Double Taxation Relief

One of the major risk in the International Business is the payment of taxes in both the countries i.e. the country in which the business is actually effected and in the country where the MNC is having its head office. This type of double taxation will definitely impede the growth and development of the MNCs in multiple ways. So the provisions are made to avoid the double taxation (Double Taxation Relief) between the two countries through two types of relief namely Bilateral Relief and Unilateral Relief.

Bilateral Relief

Under this scheme, relief against the burden of double taxation is worked out on the basis of mutual agreement between two countries. There are two types of agreements. In one type, the two concerned countries agree that certain incomes which are likely to be taxed in both countries shall be taxed only in of them or that each of the two countries should tax only a specified portion of the income. In the other type, the income subject to tax in both the countries but the assessee is given a deduction from the tax payable by him in the other country, usually the lower of the two taxes paid. This is called bilateral relief.

Unilateral Relief

There is no agreement under this scheme. Under unilateral relief, if any MNC who is resident in India in any previous year proves that, in respect of its come which accrued or arose during that previous year outside India, it has paid in country with which there is no agreement for the relief or avoidance of double taxation, income tax by deduction or otherwise, under the law in force in that country, it shall be entitled to the deduction from the Indian Income Tax payable by him of a sum calculated on such double taxed income at the Indian rate of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the rates are equal.… Read the rest

Income Tax Assessment Procedure

Ascertaining total income is one major task of the procedure involved in levying tax on an assessee.  The task of assessing the income returned and determination of tax liability is called ‘assessment’.  The term ’assessment’ has been used in the Income-tax Act meaning differently contexts.  In certain situations, it refers to computation of income, sometimes to the determination of tax payable and in some cases to the whole procedure laid down in the Act of imposing tax liability on assessee.

Assessment of income relating to one Financial Year (FY) starts in the succeeding financial year, which is called Assesment Year (AY). Income tax assessment procedure begins when an assessee files his return of income to the income tax department.

Filing of return [Sec 139 (1)]

A person has to file return of income in the prescribed form within the specified time limit if his total income exceeds the maximum non-taxable limit. A person other than a company though income is less than the nontaxable limit, who satisfies any one of six economic criteria and residing in a specified area.

  1. Ownership of a motor vehicle other than a two wheeler
  2. Occupation of any category of immovable property as may be notified by the CBDT
  3. Incurred expenditure on foreign travel by himself or in respect of any other person. Travel to Bangladesh, Pakistan, Bhutan, Nepal, Maldives, Sri Lanka and Saudi Arabia for hajj or china on pilgrimage to Manasarover are excluded.
  4. Holder of a credit card other than an add on card
  5. Member of a club where entrance fees charged is Rs.25000 or more
  6. Expenditure of Rs.50000 or more during the PY towards consumption of electricity.
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Clubbing of Income Under Income Tax

An assessee may reduce his tax liability by transferring his assets in favor of a person who is related to him. As per [Sec 60] to [Sec 64], income belonging to some other person will be taxed in the hands of the assessee in certain situation for the purpose of avoiding tax evasion. This is called  clubbing of income.

  1. Transfer of income without the transfer of assets: Income arising to nay person by virtue of any transfer of any income, without transferring the assets is deemed to be the income of the transferor and is taxable in his hands. The transfer may be revocable or not. There is no exception to this rule.
  1. Revocable transfer of assets: Any income arising to any person from an asset as a result of revocable transfer of asset shall be deemed to be the income of transferor. As per [Sec62] the income revocable transfer of assets shall not be clubbed with income of transferor when it is effected through the medium of trust is not revocable in the life time of the beneficiary or transferee.
  1. Remuneration of spouse: any remuneration received by the spouse of the individual from a concern in which the individual has substantial interest will be clubbed with the income of the individual. However if the remuneration is solely attributable to the application of technical or professional knowledge and experience of the spouse, then the income will not be clubbed. Where both husband and wife have a substantial interest in the concern and both are in receipt of the remuneration , it will be included in the total income of husband or wife whose total income excluding such remuneration is greater.
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Income from Other Sources

Income from other source is a residuary head of income. Any item of income which does not fall under any other four specific heads of income is to be charged under this head.
According to sec 56(2) following incomes are chargeable under this head.

  • Dividend declared by a foreign company
  • Family pension
  • Winnings from lottery, crossword puzzles, horse race etc
  • Income from plant, machinery or furniture let out on hire where it is not the actual business of the assessee.
  • Interest from securities, bank deposits
  • Income from sub letting
  • Any other receipts which doesn’t fall under any other heads of income.
  • Income from agricultural land situated outside India
  • Examiner ship fees received by college teachers
  • Income from undisclosed source
  • Ground rent etc
  • Receipts without consideration in certain cases

It means any amount paid by a company, out of divisible profits, whether taxable or not taxable, to its share holders in proportion to his share holding in the company. Dividend also includes deemed dividend. The following payments are deemed as dividend.
a)      any distribution entailing the release of company’s assets
b)     any distribution of debentures, debenture stock, deposit certificates
c)      distribution on liquidation of company
d)     distribution on reduction of capital
e)      any payment by way of loan or advance by a closely held company
Dividend distributed or paid by a domestic company after 31-3-2003 is not taxable in the hands of the shareholder under sec10 (34). On such dividend, the dividend declaring company has to pay tax. But deemed dividend under sec2 (22) is taxable in the hand of the share holders.… Read the rest

Income from Capital Gains

Any profits and gains arising from the transfer of a capital assets effected in the previous year shall be chargeable to income tax under the head capital gain in the PY in which the transfer took place.

It should satisfy the following conditions

  1. There should be a capital asset
  2. The capital assets should be transferred.
  3. Transfer should result in profit or gains

Capital Asset means any property of any kind held by an assessee whether or not connected with his business or profession.

                But the following assets are not capital assets.

  1. Any stock in trade, consumable stores or raw materials held for the purpose of his business or profession.
  2. All personal effects except jewellery
  3. Agricultural land in India which is situated in rural area etc.

                For the purpose of computation the capital assets can be classified into two.

  1. Short term capital assets
  2. Long term capital assets

Short term capital assets means a capital asset held for not more than 36 months immediately preceding the date of its transfer. But in the case of the following assets , the period of 36 months shall be substituted by 12 months. i.e. share in a company, any security listed in stock exchange, a unit of UTI, any unit of a mutual fund. A capital gain arising from the transfer of short term capital asset is called short term capital gain (STCG).

Long term capital assets mean capital assets which are not a short term capital assets. Capital gain arising from the long term capital asset is called long term capital gain (LTCG).… Read the rest

Profits and Gains of Business or Profession

Meaning of Business and Profession

                Business simply means any economic activity carried on for earning profits. According to Sec 2(3) business is “any trade, commerce, manufacture or any adventure in the nature of trade commerce and manufacture”. Any transaction with a motive of selling at profits included under this concept. It is not necessary that there should be a series of transaction in a business and it should be carried on permanently.

                Profession is an occupation requiring purely intellectual skills or manual skills controlled by the intellectual skill of the operator. e.g. Lawyer, doctor, engineer etc.  So profession refers to those activities where the livelihood is earned by the persons through their intellectual or manual skill.

                The following income shall be chargeable to income-tax under the head Profits and gains of business or profession,

1)     The profits and gains of any business or profession which was carried on by the assessee at any time during the previous year

2)     Any compensation or other payment due to or received by any person in connection with a business or profession

3)     Income derived by a trade, professional or similar association from specific services  performed for its members

4)     Profits on sale of a license granted under the Imports (Control) Order, 1955, made under the Imports and Exports (Control) Act, 1947 (18 of 1947) ;]

5)     Cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India ;]

6)     Any duty of customs or excise re-paid or re-payable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971 ;]

7)     Value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession;

8)     Any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm:

9)     Any sum received under a Key man insurance policy including the sum allocated by way of bonus on such policy.… Read the rest