed Profits [Sec. 59]354Study Note 10 : Income of other Persons included in Assessees Total Income357-37210.1Introduction35710.2General rules35710.3Transfer of income without transferring assets [Sec. 60]35810.4Revocable Transfer [Sec. 61]35810.5Remuneration to Spouse [Sec. 64(1)(ii)]35910.6Income from asset transferred to spouse [Sec. 64(1)(iv) & (vii)]36210.7Income of minor child [Sec. 64(1A)]36610.8Conversion of self acquired property into HUF Property [Sec. 64(2)]36910.9Liability of the transferee [Sec. 65]37110.10Important general notes371Study Note 11 : Set Off and Carry Forward of Losses373-39811.1Introduction37311.2Inter Source adjustment (Intra-Head adjustment) [Sec. 70]37411.3Inter head adjustment [Sec. 71]37711.4General notes37911.5Carry Forward of Loss38211.6Loss under the head ‘Income from House Property’ [Sec. 71B]38211.7Carry forward & set off of business loss other than speculation loss [Sec. 72]38311.8Set off and Carry forward of unabsorbed depreciation38511.9Carry forward and Set off of Speculation loss [Sec. 73]38711.10Carry forward & set off of loss from specified business covered u/s 35AD [Sec.73A]38911.11Carry forward and set off of capital loss [Sec. 74]39011.12Carry forward and set off of losses from activity of owning and maintaining race horses [Sec. 74A]39111.13Carry forward & Set-off of loss of Firm on change in constitution of firm [Sec.78]39111.14Carry forward and set off of loss in case of closely held companies [Sec. 79]39211.15Carry forward & set off of accumulated loss and unabsorbed depreciation in case ofamalgamation, demerger or succession, etc. [Sec. 72A]39311.16Carry forward and set off of accumulated loss and unabsorbed depreciation in caseof amalgamation39411.17Carry forward & set off of accumulated loss & unabsorbed depreciation in case ofdemerger [Sec. 72A(4)]395
11.18Carry forward & Set off of losses on conversion of proprietary concern or partnershipfirm into company [Sec. 72A(6)]39611.19Carry forward & Set off of losses on conversion into Limited Liability Partnership [Sec. 72A(6A)]39611.20Carry forward & set-off of accumulated loss in scheme of amalgamation of bankingcompany [Sec. 72AA]39711.21Carry forward and set off of accumulated loss and unabsorbed depreciation in businessreorganisation of co-operative banks [Sec. 72AB]397Study Note 12 : Deductions in Computing Total Income399-45712.1Basis Rules40012.2De
1.2 Direct Tax & Indirect Tax 4 1.3 Constitutional Validity of Taxes 5 1.4 Administration of Tax Laws 5 1.5 Sources of Income Tax Law in India 5 . 5.20 Valuation of perquisite in respect of Free Domestic Servants [Rule 3(3)] 114 5.21 Gas, electricity or water facility [Rule 3(4)] 115
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