UNIT III

Computation of Tax Liability of Individual and HUF

3.1 Computation of Tax Liability of Individual and HUF

Computation Of Total Income & Tax Liability of an Individual

Step 1:       Compute the income of an individual under  5 heads of income on the basis of his residential status.

Step 2:       Income of any other person, if includible u/s 60 to 64, will be included under respective heads.

Step 3:       Set off of the losses if permissible, while aggregating the income under 5 heads of income.

Step 4:       Carry forward and set off of the losses of past years, if permissible, from such income.

Step 5:       The income computed under Steps 1 to 4 is known as Gross Total Income from which deductions under sections 80C to 80U (Chapter VIA) will be allowed. However, no deduction under these sections will be allowed from short-term capital gain covered under section 111A, any long-term capital gain and winning of lotteries etc., though these incomes are part of gross total income.

Step 6:       The balance income after allowing the deductions is known as total income which will be rounded off to the nearest Rs. 10.

Step 7:       Compute tax on such Total Income at the prescribed rates of tax.

Step 8:       Allow rebate of maximum Rs. 2,500 under section 87A in case of resident individual having total income upto Rs. 3,50,000.

Step 9:       Add surcharge @ 10% on total income exceeding Rs. 50,00,000 and upto Rs. 1 crore and 15% of such income tax in case of an individual having a total income exceeding Rs. 1 crore.

Step 10:     Add education cess @ 2% and SHEC @ 1% on the tax (including surcharge if applicable).

Step 11:     Allow relief under section 89, if any.

Step 12:     Deduct the TDS, advance tax paid for the relevant assessment year and double taxation relief under section 90, 90A or 91. The balance is the net tax payable which will be rounded of nearest ten rupees and must be paid as self-assessment tax before submitting the return of income. 

Rebate of maximum Rs. 2,500 for resident individuals having total income up to Rs. 3,50,000 [Section 87A]

With a view to provide tax relief to the individual tax payers who are in lower income bracket, the Act has provided rebate from the tax payable by an assessee, if the following condition and satisfied:

• The assessee is an individual
• He is resident in India,
• His total income does not exceed Rs. 3,50,000.

Quantum of Rebate:

The rebate shall be equal to the amount of income-tax payable on the total income for any assessment year, or Rs. 2,500, whichever is less.

Solved Examples

Q.1 (PGBP + IFOS + Deduction)

From the following Profit & Loss Account of Mr. Swaraj, Pune compute his total taxable income & Tax Liability from for A.Y 2020-21

Additional Information:

1. Printing Stationery & Advertisement Expenses is 50% related to Private purpose.
2. Allowable Depreciation as per Income Tax Act Rs 90,000.
3. Business receipts Rs 90,000 is not entered into Profit & Loss Account.
4. Depreciation on Patents @ 25% is allowed as deduction.

Solution:     Mr Swaraj

Statement showing calculation of total income & tax liability for AY 2020-21

Notes:

1. Income tax , wealth tax and penalty on GST are expressly disallowed.
2. Patents made during the year are of capital nature, hence disallowed.
3. Bad debts recovered are assumed as business incomes in absence of information.
4. Dividend on shares & FD interest are non business incomes.

Q.2 (PGBP + IFHP + IFOS + Deduction)

The following is the Profit & Loss account for previous year furnished by Mr. Sagar for financial year ended 31st March, 2020. (AY 2020-21)

Additional Information:

1. Salary includes Rs. 4,200 paid to domestic servant.
2. Advertisement includes Rs. 550 as expenditure incurred for selling house hold furniture.
3. Allowable depreciation as per Income Tax Rules Rs. l4,000.
4. VAT includes Rs. 500 as penalty for not filling return in time.
5. General expenses include Rs. 5850 as the gift given to friend on his marriage ceremony.

You are required to compute total Taxable income & tax liability thereon for relevant A. Y. 2020-21 of Mr. Sagar.

Solution:

Mr Sagar

Statement showing calculation of total income & tax liability for AY 2020-21

Notes:

1. Personal expenses like salary to domestic servant, advertisement for personal sale of asset and gift to friend are disallowed.
2. Income Tax and any penalties are expressly disallowed.
3. Depreciation as per P/L A/c is disallowed.
4. Bad debts recovered (not allowed earlier as deduction) is not taxable. Hence deducted.

Q.3 (IFS + IFHP + PGBP + CG + IFOS + Deductions)

Mr. Avinash aged 50 years working in PQR Ltd., Mumbai. He has furnished the following details on his income for the year ended 31.3.2020.

Compute total taxable Income & Tax liability of Mr. Avinash for the A.Y. 2020-2021.

Solution:

Mr Avinash

Statement showing calculation of total income & tax liability for AY 2020-21

Q.4 (IFS + PGBP + IFOS)

Mrs. Sharma is working in Mahendra Ltd. Delhi. She was furnished the following details of her income for the year 20l9-20.

1. Basic salary Rs. 28,000 p.m.
2. D.A. Rs. l7,200 p.m. (not considered for retirement benefit)
3. Bonus Rs. l,00,000.
4. Entertainment allowance Rs. 600 p.m.
5. Transport allowance (for coming to office & going back to her residence) Rs. l800 p.m.
6. Agricultural income from land situated at Sri Lanka Rs. 30,000.
7. Income from business Rs. 45,000.
8. Income from unit of UTI Rs. 4,500.
9. Interest on Debentures Rs. 12,000
10. She has taken life insurance policy of Rs. 2,00,000. LIC premium of Rs. 25,800 & professional tax Rs. 2,500 is paid by employer.
11. Repayment of loan borrowed for higher education of her son Rs. 59,000 including interest Rs. 29,000.

Compute the total taxable income & Tax payable by Mrs. Sharma for AY 2020-21.

Solution:

Mrs Sharma

Statement showing calculation of total income & tax liability for AY 2020-21

Note:

1. LIC Premium-  Lower of

1. Premium Paid       Rs 25,800
2. Limit of 20% of sum assured (2,00,000 x 20%)  Rs 40,000 Rs 25800

Computation Of Total Income & Tax Liability of HUF

Before discussing the Steps for computation of total income of HUF, the following points should be considered:

As per section 64(2), income from the transfer of a self acquired asset, without adequate consideration or conversion of the same into joint family property, shall not be treated as the income of the HUF. It shall continued to be taxed in the hands of the transferor who is the member of the HUF.

Similarly, income from an impartible estate is taxable in the hands of the holder of the estate and not in the hands of the HUF.

Any fee or remuneration received by a member of the HUF as a director or a partner in a company or firm which is as a result of the investment made in such concern out of the funds of the HUF, shall be treated as income of the HUF. However, if such fee or remuneration is earned by the member as a director or partner for services rendered purely in his personal capacity because of his personal aptitude to the business of the concern, it shall be treated as the income of the individual and not the HUF. In a case decided by the Supreme Court it has been held that remuneration and commission received by the Karta of HUF on account of his personal qualifications and exertions and not on account of investments of the family funds in the company cannot be treated as income of HUF.

If remuneration is paid to the Karta of a HUF or any other member of HUF:

• Under a valid agreement which is bona fide
• Is in the interest of, and expedient for, the business of the family, and
• The payment is genuine and not excessive

Such remuneration paid wholly and exclusively for the business of the family, shall be allowable as an expenditure while computing the income of the HUF and such salary shall be taxable in the hands of karta/member as his individual income.

As already discussed above, the son is not a coparcener in Dayabhaga School of law. Therefore, if the father does not have a brother as a coparcener, income arising from ancestral property is taxable as his individual income.

Karta in his individual capacity and Karta representing HUF are two different entities. HUF can sublet its contract to Karta in his individual capacity. Income earned by Karta in his individual capacity from such contract cannot be assessed in the hands of HUF.

Steps involved in computation of total income and tax liability of HUF:

Step 1: The Gross Total Income of HUF, like any other person, shall be computed under four heads of income, on the basis of their residential status. There can be no income under the head income from salaries in the case of HUF.

Step 2: Sections 60 to 63 relating to income of other person included in the assessee’s total income are applicable in case of HUF but section 64 is not applicable to HUF as it is applicable in case of individual assessee only.

Step 3: Set off of losses is permissible while aggregating the income under different heads of income.

Step 4: Carry forward and set off of losses of past years, if permissible, is allowed.

Step 5: The income computed in steps 1 to 4 is known as gross total income from which the deductions u/s 80C, 80D, 80DD, 80DDB, 80G, 80GGA, 80GGC, 80-IA, 80-IB, 80-IBA, 80-IC, 80- ID, 80-IE, 80JJA, 80JJAA, 80TTA will be allowed.

Step 6: The balance income after allowing the deductions is known as Total income which will be rounded off to the nearest Rs. 10.

Step 7: Compute the tax on such total income at the prescribed rates of tax i.e. at special rates and normal slab rates.

Step 8: Add surcharge @ 10% on total income exceeding Rs. 50,00,000 and upto Rs. 1 crore and 15% of such income tax in case of a person having a total income exceeding Rs.  1 crore.

Step 9: Education cess @ 2% plus SHEC @ 1% on the tax plus surcharge if any, shall be levied.

Step 10: Deduct the TDS, advance tax paid for the relevant assessment year and double taxation relief under section 90, 90A or 91. The balance is the net tax payable which will be rounded off to nearest Rs. 10 and must be paid as self-assessment tax before submitting the return of income.

References:

1. Www.taxguru.com
2. Income Tax Act with Gist of Supreme Court Rulings Book (Bharat Law House.)
3. Income Tax Law & Accounts For B.Com Vth Semester of Calicut University  (English, Paperback, Dr. H.C. Mehrotra, Dr. S.P. Goyal)