PAPER 5 : INCOME-TAX AND CENTRAL SALES TAX QUESTIONS 1.

. Choose the correct answer having regard to the provisions of the Income-tax Act, 1961 (a) Ram has received Rs. 40,000 as arrears of rent during the P.Y. 2007-08. The amount taxable under section 25B would be (i) 40,000; (ii) 30,000; (iii) 28,000; (iv) Nil. (b) The term repairs under section 31 includes: (i) replacement or reconstruction of an asset; (ii) renewal or renovation of an asset; (iii) bringing into existence a new asset; (iv) running of an asset. (c) Any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956 (i) shall be regarded as dividend; (ii) shall not be regarded as dividend but capital gains tax liability is attracted in the hands of the shareholder; (iii) shall neither be regarded as dividend nor will it attract capital gains tax in the hands of the shareholder; (iv) shall be claimed as a business expenditure by the company. (d) Where the karta of a HUF is absent from India, the return of income can be signed by (i) any member of the family; (ii) any male member of the family; (iii) any other adult member of the family; (iv) None of the above. (e) An assessee aggrieved by the order of Commissioner of Incometax (Appeals) can file an appeal before the Income tax Appellate Tribunal within certain period from the date on which the order sought to be appealed against is communicated to him. Such appeal has to be filed within (i) 30 days;

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(ii) 60 days; (iii) 90 days; (iv) 45 days. 2. Sushma furnishes the following information about her period of stay in India during 199798 to 2007-08: 1997-98 1998-99 1999-00 2000-01 365 days 366 days 365 days 110 days 2001-02 2002-03 2003-04 2004-05 75 days 67 days 178 days 65 days 2005-2006 2006-2007 2007-2008 62 days 70 days 100 days

Determine her residential status for the assessment year 2008-09. 3. Mr. Vishesh furnishes the following particulars of his income earned during the previous year relevant to the assessment year 2008-09: Particulars (i) (ii) (iii) (iv) (v) (vi) (vii) Interest on debentures in an Indian company received in London Interest on a company deposit in India but received in Germany Interest on U.K. Development Bonds 50% of interest received in India Dividend from British Co. received in London Profits on sale of plant at Germany 50% of profits are received in India Income earned from business in Germany which is controlled from Delhi, Rs. 40,000 is received in India. Profits from a business in Delhi but managed entirely from London Rs. 5,000 22,000 40,000 10,000 60,000 70,000 45,000 50,000 46,000 25,000 34,000

(viii) Rent from property in London deposited in a Indian Bank at London, remitted to India subsequently (ix) (x) (xi) Interest received in London on money lent to a resident in India in London but the same money was used in India Fees for technical services rendered in India but received in London Royalty received in London for a right given to non-resident in India to be used for business in India

Find out the gross total income of Mr. Vishesh, if he is (i) resident and ordinarily resident in India, (ii) resident but not ordinarily resident in India, or (iii) non-resident in India for the assessment year 2008-09.

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4.

Fill in the blanks, having regard to the provisions of Income-tax Act, 1961: (a) An appeal to the High Court shall lie only if a ______________________ is involved. (b) Under section 10(10BC), any compensation received for loss/damage on account of any __________ is eligible for exemption. (c) Any short term capital gain arising from the transfer of an equity share in a company or a unit of an equity oriented fund shall be liable to tax at a concessional rate of _________. (d) Unabsorbed depreciation can be carried forward ______________ even if the business is discontinued. (e) The maximum ceiling limit for claiming exemption under section 10(10C) in respect of compensation received by an employee for voluntary retirement is ________.

5.

Mr. Ramesh had been working with Vashudev Ltd. in Delhi since 1-10-1994. He was entitled to the following emoluments: (i) Basic Salary w.e.f. 1-1-2007 Rs. 10,000 p.m. (ii) Dearness allowance 40% of basic salary (50% of which forms part of salary for retirement benefits). (iii) Medical allowance Rs. 1,200 p.m. (entire amount is spent on his own medical treatment). (iv) Entertainment allowance Rs. 600 p.m. (v) Children education allowance Rs. 140 p.m. per child for three children. (vi) Hostel expenditure allowance Rs. 100 p.m. per child for three children. (vii) Uniform allowance Rs.250 p.m. (He spends Rs.1,500 on the purchase and maintenance of uniform). (ix) He contributes Rs. 1,500 per month to a recognised provident fund to which his employer contributes an equal amount. He retired from his job on 1-1-2008. He was entitled to the following benefits at the time of his retirement: (a) Gratuity Rs. 2,25,000. (b) Pension from 1-1-2008 Rs. 3,000 p.m. (c) Encashment of earned leave for 150 days Rs. 2,15,000. He was entitled to 40 days leave for every completed years of service. He got 50% of his pension commuted in lump-sum w.e.f. 1-3-2008 and received Rs. 1,20,000 as commuted pension.

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He made the following payments during the previous year: (1) LIP on his life policy of Rs. 1,00,000 Rs. 18,000. (2) Deposit in PPF account Rs. 55,000. Compute his total income for the assessment year 2008-09. 6. Explain the following, having regard to the provisions of the Income-tax Act, 1961 (a) Treatment of Voluntary retirement receipts; (b) Deemed Income (with reference to Chapter VI). 7. 8. Discuss the provisions in respect of certain undertakings or enterprises in certain special category states as laid down under section 80-IC of the Act. (a) Shyam has converted his private assets comprising of the following assets into his business assets on 01.4.2007: Particulars of Asset Building Land Furniture Original cost 25,00,000 20,00,000 8,00,000 Date of Fair Market Value recorded acquisition Value as on in the books as 01.04.2007 on 01.04.2007 01.04.2005 01.04.2005 01.04.2006 35,00,000 30,00,000 3,00,000 40,00,000 20,00,000 8,00,000

Compute the cost of asset to be capitalized in the books of Shyam. (b) Discuss the allowability of the following payments under section 40A(3) in the hands of Aditya Ltd. for the A.Y. 2008-09: (i) Payment in cash for a bill amounting to Rs. 1,50,000 on a single day. (ii) Payment in cash on 01-04-07 Rs.19,500 and on 01.01.08 Rs. 85,000 towards one single bill. (iii) Payment in cash on 01-01-07, a sum of Rs. 1,50,000 for different bills of Rs. 15,000 each to a single creditor. (iv) Rs. 65,000 towards consultancy services rendered by technician. 9. Ram is the Karta of a HUF, whose members derive income as given below: Particulars (i) (ii) (iii) Income from Rams own business Mrs. Ram a an engineer draws salary Minor son Ajay earning interest on fixed deposits with PQR Ltd. which were gifted to him by his uncle Amount (Rs.) 55,000 95,000 25,000

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(iv) (v)

Minor daughter Supriya gave a music contest and received remuneration Ajay got winnings from lottery (Gross)

1,20,000 2,50,000

Discuss the taxability of the above items. 10. A non-resident is engaged in shipping business. The company also operates its ship in India. Explain how the income from the companys business operation in India is computed. 11. State with reasons, whether the following statements are true or false: (a) The deduction under section 80E is available to an individual only in respect of interest on loan taken for his higher education. (b) The benefit of deduction under section 80-IA to an undertaking engaged in the development of ports is also available to the works contractor who executes a works contract entered into with the undertaking. (c) Section 80-IB provides deduction to all industrial undertakings set up in Jammu and Kashmir which begin to manufacture or produce articles or things or operate a cold storage plant on or before 31.3.2007. (d) Before issuing directions for special audit under section 142(2A), the Assessing Officer is not required to give the assessee an opportunity of being heard. (e) Education cess @2% and secondary and higher education cess @1% is applicable on aggregate of income tax and surcharge, if any, in respect of only individuals and HUFs. 12. From the following particulars, compute the capital gains: (1) (a) Ashish commenced a business on 16-3-2002. He sold the said business on 13-3-2008 and he received Rs. 9,00,000 towards goodwill. (b) What will be your answer in the above case, if Ashish had acquired the goodwill for this business for a consideration of Rs. 3,00,000. [Cost Inflation Index (CII): F.Y.2007-08: 551, F.Y.2001-02: 426] (2) Ramesh has been living in a rented accommodation since Sep. 2000, and he is paying a rent of Rs. 1,500 per month. The landlord got the house vacated from Ramesh on 12-2-2008 and paid a sum of Rs. 6,00,000 for vacating the house. (3) Harish is a Cost Accountant practicing in Pune since May 1990. He transfers the practice to another Cost Accountant Vishwas on 11-1-2008 and charges Rs. 2,80,000 towards goodwill. 13. Discuss the powers of the Assessing Officer to make a reference to the Valuation Officer under section 142A. 14. Write a short note on revision by Commissioner of Income-tax under section 263 of the Income-tax Act.

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15. Discuss the powers of the Income-tax authorities of survey under section 133A of the Income-tax Act. 16. Fill up the blanks, having regard to the provisions of the Central Sales-tax Act (i) A dealer in Patna sold to a ship, goods for consumption on board the ship at Mumbai port. The sale will be an_____________.

(ii) The VAT rate on goods sold within the state of Gujarat is 5%. If the goods are sold to an unregistered dealer in Delhi, the CST will be ___________. (iii) The head office shall obtain a declaration in _____________ from the Branch office, in case of branch transfer of goods. (iv) Any person aggrieved by an order passed by the registration authority demanding security or forfeiting or refunding security can prefer an appeal against such order within__________ of the service of order, after furnishing the security. (v) It is__________ for a dealer making an inter-state sale to get himself registered so as to avoid penalty. 17. State with reasons, whether the following statements are true or false, as per the provisions of Central Sales-tax Act, 1956: (i) Sale of land and building are liable to Central sales tax. (ii) A certificate for registration once granted cannot be amended. (iii) Cost of freight separately charged in the invoice shall be deducted from sale price. (iv) All Directors of a Private Company which is wound up are personally liable for any tax due under the CST Act. (v) Sale of electricity is subject to CST since the definition of Goods under section 2(d) does not exclude electricity. 18. Define the following terms under the Central Sales-tax Act, 1956: (a) Sale (b) Dealer (c) Goods. 19. Discuss briefly about the powers of the Central Sales tax Appellate Authority under section 22 of the Central Sales-tax Act, 1956. 20. When is a transaction said to be exempt from central sales tax under section 6(2) of the Central Sales Tax Act? SUGGESTED ANSWERS/HINTS 1. (a) (iii) (b) (ii) (c) (ii) (d) (iii) (e) (ii)

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2.

Under section 6(1), an individual is said to be resident in India in any previous year, if he satisfies any one of the following conditions: (i) He has been in India during the previous year for a total period of 182 days or more, or

(ii) He has been in India during the 4 years immediately preceding the previous year for a total period of 365 days or more and has been in India for at least 60 days in the previous year. If the individual satisfies any one of the conditions mentioned above, he is a resident. If both the above conditions are not satisfied, the individual is a non-resident. Sushma has stayed for 100 days during the previous year 2007-08 and 375 days during the immediately preceding 4 previous years. Thus, she fulfills the second basic condition. Therefore, she is a resident. In order to determine whether she is ordinarily resident, or not ordinarily resident, the fulfillment of either of the additional conditions must be examined. A not-ordinarily resident person is one who satisfies any one of the conditions specified under section 6(6). (i) If such individual has been non-resident in India in any 9 out of the 10 previous years preceding the relevant previous year, or

(ii) If such individual has during the 7 previous years preceding the relevant previous year been in India for a period of 729 days or less. Sushma fulfills the second additional condition of staying for a period of less than 730 days during the 7 immediately previous years. The aggregate period of stay during the 7 immediately preceding previous years works out to 627 days only. Therefore, Sushma is a resident but not ordinarily resident for the assessment year 2008-09. 3. Computation of Gross total income of Mr. Vishesh Sharma for A.Y. 2008-09 S.No. Particulars Resident and ordinarily resident Rs. (i) (ii) (iii) (iv) Interest on debentures in an Indian company received in London Interest on a company deposit in India but received in Germany Interest on U.K. Development Bonds 50% of interest received in India Dividend from British Co. received in London 5,000 22,000 40,000 10,000 Resident but not ordinarily resident Rs. 5,000 22,000 20,000 Nonresident Rs. 5,000 22,000 20,000 -

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(v) (vi) (vii) (viii) (ix) (x) (xi)

Profits on sale of plant at Germany 50% of profits are received in India Income earned from business in Germany which is controlled from Delhi, Rs. 40,000 is received in India. Profits from a business in Delhi but managed entirely from London Rent from property in London deposited in a Indian Bank at London, brought to India Interest received in London on money lent to a resident in India in London but the same money was used in India Fees for technical services rendered in India but received in London Royalty received in London for a right given to non-resident in India to be used for business in India Gross Total Income

60,000 70,000 45,000 50,000 46,000 25,000 34,000 4,07,000

30,000 70,000 45,000 46,000 25,000 34,000 2,97,000

30,000 40,000 45,000 46,000 25,000 34,000 2,67,000

4.

(a) substantial question of law (b) disaster (c) 10% (d) indefinitely (e) Rs. 5,00,000

5.

Computation of total income of Mr. Ramesh for A.Y.2008-09 Particulars Basic salary (Rs. 10,000 x 9) Dearness allowance @ 40% Medical allowance (Rs. 1,200 x 9) Entertainment allowance ( Rs. 600 x 9) Children education allowance (Rs. 140 x 3 x 9) Less : Exempt (Rs. 100 x 2 x9) Hostel expenditure allowance (Rs. 100 x 3 x 9) Less : Exempt (Rs. 100 x 2 x 9) 3,780 1,800 2,700 1,800 900 1,980 Amount (Rs.) Amount (Rs.) 90,000 36,000 10,800 5,400

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Uniform allowance ( Rs. 250 x 9 Rs.1,500) Employers Contribution to RPF in excess of 12% of salary Gratuity Less : Exempt (Note 1) Uncommuted pension ( 3,000 x 2 + 1,500 x 1) Commuted pension Less: Exempt (120000 x 2 x 1/3) Leave encashment Less : Exempt (Note 2) Income from salary Gross total income Less: Deduction under section 80C RPF ( Rs. 1,500 x 9) LIP PPF Total income Notes: 1. Gratuity will be exempt upto minimum of the following: Particulars (a) (b) (c) Actual Gratuity received Half months average salary for every completed year of service (Rs. 12,000 x 1/2 x 13) Specified amount 13,500 18,000 55,000 1,20,000 80,000 2,15,000 8,000 2,25,000 78,000

750 540

1,47,000 7,500 40,000

2,07,000 5,47,870 5,47,870

86,500 4,61,370

Amount (Rs.) 2,25,000 78,000 3,50,000

Therefore, Rs. 78,000 is exempt u/s 10(10). (It is assumed that the employee is not covered under The Payment of Gratuity Act, 1972) 2. Leave encashment shall be exempt as under: Completed years of service Number of days leave allowed every year Total leave allowable Leave encashed 13 years 40 520 days 150 days

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Therefore leave availed (520-150) Leave available on basis of 30 days (30 x 13) Less : Leave availed Therefore encashment eligible for exemption (390-370)

370 days 390 days 370 days 20 days

Hence leave encashment will be exempt u/s 10(10AA) upto minimum of following 4 limits : Particulars (a) (b) (c) (d) 6. Actual encashment Eligible encashment (Rs. 12,000/ 30 x 20) 10 months average salary (Rs. 12,000 x 10) Amount specified Amount (Rs.) 2,15,000 8,000 1,20,000 3,00,000

Therefore, Rs. 8,000 is exempt u/s 10(10AA). (a) Voluntary Retirement Receipts [Section 10(10C)] Compensation received by an employee at the time of voluntary retirement is exempt from tax subject to the following conditions: Eligible Undertakings - The employee of the following undertakings are eligible for exemption under this clause: (i) Public sector company (ii) Any other company (iii) An authority established under a Central/State or Provincial Act (iv) A local authority (v) A co-operative society (vi) An University established or incorporated under a Central/State or Provincial Act and an Institution declared to be an University by the University Grants Commission. (vii) An Indian Institute of Technology (viii) Such Institute of Management as the Central Government may, by notification in the Official Gazette, specify in this behalf (ix) Any State Government (x) The Central Government (xi) An institution, having importance throughout India or in any state or states, as the Central Government may specify by notification in the Official Gazette. Limit: The maximum limit of exemption should not exceed Rs.5 lakhs.

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Such compensation should be at the time of his voluntary retirement or termination of his service, in accordance with any scheme or schemes of voluntary retirement or, in the case of public sector company, a scheme of voluntary separation. The exemption will be available even if such compensation is received in installments. The schemes should be framed in accordance with such guidelines, as may be prescribed and should include the criteria of economic viability. Guidelines Rule 2BA prescribes the guidelines for the purposes of the above clause. They are as follows: 1. It applies to an employee of the company or the authority, as the case may be, who has completed 10 years of service or completed 40 years of age. However, this requirement is not applicable in case of an employee of a public sector company under the scheme of voluntary separation framed by the company. It applies to all employees by whatever name called, including workers and executives of the company or the authority except directors of a company or a cooperative society. The scheme of voluntary retirement or separation must have been drawn to result in overall reduction in the existing strength of the employees of a company or the authority or a cooperative society. The vacancy caused by the voluntary retirement or separation must not be filled up. The retiring employee of a company shall not be employed in another company or concern belonging to the same management. The amount receivable on account of voluntary retirement or separation of the employee must not exceed the amount equivalent to three months salary for each completed year of service or salary at the time of retirement multiplied by the balance months of service left before the date of his retirement or superannuation.

2. 3. 4. 5. 6.

(b) Deemed Income (with reference to Chapter VI) (1) Cash Credits [Section 68] Where any sum is found credited in the books of the assessee and the assessee offers no explanation about the nature and source or the explanation offered is not satisfactory in the opinion of the Assessing Officer, the sum so credited may be charged as income of the assessee of that previous year. (2) Unexplained Investments [Section 69] Where in the financial year immediately preceding the assessment year, the assessee has made investments which are not recorded in the books of account and the assessee offers no explanation about the nature and the

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source of investments or the explanation offered is not satisfactory, the value of the investments are taxed as income of the assessee of such financial year. (3) Unexplained money etc. [Section 69A] Where in any financial year the assessee is found to be the owner of any money, bullion, jewellery or other valuable article and the same is not recorded in the books of account and the assessee offers no explanation about the nature and source of acquisition of such money, bullion etc. or the explanation offered is not satisfactory, the money and the value of bullion etc. may be deemed to be the income of the assessee for such financial year. Ownership is important and mere possession is not enough. (4) Amount of investments etc., not fully disclosed in the books of account [Section 69B] Where in any financial year the assessee has made investments or is found to be the owner of any bullion, jewellery or other valuable article and the Assessing Officer finds that the amount spent on making such investments or in acquiring such articles exceeds the amount recorded in the books of account maintained by the assessee and he offers no explanation for the difference or the explanation offered is unsatisfactory, such excess may be deemed to be the income of the assessee for such financial year. For example, if the assessee is found to be the owner of say 300 gms of gold (market value of which is Rs.25,000) during the financial year ending 31.3.08 but he has recorded to have spent Rs.15,000 in acquiring it, the Assessing Officer can add Rs.10,000 (i.e. the difference of the market value of such gold and Rs.15,000) as the income of the assessee, if the assessee offers no satisfactory explanation thereof. (5) Unexplained expenditure [Section 69C] Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or the explanation is unsatisfactory the Assessing Officer can treat such unexplained expenditure as the income of the assessee for such financial year. Such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as deduction under any head of income. (6) Amount borrowed or repaid on hundi [Section 69D] Where any amount is borrowed on a hundi or any amount due thereon is repaid other than through an account-payee cheque drawn on a bank, the amount so borrowed or repaid shall be deemed to be the income of the person borrowing or repaying for the previous year in which the amount was borrowed or repaid, as the case may be. However, where any amount borrowed on a hundi has been deemed to be the income of any person, he will not be again liable to be assessed in respect of

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such amount on repayment of such amount. The amount repaid shall include interest paid on the amount borrowed. 7. Special provisions in respect of certain undertakings or enterprises in certain undertakings or enterprises in certain special category States [Section 80-IC] (i) Section 80-IC allows tax holiday to the new undertakings or existing undertakings on their substantial expansion in the states of Himachal Pradesh, Uttaranchal, Sikkim and North Eastern States.

(ii) For this purpose, substantial expansion means increase in the investment in plant and machinery by at least 50% of the book value of the plant and machinery (before taking depreciation in any year), as on the first day of the previous year in which the substantial expansion is undertaken. (iii) The tax holiday in the states of Himachal Pradesh and Uttaranchal will be 100% for the first five assessment years and 25% (30% in the case of a company) for the next five assessment years. (iv) However, tax holiday in the states of Sikkim and North-Eastern States will be 100% for ten assessment years commencing from the initial assessment year. (v) For the purpose of exemption, two classifications have been made and the Thirteenth Schedule and Fourteenth Schedule have been inserted in the Income-tax Act. The said Schedules specify the list of articles and the States for the purposes of availing deduction under this section. (vi) The first classification is applicable to undertakings or enterprises which manufacture or produce any article or thing, not being any article or thing specified in the 13th Schedule (namely, tobacco, aerated beverages, pollution causing paper and paper products etc.) in any export processing zone or integrated infrastructure development centre or industrial growth centre or industrial estate or industrial park or software technology park or industrial areas or theme park in these States as notified by the Board. (vii) The second classification is applicable to those undertakings or enterprises which manufacture or produce article or thing specified in the 14th Schedule only in these States without any specification of the specified zone, area etc. (viii) The period during which the undertakings in different States should begin or should have begun to manufacture or produce are given hereunder Himachal Pradesh and Uttaranchal Sikkim North-Eastern States From 7.1.03 and ending before 1.4.2012 From 23.12.02 and ending before 1.4.2007 From 24.12.97 and ending before 1.4.2007

(ix) No benefit to these undertakings will be available under any of the sections in Chapter VIA or section 10A or section 10B in relation to the profits and gains of such undertakings.

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(x) While computing the total period of 10 years the period for which the benefit under section 80IB or under section 10C has already been availed, if any, shall also be included. (xi) The other conditions such as that it should not be formed by splitting or reconstruction of a business already in existence, or by transfer to a new business of plant and machinery previously used for any purpose are the same as are applicable for claiming benefit under section 80IA. 8. (a) Computation of actual cost of the asset for the A.Y. 2008-09 Particulars Value of building to be recorded in the books: Cost of asset as on 01.04.2005 Less : Notional depreciation @ 5% for the year 2005-06 WDV as on 31.03.2006 Less : Notional depreciation @ 5% for the year 2006-07 Cost to be capitalized as per Explanation (5) to Sec. 43 Amount (Rs.) 25,00,000 1,25,000 23,75,000 1,18,750 22,56,250

Explanation (5) to section 43 requires that the notional depreciation to be computed only in the case of building and not in case of any other asset. Therefore, the value of other fixed assets namely land and furniture shall get recorded at Rs. 20 lakhs and Rs. 8 lakhs respectively. However, in case of building the cost to be adopted for the purpose of computing depreciation under Income-tax Act shall be Rs. 22,56,250. (b) (i) Rs. 1,50,000 shall be disallowed under section 40A(3), since the cash payment exceeds Rs. 20,000.

(ii) Rs. 85,000 shall be disallowed under section 40A(3). Since Rs. 19,500, paid on 01.04.07, is below the specified limit of Rs. 20,000 under section 40A(3), the same shall not be disallowed. (iii) Section 40A(3) provides that disallowance is attracted where an assessee incurs any expenditure in respect of which payment is made in a sum exceeding Rs. 20,000 other than by way of account payee cheque or account payee draft. In the given case, the expenditure is Rs. 15,000 each and the aggregate cash payment of Rs. 1,50,000 was made on a single day. Since each expenditure is less than Rs. 20,000/- disallowance is not warranted. (iv) Rs. 65,000/- is to be disallowed as it is not covered by any of the exceptions under Rule 6DD.

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9. Particulars

Computation of total income of Mrs. Ram for the A.Y. 2008-09 Amount (Rs.) 2,75,000 1,500 Amount (Rs.) 95,000 2,73,500 3,68,500

Income from Salary Income of minor clubbed under section 64(1A) (Note ii) Less : Exemption u/s.10(32) Total income Notes: (i)

The interest income and lottery earnings of minor son Ajay will be clubbed in the hands of that parent whose total income is higher. In the given case, Mrs. Rams income of Rs. 95,000 is greater than the income of Mr. Rams which is only Rs. 55,000. Hence, the income of minor child will be clubbed in the hands of Mrs. Ram. Particulars (a) Interest on fixed deposits (b) Lottery winnings Total income to be clubbed Amount (Rs.) 25,000 2,50,000 2,75,000

(ii) Income of minor son to be clubbed:

(iii) Income from Mr. Rams own business is chargeable to tax in his hands. However, since the Business Income is lower than the basic exemption limit, there is no tax liability. (iv) The clubbing provisions do not apply to salary income of Mrs. Ram, since the same is not received from a concern in which the spouse has substantial interest. (v) The income of a minor child shall not be clubbed if the income is earned on the account of manual work done by her or any activity involving application of skill, talent, specialized knowledge and experience. Therefore, in the given case, clubbing provision cannot be applied in respect of income earned by minor daughter Supriya. 10. Special Provision for computing the profits and gains of shipping business in case of Non-residents [Section 44B] Section 44B provides for computation of the profits and gains of the business of shipping carried on by non-residents to the extent they are chargeable to income-tax in India. According to this, a sum equal to 7% of the aggregate of the following amounts would be deemed to be the profits and gains of the business of shipping chargeable to tax under the head profits and gains of business or profession.

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(i)

The amount paid or payable, whether within India or outside, to the assessee or to any person on his behalf on account of the carriage of passengers, livestock, mail or goods shipped at any port in India; and

(ii) The amount received or deemed to be received in India by the assessee himself or by any other person on behalf of the assessee on account of the carriage of passengers, livestock, mail or goods shipped at any port outside India. The amounts referred to in (i) and (ii) above shall include the amount paid or payable or received or deemed to be received by way of demurrage charges or handling charges or any other amount of similar nature. The total of the above two amounts should be ascertained and 7% thereof would be calculated and taken as the income from the business chargeable to tax in India. These provisions for computation of the income from the shipping business in case of nonresidents would apply notwithstanding anything to the contrary contained in the provisions of sections 28 to 43A of the Income-tax Act. 11. (a) False Section 80E has been amended to also provide deduction for interest on loan taken for higher education of his relative i.e. his or her spouse and children. (b) False The benefit provided under section 80-IA to an undertaking engaged in development of infrastructure facility like highway and ports etc. would not be available to a person who merely executes a works contract entered into with the undertaking or enterprise referred to in that section. (c) False The deduction under section 80-IB has been extended to all industrial undertakings set up in Jammu and Kashmir which begin to manufacture or produce articles or things or operate a cold storage plant on or before 31.3.2012. (d) False The Finance Act, 2007 has provided that the Assessing Officer is required to give the assessee an opportunity of being heard before issuing directions for special audit under section 142(2A). (e) False Education cess @2% and secondary and higher education cess @1% is applicable on aggregate of income tax and surcharge, if any, in respect of all assessees. 12. 1. (a) Sale Consideration Less : Indexed cost of acquisition (self generated) Long-term Capital Gain (b) Sale consideration Less : Indexed cost of acquisition - Rs. 3,00,000 x
551 426

Particulars

Amount (Rs.) 9,00,000 Nil 9,00,000 9,00,000 3,88,028

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Long-term Capital Gain 2. Sale consideration Less : Indexed cost of acquisition (self generated) Long-term Capital Gain 3.

5,11,972 6,00,000 Nil 6,00,000

Since the asset transferred is goodwill of a profession and not of business, it is treated as self-generated asset and there is no capital gain on selfgenerated asset.

13. Powers of the Assessing Officer to make a reference to the valuation officer [Section 142A] Section 142A clarifies that Assessing Officer has and always had the power to make a reference to the Valuation Officer for determining the cost of construction of properties. Where an estimate of the value of any (1) investment referred to in section 69 or section 69B or (2) bullion, jewellery or other valuable article referred to in section 69A or section 69B is required for the purposes of making any assessment or re-assessment, the Assessing Officer may require the Valuation Officer to make an estimate of the same and report to the Assessing Officer. The Valuation Officer to whom such a reference is made shall, for the purpose of dealing with such reference, have all the powers that he has under section 38A of the Wealth-tax Act, 1957. On receipt of the report from the Valuation Officer, the Assessing Officer may, after giving the assessee an opportunity of being heard, take into account such report in making such assessment or reassessment. However, the provisions of the section will not apply in respect of an assessment made on or before 30th September, 2004, where such assessment has become final and conclusive on or before that date, except in cases where a reassessment is required to be made under section 153A. 14. Revision of Orders prejudicial to the Revenue [Section 263] (a) The Commissioner on his own motion may call for and examine the record of any proceeding under the Act. If he considers that any order passed by Assessing Officer is erroneous in so far as it is prejudicial to the interest of the Revenue, he may, after giving the assessee a reasonable opportunity of being heard and after making such enquiries as may be necessary, make suitable orders. (b) He can enhance, modify or cancel an assessment. He can direct that a fresh assessment should be made.

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(c) For the purpose of the exercise of the revisionary power (a) an order of assessment passed by the Assistant Commissioner or the Deputy Commissioner or the Income tax Officer on the basis of directions issued by Joint Commissioner under section 144A and (b) an order passed by Joint Commissioner in the exercise of the powers or performance of the functions of an Assessing Officer will be regarded as orders passed by Assessing Officer. Hence, the above orders also can be revised by the Commissioner. (d) The term record for the purposes of this provision shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the Commissioner. (e) Where any order referred to in section 263(1) passed by the Assessing Officer had been the subject-matter of any appeal, the powers of the Commissioner under section 263(1) shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal. Thus, the Commissioner is competent to revise such an order of assessment passed by an Assessing Officer on all matters except those which have been considered and decided in an appeal. (f) It will be permissible for the Commissioner to revise even an order of reassessment made under section 147.

(g) The time limit of 2 years for the purposes of making a revisionary order under section 263 will be reckoned from the end of the financial year in which the order sought to be revised was made by the Assessing Officer. (h) The time limit, however, does not apply in case where the Commissioner has to give effect to a finding or direction by the Appellate Tribunal, NTT, High Court or Supreme Court. 15. Power of Survey [Section 133A] An income-tax authority may enter any place within the limits of the area assigned to him or any place occupied by any person in respect of whom he exercises jurisdiction, at which a business or profession is carried on and require any proprietor, employee or any other person/s, who may at that time/place be attending in any manner to or helping him to carry on any such business or profession. This power may be exercised: (i) to afford him the necessary facility to inspect such books of account or other documents as he may require and which may be available at such place;

(ii) to afford him the necessary facility to check or verify the cash, stock or other valuable articles or things which may be found therein; and (iii) to furnish such information as he may require as to any matter which may be useful for or relevant to any proceeding under the Income-tax Act. This power may be exercised in respect of any place with which the assessee is connected, whether or not such place is the principal place of business or profession. It will also include any other place, whether any business or profession is carried on therein

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or not, in which the person carrying on the business or profession states that any of his books of account or other valuable article or thing relating to his business or profession is kept. The Income-tax authority may enter any place of business or profession mentioned above only during the hours at which such place is/or open for the conduct of business or profession and in the case of any other place, only after sunrise and before sunset. The Income-tax authority exercising this power of survey may: (i) place marks of identification, if he finds it necessary, on the books of account or other documents inspected by him and make or cause to be made extracts or copies therefrom;

(ii) impound and retain in his custody for such period as he thinks fit any book of account or other documents inspected by him after recording reasons for doing so. However, the income tax authority cannot retain in his custody such books of account etc. for a period exceeding 10 days (excluding holidays) without obtaining the approval of the Chief Commissioner or Director General therefor, as the case may be. (iii) make an inventory of any cash, stock or valuable article or thing checked or verified by him; and (iv) record the statements of any person which may be useful for or relevant to any proceedings under the Income-tax Act. However, the income tax authority, cannot remove or cause to be removed from the place where he has entered, any cash, stock or other valuable article or thing. The Income-tax authorities would also have the power to collect information and record the statements of any of the persons concerned at any time after any function, ceremony or event even before the stage of commencement of assessment proceedings for the following year for which the information may be relevant, if they are of the opinion that having due regard to the nature, scale and extent of the expenditure incurred, it is necessary to do so. This provision is intended to help in collecting evidence about ostentatious expenditure immediately after the event to be used at the time of the assessment. If any person who is required to provide facility to the income-tax authority to inspect the books of account or the other documents or to check or verify any cash, stock or other valuable articles or to furnish any information or to have his statement recorded, either refuses or evades do so, the Income-tax authority would be entitled to use all the powers vested in it under section 131(1) for enforcing proper compliance with the requirements. However, no action under sub-section (1) shall be taken by the Assistant Director or a Deputy Director or an Assessing Officer or a Tax Recovery Officer or an Inspector of Income-tax except with the prior approval of the Joint Director or the Joint Commissioner, as the case may be.

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16. (i)

inter-state sale

(ii) 5% (iii) Form F (iv) 30 days (v) mandatory 17. (i) False Only movable property falls within the scope of levy of central sales tax as indicated under section 2(d) of the Central Sales Tax Act. Sale of land and building is outside the purview and therefore not liable to central sales tax.

(ii) False According to section 7(4A), certificate for registration can be amended by the registration authority on application by the dealer or after due notice to the dealer for the reasons such as change of name, place or nature of business, change of class of goods in which he carries on business etc. (iii) True Section 2(h) defining Sale price specifically excludes cost of freight, if the same is charged separately. (iv) True When a private company is wound up and any tax assessed on the company cannot be recovered, then every person who was a director of the private company at any time during the period for which tax is due shall be jointly and severally liable for payment of such tax, unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company. (v) False Goods include electricity. However, sale of electricity is not subject to. central sales tax since section 6(1), the charging section, specifically excludes electricity from the levy of central sales tax. 18. (a) Sale [Section 2(g)] : Sale with its grammatical variations and cognate expressions, means any transfer of property in goods by one person to another for cash or deferred payment or for any other valuable consideration, and includes, (i) a transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration;

(ii) a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract; (iii) a delivery of goods on hire-purchase or any system of payment by installments; (iv) a transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration; (v) a supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration; (vi) a supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption

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or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration, but does not include a mortgage or hypothecation of or a charge or pledge on goods. (b) Dealer [Section 2(b)] : The definition of dealer is of great importance since the liability for payment of tax lies upon the dealer. The term dealer means any person who carries on (whether regularly or otherwise) the business of buying, selling, supplying or distributing goods, directly or indirectly, for cash or for deferred payment or for commission, remuneration or other valuable consideration. The term also includes: (i) a local authority, a body corporate, a company, any co-operative society or other society, club, firm, Hindu undivided family or other association of persons which carries on such business;

(ii) a factor, broker, commission agent, del credere agent or any other mercantile agent, by whatever name called, and whether of the same description as herein before mentioned or not, who carries on the business of buying, selling, supplying or distributing goods belonging to any principal whether disclosed or not; and (iii) an auctioneer who carries on the business of selling or auctioning goods belonging to any principal, whether disclosed or not whether the offer of the intending purchaser is accepted by him or by the principal or a nominee of the principal. The following persons or entities are also deemed to be dealers for the purposes of this Act: (1) Every person who acts as an agent, in any State, of a dealer residing outside that State and buys, sells, supplies or distributes, goods in the State or acts on behalf of such dealer as (i) mercantile agent as defined in the Sale of Goods Act, 1930, or (ii) an agent for handling of goods or documents of title relating to goods, or (iii) an agent for the collection or the payment of the sale price of goods or as a guarantor for such collection or payments. (2) Every local branch or office in a State of a firm registered outside that State or a company or other body corporate, the principal office or head quarters whereof is outside that State. (3) A Government which, whether or not in the course of business, buys, sells, supplies or distributes, goods, directly or otherwise, for cash or for deferred payment or for commission, remuneration or other valuable consideration. However, a Government will not be deemed to be a dealer for the purposes of this Act, in relation to any sale, supply or distribution of surplus, unserviceable or old stores or materials or waste products or obsolete or discarded machinery or parts or accessories thereof.

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(c) Goods [Section 2(d)]: The definition of goods in the Act is an inclusive one. Goods has been defined to include all materials, articles or commodities and all kinds of moveable property. The term, however, does not include the following: (i) Newspapers (ii) Actionable claims (iii) Stocks (iv) Shares (v) Securities. 19. Powers of the Central Sales tax Appellate Authority (Section 22) (1) The Authority shall have the same powers as are vested in a court under the Code of Civil Procedure, 1908 while trying a suit in respect of the following matters, namely:(a) enforcing the attendance of any person, examining him on oath or affirmation; (b) compelling the production of accounts and documents; (c) issuing commission for the examination of witnesses; (d) the reception of evidence on affidavits; (e) any other matter which may be prescribed. (2) Sub-section (1A) provides that the Authority may (i) grant stay of the operation of the order of the highest appellate authority against which the appeal is filed before it or

(ii) order the pre-deposit of the tax before entertaining the appeal. (3) While granting such stay or making such order for the pre-deposit of the tax, the Authority shall take into account the pre-deposit, if any, made by the assessee under the general sales tax law of the State concerned or pass such appropriate order as it may deem fit. (4) Every proceeding before the Authority shall be deemed to be a judicial proceeding within the meaning of sections 193 and 228 of the Indian Penal Code and the Authority shall be deemed to be a civil court for the purposes of section 195 and Chapter XXVI of the Code of Criminal Procedure, 1973. 20. Section 6(2) provides that where a sale of any goods in the course of inter-State trade or commerce has either occasioned the movement of such goods from one State to another or has been effected by a transfer of documents of title to such goods during their movement from one State to another, any subsequent sale during such movement effected by a transfer of documents of title to such goods to a registered dealer, if the goods are of the description referred to in sub-section (3) of section 8, shall be exempt from tax.

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However, no such subsequent sale shall be exempt from tax unless the dealer effecting the sale furnishes to the prescribed authority and within the prescribed time or within such further time as that authority may, for sufficient cause, permit,(a) a certificate duly filled and signed by the registered dealer from whom the goods were purchased containing the prescribed particulars in the prescribed form; and (b) if the subsequent sale is made to a registered dealer, a declaration referred to in sub-section (4) of section 8: However, it shall not be necessary to furnish the declaration referred to in clause (b) above in respect of a subsequent sale of goods if,(a) the sale or purchase of such goods is, under the sales tax law of the appropriate State, exempt from tax generally or is subject to tax generally at a rate which is lower than 3% or such reduced rate as may be notified by the Central Government under section 8(1) (whether called a tax or fee or by any other name); and (b) the dealer effecting such subsequent sale proves to the satisfaction of the prescribed authority that such sale is of the nature referred to in this sub-section. IMPORTANT CIRCULARS / NOTIFICATIONS ISSUED BETWEEN 1.5.07 and 30.04.08 I 1. NOTIFICATIONS NOTIFICATION NO. 208 / 2007, DATED 27-6-2007 Rule 6DD of the Income-tax Rules has been substituted. This Rule now provides for cases and circumstances in which payment in a sum exceeding twenty thousand rupees may be made otherwise than by an account payee cheque drawn on a bank or account payee bank draft. As per this rule, no disallowance under clause (a) of sub-section (3) of section 40A shall be made and no payment shall be deemed to be the profits and gains of business or profession under clause (b) of sub-section (3) of section 40A where any payment in a sum exceeding twenty thousand rupees is made otherwise than by an account payee cheque drawn on a bank or account payee bank draft in the cases and circumstances specified hereunder, namely: (a) where the payment is made to (i) the Reserve Bank of India or any banking company; (ii) the State Bank of India or any subsidiary bank; (iii) any co-operative bank or land mortgage bank; (iv) any primary agricultural credit society or any primary credit society; (v) the Life Insurance Corporation of India; (b) where the payment is made to the Government and, under the rules framed by it, such payment is required to be made in legal tender;

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(c) where the payment is made by (i) any letter of credit arrangements through a bank; (ii) a mail or telegraphic transfer through a bank; (iii) a book adjustment from any account in a bank to any other account in that or any other bank; (iv) a bill of exchange made payable only to a bank; (v) the use of electronic clearing system through a bank account; (vi) a credit card; (vii) a debit card. (d) where the payment is made by way of adjustment against the amount of any liability incurred by the payee for any goods supplied or services rendered by the assessee to such payee; (e) where the payment is made for the purchase of (i) agricultural or forest produce; or (ii) the produce of animal husbandry (including livestock, meat, hides and skins) or dairy or poultry farming; or (iii) fish or fish products; or (iv) the products of horticulture or apiculture, to the cultivator, grower or producer of such articles, produce or products; (f) where the payment is made for the purchase of the products manufactured or processed without the aid of power in a cottage industry, to the producer of such products;

(g) where the payment is made in a village or town, which on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such village or town; (h) where any payment is made to an employee of the assessee or the heir of any such employee, on or in connection with the retirement, retrenchment, resignation, discharge or death of such employee, on account of gratuity, retrenchment compensation or similar terminal benefit and the aggregate of such sums payable to the employee or his heir does not exceed fifty thousand rupees; (i) where the payment is made by an assessee by way of salary to his employee after deducting the income-tax from salary in accordance with the provisions of section 192 of the Act, and when such employee (i) is temporarily posted for a continuous period of fifteen days or more in a place other than his normal place of duty or on a ship; and

(ii) does not maintain any account in any bank at such place or ship;

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(j)

where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike;

(k) where the payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person; (l) where the payment is made by an authorised dealer or a money changer against purchase of foreign currency or travellers cheques in the normal course of his business.

2.

NOTIFICATION NO. 213/2007, DATED 3-8-2007 Section 2(48) defining zero coupon bonds requires that such bonds should be notified by the Central Government. Accordingly, the Central Government has, vide Notification No. 213/2007 dated 3.8.2007, specified the 15 year zero coupon bonds of Power Finance Corporation (PFC), to be issued on or before 31.3.2009, as zero coupon bonds for the purposes of section 2(48).

3.

NOTIFICATION NO. 214/2007, DATED 3-8-2007 The Central Government has, vide notification no.214/2007 dated 3.8.2007 specified the cost inflation index for the financial year 2007-08. The CII for F.Y. 2007-08 is 551. S. No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. Financial Year 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 Cost Inflation Index 100 109 116 125 133 140 150 161 172 182 199 223 244 259 281 305 331

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18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 4.

1998-99 1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

351 389 406 426 447 463 480 497 519 551

NOTIFICATION NO. 262/2007, DATED 16-10-2007 Rule 117C has been inserted in the Income-tax Rules, 1962 to empower the Tax Recovery Officer to exercise or perform certain powers and functions of an Assessing Officer. The Chief Commissioner or the Commissioner, by general or special order in writing, may authorise a Tax Recovery Officer to exercise or perform the powers and functions conferred on or assigned to an Assessing Officer under section 154 for rectifying any mistake apparent from record in respect of an order passed by the Assessing Officer consequent to which a sum is payable and the Tax Recovery Officer has drawn a Certificate under section 222 in respect of such sum. The Tax Recovery Officer shall exercise or perform such powers and functions concurrently with the Assessing Officer.

5.

NOTIFICATION NO. 271/2007 DATED 7-11-2007 The Finance Act, 2007 has introduced a deeming provision to define concession in the matter of rent by inserting Explanations to section 17(2)(ii) with retrospective effect from 1.4.2006, that is, with effect from assessment year 2006-07. This has necessitated reduction of rates in case of both rent free and concessional rent accommodations and leased accommodation in Table I of rule 3 with retrospective effect from 1st April, 2006, that is, in relation to assessment year 2006-07 and subsequent years. The amendment has taken place in valuation of perquisite of unfurnished accommodation (rent free and concessional) provided to other than Government employees. Employee Where the accommodation is owned by the employer. Value of perquisite Where accommodation is provided in a city where population as per 2001 census is: (a) 10 lakh or less 7.5% of salary; (b) More than 10 lakh upto 25 lakh -10% of salary.

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(c) More than 25 lakh 15% of salary in respect of the period during which the said accommodation was occupied by the employee during the previous year as reduced by the rent, if any, actually paid by the employee. Where the accommodation is The value of perquisite would be the lower of the taken on lease or rent by the following: employer and provided to the (a) Actual amount of lease rental paid or payable employee by the employer ; or (b) 15% of salary. This value would be reduced by the rent, if any, actually paid by the employee. Further, the Finance Act, 2005 had inserted a new Chapter XII-H in the Act, relating to levy of fringe benefit tax on the employer with effect from 1st April, 2006, i.e., applicable for assessment year 2006-07 and subsequent years. Accordingly, rule 3 was amended vide notification number S.O. 265(E) dated the 28th February, 2005, to avoid double taxation on certain items. Since, Chapter XII-H relating to Fringe Benefit Tax, as provided in the Finance Act, 2005, is not applicable to the employer, being an individual or a Hindu undivided family or any fund or trust or institution eligible for exemption under clause (23C) of section 10 or registered under section 12AA, rule 3 is required to be amended so as to include valuation of perquisite in case of benefits provided by such employers to its employees. Accordingly, sub-rules 2, 6, 7 (ii), (iii), (iv), (v) and (vi) have been inserted to provide for such valuation. Sub-rule 7(ix) has been inserted to provide for valuation of any other benefit or amenity, etc. in residual cases relating to any employer. These sub-rules will take effect from 1st April, 2008 and will, accordingly, apply in relation to A.Y.2008-09 and subsequent years. The following perquisites provided by an employer, who is not liable to pay fringe benefit tax under Chapter-XIIH, shall be chargeable to tax in the hands of the employee under the head Salaries. Motor Car - Rule 3(2) Sl. No. (1) (1) Circumstances Where cubic capacity of engine does not exceed 1.6 litres (3) Where cubic capacity of engine exceeds 1.6 litres (4)

(2) Where the motor car is owned or hired by the

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employer and (a) is used wholly and exclusively in the performance of his official duties; (b) is used exclusively for the private or personal purposes of the employee or any member of his household and the running and maintenance expenses are met or reimbursed by the employer; No value, provided the documents specified in Note 2 below this table are maintained by the employer. Actual amount of expenditure incurred by the employer on the running and maintenance of motor car during the relevant previous year including remuneration, if any, paid by the employer to the chauffeur as increased by the amount representing normal wear and tear of the motor car and as reduced by any amount charged from the employee for such use. No value, provided the documents specified in Note 2 below this table are maintained by the employer. Actual amount of expenditure incurred by the employer on the running and maintenance of motor car during the relevant previous year including remuneration, if any, paid by the employer to the chauffeur as increased by the amount representing normal wear and tear of the motor car and as reduced by any amount charged from the employee for such use.

(c) is used partly in the performance of duties and partly for private or personal purposes of his own or any member of his household and (i) the expenses Rs.1,200 (plus Rs.600, if on maintenance chauffeur is also provided to and running are run the motor car) met or reimbursed by the employer, Rs.400 (plus Rs.600, if chauffeur is provided by the employer to run the motor car) Rs.1,600 (plus Rs.600, if chauffeur is also provided to run the motor car)

(ii) the expenses on running and maintenance for such private or personal use are fully met by

Rs.600 (plus Rs.600, if chauffeur is also provided to run the motor car)

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the assessee. (2) Where the employee owns a motor car but the actual running and maintenance charges (including remuneration of the chauffeur, if any) are met or reimbursed to him by the employer and (i) such reimbursement is for the use of the vehicle wholly and exclusively for official purposes, such reimbursement is for the use of the vehicle partly for official purposes and partly for personal or private purposes of the employee or any member of his household. No value, provided that the documents specified in Note 2 below this table are maintained by the employer. No value, provided that the documents specified in Note 2 below this table are maintained by the employer. The actual amount of expenditure incurred by the employer as reduced by Rs.1,600 (plus Rs.600, if chauffeur is also provided to run the motor car). However, the documents specified in Note 2 below this table should be maintained by the employer.

(ii)

The actual amount of expenditure incurred by the employer as reduced by Rs.1,200 (plus Rs.600, if chauffeur is also provided to run the motor car). However, the documents specified in Note 2 below this table should be maintained by the employer.

(3)

Where the employee owns any other automotive conveyance but the actual running and maintenance charges are met or reimbursed to him by the employer and (i) such reimbursement is for the use of the vehicle wholly and exclusively for official purposes, such reimbursement No value, provided that the Not applicable documents specified in Note 2 below this table are maintained by the employer. The actual amount of

(ii)

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is for the use of the vehicle partly for official purposes and partly for personal or private purposes of the employee. Note -

expenditure incurred by the employer as reduced by an amount of Rs.600, provided the documents specified in Note 2 below this table are maintained by the employer.

(1) Where one or more motor-cars are owned or hired by the employer and the employee or any member of his household are allowed the use of such motor-car or all or any of such motor-cars (otherwise than wholly and exclusively in the performance of his duties), the value of perquisite shall be the amount calculated in respect of one car in accordance with Sl. No. (1)(c)(i) of the above Table as if the employee had been provided one motor-car for use partly in the performance of his duties and partly for his private or personal purposes and the amount calculated in respect of the other car or cars in accordance with Sl. No. (1)(b) of the above Table as if he had been provided with such car or cars exclusively for his private or personal purposes. (2) Where the employer or the employee claims that the motor-car is used wholly and exclusively in the performance of official duty or that the actual expenses on the running and maintenance of the motor-car owned by the employee for official purposes is more than the amounts deductible in Sl. No. 2(ii) or 3(ii) of the above Table, he may claim a higher amount attributable to such official use and the value of perquisite in such a case shall be the actual amount of charges met or reimbursed by the employer as reduced by such higher amount attributable to official use of the vehicle provided that the following conditions are fulfilled: (a) the employer has maintained complete details of journey undertaken for official purpose which may include date of journey, destination, mileage, and the amount of expenditure incurred thereon; (b) the employer gives a certificate to the effect that the expenditure was incurred wholly and exclusively for the performance of official duties. (3) The normal wear and tear of a motor-car shall be taken at 10 per cent per annum of the actual cost of the motor-car or cars. Free or concessional tickets [Sub-rule (6) of Rule 3] The value of any benefit or amenity resulting from the provision by an employer (who is not liable to pay FBT) engaged in the carriage of passengers or goods to any employee or to any member of his household for personal or private journey free of cost or concessional fare in any conveyance owned, leased or made available by any other arrangement shall be the value at which such benefit or amenity is offered by such employer to the public. Any amount recovered from the employee for such benefit or

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amenity shall be reduced in determining the value of the perquisite. However, this subrule shall not apply to the employees of an airline or the railways. Travelling, touring and accommodation [Sub-rule 7(ii) of Rule 3] The value of travelling, touring, stay and other expenses borne by the employer for any holiday availed by the employee or any member of his household shall be the amount of the expenditure incurred by the employer. This provision applies in respect of trips other than those which are exempt under section 10(5) read with Rule 2B. If the facility is maintained by the employer and it is not available uniformly to all employees, the value of benefit shall be taken to be the value at which such facilities are offered by other agencies to the public. Where the employee is on official tour and the expenses are incurred in respect of any member of his household accompanying him, the amount of expenditure so incurred shall also be a fringe benefit or amenity. However, if the official tour is extended as a vacation, the value of such fringe benefit will be limited to the expenses incurred in relation to such extended period of stay or vacation. The amount so determined shall be reduced by the amount, if any, paid or recovered from the employee for such benefit or amenity. Free or concessional food and non-alcoholic beverages [Sub-rule 7(iii) of Rule 3] The value of free food and non-alcoholic beverages provided by the employer shall be the amount of expenditure incurred by the employer as reduced by the amount, if any, paid or recovered from the employee for such benefit or amenity. However, the following shall not be chargeable as perquisites: (a) Free food and non-alcoholic beverages provided by the employer during the working hours at office or business premises up to Rs.50 per meal; (b) Free food and non-alcoholic beverages provided through paid vouchers which are not transferable and usable only at eating joints if the value thereof is up to Rs.50 per meal; (c) Tea or snacks provided during working hours; and (d) Free food and non-alcoholic beverages during working hours provided in a remote area or an offshore installation. Value of gift, voucher or token in lieu of such gift [Sub-rule 7(iv) of Rule 3] The value of any gift, or voucher or token in lieu of which such gift may be received by the employee or by member of his household on ceremonial occasions or otherwise from the employer shall be the sum equal to the amount of such gift. If the value of such gift, voucher or token is below Rs. 5,000 in the aggregate during the previous year, the value of perquisite shall be taken as nil. Credit card expenses [Sub-rule 7(v) of Rule 3] The amount of expenses including membership fees and annual fees incurred by the employee or any member of his household which is charged to a credit card (including add-on-card) provided by the employer or otherwise, paid for or reimbursed by the

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employer shall be taken to be the value of perquisite chargeable to tax. The amount so determined shall be reduced by the amount, if any, paid or recovered from the employee for such benefit or amenity. However, such expenses incurred wholly and exclusively for official purposes would not be treated as a perquisite if the following conditions are satisfied: (a) complete details in respect of such expenditure are maintained by the employer which may, inter alia, include the date of expenditure and the nature of expenditure; (b) the employer gives the certificate for such expenditure to the effect that the same was incurred wholly and exclusively for the performance of official duties; Club expenditure [Sub-rule 7(vi) of Rule 3] If employer reimburses or makes payment of any expenditure incurred in a club including the amount of annual or periodical fee for the employee or any member of household, the actual amount of such expenditure shall be the value of perquisite. The amount so determined shall be reduced by the amount, if any, paid or recovered from the employee for such benefit or amenity. Where the employer has obtained corporate membership of the club and the facility is enjoyed by the employee or any member of his household, the value of perquisite shall not include the initial fee paid for acquiring such corporate membership. If the employer provides uniformly to all employees the use of health club, sports and similar facilities, there will be no taxable perquisite in respect of such facilities. Besides, there will be no taxable perquisite if the club expenditure is incurred wholly and exclusively for business purposes and the following conditions are fulfilled: (a) complete details in respect of such expenditure are maintained by the employer which may, inter alia, include the date of expenditure and the nature of expenditure and its business expediency; (b) the employer gives a certificate for such expenditure to the effect that the same was incurred wholly and exclusively for the performance of official duties. Other benefit or amenity [Sub-rule 7(ix) of Rule 3] The value of any other benefit or amenity, service, right or privilege provided by the employer shall be determined on the basis of cost to the employer under an arms' length transaction as reduced by the employee's contribution, if any. However, there will be no taxable perquisite in respect of expenses on telephones including mobile phone actually incurred on behalf of the employee by the employer i.e., if an employer pays or reimburses telephone bills or mobile phone charges of employee, there will be no taxable perquisite. 6. NOTIFICATION NO. 281/2007, DATED 27-11-2007 The Finance Act, 2007 inserted a new section 80-ID in the Income-tax Act, 1961 to provide for a 100% deduction of the profits and gains derived by an undertaking from the

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business of operating a hotel or from the business of building, owning and operating a convention centre in a specified area subject to the conditions prescribed therein. Clause (a) of sub-section (6) of section 80-ID of the said Act defines a 'convention centre' as a building of prescribed area and having such other facilities as may be prescribed. Accordingly, a new rule 18DE and a new form 10CCBBA have been inserted in the Income-tax Rules for this purpose. Rule 18DE prescribes the following conditions to be fulfilled in order to avail deduction under section 80-ID: (a) the convention centre shall have a minimum covered plinth area of 25,000 sq. mts; (b) it shall have minimum of 3,000 seating capacity; (c) there shall be minimum of 10 convention halls; (d) the convention centre shall have convention halls, whether called conference halls or seminar halls or auditorium for holding seminars and conferences; (e) each convention hall of the convention centre shall be equipped with modern public address system, slide and power-point projection system and LCD projector or video screening facility; (f) the convention centre shall have a documentation centre with computers and printers, telephone with STD or ISD facilities, e-mail, photocopy and scanning facility along with trained operators to provide these facilities;

(g) the convention centre shall be completely centrally air-conditioned; (h) the convention centre shall have adequate parking facility and other public convenience as per local building regulations and should also fulfill all local building regulations in respect of fire and safety. In addition to the above facilities, the convention centers may have the following: (a) an amphitheatre and landscaped open spaces for outdoor conference or seminar related activities; (b) a kitchen, dining facility, cafeteria or restaurant only to support events in the convention centre. The new rule 18DE and the new form 10CCBBA will take effect from 1st April, 2008 and will, accordingly, apply in relation to A.Y.2008-09 and subsequent years. 7. NOTIFICATION NO. 2/2008, DATED 8-1-2008 The CBDT has substituted the existing Rule 18C with new Rule 18C, which lays down the following eligibility criteria for Industrial Parks to claim benefit under section 80-IA (4)(iii) (1) The undertaking should begin to develop, develop and operate or maintain and operate an industrial park any time during the period from 1.4.2006 to 31.3.2009.

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(2) The undertaking and the Industrial Park should be notified by the Central Government under the Industrial Park Scheme, 2008. (3) The undertaking should continue to fulfill the conditions envisaged in the Industrial Park Scheme, 2008. 8. NOTIFICATION NO. 6/2008, DATED 14-1-2008 Section 10(15)(vii) exempts interest on bonds issued by a local authority or by a State Pooled Finance Entity and notified by the Central Government in the Official Gazette. Accordingly, the Central Government has specified the Tax-free Pooled Finance Development Bonds under Pooled Finance Development Fund Scheme of Government of India, interest from which would be exempt under section 10(15)(vii). 9. NOTIFICATION NO. 7/2008, DATED 15-1-2008 As per section 10(39), any specified income arising from any notified international sporting event held in India, to the person or persons notified by the Central Government in the Official Gazette, is exempt from tax. Accordingly, in exercise of the powers conferred by section 10(39), the Central Government has notified the following: (a) the Commonwealth Games Federation, London, United Kingdom as the person, (b) the Commonwealth Games 2010 to be held in India, as the international sporting event, (c) the income arising to Commonwealth Games Federation from Commonwealth Games 2010 on account of Host Fee, received or receivable from the Organising Committee Commonwealth Games 2010 Delhi, India amounting to 7.3 million GBP, as the specified income, for the purposes of exemption under section 10(39). 10. NOTIFICATION NO. 20/2008, DATED 5-2-2008 The CBDT has inserted new Rule 14B, which lays down the guidelines for the purposes of determining expenses for audit under section 142(2A). The said notification is applicable when the audit under section 142(2A) is directed by an Assessing Officer on or after 1st June, 2007. The expenses of, and incidental to, audit (including the remuneration of the accountant, qualified assistants, semi-qualified and other assistants who may be engaged by such Accountant) should not be less than Rs.3750 and not more than Rs.7500 for every hour of the period as specified by the Assessing Officer under section 142(2C). Such period shall be specified in terms of the number of hours required for completing the report. 11. NOTIFICATION NO. 21/2008, DATED 5-2-2008 Section 36(1)(xii) provides that deduction shall be allowed in respect of any expenditure (not being a capital expenditure) incurred by a corporation or a body corporate, by whatever name called, if such corporation or a body corporate is, inter alia, notified by the Central Government in the Official Gazette. Accordingly, the Central Government has

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notified the Oil Industry Development Board for the purpose of deduction under section 36(1)(xii), w.e.f. A.Y.2008-09. 12. NOTIFICATION NO. 23/2008, DATED 6-2-2008 Section 2(48) defining zero coupon bonds requires that such bonds should be notified by the Central Government. Accordingly, the Central Government has, vide this Notification, specified the 10 year zero coupon bonds of National Housing Bank (NHB), to be issued on or before 31.3.2009, as zero coupon bonds for the purposes of section 2(48). 13. NOTIFICATION NO. 34/2008, DATED 13-3-2008 The CBDT has inserted a new Rule 125 which has made electronic payment of taxes (including interest and penalty) by corporate assessees and assessees subject to tax audit mandatory on or after 1 st April 2008. Electronic payment of taxes means payment of taxes by way of internet banking facility or credit or debit cards. 14. NOTIFICATION NO. 45/2008, DATED 24-3-2008 The CBDT has inserted a new Rule 8D which lays down the method for determining amount of expenditure in relation to income not includible in total income. If the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with (a) the correctness of the claim of expenditure by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred in relation to exempt income for such previous year, he shall determine the amount of expenditure in relation to such income in the manner provided hereunder The expenditure in relation to income not forming part of total income shall be the aggregate of the following: (i) the amount of expenditure directly relating to income which does not form part of total income;

(ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely :
A B C

Where, A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year; B = the average of value of investment, income from which does not or shall not

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form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; C = the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; (iii) an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year. 15. NOTIFICATION NO. S.O. 752(E), DATED 28-3-2008 The CBDT has notified income-tax return forms for the A.Y. 2008-09. In Appendix II, Form ITR-1, Form ITR-2, Form ITR-3, Form ITR-4, Form ITR-5, Form ITR-6, Form ITR-7 and Form ITR-8 have been substituted by new forms. S. No. 1 2 3 4 5 6 7 8 II 1. CIRCULARS CIRCULAR NO.4/2007 DATED 15.6.2007 This Circular provides the tests for distinction between shares held as stock-in-trade and shares held as investment. The Income Tax Act, 1961 makes a distinction between a capital asset and a trading asset. Capital asset is defined in section 2(14). Long-term capital assets and gains are dealt with under section 2(29A) and section 2(29B). Short-term capital assets and gains are dealt with under section 2(42A) and section 2(42B). Trading asset is dealt with under section 28. Form No. ITR-1 ITR-2 ITR-3 ITR-4 ITR-5 ITR-6 ITR-7 ITR-8 Description For Individuals having income from Salary & Interest For Individuals & HUFs not having Income from Business or Profession For Individuals/HUFs being partners in firms and not carrying out business or profession under any proprietorship For Individuals & HUFs having income from a proprietory business or profession For firms, AOPs and BOIs For Companies other than companies claiming exemption under section 11 For persons including companies required to furnish return under section 139(4A) or section 139(4B) or section 13(4C) or section 139(4D). (Not available for e-Filing) Return of Fringe Benefits

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The Central Board of Direct Taxes (CBDT) had, through Instruction No.1827 dated August 31, 1989, brought to the notice of the Assessing Officers that there is a distinction between shares held as investment (capital asset) and shares held as stock-in-trade (trading asset). In the light of a number of judicial decisions pronounced after the issue of the above instructions, the same have been further updated for the information of assessees as well as for guidance of the Assessing Officers. (1) The Supreme Court, in, CIT (Central), Calcutta vs Associated Industrial Development Company (P) Ltd 82 ITR 586, observed that: Whether a particular holding of shares is by way of investment or forms part of the stock-in-trade is a matter which is within the knowledge of the assessee who holds the shares and it should, in normal circumstances, be in a position to produce evidence from its records as to whether it has maintained any distinction between those shares which are its stock-in-trade and those which are held by way of investment. (2) In the case of CIT, Bombay vs H. Holck Larsen 160 ITR 67, the Supreme Court observed that: The High Court, in our opinion, made a mistake in observing whether transactions of sale and purchase of shares were trading transactions or whether these were in the nature of investment was a question of law. This was a mixed question of law and fact. (3) The Authority for Advance Rulings (AAR) 288 ITR 641, referring to the decisions of the Supreme Court in several cases, has culled out the following principles :(i) where a company purchases and sells shares, it must be shown that they were held as stock-in-trade and that existence of the power to purchase and sell shares in the memorandum of association is not decisive of the nature of transaction;

(ii) the substantial nature of transactions, the manner of maintaining books of accounts, the magnitude of purchases and sales and the ratio between purchases and sales and the holding would furnish a good guide to determine the nature of transactions; (iii) ordinarily the purchase and sale of shares with the motive of earning a profit, would result in the transaction being in the nature of trade/adventure in the nature of trade; but where the object of the investment in shares of a company is to derive income by way of dividend etc. then the profits accruing by change in such investment (by sale of shares) will yield capital gain and not revenue receipt. It is possible for a tax payer to have two portfolios, i.e., an investment portfolio comprising of securities which are to be treated as capital assets and a trading portfolio comprising of stock-in-trade which are to be treated as trading assets. Where an

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assessee has two portfolios, the assessee may have income under both heads i.e., capital gains as well as business income. The above principles would help in determining whether, in a given case, the shares are held by the assessee as investment (and therefore giving rise to capital gains) or as stock-in-trade (and therefore giving rise to business profits). It is to be noted that no single principle would be decisive and the total effect of all the principles should be considered to determine whether, in a given case, the shares are held by the assessee as investment or stock-in-trade. 2. CIRCULAR NO. 6/2007, DATED 11-10-2007 This Circular is to clarify the issue of allowability of the claim of harvesting and transportation expenses incurred by the Co-operative sugar mills for procuring sugarcane from farmers, who are members of such Co-operative Sugar Mills and who are bound under an agreement to supply the sugarcane exclusively to the concerned sugar Mill. The issue of allowability of such expenses in the case of Co-operative Sugar Mills has been examined by the CBDT. These expenses are incurred by the Sugar Mills for ensuring an adequate and sustained supply of freshly cut sugarcane that is an essential input for the continuous running of such Mills. These expenses are, therefore, incurred for commercial expediency and are prima facie wholly and exclusively for the purpose of business. Such expenses are, therefore, allowable in the computation of the income of the Co-operative Sugar Mills. 3. CIRCULAR NO. 2/2008, DATED 22-2-2008 Securities and Exchange Board of India (SEBI) vide Circular No. MRD/DoP/SE/DEP/Cir. 14/2007, dated 20-12-2007, has decided to permit all classes of investors (individuals, institutional, etc.) to short sell. Further, with a view to provide a mechanism for borrowing of securities to enable settlement of securities sold short, SEBI has also decided to put in place a full-fledged Securities Lending and Borrowing (SLB) Scheme for all market participants in the Indian securities market under the overall framework of Securities Lending Scheme, 1997 of SEBI. In this context, the following taxation issues have arisen in respect of transactions under the scheme of securities lending (i) Would the lending/borrowing of securities under the Securities Lending Scheme amount to a transfer under section 2(47) in the hands of the lender?

(ii) Would lending/borrowing of the securities be subject to Securities Transaction Tax (STT)? The Lending and Borrowing of Securities under the new scheme notified by SEBI vide Circular No. MRD/DoP/SE/DEP/Cir.14/2007, dated 20-12-2007 is in accordance with the overall framework of the Securities Lending Scheme of 1997. Accordingly, the provisions of section 47(xv) will be equally applicable in respect of the transactions under the new scheme.

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Securities Transaction Tax (STT) is levied on purchase or sale of an equity share, unit and derivative, under such circumstances as specified in section 98 of the Finance (No. 2) Act, 2004. The transactions in the nature of lending and borrowing under the new scheme do not fall within the scope of section 98 to the Finance (No.2) Act, 2004. Therefore, the transactions of lending and borrowing are not liable to Securities Transaction Tax (STT).

RECENT AMENDMENTS IN INCOME TAX AND CENTRAL SALES TAX Students are advised to study thoroughly the Supplementary Study Paper-2006 and Supplementary Study Paper-2007 on Income-tax and Central Sales-tax for the PE-II Course. The Supplementary Study Paper-2006 contains the amendments made by the Finance Act, 2006 as well as the important notifications/circulars/other legislative amendments between 1.5.05 and 30.4.06. The Supplementary Study Paper-2007 contains the amendments made by the Finance Act, 2007 as well as the important notifications/circulars/other legislative amendments between 1.5.06 and 30.4.07. These Supplementary Study Papers are available at the branches and regional sales counters of the Institute. They have also been hosted on the website of the Institute [http://www.icai.org/post.html?post-id=911]. This RTP contains the significant amendments made between 1.5.07 and 30.04.08 through notifications and circulars. It is very important to have good knowledge of the latest amendments since considerable weightage is being given to the latest amendments in the examinations.