Unit 10 Income-tax and Corporate Tax Planning PYQ’s 6th Dec 2019 Shift 2

TAX DEDUCTED AT SOURCE (TDS):

The concept of TDS was introduced with an aim to collect tax from the very source of income. As per this concept, a person (deductor) who is liable to make payment of specified nature to any other person (deductee) shall deduct tax at source and remit the same into the account of the Central Government.

Key Points

TDS Rates under Section 194I:

Rates of the tax deduction depend on the nature of payment and are given below:

Confusion Points

Under Section 194-I, rent on Land or building or furniture or fitting is 10%, however, the Official question of UGC has mentioned it as 5% and considered the option to be correct.

TDS certificate:

Form 16, Form 16A, Form 16 B and Form 16 C are all TDS certificates. TDS certificates have to be issued by a person deducting TDS to the assessee from whose income TDS was deducted while making payment.

For instance, banks issue Form 16A to the depositor when TDS is deducted on interest from fixed deposits. Form 16 is issued by the employer to the employee.

Therefore, from the above explanation, Option 3 is the correct answer.

Tax Deducted at Source

1. TDS stands for ‘Tax Deducted at Source’.
2. It was introduced to collect tax at the source from where an individual’s income is generated.
3. The government uses TDS as a tool to collect tax in order to minimize tax evasion by taxing the income (partially or wholly) at the time it is generated rather than at a later date.

Key Points

The following are the correct statements about TDS Certificates:

1. Form 16:

• Form 16 is your salary TDS certificate.
• If your income from salary for the financial year is more than the basic exemption limit of Rs 2,50,000 your employer is required, by the Income Tax Act, to deduct TDS on your salary and deposit it with the government.
• If you have also disclosed your income from other heads to your employer, they will consider your total income for TDS deduction.

2. Form 16 A: Form 16A is also a TDS Certificate. While Form 16 is for only salary income, Form 16A is applicable for TDS on Income Other than Salary. For example, a Form 16A shall be issued to you –

• when a bank deducts TDS on your interest income from fixed deposits,
• for TDS deducted on insurance commission,
• for TDS deducted on your rent receipts.

3. Form 16 B:

• Form 16B for tax deducted at source verifies the volume of tax deducted at source when making a property purchase.
• This amount is given by the buyer to the Income Tax department.
• In a nutshell, this is a TDS certificate for all TDS deducted upon a property sale.

4. Form 16 C:

• Form 16C is the TDS certificate to be issued by the deductor (Tenant of property) to the deductee (Landlord of property) in respect of the tax deducted and deposited as TDS on rent under section 194-IB of the Income-tax Act, 1961.

Therefore, from the above explanation, Option 2 is the correct answer.

The following are the explanation for the correct match:

Following are the 6 steps for E-Filing Income Tax Returns:

STEP 1. Register yourself: To e-file your income tax return, you will have you register on the Income Tax Department’s online tax filing site (incometaxindiaefiling.gov.in). You have to provide your permanent account number (PAN), name, and date of birth and choose a password. Your PAN will be your user ID.

STEP 2. Choose how you want to e-file: There are two ways of e-filing your income tax return. One is to go to the download section and select the requisite form, save it on your desktop and fill all the details offline and then upload it back on the site. Or you can choose to fill the form online by selecting the quick e-file option.

STEP 3. Select the requisite form:

1. ITR-1: For individuals earning a salary, pension, or income from property or sources other than lottery.
2. ITR-2: For those earning capital gains. ITR 2A for those owning more than one house but no capital gains.
3. ITR 3, 4, and 4S: Professionals and business owners.

STEP 4. Keep the documents ready: Keep your PAN, Form 16, interest statements, TDS certificates, details of investments, insurance and home loans handy. Download Form 26AS, which summarizes tax paid against your PAN. You can then validate your tax return with Form 26AS to check your tax liability. If you earn more than Rs. 50 lakh, from this year you will have to fill an additional column —”AL” or assets and liabilities. You will have to disclose the value of your assets and liabilities. Assets have to be declared at cost.

STEP 5. Fill the form and upload: If you choose to fill the form offline after you have downloaded the form and filled all the details, click on ‘generate XML’. Then go to the website again and click on the ‘upload XML’ button. You will have to first log in to upload the XML file saved on desktop and click on submit.

STEP 6. Verify ITR V: On submitting your ITR form, an acknowledgment number is generated. In case the return is submitted using a digital signature, you just have to preserve this number. If the return is submitted without a digital signature, an ITR-V is generated and is sent to your registered email ID.

The tax filing process is incomplete and ITR is invalid unless your ITR V is verified. You can electronically verify or mail the signed ITR V to the processing center in Bengaluru within 120 days of filing the return.

Therefore, the correct sequence to e-filing of Income Tax Return is a) → c) → d) → b)

Assertion (A): Tax should not be charged on dividend income from the shareholders

Explanation:

1. The dividend is the amount received by an investor, whether it’s an individual or HUF, on account of holding shares in a company. In simple words, it is the distribution of profits of the company to its shareholders.
2. The tax on dividends received from domestic companies is deducted at the rate of 15%. The tax is deducted and paid by the company, so the dividend received in the hands of the shareholder is fully exempt.
3. Dividend Distribution Tax is required to be paid by the company before actually paying or distributing the dividend. The dividend that shareholders received is after deducting the tax, which makes the amount in their hands tax-free.
4. Hence, Tax should not be charged on dividend income from the shareholders.

Therefore, Assertion (A) is the correct statement.

Reason (R): Some economists are of the opinion that when tax has already been paid on the profit of the company and the balance is distributed as a dividend to the owners, tax need not be levied on them

Explanation:

1. Until 2019, In India, a company that has declared, distributed, or paid any amount as a dividend is required to pay a dividend distribution tax at 15%.
2. The provisions of DDT were introduced by the Finance Act 1997.
3. Only a domestic company is liable for the tax.
4. Domestic companies have to pay the tax even if the company is not liable to pay any tax on their income.
5. It is applicable whether it is paid out of current or accumulated profits.
6. If the dividend holder also pays tax on the dividend it will result in a cascading effect.
7. Hence, Some economists are of the opinion that when tax has already been paid on the profit of the company and the balance is distributed as a dividend to the owners, tax need not be levied on them

Therefore, Reason (R) is the correct statement, and R) is the correct explanation of A).

Important Points

• In a move that will offer some relief to India Inc., the Narendra Modi-led government eliminated the dividend distribution tax that is levied on dividends issued by companies.
• Dividend income will now be taxed only in the hands of investors as per the tax rate applicable to their income, Finance Minister Nirmala Sitharaman announced in her Union Budget 2020 speech.

Compensation on account of any disaster [Section 10(10BC)]:

1. Any amount received from the Central Government or State Government or a Local Authority by an individual or his legal heirs as compensation on account of any disaster is 100% exempt from tax.
2. However, no deduction is available in respect of the amount received or receivable to the extent such individual or his legal heirs has been allowed a deduction under the Act on account of loss or damage caused due to such disaster.
3. Disaster here means any disaster due to any natural or man-made causes or by accident/negligence which results in substantial loss of human life or damage to property or environment and the magnitude of such disaster is beyond the coping capacity of the community of the affected area.

Companies can be classified into two residential status categories only. A company can either be a resident or non-resident.

A) Resident: A company is said to be resident in India in any previous year if i) it is an Indian company, or ii) during the year, the control and management of its affairs are situated wholly in India.

(I) Indian Company : Section 2(26): Indian company means a company formed and registered under the Companies Act, 1956 and includes:

1. a company formed and registered under any law relating to companies formerly in force in any part of India, other than the state of Jammu and Kashmir and the union territories,
2. a corporation established by or under a central, or state or provincial act.
3. any institution, association, or body which is declared by the Central Board of Direct Taxes to be a company under Section 2(17).
4. in the case of Jammu and Kashmir, a company formed and registered under any law for the time being in force in that state.
5. in the case of any of the union territories of Dadra and Nagar Haweli, Daman and Diu, and Pondicherry, a company formed and registered under any law for the time being in force in that union territory.

In all the above cases, it is necessary that the registered or, as the case may be, the office of the company. corporation institution, association, or body is in India.

(ii) Control and Management of the Affairs of the Company

1. A non-Indian company is a resident in India if the control and management is wholly situated in India.
2. The term “Control and Management” refers to “head and brain” which directs the affairs of policy framing, finance, disposal of profits and vital things concerning the management of a company.
3. A company may be resident in India even though its entire trading operations are carried on abroad.
4. If the management and control are situated in India, the company is resident in India.
5. It does not matter where it is registered and where the act of selling and buying of the goods takes place.

B) Non-Resident:

1. If a company does not satisfy any of the aforesaid conditions of residence, it is said to be a ‘non-resident’ company.
2. In other words, if the company is not registered in India, and its control and management is situated wholly or partially outside India, it is regarded as a non-resident.

A company can be a resident or nonresident only. Thus, a company can never be classified as not ordinarily resident.

Income-tax (Double Taxation Relief) (Aden) Rules, 1953 – Present position

1. In exercise of the powers available under section 49A of the 1922 Act, the Government of India had issued a Notification dated 24-3-1953 called the Income-tax (Double Taxation Relief) (Aden) Rules, 1953 providing for the grant of relief in respect of income on which tax has been paid both in India and in Aden. These Rules being consistent with the corresponding provisions of the 1961 Act, continued to be operative by virtue of the provisions contained in section 297(2)(k).

2. The Government of the Peoples’ Democratic Republic of Yemen (formerly Aden) has, however, stated that the Agreement on the basis of which the above Rules were applicable is no longer binding on it after November 30, 1967, the date of attainment of independence by it. Thus, there is no subsisting agreement between India and Aden for the avoidance of double taxation of income after November 30, 1967.

3. The cases of Indian residents will, therefore, be covered by the provisions for grant of unilateral relief under section 91 of the 1961 Act. This will be applicable in respect of the assessment years commencing from the assessment year immediately following the financial year in which Aden attained independence. Thus, the provision for unilateral relief will become applicable in the case of income in the Peoples’ Democratic Republic of Yemen for and from the assessment year 1968-69.

According to Section 4 of the Indian Partnership Act, 1932, Partnership means “The relationship between the persons who have agreed to share profit of business carried on by all or any of them acting for all.”

Key Points

All persons who have entered into a partnership with one another are called individually ‘Partners‘ and collectively a ‘Firm’ and the name under which business is carried on is called the ‘Firm Name‘.

Thus, a partner of a partnership firm will be assessed as a firm.