Residential Status for Income Tax – Individuals & Residents

It is important for Income Tax Department to determine the residential status of a

tax paying individual or company. It becomes particularly relevant during the tax
filing season. In fact, this is one of the factors based on which a person’s taxability
is decided. Let us explore the residential status and taxability in detail.

Meaning and importance of residential status

The taxability of an individual in India depends upon his residential status in India
for any particular financial year. The term residential status has been coined under
the income tax laws of India and must not be confused with an individual’s
citizenship in India. An individual may be a citizen of India but may end up being
a non-resident for a particular year. Similarly, a foreign citizen may end up being a
resident of India for income tax purposes for a particular year.
Also to note that the residential status of different types of persons viz an
individual, a firm, a company etc is determined differently. In this article, we have
discussed about how the residential status of an individual taxpayer can be
determined for any particular financial year

How to determine residential status?

For the purpose of income tax in India, the income tax laws in India classifies
taxable persons as:
a. A resident
b. A resident not ordinarily resident (RNOR)
c. A non-resident (NR)
The taxability differs for each of the above categories of taxpayers. Before we get
into taxability, let us first understand how a taxpayer becomes a resident, an RNOR
or an NR.

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Resident
A taxpayer would qualify as a resident of India if he satisfies one of the following
2 conditions :
1. Stay in India for a year is 182 days or more or
2. Stay in India for the immediately 4 preceding years is 365 days or more and 60
days or more in the relevant financial year
In the event an individual leaves India for employment during an FY, he will
qualify as a resident of India only if he stays in India for 182 days or more. This
otherwise means, condition (b) above of 60 days would not apply to him

Resident Not Ordinarily Resident

If an individual qualifies as a resident, the next step is to determine if he/she is a
Resident ordinarily resident (ROR) or an RNOR. He will be a ROR if he meets
both of the following conditions:
1. Has been a resident of India in at least 2 out of 10 years immediately previous
years and
2. Has stayed in India for at least 730 days in 7 immediately preceding years
Therefore, if any individual fails to satisfy even one of the above conditions, he
would be an RNOR.

Non-resident
An individual satisfying neither of the conditions stated in (a) or (b) above would
be an NR for the year.

Taxability
Resident: A resident will be charged to tax in India on his global income i.e.
income earned in India as well as income earned outside India.
NR and RNOR: Their tax liability in India is restricted to the income they earn in
India. They need not pay any tax in India on their foreign income.
Also note that in a case of double taxation of income where the same income is
getting taxed in India as well as abroad, one may resort to the Double Taxation
Avoidance Agreement (DTAA) that India would have entered into with the other
country in order to eliminate the possibility of paying taxes twice.

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 Tax Planning
Tax planning is the analysis of a financial situation or plan from a tax perspective.
The purpose of tax planning is to ensure tax efficiency. Through tax planning, all
elements of the financial plan work together in the most tax-efficient manner
possible. Tax planning is an essential part of a financial plan. Reduction of tax
liability and maximizing the ability to contribute to retirement plans are crucial for
success.

Objectives of Tax Planning

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 Reduction of Tax Liability:
An assessee can save the maximum amount of tax, by properly arranging
his/her operations as per the requirements of the law, within the framework of
the statute.ss
 Minimization of Litigation:
There is a war-like situation between the taxpayers and tax collectors as the
former wants the tax liability to be minimum while the latter attempts to extract
the maximum. So, a proper tax planning aims at conforming to the provisions of
the tax law, in such a way that incidence of litigation is minimized.
 Productive Investment:
One of the major objective of tax planning is channelisation of taxable income
to different investment plans. It aims at the optimum utilization of resources for
productive causes and relieving the assessee from tax liability.
 Healthy Growth of Economy
The growth and development of the economy greatly depend on the growth of
its citizens. Tax planning measures involve generating white money that flows
freely and results in the sound progress of the economy.
 Economic Stability:
Proper tax planning brings economic stability by various techniques such as
mobilizing resources for national projects or availing ways for investments
which are productive in nature.
Tax Planning follows an honest approach, to achieve maximum benefits of tax
laws, by applying the script and moral of law. Therefore the objectives do not in
any way contradict the concept of tax laws.

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 Types of Tax Planning

1. . Short-range and long-range Tax Planning:

The tax planning which is made every year to arrive at specific or limited
objectives, is called short-range tax planning. Conversely, long-range tax planning
alludes to such practices undertaken by the assessee which are not paid off
immediately.

2. Permissive Tax Planning:

Tax planning, wherein the planning is made as per expressed provision of the
taxation laws is termed as permissive tax planning.

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3. Purposive Tax Planning:

Purposive tax planning refers to the tax planning method which misleads the law.
Under this type, there is no expressed provision of the statute.

Tax planning means intelligently applying tax provisions to manage an

individual’s affairs, in order to avail the tax benefits based on the national
priorities, in accordance with the interest of general public and government

TAX MANAGEMENT IN LOCATION OF THE NEW BUSINESS

1. Sec. [ 10A] : Tax Holiday for newly established undertaking in Free Trade
Zone:

First 5 Years – 100 % of profits and gains is allowed as deduction

Next 2 Years : 50% of such Profit and Gains is deductible for further 2 assessment
years.

Next 3 Years : for the next three consecutive assessment years, so much of the
amount not exceeding 50% of the profit as is debited to the profit and loss account
year in respect of which the deduction is to be allowed and credited to a reserve
account (to be called the ''Special Economic Zone Re-investment Allowance
Reserve Account'') to be created and utilised for the purposes of the business of the
assessee

2. Sec. [ 80IA] : an [undertaking] which,—

(a) is set up in any part of India for the generation or generation and distribution of
power if it begins to generate power at any time during the period beginning on the
1st day of April, 1993 and ending on the 31st day of March, 2010;

(b) starts transmission or distribution by laying a network of new transmission or

distribution lines at any time during the period beginning on the 1st day of April,
1999 and ending on the 31st day of March, 2010.

(c) undertakes substantial renovation and modernisation of the existing network of

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transmission or distribution lines at any time during the period beginning on the
1st day of April, 2004 and ending on the 31st day of March, 2010.

Deductions allowed is 100% or 30% of profits from such eligible business

3. Sec. [80IB] : Deduction in respect of Profits of Industrial

Undertaking located in backward State or District. Deduction allowed is either
100% and /or 30% for 10 years depending upon case to case.

4. Sec. [80IB(11B)] : The amount of deduction in the case of an undertaking

deriving profits from the business of operating and maintaining a hospital in a rural
area shall be 100% of the profits and gains of such business for a period of five
(5) consecutive assessment years, beginning with the initial assessment year.

5. Sec. [ 80IC] : Profits from Industrial Undertaking located in the

specified States,. States are State of Jammu & Kashmir, Himachala Pradesh,
Uuttaranchal and North Eastern States. Deduction allowed is 100% of such profit.

6. Sec.[ 80 LA] : Where the gross total income of an assessee,—

(i) being a scheduled bank, or, any bank incorporated by or under the laws of a
country outside India; and having an Offshore Banking Unit in a Special Economic
Zone; or

(ii) being a Unit of an International Financial Services Centre , there shall be

allowed a deduction from such income, of an amount equal to— 100% of such
income for five consecutive assessment years beginning with the assessment year.

TAX MANAGEMENT IN NATURE OF THE NEW BUSINESS

1. Sec. [ 10(1) ] : Agricultural Income– fully exempted (100%.

2. Sec. [10(23FB)] : Dividend or Long-Term Capital Gain ( LTCG) accruing to
Venture Capital or a Venture Company – 100% tax exempted.
―venture capital company‖ means such company—
(i) which has been granted a certificate of registration under the Securities and
Exchange Board of India Act, 1992

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 ―venture capital fund‖ means such fund—
(i) operating under a trust deed registered under the provisions of the
Registration Act, 1908 or operating as a venture capital scheme
made by the Unit Trust of India established under the Unit Trust of
India Act, 1963;
(ii) which has been granted a certificate of registration under the Securities
and Exchange Board of India Act, 1992 .
3. Sec. [ 33 AB) ] : Tea Development Account, Coffee Development Account and
Rubber Development Account : Where an assessee carrying on business of
growing and manufacturing tea or coffee or rubber in India has, before the expiry
of six months from the end of the previous year or before the due date of
furnishing the return of his income, whichever is earlier,— deposited with the
National Bank any amount or amounts in an account the assessee shall be allowed
a deduction of—
(a) a sum equal to the amount or the aggregate of the amounts so deposited ; or
(b) a sum equal to 40% [forty] per cent of the profits of such business (computed
under the head ―Profits and gains of business or profession‖ before making any
deduction under this section), whichever is less :
4. Sec. [ 35 D ] : Amortization of Certain Preliminary Expenses : Where an
assessee, being an Indian company or a person (other than a company) who is
resident in India, incurs, after the 31st day of March, 1970, any expenditure
specified in sub-section (2),—
(i) before the commencement of his business, or
(ii) after the commencement of his business, in connection with the extension of
his [industrial] undertaking or in connection with his setting up a new [industrial]
unit, the assessee shall be allowed a deduction of an amount equal to one-tenth
(1/10 th. ) of such expenditure for each of the ten successive previous years
beginning with the previous year in which the business commences or the new
[industrial] unit commences production or operation :
5. Sec. [ 35 E ] : Profits from Prospecting Certain Minerals : Where an assessee,
being an Indian company or a person (other than a company) who is resident in
India, is engaged in any operations relating to prospecting for, or extraction or
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production of, any mineral and incurs, after the 31st day of March, 1970, any the
assessee shall be allowed for each one of the relevant previous years a deduction of
an amount equal to one-tenth (1/10) of the amount of such expenditure.
6. Sec. [ 35 ABB ] : Expenditure for obtaining licence to operate
telecommunication services : In respect of any expenditure, being in the nature of
capital expenditure, incurred for acquiring any right to operate telecommunication
services and for which payment has actually been made to obtain a licence, there
shall be allowed a deduction equal to the appropriate fraction of the amount of
such expenditure.
7. Sec. [ 36(1)(viii) ] : Special Reserve Created by Financial Corporation : in
respect of any special reserve created and maintained by a specified entity, an
amount not exceeding 20% of the profits derived from eligible business computed
under the head ―Profits and gains of business or profession‖ (before making any
deduction under this clause) carried to such reserve account: Provided that where
the aggregate of the amounts carried to such reserve account from time to time
exceeds twice the amount of the paid up share capital and of the general reserves of
the specified entity, no allowance under this clause shall be made in respect of such
excess.
8. Sec. [ 42 ] : Special provision for deductions in the case of business for
prospecting, etc., for mineral oil : For the purpose of computing the profits or gains
of any business consisting of the prospecting for or extraction or production of
mineral, there shall be made in lieu of, or in addition to, the allowances admissible
under this Act
9. Sec. [ 44BB ] : Special provision for computing profits and gains in connection
with the business of exploration, etc., of mineral oils : If an assessee engaged in the
business of providing services or facilities inconnection with, or supplying plant
and machinery on hire used in the prospecting for, or extraction or production of,
mineral oils, then 10% of the aggregate of the amounts shall be deemed to be the
profits and gains of such business chargeable to tax under the head ―Profits and
gains of business or profession‖
10. Sec. [ 44 AD ] : Special provision for computing profits and gains of business
of civil construction, etc. : in the case of an assessee engaged in the business of
civil construction or supply of labour for civil construction, a sum equal to 8% of

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the gross receipts paid or payable to the assessee in the previous year on account of
such business or, as the case may be, a sum higher than the aforesaid sum as
declared by the assessee in his return of income, shall be deemed to be the profits
and gains of such business chargeable to tax under the head "Profits and gains of
business or profession":
11. Sec. [ 44 AE ] : Special provision for computing profits and gains of business
of plying, hiring or leasing goods carriages : If an assessee engaged in the business
of plying, hiring or leasing such goods carriages and who owns not more than 10
goods carriages and, the income of such business chargeable to tax under the head
"Profits and gains of business or profession" shall be deemed to be the aggregate of
the profits and gains, computed as follows :
(i) An amount equal to Rs.3,500 [three thousand five hundred rupees] for every
month or part of a month for a heavy goods vehicle.
(ii) An amount equal to Rs. 3,150 ) [three thousand one hundred and fifty rupees]
for every month or part of a month for other than a heavy goods vehicle.
12. Sec. [ 44 AF ] : Special provisions for computing profits and gains of retail
business : If the assessee engaged in retail trade in any goods or merchandise, a
sum equal to 5% (five per cent ) of the total turnover shall be deemed to be the
profits and gains of such business chargeable to tax under the head ―Profits and
gains of business or profession‖.
13 Sec. [ 44B ] : Special provision for computing profits and gains of shipping
business in the case of non-residents. : in the case of an assessee, being a non-
resident, engaged in the business of operation of ships, a sum equal to 7½ % (seven
and a half per cent ) of the aggregate of the amounts shall be deemed to be the
profits and gains of such business chargeable to tax under the head ―Profits and
gains of business or profession‖.
14 Sec. [ 44 BBA ] : Special provision for computing profits and gains of the
business of operation of aircraft in the case of non-residents : in the case of an
assessee, being a nonresident, engaged in the business ofoperation of aircraft, a
sum equal to 5% ( five per cent ) of the aggregate of the amounts shall be deemed
to be the profits and gains of such business chargeable to tax under the head
―Profits and gains of business or profession‖.

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15 Sec. [ 44 BBB ] : Special provision for computing profits and gains of foreign
companies engaged in the business of civil construction, etc., in certain turnkey
power projects : in the case of an assessee, being a foreign company, engaged in
the business of civil construction or the business of erection of plant or machinery
or testing or commissioning thereof, in connection with a turnkey power project
approved by the Central Government, a sum equal to (10%) ten per cent of the
amount paid or payable (whether in or out of India) to the said assessee or to any
person on his behalf on account of such civil construction, erection, testing or
commissioning shall be deemed to be the profits and gains of such business
chargeable to tax under the head ―Profits and gains of business or profession‖.
16 Sec. [ 44 D ] : Special provisions for computing income by way of royalties,
etc., in the case of foreign companies : in the case of an assessee, being a foreign
company,— (a) the deductions admissible under the said sections in computing the
income by way of royalty or fees for technical services received shall not exceed in
the aggregate 20% (twenty per cent) of the gross amount of such royalty or fees ;
(b) no deduction in respect of any expenditure or allowance shall be allowed under
any of the said sections in computing the income by way of royalty or fees for
technical services received.
17. Sec. [ 80 IA ] : Deductions in respect of profits and gains from industrial
undertakings or enterprises engaged in infrastructure development, etc. :
Deductions allowed is 100% or 30% of profits from such eligible business. The
profits from such business shall be computed as if such eligible business were the
only source of income of the assessee .

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Tax Management With Reference To Capital Structure
CAPITAL STRUCTURE DECISIONS
What is the Optimum Capital Structure : The optimum capital structure is a mix
of equity capital and debt funds. Their composition depends upon many factors
namely :
1. Cost of Capital and also expenditure incurred in raising of such capital.
2. Expectation of shareholders by way of dividend, growth etc.
3. Expansion need of the business i.e. the rate by which profits of the business
shall be again ploughed back in the business.
4. Taxation policy ; and
5. Rate of return on investment ( Equity + Debt funds ).

TAX CONSIDERATIONS
1. Interest on debt fund is allowed as deduction as it is a business expenditure.
Therefore, it may increase the rate of return on owner’s equity.
2. Dividend on equity fund is not allowed as deduction as it is the appropriate
of profit. Dividend is exempt in the hands of shareholders u/s 10(34) .
However, the company declaring the dividend shall pay dividend
distribution tax @ 12.5% + surcharges + education cess.
3. The Cost raising owner’s fund is treated as capital expenditure therefore not
allowed as deduction. However if conditions of Sec. 35D is satisfied then
specified expenditures can be amortized.
4. The Cost of raising dent fund is treaded as revenue expenditure. It can be
claimed as deduction in computing the total income.
5. Where the assesses is entitled to incentives u/s 10A etc. maximum equity
fund should be utilized.
6. Where interest on debt fund is payable outside India, tax should be deducted
at source otherwise deduction is not allowed.

TAX PLANNING
1. If the return on investment > rate of interest , maximum debt funds may be
used, since is shall increase the rate of return on equity . However, cost of
raising debt fund should be kept in mind.
2. if rate of return on investment < rate of interest, minimum debt funds should
be used.
3. Where assessee enjoys tax holidays under various provisions of Income-Tax
in such case minimum debt fund should be used, since the profit arising
from business is fully exempt from tax which increase the rate of return of

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 equity capital. But the borrowed funds reduces the profits ( profits less
interest) before tax and to the extent exemption is reduce.

The balance of capital structure shall depend upon maximizing the return on
capital employed which is computed by using following formula :
Distributable Profit
_________________________ X 100
Equity Capital

WHAT IS Tax Differential View Of Dividend Policy

The tax differential view of dividend policy is the belief that shareholders prefer
equity appreciation to dividends because capital gains are effectively taxed at
lower rates than dividends when the investment time horizon and other factors are
considered. Corporations that adopt this viewpoint generally have lower targeted
payout ratios, or a long-term dividend-to-earnings ratio, as dividend payments are
set rather than variable.

Tax Differential View Of Dividend Policy

The tax differential view is part of a debate over dividends vs. equity growth that is
old but still vigorous. The payment of dividends to shareholders can be traced back
to the origins of modern corporations. In the 16th century, sailing captains in
England and Holland sold shares of their upcoming voyage to investors; at the end
of the voyage whatever capital was earned from trading or, as the case may be,
plunder would be divided among the investors and the venture shut down.
Eventually it became more efficient to create an ongoing joint stock company, with
shares sold on exchanges and dividends allotted per share. Before the advent of
rigorous corporate earnings reports, dividends were the most reliable way to
capitalize on investments.

However, with growing corporations and stock exchanges came an increase in

corporate reporting, making it more feasible to track long-term investments based
on rising share value. Moreover, for much of modern financial history dividends
have been taxed at a higher rate than capital gains from stock sales. In the United
States however, both forms of income are now taxed at the same rate, up to 20
percent depending on total income.

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BONES SHARE

 When bonus share are issued to the equity shareholders, the value of the share
is not taxed as dividend distributed.
 Where Redeemable preference share are issued as bonus share on their
redemptions, the amount shall be taxed distributed
 Where bonus are issued to the preference share holder , on their issue it is
deemed to be dividend and liable to tax.
 Expanses on issue on bonus share is allowed as deductions as per supreme
court judgment .

Tax planning

A company may capitalized its profit by converting partly paid share into fully
paid up share instead of issues of bonus share . This conversion will not be a
deemed dividend, further benefit of indexation for the price paid by the share
holders will be available from the date of allotment of share.

INTER- CORPORATE DIVIDEND

When any domestic companies receives dividend from any other domestic
company (expect loan from a closely held company) it is exempted u/s 10(34),
however the domestic companies who is declaring, distribution or paying dividen
disliable to pay tax on u/s 115-O in addition to tax on total income.

Tax planning

When companies issue shares to its equity shareholder it is not a deemed dividend
are not liable tax on such deemed dividend. Hence domestic companies may issue
bonus share to its equity share to its equity share holder instead of cash dividend in
cash to reduce the tax liability.

Tax Planning and Managerial Decision (MAKE or BUY )

Management decision should be based on careful consideration of all the factors,

including implication as regard to tax liability. Keeping view various tax
implications that are relevant while taking some specific management decision
under different provision of Income tax Act have dealt with:
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Make or Buy:
One of the vital investments subject to the influence of tax factor is
“Make or buy decision". Most of the companies have to decide sometimes or the
other whether they should buy a part from a market and stop making it themselves
or whether they should stop buying it and start making it. There are various
consideration affecting this decision, chief of which is cost. In other words, in
making this sort of decision the various cost of making the product or part
component of product is compared with its purchase price in market. A host of
other consideration such as capacity utilization, supply position of the article to be
bought, terms of purchase, ill effect of layoffs etc. are kept in view while taking
such decision.
Tax planning can be helpful in decision as regards making or buying a particular
product, component

REPAIR, REPLACE, RENEWAL OR RENOVATION

The main tax consideration which one has to keep in mind is whether expenditure
on repair, replacement or renewal is deductible as revenue expenditure u/s 30, 31,
or 37(1) . It the expenditure is deductible as revenue expenditure under these
sections, then cost of financing such expenditure is reduced to the extent of tax
save. On the other hand if such expenditure is not allowed as deduction u/s 30, 31
or 37(1) then it may be capitalized and on the amount so capitalized depreciation is
available if certain conditions are satisfied.
“Repair” implies the existence of a thing has malfunctioned and can be set right
by effecting repairs which may involve replacement of some parts, thereby making
the thing as efficient as it was before or close to it as possible. After repair the
thing to which the repair was carried out continues to be available for use.
Replacement is different from repair.
“Replacement” implies the removal or discarding of the things that was in use, by
a different or new thing capable of performing the same function with the same or
greater efficiency. The replacement of a section in a series of machines which are
inter connected , in a segment of the production process which together form an
integrated whole may in some circumstances , be regarded as amounting to repair
when without such replacement that unit in that segment will not function. That
logic cannot be extended to the entire manufacturing facility from the stage of Raw
Material to the delivery of the final finished product.
“Current Repair” implies the expenditure must have been incurred to ‘preserve
and maintain’ an already existing asset and the object of the expenditure must not
be to bring a new asset into existence of for obtaining a new advantage.
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 TAX PLANNING FOR SHUT DOWN OR CONTINUE

Introduction
Ups and downs are a part and parcel of business life. In an up situation, a business
flourishes, earns profits and brings cheers to businessman. A number of factors
play an important role in placing a business in such a situation. Some of these
factors are as follows :

(1) High demand of product

(2) Cost effectiveness
(3) Govt. support
(4) Tax incentives available etc.

In a down situation, a business shrinks, generates losses and causes tension to

owners. Such a situation occurs when any/ some/ all of the above factors go against
the business. i.e.

(i) Low demand/ falling demand of product

(ii) Falling profit margin
(iii) Withdrawl of government support
(iv) No encouraging future prospects etc.

Such situations are normally described as industrial sickness.

Generally under such a situation, a business house faces a problem whether the
business should be continued or shut down.

Meaning of ‘ Shut down’ or ‘discontinuance of business for Income tax

purposes

It refers to a complete cessation or closing down of the business. It involves :-

 No buying or selling
 No manufacturing
 Assets to be sold or disposed off
 Returning capital to owners etc.

Post shutdown tax effects

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Before deciding for closing a business, two aspects should be understood clearly :-

(A) various tax provisions to be complied with after deciding to shut down
a business
(B) tax implications of shut down decision

(1) Decision relating to Profit-Earning Business:

1. Profit earning business with no past losses and unabsorbed depreciation.

Solution: It is never advisable to shut down or discontinue such a
business.
2. Profit earning business with past losses and unabsorbed depreciation.
Solution: If possible, such a business should be continued till the past
losses and
unabsorbed depreciation are not fully set off.
(2) Loss generating business:
If the occurrence of loss is a temporary phenomenon and financial position
of the business allows the business house to bear such losses for some
years then such a business should be continued. The business, in this case,
can be continued at reduced level of activity. Later on, when the business
restarts earning profit, then past business losses and unabsorbed
depreciation can be set off.
However, if the occurrences of losses is expected to be for a long period
then business should be discontinued at the earliest.
(3) How tea/coffee/rubber business house can avoid the withdrawal of
deduction claimed u/s 33AB ?

Following tax planning can avoid withdrawal of deduction claimed u/s

33AB:-

Meaning : Section 33AB Income Tax Act Deduction is available for

assessees engaged in the development of Tea, Coffee and Rubber. Section

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33AB was introduced to encourage the growth of commercial crops in India.
Important point to be noted here is that, the assessee must be growing and
also manufacturing these crops to avail the deduction under section 33AB of
Income Tax Act.

Law: A sum equal amount deposited( before 6month) or

WEL
40% of Profit of such business(before making 33AB deduction)
Withdrawal is possible only
(a) closure of business;
(b) death of an assessee;
(c) partition of a H.U.F.
(d) dissolution of a firm;
(e) liquidation of a company.

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If assets acquired by withdrawing amount from ‘Special Account’ are to be sold
before the expiry of stipulated period of 8 years then, if possible, such assets
should be sold to any of the following persons :-
(a) Government (Central or state)
(b) Local Authority
(c) A corporation established by or under a Central, State or Provincial
Act
(d) A government company as defined in Sec 617 of the Companies
Act, 1956

If this is done, then the incentive deduction shall not be withdrawn and hence
assessee shall not be liable to pay tax on deemed business profits.

(i) In case of firm :- If assets acquired u/s 33AB are required to be sold
before the expiry of 8 years then such a firm is advised to sell/ transfer
such assets to a company in connections with succession of firm by
company arrangement subject to fulfillment of prescribed conditions
given for this. These conditions are :
(a) All the properties of the firm relating to the business or profession
immediately before the succession become the properties of the
company;
(b) All the liabilities of the firm relating to the business or profession
immediately before the succession become the liabilities of the
company;
(c) All the partners of the firm before succession become all the
shareholders of company.
(4) How petroleum or natural gas business houses can avoid the
withdrawal of deduction claimed u/s 33AB
Same as suggested for Tea/Coffee/Rubber business in pt(3)

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(5) Assesses engaged in shipping business cannot avoid the withdrawal of
deduction claimed u/s 33AC by rresorting to any tax planning
(6) While discontinuing a company, the management is advised to see the
possibility of its amalgamation with some other company
(7) Whether selling business as ‘Slump sale’ is beneficial or not?
In case of slump sale, the entire business is sold/transferred for a lump
sum price without assigning values to individual assets Sec 50-B of
income Tax Act provide the method of computation of capital gain
arising from slump sale.
Capital gain on slump sale = Sale proceeds-Net worth
Meaning of networth :- Networth shall be the aggregate value of total
assets of the undertaking/division as reduced by the value of liabilities of
such undertaking as appearing in the books of account.
Aggregate value of total assets :-
(a) In case of appreciable assets, the W.D.V off the block
(b) In case of other assets, the book value of such assets.Thus
management of discontinued business has two options to sell assets
i.e.
(i) To sell the entire undertaking as slump sale or
(ii) To sell assets individually or otherwise

So, it is advised that tax incidence under the two options should be
analysed before hand.

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 TDS

Tax Deducted at Source (TDS) is a system introduced by Income Tax

Department, where person responsible for making specified payments such as
salary, commission, professional fees, interest, rent, etc. is liable to deduct a
certain percentage of tax before making payment in full to the receiver of the
payment. As the name suggests, the concept of TDS is to deduct tax at its
source. Let us take an example of TDS assuming the nature of payment is
professional fees on which specified rate is 10%.

XYZ Ltd makes a payment of Rs 50,000/- towards professional fees to Mr.

ABC, then XYZ Ltd shall deduct a tax of Rs 5,000/- and make a net payment of
Rs 45,000/- (50,000/- deducted by Rs 5,000/-) to Mr. ABC. The amount of
5,000/- deducted by XYZ Ltd will be directly deposited by XYZ Ltd to the
credit of the government.

What is TDS Certificate?

TDS certificates are issued by the deductor (the person who is deducting tax) to
the deductee (the person from whose payment the tax is deducted). There are
mainly two types of TDS certificates issued by the deductor.
1. Form 16: which is issued by the employer to the employee incorporating
details of tax deducted by the employer throughout the year, and
2. Form 16A: which is issued in all cases other than salary.
For example, Mr. Gupta is working as a salaried employee at a company and tax
is deducted on his salary @ 15%. The company shall provide Mr. Gupta with a
Form 16 describing particulars in detail regarding the amount of salary paid and
tax deducted on the same.
However, had Mr. Gupta been working as a professional and received
professional fees from an organization which is subject to TDS, then he will be
provided Form 16A for the same.

6) What are rates of TDS?

There are around 20-25 sections which prescribe different types of payments on
which tax is deductible at source. Here, we are going to discuss some of the
most commonly encountered nature of payments on which tax is to be deducted
at source.

How much tax should be deducted from salary?

Persons responsible for paying salary are liable to deduct tax on estimated
salary at prescribed rate of 15% subject to following:

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 1. Exemption Limit: No tax is required to be deducted at source unless the
estimated salary exceeds basic exemption limit.
2.

Section Nature of payment Rate of TDS

15%

(Education and higher

education cess @ 2% &
1% respectively in cases
where salary exceeds
192 Salary Rs 1 crore)

194 Deemed Dividend u/s 2(22)(e) 10%

194A Interest other than interest on securities 10%

1% (in cases of individual

and HUF)2% (in cases of

person other than

individual
Payment or credit to a resident contractor/sub-
194C contractor or HUF)

5% (in cases of individuals

and HUF)

10% (in cases of person

other than individual or
194D Insurance Commission HUF)

194G Commission on sale of lottery tickets 10%

194H Commission or Brokerage 10%

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 2% (rent of plant &

machinery)

10% (rent of land or

building
194-I Rent or furniture or fixtures)

Payment/credit of consideration to a resident

transferor for transfer of any immovable property
194-IA (other than rural agricultural land) 1%

Professional fees, technical fees, royalty or

194J remuneration to a director 10%

Payment of compensation on acquisition of

194LA certain immovable property 10%

3. Exempt allowances: Allowances such as LTC, HRA, conveyance, travelling

exempt as per prescribed limits and other perquisites not forming part of
salary should be deducted from total salary while calculating taxable salary.
4. Other deductions: Other deductions such as deductions under section 80C,
80CCC, 80CCD, 80CCG, 80D, 80DD, 80DDB, 80E, 80EE, etc. should be
considered before the calculation of tax on salary.

How much tax should be deducted from salary?

Persons responsible for paying salary are liable to deduct tax on estimated
salary at prescribed rate of 15% subject to following:
1. Exemption Limit: No tax is required to be deducted at source unless the
estimated salary exceeds basic exemption limit.
2. Exempt allowances: Allowances such as LTC, HRA, conveyance, travelling
exempt as per prescribed limits and other perquisites not forming part of
salary should be deducted from total salary while calculating taxable salary.
3. Other deductions: Other deductions such as deductions under section 80C,
80CCC, 80CCD, 80CCG, 80D, 80DD, 80DDB, 80E, 80EE, etc. should be
considered before the calculation of tax on salary.

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 Tax collected at source (TCS)
Tax collected at source (TCS) is the tax payable by a seller which he collects
from the buyer at the time of sale. Section 206C of the Income-tax act governs
the goods on which the seller has to collect tax from the purchasers.

2. Goods covered under TCS provisions and rates applicable to them

When the below-mentioned goods are utilized for the purpose of manufacturing,
processing, or producing things, the taxes are not payable. If the same goods are
utilized for trading purposes then tax is payable. The tax payable is collected by
the seller at the point of sale.
The rate of TCS is different for goods specified under different categories :
Type of Goods Rate

Liquor of alcoholic nature, made for consumption by humans 1%

Timber wood under a forest leased 2.5%

Tendu leaves 5%

Timber wood by any other mode than forest leased 2.5%

A forest produce other than Tendu leaves and timber 2.5%

Scrap 1%

Minerals like lignite, coal and iron ore 1%

Bullion that exceeds over Rs. 2 lakhs/ Jewellery that exceeds over Rs. 5 lakhs 1%

Purchase of Motor vehicle exceeding Rs. 10 Lakhs 1%

Parking lot, Toll Plaza and Mining and Quarrying 2%

3. Classification of Sellers and Buyers for TCS

There are some specific people or organizations who have been classified as
sellers for tax collected at source. No other seller of goods can collect tax at
source from the buyers apart from the following list :
1. Central Government

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2. State Government
3. Local Authority
4. Statutory Corporation or Authority
5. Company registered under Companies Act
6. Partnership firms
7. Co-operative Society
8. Any person or HUF who is subjected to an audit of accounts under Income
tax act for a particular financial year.
Similarly, only a few buyers are liable to pay the tax at source to the sellers.
Let us know who are those buyers:
1. Public sector companies
2. Central Government
3. State Government
4. Embassy of High commision
5. Consulate and other Trade Representation of a Foreign Nation
6. Clubs such as sports clubs and social clubs

5. Certificate of TCS
1. When a tax collector files his quarterly TCS return i.e Form 27EQ, he has to
provide a TCS certificate to the purchaser of the goods.
2. Form 27D is the certificate issued for TCS returns filed. This certificate
contains the following details:
a. Name of the Seller and Buyer
b. TAN of the seller i.e who is filing the TCS return quarterly
c. PAN of both seller and buyer
d. Total tax collected by the seller
e. Date of collection
f. The rate of Tax applied
3. This certificate has to be issued within 15 days from the date of filing TCS
quarterly returns. The due dates are:

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 Quarter Ending Date for generating Form 27D

For the quarter ending on 30th June 15th August

For the quarter ending on 30th September 15th November

For the quarter ending on 31st December 15th February

For the quarter ending on 31st March 15th June

In case you are still confused about filing TCS returns, feel free to consult the
tax experts at ClearTax.

6. TCS Exemptions
Tax collection at source is exempted in the following cases :
1. When the eligible goods are used for personal consumption
2. The purchaser buys the goods for manufacturing, processing or production
and not for the purpose of trading of those goods.

7. TCS under GST

a. Any dealer or traders selling goods online would get the payment from the
online platform after deducting an amount tax @ 1 % under IGST Act. (0.5% in
CGST & 0.5% in SGST)
b. The tax would have to be deposited to the government by 10th of the next
month.
c. All the dealers/traders are required to get registered under GST compulsorily.
d. These provisions are effective from 1st Oct 2018.
Example: Mr. Raj(seller) is a trader who sells clothes online on Flipkart
(buyer). He receives an order for Rs 10, 000 inclusive of tax and commission.
Flipkart would thus be deducting tax for Rs 100 (1% of Rs. 10000).

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 ADVANCE TAX

As the name suggests, advance tax refers to paying a part of your taxes before
the end of the financial year. Also called ‘pay-as-you-earn’ scheme, advance tax
is the income tax payable if your tax liability is more than Rs10,000 in a
financial year. It should be paid in the year in which the income is received.

Rather than receiving all tax payments at the end of the year, advance tax
receipts help the government get a constant flow of income throughout the year
so that expenses can be met. For instance, if your advance tax liability for the
financial year 2017-18 has exceeded Rs10,000, you are expected to pay it in
FY17-18 itself.

Who should file it?

If you are a salaried employee, you need not pay advance tax as your employer
deducts it at source, known as TDS (tax deducted at source). Advance tax is
applicable when an individual has sources of income other than his salary. For
instance, if an assessee earns via capital gains on shares, interest on fixed
deposits, winnings from lottery or races, and capital gains on house property
besides his regular business/salaried income, then he needs to pay advance tax
on all income after adjusting expenses or losses. While employers apply TDS
on salaries, advance tax is paid on income that is not subject to TDS.
Professionals (self-employed) and businessmen will have to pay taxes in
advance as, given their business income, the liability can be huge. The same
implies for companies and corporates.

Payment of advance tax: Self-employed and businessmen

Due date of installment Amount On or before September 15 Not

payable less than 30% of the advance tax
liability
On or before December 15 Not On or before March 15 100% of the
less than 60% of the advance tax advance tax liability
liability

Payment of advance tax: Companies

Due date of instalment Amount payable

On or before June 15 Not less than 15% of the advance tax
liability
On or before September 15 Not less than 45% of the advance tax

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 liability
On or before December 15 Not less than 75% of the advance tax
liability
On or before March 15 100% of the advance tax liability

Advance tax has to be paid on the 15th of September, December, and March in
instalments of 30%, 30%, and 40%, respectively, for self-employed individuals
as well as businessmen. Companies need to pay advance tax on the 15th of
June, September, December, and March.

How to file advance tax?

Individuals may pay advance tax using tax payment challans at bank branches
authorized by the Income Tax (I-T) Department. It can be deposited with the
Reserve Bank of India, State Bank of India, ICICI Bank, HDFC Bank, Indian
Overseas Bank, Indian Bank, Allahabad Bank, Syndicate Bank, Axis Bank,
Punjab National Bank, Punjab & Sind Bank, and other authorized banks. There
are 926 branches in India that accept advance tax payments. Individuals may
also pay it online through the I-T department or the National Securities
Depository Ltd (NSDL).

If you miss the deadline?

If you fail to pay your advance tax or the amount you pay is less than the
mandated 30% of the total liability by the first deadline (September 25), you
will be liable to pay interest on the amount, which comes to 1% simple interest
per month on the defaulted amount for three months.

The same interest penalty would apply if you fail to pay the amount by the
second deadline (December 15). Failing to pay the third and last instalment
(March 25) would mean paying 1% simple interest on the defaulted amount for
every month until the tax is fully paid.

What if advance tax paid is more than required?

If the amount paid as advance tax is higher than the total tax liability, the
assessee will receive the excess amount as a refund. Interest @6% per annum
will also be paid by the I-T Department to the assessee on the excess amount (if
the amount is more than 10% of the tax liability).

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