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Study Notes Direct Taxation INTERMEDIATE : PAPER - 7 SYLLABUS - 2016 DIRECT TAXATION INTERMEDIATE STUDY NOTES The Institute of Cost Accountants of India CMA Bhawan, 12, Sudder Street, Kolkata - 700 016 First Edition : January, 2018 Revised Edition : June, 2018 Revised Edition : January, 2019 Edition : August, 2019 Published by : Directorate of Studies The Institute of Cost Accountants of India (ICAI) CMA Bhawan, 12, Sudder Street, Kolkata - 700 016 www.icmai.in Printed at : M/s. Sap Prints Solutions Pvt. Ltd. 28A, Lakshmi Industrial Estate, S.N. Path, Lower Parel (W) Mumbai - 400 013, Maharashtra Copyright of these Study Notes is reserved by the Institute of Cost Accountants of India and prior permission from the Institute is necessary for reproduction of the whole or any part thereof. Syllabus - 2016 PAPER 7 : DIRECT TAXATION Syllabus Structure A Income Tax Act Basics 10% B Heads of Income and Computation of Total Income and Tax Liability 70% C Tax Management, Administration Procedure and ICDS 20% A C 10% 20% B 70% ASSESSMENT STRATEGY There will be wirtten examination paper of three hours. OBJECTIVES To gain knowledge about the direct tax laws in force for the relevant previous year and to provide an insight into procedural aspects for assessment of tax liability for various assessees. Learning Aims The 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 procedure Skill sets required Level 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 Basics 10% 1. Introduction to Income Tax Act, 1961 2. 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 Liability 70% 3. Heads of Income and Computation of Total Income under various heads 4. Clubbing Provisions, Set off and Carry forward of Losses, Deductions 5. Assessment of Income and tax liability of different persons Section C : Tax Management, Administrative Procedures and ICDS 20% 6. TDS, TCS and Advance Tax 7. Administrative Procedures 8. ICDS Paper 7 : Direct Taxation (DTX) Section A : Income Tax Act Basics (10 Marks) 1. Introduction to Income tax Act, 1961 a. Constitutional Validity b. Basic Concepts and definitions c. Capital and Revenue Receipts d. Basis of charge and scope of total income e. 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 heads a. Salaries b. Income from House Property c. Profits and Gains of Business or Profession (excluding 42 to 44DB but including sections 43A, 43B, 43AA, 44AB, 44AD, 44ADA and 44AE) d. Capital Gains e. Income from Other Sources 4. Clubbing Provisions, set off and carry forward of losses, deductions a. Income of other persons included in assessee’s total income b. Aggregation of income and set off and carry forward of losses c. Deductions in computing total income d. Rebate and Reliefs e. Applicable Rates of tax and tax liability 5. Assessment of income and tax liability of different persons a. Taxation of individual (including AMT but excluding non-resident) b. HUF c. Firms, LLP and Association of Persons d. Co-operatives Societies Section C : Tax Management, Administrative Procedure and ICDS [20 Marks] 6. TDS, TCS and Advance Tax a. Tax Deduction at Source (excluding sections relevant to non-residents) b. Tax Collected at Source c. Advance Tax 7. Administrative Procedures a. Return & PAN b. Intimation c. Brief concepts of Assessment u/s 140A, 143 and 144 8. ICDS a. Basic Concepts of ICDS Contents Section A - INCOME TAX ACT BASICS Study Note 1 : Basic Concepts 3-23 1.1 Introduction 3 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 1.6 Basic principles for charging Income Tax [Sec. 4] 6 1.7 Assessment Year (A.Y.) [Sec. 2(9)] 7 1.8 Previous Year [Sec.3] 7 1.9 Assessee [Sec 2(7)] 8 1.10 Person [Sec. 2 (31)] 8 1.11 Income [Sec. 2(24)] 12 1.12 Heads of Income [Sec. 14] 13 1.13 Gross Total Income (GTI) [Sec. 80B(5)] 14 1.14 Rounding-off of total income [Sec. 288A] 14 1.15 Rounding-off of tax [Sec. 288B] 14 1.16 Capital -vs.- Revenue 15 1.17 Tax Planning, Tax Evasion and Tax Avoidance 17 1.18 Diversion & Application of Income 19 Study Note 2 : Residential Status 25-40 2.1 Introduction 25 2.2 General points to be kept in mind regarding residential status of a person 26 2.3 Determination of Residential Status 26 2.3.1 Individual [Sec. 6(1)] 26 2.3.2 Exceptions to the above rule 27 2.3.3 Additional conditions to test whether resident individual is ‘Ordinarily resident or not’ [Sec. 6(6)] 28 2.4 Hindu Undivided Family (HUF) [Sec. 6(2)] 31 2.5 Company [Sec. 6(3)] 32 2.6 Firm or an Association of Persons (AOP) or Body of Individuals (BOI) [Sec. 6(4)] 32 2.7 Any other person 32 2.8 Incidence of Tax [Sec. 5] 32 2.9 Income received in India 34 2.10 Income deemed to be received in India 34 2.11 Income deemed to accrue or arise in India [Sec. 9] 35 Study Note 3 : Agriculture Income 41-46 3.1 Meaning 41 3.2 Instances of Agricultural (Agro) Income 43 3.3 Instances of Non-agricultural (Non-agro) Income 43 3.4 Treatment of Partly Agricultural & Partly Non-Agricultural Income [Rule 7] 44 3.5 Impact of agricultural income on tax computation 46 Study Note 4 : Income, which do not form part of Total Income 47-64 4.1 Income which don’t form part of Total Income 47 Section B - HEADS OF INCOME AND COMPUTATION OF TOTAL INCOME AND TAX LIABILITY Study Note 5 : Income under Head Salaries 67-136 5.1 Basic Elements of Salary 68 5.2 Definition of Salary [Sec. 17(1)] 69 5.3 General Notes 70 5.4 Basis of charge [Sec.15] 70 5.5 Computation of Salary, at a glance 72 5.6 Gratuity 73 5.7 Leave Salary Encashment 78 5.8 Pension [Sec. 17(1)(ii)] 81 5.9 Retrenchment Compensation 83 5.10 Compensation received at the time of voluntary retirement [Sec. 10(10C)] 83 5.11 Annuity [Sec. 17(1)(ii)] 84 5.12 Salary received in lieu of notice period 85 5.13 Profits in lieu of salary [Sec. 17(3)] 85 5.14 Allowances 85 5.15 Perquisite [Sec. 17(2)] 95 5.16 Insurance premium payable by employer 106 5.17 Valuation of sweat equity shares allotted or transferred to the assessee 107 5.18 Valuation of perquisites in respect of Motor Car [Rule 3(2)] 108 5.19 Valuation of Perquisite in respect of Vehicle other than Motor Car 113 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 5.22 Valuation of perquisite in respect of free education [Rule 3(5)] 115 5.23 Valuation of perquisite in respect of Free Transport [Rule 3(6)] 116 5.24 Valuation of perquisite in respect of interest free loan or concessional rate of interest [Rule 3(7)(i)] 116 5.25 Travelling/Touring/Holiday Home expenditure on Holiday [Rule 3(7)(ii)] 117 5.26 Valuation of perquisite in respect of free meals [Rule 3(7)(iii)] 117 5.27 Gift, voucher or token given by employer [Rule 3(7)(iv)] 118 5.28 Credit Card [Rule 3(7)(v)] 118 5.29 Club Expenditure [Rule 3(7)(vi)] 119 5.30 Valuation of perquisite in respect of use of movable assets [Rule 3(7)(vii)] 120 5.31 Valuation of the perquisite in respect of movable assets sold by an employer [Rule 3(7)(viii)] 120 5.32 Medical Facility [Proviso to Sec. 17(2)] 122 5.33 Leave Travel Concession [Sec. 10(5)] 125 5.34 Other Perquisites 126 5.35 Provident Fund 127 5.36 Standard Deduction [Sec. 16 (ia)] 131 5.37 Entertainment Allowance [Sec. 16 (ii)] 131 5.38 Tax on employment or professional tax [Sec. 16(iii)] 132 Study Note 6 : Income under Head House Property 137-169 6.1 Chargeability [Sec. 22] 137 6.2 Some special cases 140 6.3 Exempted properties 142 6.4 Computation of Income 143 6.5 Let out property [Sec. 23(1)] 143 6.6 Taxes levied by local authority (Municipal Tax) [Proviso to Sec. 23(1)] 150 6.7 Deductions u/s 24 151 6.8 Self-occupied property [Sec. 23(2)(a)] 156 6.9 Unoccupied property [Sec. 23(2)(b)] 160 6.10 Deemed to be let-out house property [Sec. 23(4)] 161 6.11 Partly self-occupied and partly let-out [Sec. 23(3)] 163 6.12 Recovery of unrealised rent and Arrears Rent [Sec. 25A] 167 Study Note 7 : Income under Head Profits and Gains of Business or Profession 171-252 7.1 Meaning of Business & Profession 173 7.2 Income chargeable under the head Profits & gains of business or profession [Sec. 28] 173 7.3 Incomes not taxable under the head Profits and gains of business or profession 175 7.4 Expenditures allowed as deduction 176 7.5 Specific Deductions 176 7.6 Rent, rates, taxes, repairs & insurance for building [Sec.
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