Direct Tax Notes - Semester 4 CCF

Clubbing of Remuneration of Spouse – Section 64(1)(iv)

• Provision Summary:

  • Section 64(1)(iv) deals with clubbing of income when a spouse receives remuneration from a concern in which the other spouse has a substantial interest.

• Key Conditions:

  • Remuneration includes salary, commission, fees, or any other form of income.

  • The income must be received by the spouse without technical or professional qualifications.

  • The other spouse must have a substantial interest in the concern (i.e., holding ≥20% equity or voting power).

• Clubbing Rule:

  • The entire income earned by the spouse is clubbed with the income of the spouse having substantial interest.

  • If the spouse is technically or professionally qualified, and the income is due to such qualification, clubbing does not apply.

• Important Terms:

  • Substantial Interest: ≥20% equity shares or voting rights in the concern

  • Remuneration: Salary, commission, fees, etc.

  • Technical Qualification: Recognized professional degree or skill (e.g., CA, MBA, Engineer)

Clubbing of Income of Minor Child – Section 64(1A)

• Provision Summary:

  • Section 64(1A) mandates that the income of a minor child is clubbed with the income of the parent whose total income is higher.

• Key Exceptions:

  • Income earned by the minor child due to manual work

  • Skill, talent, or specialized knowledge

  • Disability covered under Section 80U

  • → Not clubbed, taxed in the hands of the child.

• Tax Treatment:

  • Parent can claim an exemption of 1,500 per child under Section 10(32).

  • If both parents are alive, income is clubbed with the parent having higher income before clubbing.

  • If one parent is deceased, income is clubbed with the surviving parent.

• Important Terms:

  • Minor: Individual below 18 years of age

  • Exemption u/s 10(32): 1,500 per minor child whose income is clubbed

  • Disability Exception: Income of disabled minor child not clubbed (Section 80U)

Carry Forward and Set-Off of Losses under Capital Gains

• Relevant Sections:

  • Section 70 – Intra-head set-off

  • Section 71 – Inter-head set-off

  • Section 74 – Carry forward of capital losses

• Key Provisions:

  • Intra-head Set-Off (Section 70):

  • Short-term capital loss can be set off against any capital gains (short-term or long-term).

  • Long-term capital loss can be set off only against long-term capital gains.

  • Inter-head Set-Off (Section 71):

  • Capital losses cannot be set off against income from other heads (e.g., salary, business income).

  • Carry Forward (Section 74):

  • Unabsorbed capital losses can be carried forward for 8 assessment years.

  • Can be set off only against capital gains in future years.

  • Loss must be declared in the income tax return filed within the due date under Section 139(1).

• Important Notes:

  • Type of Loss vs Set-Off Availability:

  • Short-Term Capital Loss: Set-off allowed against STCG and LTCG; Carry forward for 8 years.

  • Long-Term Capital Loss: Set-off allowed only against LTCG; Carry forward for 8 years.

Income Tax Slab Rates – Old vs New Regime (Section 115BAC)

• Old Tax Regime (with deductions and exemptions):

  • Income Slab:

  • 0-2,50,000 → $0\%$

  • 2,50,001 - 5,00,000 → $5\%$

  • 5,00,001 - 10,00,000 → $20\%$

  • Above 10,00,000 → $30\%$

  • Deductions allowed:

  • Standard deduction

  • HRA, LTA

  • Chapter VI-A deductions (e.g., 80C, 80D)

• New Tax Regime (Section 115BAC without most deductions):

  • Income Slab:

  • 0-3,00,000 → Nil

  • 3,00,001 - 6,00,000 → $5\%$

  • 6,00,001 - 9,00,000 → $10\%$

  • 9,00,001 - 12,00,000 → $15\%$

  • 12,00,001 - 15,00,000 → $20\%$

  • Above 15,00,000 → $30\%$

  • No major deductions allowed, except:

  • NPS (Section 80CCD(2))

  • Employer contribution to EPF

  • Standard deduction of $₹50{,}000$ (from AY 2024-25 onwards)

Circumstances When Return of Income Is Mandatory Even If Total Income Is Below Taxable Limit

• Relevant Provision: Section 139

• Mandatory Filing Situations:
  1) Deposit in Current Account: aggregate deposits exceed $₹1\, crore$ in a financial year.
  2) Foreign Travel Expenditure: expenditure of $₹2\, lakh$ or more on foreign travel (self or other).
  3) Electricity Consumption: electricity expenses of $₹1\, lakh$ or more during the year.
  4) Ownership of Foreign Assets or Income: holds foreign assets or income, or signs foreign account.
  5) Claiming Refund: if claiming a refund of TDS or excess tax paid.
  6) Being a Company or Firm: all must file returns irrespective of income level.
  7) Section 90/91 Relief: to claim relief under DTAA.
  8) Audit Cases: liable for tax audit under Section 44AB.

What Is Return of Income and When It Becomes Mandatory - Section 139(1)

• Definition:

  • A Return of Income is a formal statement filed by an assessee with the Income Tax Department declaring total income, tax liability, deductions claimed, and tax paid during a financial year.

• Mandatory Filing - Section 139(1):
  An individual must file a return under Section 139(1) if:

  1. Total Income exceeds the basic exemption limit:

  • Individuals below 60 years: $₹2,50,000$

  • Senior citizens (60-80 years): $₹3,00,000$

  • Super senior citizens (above 80 years): $₹5,00,000$

  1. Company or Firm: must file irrespective of income level.

  2. Loss Carry Forward: to carry forward losses under any head (e.g., capital gains, business).

  3. Claiming Refund: if claiming refund of excess TDS or advance tax.

  4. Foreign Assets or Income: file even if income is below exemption.

  5. Income from Trusts, Political Parties, Institutions: must file returns as prescribed.

Due Dates for Filing

• Category of Assessee and Due Date (AY 2025-26):

  • Individual (non-audit) → $31\, July\, 2025$

  • Company / Audit Cases → $31\, October\, 2025$

  • Transfer Pricing Cases → $30\, November\, 2025$

Note on ITR and ITR-2

• ITR: Income Tax Return is a formal statement filed by a taxpayer with the Income Tax Department, detailing income, deductions, taxes paid, and refunds due.

• ITR-2: Form used for individuals and HUFs not having income from business or profession. Applicable when income includes salary, house property, capital gains, foreign assets, or other sources. Not suitable for those with income from proprietary business or professional services.

PAN - Permanent Account Number

• PAN stands for Permanent Account Number. A ten-character alphanumeric code issued by the Income Tax Department under Section 139A.

• PAN serves as a unique identification number for taxpayers and is used to track financial transactions and tax payments.

• Structure: five letters, followed by four digits, ending with one letter.

• Mandatory for various financial activities: filing returns, opening bank accounts, purchasing property above thresholds, investing in mutual funds.

TAN - Tax Deduction and Collection Account Number

• TAN refers to Tax Deduction and Collection Account Number. A ten-digit alphanumeric number issued under Section 203A.

• Required by entities responsible for deducting or collecting tax at source (e.g., employers, banks, companies).

• TAN must be quoted in all TDS and TCS returns, challans, and certificates like Form 16/16A.

• Without a valid TAN, entities cannot file TDS returns or issue TDS certificates; ensures proper tracking of tax deducted and collected at source and compliance with tax laws.

Self-Assessment - Section 140A

• Self-assessment refers to the process where the assessee calculates their own tax liability based on the income declared in the return.

• Under Section 140A, the assessee is required to pay:

  • Tax on total income

  • Interest under Sections 234A, 234B, and 234C (if applicable)

  • Fee under Section 234F (for late filing)

• The payment must be made before filing the return of income. The challan used for payment is ITNS 280.

• Only after paying self-assessment tax can the return be considered valid under Section 139.

Summary Assessment - Section 143(1)

• Summary assessment is a preliminary check conducted by the Income Tax Department under Section 143(1).

• It is done without calling the assessee for any inquiry or hearing.

• Key features:

  • Arithmetical errors and incorrect claims are automatically adjusted

  • Intimation is sent to the assessee showing:

  • Income as per return

  • Adjustments made

  • Tax payable or refund due

  • No detailed scrutiny is involved. It is a computerized processing of returns to ensure basic correctness.

Best Judgement Assessment - Section 144

• Best judgement assessment is carried out by the Assessing Officer under Section 144 when the assessee:

  • Fails to file the return under Section 139

  • Does not comply with notices under Sections 142(1) or 143(2)

  • Fails to produce relevant documents or information

• In such cases, the officer makes an assessment based on available material and evidence, using their best judgement. This is a compulsory assessment and may result in higher tax liability due to lack of cooperation from the assessee.

Advance Tax - Meaning and Liability

• Advance Tax refers to the payment of income tax before the end of the financial year, instead of paying it as a lump sum after the year ends.

• Who is liable to pay:

  • Any assessee (individual, firm, company) whose tax liability exceeds ₹10,000 in a financial year.

• Advance tax is paid in installments as per prescribed due dates. Applies to business income, professional income, capital gains, interest income, etc.

• Due Dates for Individuals (Non-Corporate Assessee):

  • 15th June - 15% of total tax liability

  • 15th September - 45% cumulative

  • 15th December - 75% cumulative

  • 15th March - 100% of total tax liability

Provision Regarding TDS from Salary – Section 192

• Section 192 governs Tax Deducted at Source (TDS) from salary income.

• Key Provisions:

  • TDS is deducted by the employer at the time of salary payment.

  • Rate of deduction is based on the income slab rates applicable to the employee.

  • The employer considers all eligible deductions and exemptions (e.g., HRA, LTA, 80C, 80D).

  • TDS is deposited monthly and reflected in Form 16, issued annually to the employee.

  • If PAN is not provided, TDS is deducted at a higher rate under Section 206AA.

Provision Regarding Interest on Securities - Section 193

• Section 193 deals with TDS on interest earned from securities such as debentures, bonds, and government securities.

• Key Provisions:

  • TDS is applicable on interest paid to residents.

  • Rate of TDS is $10\%$ if PAN is provided, and $20\%$ if PAN is not provided.

  • No TDS if interest does not exceed ₹5,000 in a financial year (for listed securities).

  • Exemptions: No TDS on interest paid to banks, LIC, UTI, or on government securities.

What Is Refund and Who Can Claim It

• Refund refers to the excess amount of tax paid by the assessee over the actual tax liability.

• Who can claim:

  • Any assessee who has paid advance tax, self-assessment tax, or TDS more than the actual tax liability.

• Refund process:

  • Refund is claimed by filing the income tax return within the prescribed time.

  • The Income Tax Department processes the return and issues the refund to the assessee's bank account.

  • Refund status can be tracked online through the Income Tax portal.