Other Profits

Some special points to remember:

 

1. If an individual makes a gift in cash or by cheque to his spouse and that money is utilized by the spouse for purchase of an asset . The income earned by the spouse from that asset will not be clubbed in the income of the individual.
2. In order to invoke clubbing provisions there must be relation of  husband and wife. That means if a person transfers asset to his would be spouse before marriage income arising from such asset will not be included in the income of  transferor.
3. Negative income is also income. Under the Income Tax Act income does not means positive income only. The term income includes negative income or loss also.
4. Income from accretion to asset is not taxable in the hands of the transferor.
5. Income from saving out of pin money  is not included in the income of husband.
6. Income of minor child is clubbed with the income of the parent whose income after excluding the share of minor’s income is greater.
7. If trust is created for the benefit of minor child and income during minority of child is being accumulated and added to corpus of trust and income from increased corpus is given to the child after attaining majority, clubbing provisions are not applicable.
8. A loan is not transfer for the purpose of this chapter.

Clubbing of Income

In the Indian Income Tax Act there are provisions of Clubbing of Income.

 

But , the question is What is Clubbing of Income and why it is so?

 

Clubbing of income means Income of other person included in assessee’s total income, for example: Income of husband which is shown to be the income of his wife is clubbed in the income of Husband and is taxable in the hands of the husband.

     Income of a minor child is taxable in the hands of his parents.

 

Why it is so?

Under the Income Tax Act a person has to pay taxes on his income. A person cannot transfer his income or an asset which is his one of source of his income to some other person or in other words we can say that a person cannot divert his income to any other person and says that it is not his income. If he do so the income shown to be earned by any other person is included in the assessee’s total income and the assessee has to pay tax on it.

For example: A purchased a house property in the name of his wife B. A let out this house property . The rental income earned by A in name of his wife B is taxable in the hands of A.

 

Clubbing of Income takes place in the following cases:

1. Transfer of income without transfer of Asset:  If any person transfers income without transferring the ownership of  the asset , such income will be taxable in the hands of the transferor. Ex. X owns 4000, 14% debentures of A ltd. of Rs. 100 each , he transfers interest income to his friend Y without transferring the ownership of Debentures . In this case although interst will be received by Y but it is taxable in the hands of X.

 

2.Revocable transfer of Asset: If any person transfers any asset to any other person in such form and condition that such transfer is revocable at any time during the lifetime of the transferee , the income earned through such asset is chargeable to tax as the income of the transferor. For ex. X transfers a house property to A. However , X has right to revoke the transfer during the life time of A . It is a revocable transfer and income arising from the house property is taxable in the hands of X.

 

3. Remuneration to Spouse: An individual is chargeable to tax in respect of any remuneration received by the spouse from a concern in which the individual has *substantial interest. This provision has an exception. If the remuneration is received by spouse by the application of technical or professional knowledge or experience clubbing provisions will not take place. For ex. X  has substantial interest in A ltd. and Mrs. X is employed by A ltd. without any technical or professional qualification. In this case salary income of Mrs. X shall be taxable in the hands of X.

 

4. Income from assets transferred to spouse: Where an asset is transferred by an individual to his spouse directly or indirectly, otherwise than for adequate consideration or in connection with an agreement to live apart, any income from such asset is deemed to be the income of the transferor. For ex.  Mrs. A transfer’s 100 debentures of IFCI to her husband without adequate consideration. Interest income on these debentures will be included in the income of Mrs. A.

 

5. Income from asset transferred to son’s wife: If an individual , directly or indirectly transfers asset , without adequate consideration to son’s wife , income arising from such asset is included in the income of the transferor. For ex.  Mrs. A transfer’s 100 debentures of IFCI to her son’s wife without adequate consideration. Interest income on these debentures will be included in the income of Mrs. A.

 

6. Income from asset transfer to a person for the benefit of spouse/ son’s wife: If an individual , directly or indirectly transfers asset , without adequate consideration to a person or an association of persons for the benefit of his/her spouse /son’s wife , income arising from such asset directly or indirectly is included in the income of the transferor. For Ex. X transfers Government bonds without consideration to an association of persons, subject to the condition that , the interest income from these bonds will be utilized for the benefit of Mrs. X or Mrs. X son’s wife . Interest from bonds will be included in the income of X

 

7. Income of a minor child: All income which arises to the minor shall be clubbed in the income of his parents. Income will be included in the income of that parent whose total income is greater.  This case has two exceptions.(1) Income of minor child suffering from specified disability . (2) Income of minor child on account of manual work or involving application of his skill/talent etc.

 

 

*Substantial Interest: An individual is deemed to have substantial interest if he beneficially holds equity shares carrying not less than 20% voting powering case of a company or is entitled to not less than 20% of the profits in case of a concern other tan a company , at any time during the previous year.

Banking Cash Transaction Tax

In order to trap the black money our honorable Finance Minister Mr. P. Chidambaram has levied Banking Cash Transaction Tax in the Finance Act 2005. This tax is levied on cash withdrawls from the bank above the specified limits. This tax is applicable from all cash withdrawls from June 1, 2005.

This tax here in fourth referred as BCTT is levied on cash withdrawl (by whatever mode) on any single day from an account (other than saving bank account) maintained with any bank in India (except the state of Jammu and Kashmir) exceeding the following amount:-

Account (not being saving

Bank a/c) maintained by-                       Amount of withdrawl

Any individual or HUF                                     Rs. 50,000

A person other than any individual or HUF            Rs. 1,00,000

 

 

Term Deposit in the name of                    Amount of withdrawl

Any individual or HUF                                       Rs. 50,000

A person other than any individual or HUF           Rs. 1,00,000

BCTT is levied @ 0.1%  of the value of every such taxable banking transaction.

In the Finance Act 2008 our finance minister has withdrawn this tax from 01 April 2009. This means that on or after 01st April 2009 any sum of cash can be withdrawn from the bank account without paying any tax. As per him the purpose for which this tax was levied has been fulfilled . But no one know that whether the purpose has been fulfilled or the tax has been withdrawn as part of a statregy to capture the vote bank in the forthcoming elections.

Permanent Account Number (PAN)

I think that my readers are very familiar with this term. Under the Income Tax Act

every assessee is liable to get PAN before he files his tax return  in the department.

 PAN is a unique 10 digit number which is issued by the income tax office to the

person applying for it. Every digit in a PAN signifies a meaning in itself.

 

To know about the need of PAN and its importance click on the below link

http://www.incometaxindia.gov.in/PAN/Overview.asp

 

This contains a series of FAQ’s on PAN which is issued by the Income Tax

Department.

 

Hope it will be useful to you.

Computation of Tax

The following is a short performa of computation of tax:

1. Compute Tax on long term Capital Gain @ 10% or 20%                      xx

2. Compute Tax on winning from lotterries, crossword

Puzzles, races ,etc                                                                               xx

 

3.  Compute Tax on other income at normal rates                                      xx

                                                            Total Tax                                    xx

Less: Rebate / Relief                                                                                   x

                                                                                                                xx

Add: Surcharge (If applicable @ 10%)                                          x 

                                                                                                                xx

Add: Education Cess @ 2% + 1%                                                             x 

                                                                                                                xx

Less: 1. TDS                            xx

          2. Advance tax               xx                                                             xx

                                                                        Net Tax Liability              x

How to Compute Total Income

Before filing return in the income tax department a statement showing computation of total income is to be submitted along with the ROI. Here is given a brief presentation of  Computation of Total Income:

 

      Particulars

a)      Income from Salaries

Basic Salary                                         xx

Taxable Allowances                              xx

Taxable Value of Perquisites                 xx

          Gross Salary                                           xx

Less : Entertainment Allowance             xx

           Professional Tax                                    xx                     xx

 

 b)      Income From House Property

Gross Annual Value                              xx

Less: Municipal Taxes paid                     x

            Annual Value                            xx

Less: Deduction u/s 24              xx                                 xx

 

 c)      Profits and Gains of Business

or Profession

      Net Profit as per P/L A/c                      xxx

      Add: Amount shown as expenses

               but not allowed                              xx

                                                                  xxx

      Less: Expenses allowed but not

                claimed.                                        xx      

                                                                  xxx

      Add: Incomes not shown in the P/L

               A/c but taxable                              xx

                                                                  xxx

      Less: Incomes shown in the P/L

               A/c but not taxable                        xx                               xxx

 

d)      Capital Gains

Sale Consideration                                xxx

Less: Expenses on transfer                      xx

Net Sale Consideration             xxx

Less: Cost of acquisition/improve.           xx

            Capital Gains                            xxx

Less: Exemptions (if any)                        xx                               xxx

  

e)      Income From Other Sources                                                       xx

 

Gross Total Income                                                               xxx

Less: Deduction u/s 80CCC to 80U                                            xx

            Total Income                                                              xxx

Types of Income Tax Return Forms

To file tax returns Income Tax Department had issued a series of forms applicable to different type of assessees:

ITR 1: This form is applicable for an individual who has no income other than Salary/ Pension and Interest.

ITR 2: This form is applicable for an individual who has income under different heads but not business /profession income.

ITR 3: This form is applicable for an individual who is partner in a partneship firm .

ITR 4: This form is applicable for an individual who has income from business/profession.

ITR 5: This form is applicable for a Firms, AOP,BOI, Local Authority.

ITR 6: This form is applicable for a Company.

ITR 7: This form  is applicable for a Trust.

ITR 8: This form is used for filing only FBT Return.

https://incometaxindiaefiling.gov.in/portal/selectforms.do

The Income Tax Department has given the facility to file tax returns online with the help of softwares awailable at the above link.

Due dates to file Income Tax returns

The due dates for filing Income Tax Returns for A.Y. 2008-09 as specified under the Income Tax are as under:

31st July

For all the persons who are not liable to get their accounts audited under the Income Tax Act.

30th September 

a) Companies

b) All the persons who are liable to get their accounts audited under the Income Tax Act or any other law. 

c) All the working partners of the firm who are liable to get their accounts audited under the act or any other law.

Defination of Income

In order to tax the income of a person the term itself is designed under the Income Tax Act. As per the Act the term Income includes:

a. Profits and gains of Business or Profession: This includes income from carrying on a business or income earned by doing any profession.

b. Dividend:

c. Profit in lieu of Salary, perqusite: This includes any amount received by an employee from his employer other then the salary amount.

d. Allowances granted to the assesse to meet his expenses incurred for performance of his duties: This includes allowances such as HRA, Medical allowance, etc given by an employer to his employee.

e. Any capital gains: This means any profit dericed on sale of any capital asset.

f. Winning from lotteries, crossword puzzles, races, card game, T.V. Show , etc

g. Any sum received for fund created for welfare of employees.

One interesting thing in the defination of income is that it can be received in cash or in kind. More over the Income Tax Act does not make distinction between legal source of income or illegal source of income. This means that gambling, smugling income is also chargeable to tax under the Income Tax act. More over gifts of personal nature for eg. birthday/ marriage gifts are not treated as income (but there are some exceptions in this ).

In all tis one more thing is that the term income does not only means profits but there is a concept of negative income also.

Heads of Income

In the Income Tax any income earned by a person is broadly categorised into five heads of income. Any income earned to be taxed must come under any of the five heads of income. The five heads of income are:

1. Income under Head Salaries: This head taxes the income earned by an individual as salary from any firm or organisation.

2. Income from House Property: This head taxes rental income received by any person from way of renting of any immoveable property.

3. Profits and Gains of Business or Profession: This head of income broadly covers income earned by a person as a result of some business or professional set-up by him.

4. Capital Gains: This head of income taxes the income earned on sale of any investment in form of gold, precious ornaments, shares, etc or immoveable property.

5. Income from other Sources: This head of income covers any income which is not chargeable to tax under any of the above heads of income. Any income including gambling or profit/loss on running of race horses, camels, interest income , etc are chargeable to tax under this head of income.

We will take each Head of Income one by one but first in the next post we will understand meaning of the  term “Income” itself:

…Contt.