Unit 5
Computation of total income of individuals
Q1) What is the procedure for computation of total income and tax liability of an individual?
A1) According to section 2(45) total income means the total amount of income referred to in section 5, computed in the manner laid down in this Act. Section 5 of the act provides scope of total Income-
(1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which-
(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year; or
(c) accrues or arises to him outside India during such year:
Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section (6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.
(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which—
(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year.
Q2) What types of income included in aggregated income of the assessee?
A2) Aggregated income of the assessee includes the following incomes:
Income of the assessee
Deemed Incomes
Clubbing of Incomes
Share of a member in the income of (a) Association of persons (AOP) or (b) Body of individuals (BOI)
Q3) What is deemed incomes?
A3) There are certain such incomes or amounts which apparently are not the income of the assessee even then they are deemed to be the income of the assessee under the various provisions of the Income Tax Act. Such incomes are added to the income of assessee and are called 'Deemed Incomes'.
Q4) What is Clubbing of income? Explain.
A4) According to these provisions to the extent of transfer of income to the other person or to the extent of income earned by such person on such transfers shall be included in the total income of the assessee. Such inclusion of income of other person in the income of the assessee is called ‘Clubbing of Income’. Provisions of Clubbing of Income areas under:
1. Transfer of Income without Transfer of Assets
If an income earned through an asset is transferred by a person to another person without transferring the ownership of the asset, the income from such asset shall be deemed to be the income of the transferor and shall be included in his total income.
2. Revocable Transfer of Assets (Section 61)
Where a revocable transfer is made of an asset by one person to another person, any income arising or derived from such assets shall be deemed to be the income of the transferor and shall be included in his total income. A transfer shall be deemed to be revocable if
i)It contains any provision for the retransfer directly or indirectly of the whole or any part of the income or assets to the transferor, or
Ii) It (Transfer) in any way, give the transferor a right to reassume power directly or indirectly over the whole or any part of the income or assets.
Transfer includes any settlement, trust, covenant, agreement or arrangement (Sec. 63).
3.Salary, Commission, Fees, or Any Other Remuneration to the Spouse (Section 64)
In computing the total income of an individual, there shall be included all such income as arises directly or indirectly to the spouse of such individual by way of salary, commission, fees or any other form of remuneration whether in cash or in kind from a concern in which such individual has a substantial interest. However, these provisions will not apply on the income of such spouse who possesses Technical or Professional Qualifications and the income is solely attributable to the application of his or her Technical or Professional knowledge and experience. In case of a company, an individual is considered as deemed to have substantial interest, if he beneficially has at least 20% equity shares along with his relatives at any time during the previous year. The shares must carry voting rights. In any other case (where the concern is not a company), the individual along with his relatives is entitled to at least 20% of the profits of the concern at any time during the previous year. If each spouse has substantial interest in a concern and both are in receipt of remuneration from such concern, the remuneration shall be clubbed in the income of that spouse (husband or wife) whose total income is higher excluding such remuneration. Spouse means husband or wife and the clubbing is limited to the incomes of salary, commission, fees or any other remuneration received by the spouse, directly or indirectly and in cash or kind.
4. Income from Assets Transferred to Spouse [Section 64 (1) iv]
Where an individual transfers his asset (excluding house property) directly or indirectly, to his spouse, any income from such asset is deemed to be the income of the transferor. However, these provisions will not apply in the following circumstances:
i) If the transfer is made for adequate consideration.
Ii) If the transfer is made under an agreement between the spouses to live apart. Such separation may be judicial or voluntary. In the cases, where the consideration is not adequate, proportionate income shall be included in the income of the transferor. The income from house property transferred to spouse shall be taxed under the head 'Income from House Property' in the hands of transferor and not in the hands of transferee.
5. Income from Assets Transferred to Daughter-in-law (Son's wife) [Section 64 (1) (vi)]
Income arising from transfer of an asset by an individual directly or indirectly on or after the 1st day of June 1973 without adequate consideration to son's wife (daughter-in-law) is included in the total income of the transferor.
6. Income from Assets Transferred to a Person or Association of Persons for the Benefit of Spouse [Section 64 (1) (vii)]
Income arising from transfer of an asset directly or indirectly by an individual without adequate consideration to a person or Association of Persons for the immediate or deferred benefit of his or her spouse shall be included in the total income of the transferor to the extent it is for the benefit of the spouse.
7. Income from Assets Transferred to a Person or Association of Persons for the Benefit of Son's Wife [Section 64 (1) (viii)]
Income arising from transfer of an asset after 31.05.1973, directly or indirectly by an individual without adequate consideration to a person or Association of Persons for the immediate or deferred benefit of son's wife, shall be included in the total income of the transferor to the extent it is for the benefit of the son's wife.
8. Income to the Spouse or Son's wife from investment of Transferred Asset
Where the individual has transferred any asset or assets directly or indirectly to the spouse or son's wife and such assets are invested by the transferee.
a) In any business, such investment being not in the nature of contribution of capital as a partner in a firm or for being admitted to the benefits of partnership in a firm, the amount as calculated in the following manner shall be included in the total income of the transferor =
Value of the asset transferred by the Transferor on the 1st day of previous Year/ Total Investment in the business by the transfer as on the 1st day of previous year × Income from the business to the transferee
b) In any business, such investment in the nature of contribution of capital
As a partner in a firm, the amount as calculated in the following manner,
Shall be included in the total income of the transferor =
Such capital contribution of the transferee as on 1st day of previous year/ Total capital contribution of the transferee as on 1st day of previous year × Total Income received by the transferee from the firm.
Q5) What is Income of a minor child?
A5) Every income of a minor child not being a minor child suffering from any, disability of the nature specified in Section 80 U shall be included (clubbed) in the income of his/her parent. Income includes both which arises or accrues to the minor. However, the following incomes shall not be included in the total income of parent:
a) Income as arises or accrues to the minor child on account of any manual work done by him; or
b) Income as arises or accrues to the minor child from any activity involving application of his skill, talent or specialized knowledge and experience.
Q6) What are the rules of clubbing of a minor’s income in the income of a parent?
A6) a) Where the marriage of his (minor's) parent subsists, income shall be clubbed in the income of that parent whose total income (excluding the income of minor child) is greater, for example, if in the previous year, exclusive income of mother is Rs 6,00,000 and father’s income is Rs 7,00,000 (without adding minor’s income in both the cases), and the minor’s income in the previous year is Rs 2,00,000, then, minor’s income shall be included in the income of the father because his exclusive income is greater.
b) Where the marriage of his parent does not subsist, the income of the minor child shall be included (clubbed) in the minor child in the income of that parent who maintains the minor child in the previous year.
Where any income of minor is once included in the total income of either parent, any such income arising in any succeeding year shall not be included in the total income of the other parent unless the Assessing Officer is satisfied and gives approval for doing so. If a minor child's income is included in the total income of an individual (any parent), such individual shall be entitled to the following exemption in respect of each minor child separately:
The income of the minor child so included
Or Rs. 1,500 (Whichever is less).
Q7) What is Income from converted property?
A7) Income from converted property
If an individual who is a member of H.U.F. Converts any asset owned by him into asset of HUF without adequate consideration after 31.12.1969, then the income from such asset shall be deemed to be the income of the individual and not of the H.U.F. And shall be included in the total income of the transferor (individual). If such converted property is partitioned subsequently, the income earned/received from such converted property or transferred property as is received by the spouse of the transferor, shall be deemed to be the income of the transferor and shall be included in his total income.
Q8) What is Clubbing of negative incomes (losses)?
A8) Losses are also called Negative Incomes. Since incomes of other persons (transferee) may be clubbed in the income of transferor, the negative incomes or losses shall be taken into account in computing the income of transferor for such purpose. Thus, it may be concluded that for the purpose of clubbing provision income includes, loss also.
Q9) What is Cross transactions?
A9) Cross Transfers are the transfers which are intimately connected by agreement so as to form part of a single transaction, and each transfer constitutes consideration for the other. In such cross transfers, income shall be clubbed in the hands of deemed transferor and the provisions of Section 64 will be applicable.
Q10) What is the stepwise procedure for computation of total income and tax liability of an individual?
A10) The stepwise procedure for computation of total income and tax liability of an individual are stated below-
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/ss 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 up to Rs. 3,50,000. For details see below.
Step 9: Add surcharge @ 10% on total income exceeding Rs. 50,00,000 and up to 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.
Q11) What is Cash Credits (Section 68)?
A11) Any amount credited in the books of accounts of assessee in the previous year for which assessee does not offer satisfactory explanation regarding nature and source of such credit, to the assessing officer then such credited amount may be added to the income of assessee and tax may be charged on it. Share application money, share capital, security premium reserve etc. if found credited in the accounts of closely held company, then it will be deemed unexplained unless it is explained to the satisfaction of assessing officer by the resident person in whose name such credit is recorded in the books of such company. However, if such explanation does not satisfy the Assessing Officer (A.O.), the amount so credited shall be deemed to be the income of the company in whose account such amount was found credited. This is to be noted that, this provision is not applicable, if the sum is recorded in the name of a Venture Capital Fund or a Venture Capital Company. The unexplained income shall be taxable @ 60% + surcharge (if applicable) + 4% Health and Education Cess (HEC).
Q12) What are Unexplained Investments (Section 69)?
A12) If in the relevant previous year, the assessee has made investments which are not recorded in the books of accounts, if any maintained by him for any source of income, and the assessee offers no explanation about the nature and source of money invested or the explanation offered by him is not satisfactory in the opinion of the Assessing Officer, the value of the investments may be deemed to be the income of the assessee for such previous year and tax will be imposed on such income.
Q13) What are Unexplained Money etc. (Section 69 A)?
A13) If in any financial year, the assessee is found to be the owner of any money, bullion, jewellery or other valuable article which is not recorded in the books of accounts, if any, maintained by him for any source of income and the assessee offers no explanation about the nature and source of acquisition of money, bullion, jewellery and other valuable article or the explanation offered by him is not in the opinion of Assessing Officer satisfactory, the money and the value of the bullion, jewellery, or other valuable article may be deemed to be the income of the assessee for such financial year and will be included in his total income and then, tax will be imposed on it.
Q14) Write in brief Investment Amount etc not Fully Disclosed in the Books of Accounts (Section 69 B).
A14) If in any financial year, the assesse has made investments or is found to be the owner of any bullion jewellery, or other valuable article and the Assessing Officer finds that the amount expanded on making such investments or in acquiring such bullion, Jewellery or other valuable articles exceeds the amount recorded in this behalf in the books of accounts maintained by the assessee for any source of income and the assessee offers no explanation about such excess amount or the explanation offered by him is not, in the opinion of the Assessing Officer is satisfactory, the excess amount may be deemed to be the income of the assessee for such financial year, in which the investment has been taken and the assessee is being found to be the owner of the investment and such income will be included in his total income and tax will be imposed.
Q15) What are Unexplained Expenditure etc. (Section 69 C)?
A15) If in any financial year, an assessee has incurred any expenditure and the assessee is unable to give a satisfactory explanation about the source of money for such expenditure or part thereof, then such expenditure is deemed to be his income for that financial year and added to his total income and then tax will be imposed. Such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income.
Q16) Write in brief amount Borrowed or Repaid on Hundi (Section 69 D).
A16) Amount borrowed on hundis and its repayment must be made by Account Payee Cheque otherwise amount of such borrowing or amount repaid shall be treated as the income of the person borrowing or repaying the amount for the previous year in which such transaction is made. Repayment of the amount shall include the amount of interest on the amount borrowed. It must be noted that if any amount borrowed on a Hundi and which has been deemed as income, it shall not be deemed as income again when such amount is repaid.
Q17) What is Taxation of Deemed Incomes?
A17) Incomes falling under Sections (68, 69, 69 A, 69B, 69C and 69D) as deemed incomes shall be charged to tax @ 30% plus (Surcharge and Cess as applicable). In the aforesaid Section, no deduction in respect of any expenditure or allowance or set off of any loss shall be allowed to the assessee in computing deemed income.
Q18) What is Income from the accretion to assets?
A18) Income arising to the transferee from the property transferred without consideration to him is taxable in the hands of the transferor. However, if an income arises from accretion of such property or from accumulated income of such property to the transferee, it will not be included in the total income of the transferor and shall be taxable in the hands of the transferee.
Q19) What is Aggregation of income section 2(45)?
A19) Section 2 (45) describes Total Income for which an assessee is chargeable to tax and which is computed as per the provisions and the manners prescribed in the Act. It means, that the Total Income of an assessee includes all such incomes which are chargeable to tax however, there are circumstances in which such income is also included in assessee's Total Income, on which income tax is not payable. The Procedure of including such incomes in an assessee's Total Income, on which income tax is not payable, is termed as 'Aggregation of Income'. According to Section 66 of the Act, in computing the total income of an assessee, there shall be included all income on which no income tax is payable.' According to Section 86 of the Act, share of an assessee in the income of an association of persons (AOP) or Body of Individuals (BOI) is such income. Rules for inclusion of its share are as under:
1) If an assessee is a member of Association of Persons (AOP) or Body of Individuals (BOI), the share of assessee in AOP or BOI shall be included in his total income, However, if the AOP or BOI is liable to pay tax on its total income, the assessee shall be entitled to rebate of such income tax on such share of income including any remuneration at the average rate of income tax.
2) Where the assessee is a member of AOP or BOI but such AOP or BOI is not liable to pay tax on its total income, the assessee shall not be entitled to rebate of income tax on his share of income from such AOP or BOI. It means the assessee will pay tax on such income.
3) If the total income of AOP or BOI is chargeable to tax at the maximum marginal rate or any higher rate, under any of the provision of this act, the share income of the member assessee of such AOP or BOI shall not be included in his Total Income. In such case, the assessee's share of income from AOP or BOI shall be exempt from tax.
Q20) What is Benami transaction?
A20) When a person enters into a transaction in the name of a person other than the real person, it is called Benami Transaction and the person in whose name the transaction is made is called Benamidar. The purpose of such transaction used to avoid tax. If the Assessing Officer considers that a particular transaction is Benami, then, he may treat income of such Benami Transaction as the income of real person and it is taxed in the hands of real person.
Unit 5
Computation of total income of individuals
Q1) What is the procedure for computation of total income and tax liability of an individual?
A1) According to section 2(45) total income means the total amount of income referred to in section 5, computed in the manner laid down in this Act. Section 5 of the act provides scope of total Income-
(1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which-
(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year; or
(c) accrues or arises to him outside India during such year:
Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section (6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.
(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which—
(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year.
Q2) What types of income included in aggregated income of the assessee?
A2) Aggregated income of the assessee includes the following incomes:
Income of the assessee
Deemed Incomes
Clubbing of Incomes
Share of a member in the income of (a) Association of persons (AOP) or (b) Body of individuals (BOI)
Q3) What is deemed incomes?
A3) There are certain such incomes or amounts which apparently are not the income of the assessee even then they are deemed to be the income of the assessee under the various provisions of the Income Tax Act. Such incomes are added to the income of assessee and are called 'Deemed Incomes'.
Q4) What is Clubbing of income? Explain.
A4) According to these provisions to the extent of transfer of income to the other person or to the extent of income earned by such person on such transfers shall be included in the total income of the assessee. Such inclusion of income of other person in the income of the assessee is called ‘Clubbing of Income’. Provisions of Clubbing of Income areas under:
1. Transfer of Income without Transfer of Assets
If an income earned through an asset is transferred by a person to another person without transferring the ownership of the asset, the income from such asset shall be deemed to be the income of the transferor and shall be included in his total income.
2. Revocable Transfer of Assets (Section 61)
Where a revocable transfer is made of an asset by one person to another person, any income arising or derived from such assets shall be deemed to be the income of the transferor and shall be included in his total income. A transfer shall be deemed to be revocable if
i)It contains any provision for the retransfer directly or indirectly of the whole or any part of the income or assets to the transferor, or
Ii) It (Transfer) in any way, give the transferor a right to reassume power directly or indirectly over the whole or any part of the income or assets.
Transfer includes any settlement, trust, covenant, agreement or arrangement (Sec. 63).
3.Salary, Commission, Fees, or Any Other Remuneration to the Spouse (Section 64)
In computing the total income of an individual, there shall be included all such income as arises directly or indirectly to the spouse of such individual by way of salary, commission, fees or any other form of remuneration whether in cash or in kind from a concern in which such individual has a substantial interest. However, these provisions will not apply on the income of such spouse who possesses Technical or Professional Qualifications and the income is solely attributable to the application of his or her Technical or Professional knowledge and experience. In case of a company, an individual is considered as deemed to have substantial interest, if he beneficially has at least 20% equity shares along with his relatives at any time during the previous year. The shares must carry voting rights. In any other case (where the concern is not a company), the individual along with his relatives is entitled to at least 20% of the profits of the concern at any time during the previous year. If each spouse has substantial interest in a concern and both are in receipt of remuneration from such concern, the remuneration shall be clubbed in the income of that spouse (husband or wife) whose total income is higher excluding such remuneration. Spouse means husband or wife and the clubbing is limited to the incomes of salary, commission, fees or any other remuneration received by the spouse, directly or indirectly and in cash or kind.
4. Income from Assets Transferred to Spouse [Section 64 (1) iv]
Where an individual transfers his asset (excluding house property) directly or indirectly, to his spouse, any income from such asset is deemed to be the income of the transferor. However, these provisions will not apply in the following circumstances:
i) If the transfer is made for adequate consideration.
Ii) If the transfer is made under an agreement between the spouses to live apart. Such separation may be judicial or voluntary. In the cases, where the consideration is not adequate, proportionate income shall be included in the income of the transferor. The income from house property transferred to spouse shall be taxed under the head 'Income from House Property' in the hands of transferor and not in the hands of transferee.
5. Income from Assets Transferred to Daughter-in-law (Son's wife) [Section 64 (1) (vi)]
Income arising from transfer of an asset by an individual directly or indirectly on or after the 1st day of June 1973 without adequate consideration to son's wife (daughter-in-law) is included in the total income of the transferor.
6. Income from Assets Transferred to a Person or Association of Persons for the Benefit of Spouse [Section 64 (1) (vii)]
Income arising from transfer of an asset directly or indirectly by an individual without adequate consideration to a person or Association of Persons for the immediate or deferred benefit of his or her spouse shall be included in the total income of the transferor to the extent it is for the benefit of the spouse.
7. Income from Assets Transferred to a Person or Association of Persons for the Benefit of Son's Wife [Section 64 (1) (viii)]
Income arising from transfer of an asset after 31.05.1973, directly or indirectly by an individual without adequate consideration to a person or Association of Persons for the immediate or deferred benefit of son's wife, shall be included in the total income of the transferor to the extent it is for the benefit of the son's wife.
8. Income to the Spouse or Son's wife from investment of Transferred Asset
Where the individual has transferred any asset or assets directly or indirectly to the spouse or son's wife and such assets are invested by the transferee.
a) In any business, such investment being not in the nature of contribution of capital as a partner in a firm or for being admitted to the benefits of partnership in a firm, the amount as calculated in the following manner shall be included in the total income of the transferor =
Value of the asset transferred by the Transferor on the 1st day of previous Year/ Total Investment in the business by the transfer as on the 1st day of previous year × Income from the business to the transferee
b) In any business, such investment in the nature of contribution of capital
As a partner in a firm, the amount as calculated in the following manner,
Shall be included in the total income of the transferor =
Such capital contribution of the transferee as on 1st day of previous year/ Total capital contribution of the transferee as on 1st day of previous year × Total Income received by the transferee from the firm.
Q5) What is Income of a minor child?
A5) Every income of a minor child not being a minor child suffering from any, disability of the nature specified in Section 80 U shall be included (clubbed) in the income of his/her parent. Income includes both which arises or accrues to the minor. However, the following incomes shall not be included in the total income of parent:
a) Income as arises or accrues to the minor child on account of any manual work done by him; or
b) Income as arises or accrues to the minor child from any activity involving application of his skill, talent or specialized knowledge and experience.
Q6) What are the rules of clubbing of a minor’s income in the income of a parent?
A6) a) Where the marriage of his (minor's) parent subsists, income shall be clubbed in the income of that parent whose total income (excluding the income of minor child) is greater, for example, if in the previous year, exclusive income of mother is Rs 6,00,000 and father’s income is Rs 7,00,000 (without adding minor’s income in both the cases), and the minor’s income in the previous year is Rs 2,00,000, then, minor’s income shall be included in the income of the father because his exclusive income is greater.
b) Where the marriage of his parent does not subsist, the income of the minor child shall be included (clubbed) in the minor child in the income of that parent who maintains the minor child in the previous year.
Where any income of minor is once included in the total income of either parent, any such income arising in any succeeding year shall not be included in the total income of the other parent unless the Assessing Officer is satisfied and gives approval for doing so. If a minor child's income is included in the total income of an individual (any parent), such individual shall be entitled to the following exemption in respect of each minor child separately:
The income of the minor child so included
Or Rs. 1,500 (Whichever is less).
Q7) What is Income from converted property?
A7) Income from converted property
If an individual who is a member of H.U.F. Converts any asset owned by him into asset of HUF without adequate consideration after 31.12.1969, then the income from such asset shall be deemed to be the income of the individual and not of the H.U.F. And shall be included in the total income of the transferor (individual). If such converted property is partitioned subsequently, the income earned/received from such converted property or transferred property as is received by the spouse of the transferor, shall be deemed to be the income of the transferor and shall be included in his total income.
Q8) What is Clubbing of negative incomes (losses)?
A8) Losses are also called Negative Incomes. Since incomes of other persons (transferee) may be clubbed in the income of transferor, the negative incomes or losses shall be taken into account in computing the income of transferor for such purpose. Thus, it may be concluded that for the purpose of clubbing provision income includes, loss also.
Q9) What is Cross transactions?
A9) Cross Transfers are the transfers which are intimately connected by agreement so as to form part of a single transaction, and each transfer constitutes consideration for the other. In such cross transfers, income shall be clubbed in the hands of deemed transferor and the provisions of Section 64 will be applicable.
Q10) What is the stepwise procedure for computation of total income and tax liability of an individual?
A10) The stepwise procedure for computation of total income and tax liability of an individual are stated below-
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/ss 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 up to Rs. 3,50,000. For details see below.
Step 9: Add surcharge @ 10% on total income exceeding Rs. 50,00,000 and up to 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.
Q11) What is Cash Credits (Section 68)?
A11) Any amount credited in the books of accounts of assessee in the previous year for which assessee does not offer satisfactory explanation regarding nature and source of such credit, to the assessing officer then such credited amount may be added to the income of assessee and tax may be charged on it. Share application money, share capital, security premium reserve etc. if found credited in the accounts of closely held company, then it will be deemed unexplained unless it is explained to the satisfaction of assessing officer by the resident person in whose name such credit is recorded in the books of such company. However, if such explanation does not satisfy the Assessing Officer (A.O.), the amount so credited shall be deemed to be the income of the company in whose account such amount was found credited. This is to be noted that, this provision is not applicable, if the sum is recorded in the name of a Venture Capital Fund or a Venture Capital Company. The unexplained income shall be taxable @ 60% + surcharge (if applicable) + 4% Health and Education Cess (HEC).
Q12) What are Unexplained Investments (Section 69)?
A12) If in the relevant previous year, the assessee has made investments which are not recorded in the books of accounts, if any maintained by him for any source of income, and the assessee offers no explanation about the nature and source of money invested or the explanation offered by him is not satisfactory in the opinion of the Assessing Officer, the value of the investments may be deemed to be the income of the assessee for such previous year and tax will be imposed on such income.
Q13) What are Unexplained Money etc. (Section 69 A)?
A13) If in any financial year, the assessee is found to be the owner of any money, bullion, jewellery or other valuable article which is not recorded in the books of accounts, if any, maintained by him for any source of income and the assessee offers no explanation about the nature and source of acquisition of money, bullion, jewellery and other valuable article or the explanation offered by him is not in the opinion of Assessing Officer satisfactory, the money and the value of the bullion, jewellery, or other valuable article may be deemed to be the income of the assessee for such financial year and will be included in his total income and then, tax will be imposed on it.
Q14) Write in brief Investment Amount etc not Fully Disclosed in the Books of Accounts (Section 69 B).
A14) If in any financial year, the assesse has made investments or is found to be the owner of any bullion jewellery, or other valuable article and the Assessing Officer finds that the amount expanded on making such investments or in acquiring such bullion, Jewellery or other valuable articles exceeds the amount recorded in this behalf in the books of accounts maintained by the assessee for any source of income and the assessee offers no explanation about such excess amount or the explanation offered by him is not, in the opinion of the Assessing Officer is satisfactory, the excess amount may be deemed to be the income of the assessee for such financial year, in which the investment has been taken and the assessee is being found to be the owner of the investment and such income will be included in his total income and tax will be imposed.
Q15) What are Unexplained Expenditure etc. (Section 69 C)?
A15) If in any financial year, an assessee has incurred any expenditure and the assessee is unable to give a satisfactory explanation about the source of money for such expenditure or part thereof, then such expenditure is deemed to be his income for that financial year and added to his total income and then tax will be imposed. Such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income.
Q16) Write in brief amount Borrowed or Repaid on Hundi (Section 69 D).
A16) Amount borrowed on hundis and its repayment must be made by Account Payee Cheque otherwise amount of such borrowing or amount repaid shall be treated as the income of the person borrowing or repaying the amount for the previous year in which such transaction is made. Repayment of the amount shall include the amount of interest on the amount borrowed. It must be noted that if any amount borrowed on a Hundi and which has been deemed as income, it shall not be deemed as income again when such amount is repaid.
Q17) What is Taxation of Deemed Incomes?
A17) Incomes falling under Sections (68, 69, 69 A, 69B, 69C and 69D) as deemed incomes shall be charged to tax @ 30% plus (Surcharge and Cess as applicable). In the aforesaid Section, no deduction in respect of any expenditure or allowance or set off of any loss shall be allowed to the assessee in computing deemed income.
Q18) What is Income from the accretion to assets?
A18) Income arising to the transferee from the property transferred without consideration to him is taxable in the hands of the transferor. However, if an income arises from accretion of such property or from accumulated income of such property to the transferee, it will not be included in the total income of the transferor and shall be taxable in the hands of the transferee.
Q19) What is Aggregation of income section 2(45)?
A19) Section 2 (45) describes Total Income for which an assessee is chargeable to tax and which is computed as per the provisions and the manners prescribed in the Act. It means, that the Total Income of an assessee includes all such incomes which are chargeable to tax however, there are circumstances in which such income is also included in assessee's Total Income, on which income tax is not payable. The Procedure of including such incomes in an assessee's Total Income, on which income tax is not payable, is termed as 'Aggregation of Income'. According to Section 66 of the Act, in computing the total income of an assessee, there shall be included all income on which no income tax is payable.' According to Section 86 of the Act, share of an assessee in the income of an association of persons (AOP) or Body of Individuals (BOI) is such income. Rules for inclusion of its share are as under:
1) If an assessee is a member of Association of Persons (AOP) or Body of Individuals (BOI), the share of assessee in AOP or BOI shall be included in his total income, However, if the AOP or BOI is liable to pay tax on its total income, the assessee shall be entitled to rebate of such income tax on such share of income including any remuneration at the average rate of income tax.
2) Where the assessee is a member of AOP or BOI but such AOP or BOI is not liable to pay tax on its total income, the assessee shall not be entitled to rebate of income tax on his share of income from such AOP or BOI. It means the assessee will pay tax on such income.
3) If the total income of AOP or BOI is chargeable to tax at the maximum marginal rate or any higher rate, under any of the provision of this act, the share income of the member assessee of such AOP or BOI shall not be included in his Total Income. In such case, the assessee's share of income from AOP or BOI shall be exempt from tax.
Q20) What is Benami transaction?
A20) When a person enters into a transaction in the name of a person other than the real person, it is called Benami Transaction and the person in whose name the transaction is made is called Benamidar. The purpose of such transaction used to avoid tax. If the Assessing Officer considers that a particular transaction is Benami, then, he may treat income of such Benami Transaction as the income of real person and it is taxed in the hands of real person.
Unit 5
Computation of total income of individuals
Q1) What is the procedure for computation of total income and tax liability of an individual?
A1) According to section 2(45) total income means the total amount of income referred to in section 5, computed in the manner laid down in this Act. Section 5 of the act provides scope of total Income-
(1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which-
(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year; or
(c) accrues or arises to him outside India during such year:
Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section (6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.
(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which—
(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year.
Q2) What types of income included in aggregated income of the assessee?
A2) Aggregated income of the assessee includes the following incomes:
Income of the assessee
Deemed Incomes
Clubbing of Incomes
Share of a member in the income of (a) Association of persons (AOP) or (b) Body of individuals (BOI)
Q3) What is deemed incomes?
A3) There are certain such incomes or amounts which apparently are not the income of the assessee even then they are deemed to be the income of the assessee under the various provisions of the Income Tax Act. Such incomes are added to the income of assessee and are called 'Deemed Incomes'.
Q4) What is Clubbing of income? Explain.
A4) According to these provisions to the extent of transfer of income to the other person or to the extent of income earned by such person on such transfers shall be included in the total income of the assessee. Such inclusion of income of other person in the income of the assessee is called ‘Clubbing of Income’. Provisions of Clubbing of Income areas under:
1. Transfer of Income without Transfer of Assets
If an income earned through an asset is transferred by a person to another person without transferring the ownership of the asset, the income from such asset shall be deemed to be the income of the transferor and shall be included in his total income.
2. Revocable Transfer of Assets (Section 61)
Where a revocable transfer is made of an asset by one person to another person, any income arising or derived from such assets shall be deemed to be the income of the transferor and shall be included in his total income. A transfer shall be deemed to be revocable if
i)It contains any provision for the retransfer directly or indirectly of the whole or any part of the income or assets to the transferor, or
Ii) It (Transfer) in any way, give the transferor a right to reassume power directly or indirectly over the whole or any part of the income or assets.
Transfer includes any settlement, trust, covenant, agreement or arrangement (Sec. 63).
3.Salary, Commission, Fees, or Any Other Remuneration to the Spouse (Section 64)
In computing the total income of an individual, there shall be included all such income as arises directly or indirectly to the spouse of such individual by way of salary, commission, fees or any other form of remuneration whether in cash or in kind from a concern in which such individual has a substantial interest. However, these provisions will not apply on the income of such spouse who possesses Technical or Professional Qualifications and the income is solely attributable to the application of his or her Technical or Professional knowledge and experience. In case of a company, an individual is considered as deemed to have substantial interest, if he beneficially has at least 20% equity shares along with his relatives at any time during the previous year. The shares must carry voting rights. In any other case (where the concern is not a company), the individual along with his relatives is entitled to at least 20% of the profits of the concern at any time during the previous year. If each spouse has substantial interest in a concern and both are in receipt of remuneration from such concern, the remuneration shall be clubbed in the income of that spouse (husband or wife) whose total income is higher excluding such remuneration. Spouse means husband or wife and the clubbing is limited to the incomes of salary, commission, fees or any other remuneration received by the spouse, directly or indirectly and in cash or kind.
4. Income from Assets Transferred to Spouse [Section 64 (1) iv]
Where an individual transfers his asset (excluding house property) directly or indirectly, to his spouse, any income from such asset is deemed to be the income of the transferor. However, these provisions will not apply in the following circumstances:
i) If the transfer is made for adequate consideration.
Ii) If the transfer is made under an agreement between the spouses to live apart. Such separation may be judicial or voluntary. In the cases, where the consideration is not adequate, proportionate income shall be included in the income of the transferor. The income from house property transferred to spouse shall be taxed under the head 'Income from House Property' in the hands of transferor and not in the hands of transferee.
5. Income from Assets Transferred to Daughter-in-law (Son's wife) [Section 64 (1) (vi)]
Income arising from transfer of an asset by an individual directly or indirectly on or after the 1st day of June 1973 without adequate consideration to son's wife (daughter-in-law) is included in the total income of the transferor.
6. Income from Assets Transferred to a Person or Association of Persons for the Benefit of Spouse [Section 64 (1) (vii)]
Income arising from transfer of an asset directly or indirectly by an individual without adequate consideration to a person or Association of Persons for the immediate or deferred benefit of his or her spouse shall be included in the total income of the transferor to the extent it is for the benefit of the spouse.
7. Income from Assets Transferred to a Person or Association of Persons for the Benefit of Son's Wife [Section 64 (1) (viii)]
Income arising from transfer of an asset after 31.05.1973, directly or indirectly by an individual without adequate consideration to a person or Association of Persons for the immediate or deferred benefit of son's wife, shall be included in the total income of the transferor to the extent it is for the benefit of the son's wife.
8. Income to the Spouse or Son's wife from investment of Transferred Asset
Where the individual has transferred any asset or assets directly or indirectly to the spouse or son's wife and such assets are invested by the transferee.
a) In any business, such investment being not in the nature of contribution of capital as a partner in a firm or for being admitted to the benefits of partnership in a firm, the amount as calculated in the following manner shall be included in the total income of the transferor =
Value of the asset transferred by the Transferor on the 1st day of previous Year/ Total Investment in the business by the transfer as on the 1st day of previous year × Income from the business to the transferee
b) In any business, such investment in the nature of contribution of capital
As a partner in a firm, the amount as calculated in the following manner,
Shall be included in the total income of the transferor =
Such capital contribution of the transferee as on 1st day of previous year/ Total capital contribution of the transferee as on 1st day of previous year × Total Income received by the transferee from the firm.
Q5) What is Income of a minor child?
A5) Every income of a minor child not being a minor child suffering from any, disability of the nature specified in Section 80 U shall be included (clubbed) in the income of his/her parent. Income includes both which arises or accrues to the minor. However, the following incomes shall not be included in the total income of parent:
a) Income as arises or accrues to the minor child on account of any manual work done by him; or
b) Income as arises or accrues to the minor child from any activity involving application of his skill, talent or specialized knowledge and experience.
Q6) What are the rules of clubbing of a minor’s income in the income of a parent?
A6) a) Where the marriage of his (minor's) parent subsists, income shall be clubbed in the income of that parent whose total income (excluding the income of minor child) is greater, for example, if in the previous year, exclusive income of mother is Rs 6,00,000 and father’s income is Rs 7,00,000 (without adding minor’s income in both the cases), and the minor’s income in the previous year is Rs 2,00,000, then, minor’s income shall be included in the income of the father because his exclusive income is greater.
b) Where the marriage of his parent does not subsist, the income of the minor child shall be included (clubbed) in the minor child in the income of that parent who maintains the minor child in the previous year.
Where any income of minor is once included in the total income of either parent, any such income arising in any succeeding year shall not be included in the total income of the other parent unless the Assessing Officer is satisfied and gives approval for doing so. If a minor child's income is included in the total income of an individual (any parent), such individual shall be entitled to the following exemption in respect of each minor child separately:
The income of the minor child so included
Or Rs. 1,500 (Whichever is less).
Q7) What is Income from converted property?
A7) Income from converted property
If an individual who is a member of H.U.F. Converts any asset owned by him into asset of HUF without adequate consideration after 31.12.1969, then the income from such asset shall be deemed to be the income of the individual and not of the H.U.F. And shall be included in the total income of the transferor (individual). If such converted property is partitioned subsequently, the income earned/received from such converted property or transferred property as is received by the spouse of the transferor, shall be deemed to be the income of the transferor and shall be included in his total income.
Q8) What is Clubbing of negative incomes (losses)?
A8) Losses are also called Negative Incomes. Since incomes of other persons (transferee) may be clubbed in the income of transferor, the negative incomes or losses shall be taken into account in computing the income of transferor for such purpose. Thus, it may be concluded that for the purpose of clubbing provision income includes, loss also.
Q9) What is Cross transactions?
A9) Cross Transfers are the transfers which are intimately connected by agreement so as to form part of a single transaction, and each transfer constitutes consideration for the other. In such cross transfers, income shall be clubbed in the hands of deemed transferor and the provisions of Section 64 will be applicable.
Q10) What is the stepwise procedure for computation of total income and tax liability of an individual?
A10) The stepwise procedure for computation of total income and tax liability of an individual are stated below-
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/ss 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 up to Rs. 3,50,000. For details see below.
Step 9: Add surcharge @ 10% on total income exceeding Rs. 50,00,000 and up to 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.
Q11) What is Cash Credits (Section 68)?
A11) Any amount credited in the books of accounts of assessee in the previous year for which assessee does not offer satisfactory explanation regarding nature and source of such credit, to the assessing officer then such credited amount may be added to the income of assessee and tax may be charged on it. Share application money, share capital, security premium reserve etc. if found credited in the accounts of closely held company, then it will be deemed unexplained unless it is explained to the satisfaction of assessing officer by the resident person in whose name such credit is recorded in the books of such company. However, if such explanation does not satisfy the Assessing Officer (A.O.), the amount so credited shall be deemed to be the income of the company in whose account such amount was found credited. This is to be noted that, this provision is not applicable, if the sum is recorded in the name of a Venture Capital Fund or a Venture Capital Company. The unexplained income shall be taxable @ 60% + surcharge (if applicable) + 4% Health and Education Cess (HEC).
Q12) What are Unexplained Investments (Section 69)?
A12) If in the relevant previous year, the assessee has made investments which are not recorded in the books of accounts, if any maintained by him for any source of income, and the assessee offers no explanation about the nature and source of money invested or the explanation offered by him is not satisfactory in the opinion of the Assessing Officer, the value of the investments may be deemed to be the income of the assessee for such previous year and tax will be imposed on such income.
Q13) What are Unexplained Money etc. (Section 69 A)?
A13) If in any financial year, the assessee is found to be the owner of any money, bullion, jewellery or other valuable article which is not recorded in the books of accounts, if any, maintained by him for any source of income and the assessee offers no explanation about the nature and source of acquisition of money, bullion, jewellery and other valuable article or the explanation offered by him is not in the opinion of Assessing Officer satisfactory, the money and the value of the bullion, jewellery, or other valuable article may be deemed to be the income of the assessee for such financial year and will be included in his total income and then, tax will be imposed on it.
Q14) Write in brief Investment Amount etc not Fully Disclosed in the Books of Accounts (Section 69 B).
A14) If in any financial year, the assesse has made investments or is found to be the owner of any bullion jewellery, or other valuable article and the Assessing Officer finds that the amount expanded on making such investments or in acquiring such bullion, Jewellery or other valuable articles exceeds the amount recorded in this behalf in the books of accounts maintained by the assessee for any source of income and the assessee offers no explanation about such excess amount or the explanation offered by him is not, in the opinion of the Assessing Officer is satisfactory, the excess amount may be deemed to be the income of the assessee for such financial year, in which the investment has been taken and the assessee is being found to be the owner of the investment and such income will be included in his total income and tax will be imposed.
Q15) What are Unexplained Expenditure etc. (Section 69 C)?
A15) If in any financial year, an assessee has incurred any expenditure and the assessee is unable to give a satisfactory explanation about the source of money for such expenditure or part thereof, then such expenditure is deemed to be his income for that financial year and added to his total income and then tax will be imposed. Such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income.
Q16) Write in brief amount Borrowed or Repaid on Hundi (Section 69 D).
A16) Amount borrowed on hundis and its repayment must be made by Account Payee Cheque otherwise amount of such borrowing or amount repaid shall be treated as the income of the person borrowing or repaying the amount for the previous year in which such transaction is made. Repayment of the amount shall include the amount of interest on the amount borrowed. It must be noted that if any amount borrowed on a Hundi and which has been deemed as income, it shall not be deemed as income again when such amount is repaid.
Q17) What is Taxation of Deemed Incomes?
A17) Incomes falling under Sections (68, 69, 69 A, 69B, 69C and 69D) as deemed incomes shall be charged to tax @ 30% plus (Surcharge and Cess as applicable). In the aforesaid Section, no deduction in respect of any expenditure or allowance or set off of any loss shall be allowed to the assessee in computing deemed income.
Q18) What is Income from the accretion to assets?
A18) Income arising to the transferee from the property transferred without consideration to him is taxable in the hands of the transferor. However, if an income arises from accretion of such property or from accumulated income of such property to the transferee, it will not be included in the total income of the transferor and shall be taxable in the hands of the transferee.
Q19) What is Aggregation of income section 2(45)?
A19) Section 2 (45) describes Total Income for which an assessee is chargeable to tax and which is computed as per the provisions and the manners prescribed in the Act. It means, that the Total Income of an assessee includes all such incomes which are chargeable to tax however, there are circumstances in which such income is also included in assessee's Total Income, on which income tax is not payable. The Procedure of including such incomes in an assessee's Total Income, on which income tax is not payable, is termed as 'Aggregation of Income'. According to Section 66 of the Act, in computing the total income of an assessee, there shall be included all income on which no income tax is payable.' According to Section 86 of the Act, share of an assessee in the income of an association of persons (AOP) or Body of Individuals (BOI) is such income. Rules for inclusion of its share are as under:
1) If an assessee is a member of Association of Persons (AOP) or Body of Individuals (BOI), the share of assessee in AOP or BOI shall be included in his total income, However, if the AOP or BOI is liable to pay tax on its total income, the assessee shall be entitled to rebate of such income tax on such share of income including any remuneration at the average rate of income tax.
2) Where the assessee is a member of AOP or BOI but such AOP or BOI is not liable to pay tax on its total income, the assessee shall not be entitled to rebate of income tax on his share of income from such AOP or BOI. It means the assessee will pay tax on such income.
3) If the total income of AOP or BOI is chargeable to tax at the maximum marginal rate or any higher rate, under any of the provision of this act, the share income of the member assessee of such AOP or BOI shall not be included in his Total Income. In such case, the assessee's share of income from AOP or BOI shall be exempt from tax.
Q20) What is Benami transaction?
A20) When a person enters into a transaction in the name of a person other than the real person, it is called Benami Transaction and the person in whose name the transaction is made is called Benamidar. The purpose of such transaction used to avoid tax. If the Assessing Officer considers that a particular transaction is Benami, then, he may treat income of such Benami Transaction as the income of real person and it is taxed in the hands of real person.
Unit 5
Computation of total income of individuals
Q1) What is the procedure for computation of total income and tax liability of an individual?
A1) According to section 2(45) total income means the total amount of income referred to in section 5, computed in the manner laid down in this Act. Section 5 of the act provides scope of total Income-
(1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which-
(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year; or
(c) accrues or arises to him outside India during such year:
Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section (6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.
(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which—
(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year.
Q2) What types of income included in aggregated income of the assessee?
A2) Aggregated income of the assessee includes the following incomes:
Income of the assessee
Deemed Incomes
Clubbing of Incomes
Share of a member in the income of (a) Association of persons (AOP) or (b) Body of individuals (BOI)
Q3) What is deemed incomes?
A3) There are certain such incomes or amounts which apparently are not the income of the assessee even then they are deemed to be the income of the assessee under the various provisions of the Income Tax Act. Such incomes are added to the income of assessee and are called 'Deemed Incomes'.
Q4) What is Clubbing of income? Explain.
A4) According to these provisions to the extent of transfer of income to the other person or to the extent of income earned by such person on such transfers shall be included in the total income of the assessee. Such inclusion of income of other person in the income of the assessee is called ‘Clubbing of Income’. Provisions of Clubbing of Income areas under:
1. Transfer of Income without Transfer of Assets
If an income earned through an asset is transferred by a person to another person without transferring the ownership of the asset, the income from such asset shall be deemed to be the income of the transferor and shall be included in his total income.
2. Revocable Transfer of Assets (Section 61)
Where a revocable transfer is made of an asset by one person to another person, any income arising or derived from such assets shall be deemed to be the income of the transferor and shall be included in his total income. A transfer shall be deemed to be revocable if
i)It contains any provision for the retransfer directly or indirectly of the whole or any part of the income or assets to the transferor, or
Ii) It (Transfer) in any way, give the transferor a right to reassume power directly or indirectly over the whole or any part of the income or assets.
Transfer includes any settlement, trust, covenant, agreement or arrangement (Sec. 63).
3.Salary, Commission, Fees, or Any Other Remuneration to the Spouse (Section 64)
In computing the total income of an individual, there shall be included all such income as arises directly or indirectly to the spouse of such individual by way of salary, commission, fees or any other form of remuneration whether in cash or in kind from a concern in which such individual has a substantial interest. However, these provisions will not apply on the income of such spouse who possesses Technical or Professional Qualifications and the income is solely attributable to the application of his or her Technical or Professional knowledge and experience. In case of a company, an individual is considered as deemed to have substantial interest, if he beneficially has at least 20% equity shares along with his relatives at any time during the previous year. The shares must carry voting rights. In any other case (where the concern is not a company), the individual along with his relatives is entitled to at least 20% of the profits of the concern at any time during the previous year. If each spouse has substantial interest in a concern and both are in receipt of remuneration from such concern, the remuneration shall be clubbed in the income of that spouse (husband or wife) whose total income is higher excluding such remuneration. Spouse means husband or wife and the clubbing is limited to the incomes of salary, commission, fees or any other remuneration received by the spouse, directly or indirectly and in cash or kind.
4. Income from Assets Transferred to Spouse [Section 64 (1) iv]
Where an individual transfers his asset (excluding house property) directly or indirectly, to his spouse, any income from such asset is deemed to be the income of the transferor. However, these provisions will not apply in the following circumstances:
i) If the transfer is made for adequate consideration.
Ii) If the transfer is made under an agreement between the spouses to live apart. Such separation may be judicial or voluntary. In the cases, where the consideration is not adequate, proportionate income shall be included in the income of the transferor. The income from house property transferred to spouse shall be taxed under the head 'Income from House Property' in the hands of transferor and not in the hands of transferee.
5. Income from Assets Transferred to Daughter-in-law (Son's wife) [Section 64 (1) (vi)]
Income arising from transfer of an asset by an individual directly or indirectly on or after the 1st day of June 1973 without adequate consideration to son's wife (daughter-in-law) is included in the total income of the transferor.
6. Income from Assets Transferred to a Person or Association of Persons for the Benefit of Spouse [Section 64 (1) (vii)]
Income arising from transfer of an asset directly or indirectly by an individual without adequate consideration to a person or Association of Persons for the immediate or deferred benefit of his or her spouse shall be included in the total income of the transferor to the extent it is for the benefit of the spouse.
7. Income from Assets Transferred to a Person or Association of Persons for the Benefit of Son's Wife [Section 64 (1) (viii)]
Income arising from transfer of an asset after 31.05.1973, directly or indirectly by an individual without adequate consideration to a person or Association of Persons for the immediate or deferred benefit of son's wife, shall be included in the total income of the transferor to the extent it is for the benefit of the son's wife.
8. Income to the Spouse or Son's wife from investment of Transferred Asset
Where the individual has transferred any asset or assets directly or indirectly to the spouse or son's wife and such assets are invested by the transferee.
a) In any business, such investment being not in the nature of contribution of capital as a partner in a firm or for being admitted to the benefits of partnership in a firm, the amount as calculated in the following manner shall be included in the total income of the transferor =
Value of the asset transferred by the Transferor on the 1st day of previous Year/ Total Investment in the business by the transfer as on the 1st day of previous year × Income from the business to the transferee
b) In any business, such investment in the nature of contribution of capital
As a partner in a firm, the amount as calculated in the following manner,
Shall be included in the total income of the transferor =
Such capital contribution of the transferee as on 1st day of previous year/ Total capital contribution of the transferee as on 1st day of previous year × Total Income received by the transferee from the firm.
Q5) What is Income of a minor child?
A5) Every income of a minor child not being a minor child suffering from any, disability of the nature specified in Section 80 U shall be included (clubbed) in the income of his/her parent. Income includes both which arises or accrues to the minor. However, the following incomes shall not be included in the total income of parent:
a) Income as arises or accrues to the minor child on account of any manual work done by him; or
b) Income as arises or accrues to the minor child from any activity involving application of his skill, talent or specialized knowledge and experience.
Q6) What are the rules of clubbing of a minor’s income in the income of a parent?
A6) a) Where the marriage of his (minor's) parent subsists, income shall be clubbed in the income of that parent whose total income (excluding the income of minor child) is greater, for example, if in the previous year, exclusive income of mother is Rs 6,00,000 and father’s income is Rs 7,00,000 (without adding minor’s income in both the cases), and the minor’s income in the previous year is Rs 2,00,000, then, minor’s income shall be included in the income of the father because his exclusive income is greater.
b) Where the marriage of his parent does not subsist, the income of the minor child shall be included (clubbed) in the minor child in the income of that parent who maintains the minor child in the previous year.
Where any income of minor is once included in the total income of either parent, any such income arising in any succeeding year shall not be included in the total income of the other parent unless the Assessing Officer is satisfied and gives approval for doing so. If a minor child's income is included in the total income of an individual (any parent), such individual shall be entitled to the following exemption in respect of each minor child separately:
The income of the minor child so included
Or Rs. 1,500 (Whichever is less).
Q7) What is Income from converted property?
A7) Income from converted property
If an individual who is a member of H.U.F. Converts any asset owned by him into asset of HUF without adequate consideration after 31.12.1969, then the income from such asset shall be deemed to be the income of the individual and not of the H.U.F. And shall be included in the total income of the transferor (individual). If such converted property is partitioned subsequently, the income earned/received from such converted property or transferred property as is received by the spouse of the transferor, shall be deemed to be the income of the transferor and shall be included in his total income.
Q8) What is Clubbing of negative incomes (losses)?
A8) Losses are also called Negative Incomes. Since incomes of other persons (transferee) may be clubbed in the income of transferor, the negative incomes or losses shall be taken into account in computing the income of transferor for such purpose. Thus, it may be concluded that for the purpose of clubbing provision income includes, loss also.
Q9) What is Cross transactions?
A9) Cross Transfers are the transfers which are intimately connected by agreement so as to form part of a single transaction, and each transfer constitutes consideration for the other. In such cross transfers, income shall be clubbed in the hands of deemed transferor and the provisions of Section 64 will be applicable.
Q10) What is the stepwise procedure for computation of total income and tax liability of an individual?
A10) The stepwise procedure for computation of total income and tax liability of an individual are stated below-
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/ss 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 up to Rs. 3,50,000. For details see below.
Step 9: Add surcharge @ 10% on total income exceeding Rs. 50,00,000 and up to 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.
Q11) What is Cash Credits (Section 68)?
A11) Any amount credited in the books of accounts of assessee in the previous year for which assessee does not offer satisfactory explanation regarding nature and source of such credit, to the assessing officer then such credited amount may be added to the income of assessee and tax may be charged on it. Share application money, share capital, security premium reserve etc. if found credited in the accounts of closely held company, then it will be deemed unexplained unless it is explained to the satisfaction of assessing officer by the resident person in whose name such credit is recorded in the books of such company. However, if such explanation does not satisfy the Assessing Officer (A.O.), the amount so credited shall be deemed to be the income of the company in whose account such amount was found credited. This is to be noted that, this provision is not applicable, if the sum is recorded in the name of a Venture Capital Fund or a Venture Capital Company. The unexplained income shall be taxable @ 60% + surcharge (if applicable) + 4% Health and Education Cess (HEC).
Q12) What are Unexplained Investments (Section 69)?
A12) If in the relevant previous year, the assessee has made investments which are not recorded in the books of accounts, if any maintained by him for any source of income, and the assessee offers no explanation about the nature and source of money invested or the explanation offered by him is not satisfactory in the opinion of the Assessing Officer, the value of the investments may be deemed to be the income of the assessee for such previous year and tax will be imposed on such income.
Q13) What are Unexplained Money etc. (Section 69 A)?
A13) If in any financial year, the assessee is found to be the owner of any money, bullion, jewellery or other valuable article which is not recorded in the books of accounts, if any, maintained by him for any source of income and the assessee offers no explanation about the nature and source of acquisition of money, bullion, jewellery and other valuable article or the explanation offered by him is not in the opinion of Assessing Officer satisfactory, the money and the value of the bullion, jewellery, or other valuable article may be deemed to be the income of the assessee for such financial year and will be included in his total income and then, tax will be imposed on it.
Q14) Write in brief Investment Amount etc not Fully Disclosed in the Books of Accounts (Section 69 B).
A14) If in any financial year, the assesse has made investments or is found to be the owner of any bullion jewellery, or other valuable article and the Assessing Officer finds that the amount expanded on making such investments or in acquiring such bullion, Jewellery or other valuable articles exceeds the amount recorded in this behalf in the books of accounts maintained by the assessee for any source of income and the assessee offers no explanation about such excess amount or the explanation offered by him is not, in the opinion of the Assessing Officer is satisfactory, the excess amount may be deemed to be the income of the assessee for such financial year, in which the investment has been taken and the assessee is being found to be the owner of the investment and such income will be included in his total income and tax will be imposed.
Q15) What are Unexplained Expenditure etc. (Section 69 C)?
A15) If in any financial year, an assessee has incurred any expenditure and the assessee is unable to give a satisfactory explanation about the source of money for such expenditure or part thereof, then such expenditure is deemed to be his income for that financial year and added to his total income and then tax will be imposed. Such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income.
Q16) Write in brief amount Borrowed or Repaid on Hundi (Section 69 D).
A16) Amount borrowed on hundis and its repayment must be made by Account Payee Cheque otherwise amount of such borrowing or amount repaid shall be treated as the income of the person borrowing or repaying the amount for the previous year in which such transaction is made. Repayment of the amount shall include the amount of interest on the amount borrowed. It must be noted that if any amount borrowed on a Hundi and which has been deemed as income, it shall not be deemed as income again when such amount is repaid.
Q17) What is Taxation of Deemed Incomes?
A17) Incomes falling under Sections (68, 69, 69 A, 69B, 69C and 69D) as deemed incomes shall be charged to tax @ 30% plus (Surcharge and Cess as applicable). In the aforesaid Section, no deduction in respect of any expenditure or allowance or set off of any loss shall be allowed to the assessee in computing deemed income.
Q18) What is Income from the accretion to assets?
A18) Income arising to the transferee from the property transferred without consideration to him is taxable in the hands of the transferor. However, if an income arises from accretion of such property or from accumulated income of such property to the transferee, it will not be included in the total income of the transferor and shall be taxable in the hands of the transferee.
Q19) What is Aggregation of income section 2(45)?
A19) Section 2 (45) describes Total Income for which an assessee is chargeable to tax and which is computed as per the provisions and the manners prescribed in the Act. It means, that the Total Income of an assessee includes all such incomes which are chargeable to tax however, there are circumstances in which such income is also included in assessee's Total Income, on which income tax is not payable. The Procedure of including such incomes in an assessee's Total Income, on which income tax is not payable, is termed as 'Aggregation of Income'. According to Section 66 of the Act, in computing the total income of an assessee, there shall be included all income on which no income tax is payable.' According to Section 86 of the Act, share of an assessee in the income of an association of persons (AOP) or Body of Individuals (BOI) is such income. Rules for inclusion of its share are as under:
1) If an assessee is a member of Association of Persons (AOP) or Body of Individuals (BOI), the share of assessee in AOP or BOI shall be included in his total income, However, if the AOP or BOI is liable to pay tax on its total income, the assessee shall be entitled to rebate of such income tax on such share of income including any remuneration at the average rate of income tax.
2) Where the assessee is a member of AOP or BOI but such AOP or BOI is not liable to pay tax on its total income, the assessee shall not be entitled to rebate of income tax on his share of income from such AOP or BOI. It means the assessee will pay tax on such income.
3) If the total income of AOP or BOI is chargeable to tax at the maximum marginal rate or any higher rate, under any of the provision of this act, the share income of the member assessee of such AOP or BOI shall not be included in his Total Income. In such case, the assessee's share of income from AOP or BOI shall be exempt from tax.
Q20) What is Benami transaction?
A20) When a person enters into a transaction in the name of a person other than the real person, it is called Benami Transaction and the person in whose name the transaction is made is called Benamidar. The purpose of such transaction used to avoid tax. If the Assessing Officer considers that a particular transaction is Benami, then, he may treat income of such Benami Transaction as the income of real person and it is taxed in the hands of real person.
