Income of Non Resident

(Sec. 115D) Computation of Investment income of Non-Resident :

Non deductionof any expenditure or allowance is allowed in computing the Investment Income of a Non

Resident Indian. Further no deduction under chapter VIA allowed from Investment Income or from Long

Term Capital Gains. While computing Long Term Capital Gain indexed cost shall not be allowed.

Note : (Sec. 115C) Definitions :

(a)     Non-resident Indian mean an individual, being a citizen of India or a person of Indian origin who is not a ‘resident’.

(b)     Investment Income means any income derived from a foreign exchange asset.

(c)     Foreign Exchange Asset means any specified asset which the assessee has acquired, purchased with or subscribed to, in convertible foreign exchange.

(d)     Specified asset means nay of the following assets :

i)        shares in an Indian company;

ii)       debentures issued by an Indian public company which is not a private company as defined in the

Companies Act, 1956;

iii)      deposits with an Indian company which is not a private company; defined in the Companies Act,     

          1956.

iv)      any security of the Central Government; as per Sec. 2(2) of Public Dept. Act., 1994.

v)        such other assets as the C.G. may specify in this behalf by notification in the official Gazette.

(e)     Convertible Foreign Exchange means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973, and any rules made there under.

2.      (Sec. 115E) Tax on Investment Income and Long Term Capital Gain :

         Both the income is to be taxed @20% but capital gain on transfer of specified assets is to be taxed @ 10% provided.

Note :    Sec. 115G. It shall not be necessary for a non-resident Indian to furnish return u/s 139(i) of his income if—

(a)   his total income in respect of which he is assessable under this Act during the previous year consisted only Investment Income or Long Term capital Gain or Both and

(b)   the TDS has been deducted from such income.

3.      (Sec. 115F) Long Term Capital Gain (LTCG) on transfer of foreign exchange assets not to be charged in certain cases :

         LTCG on transfer of foreign exchange assets will not be charged to tax, if whole net consideration is invested within 6 months of transfer in any specified assets. If only part of net consideration is invested, proportionate exemption will be granted as under :

Note :    If the specified assets is transferred within 3 years of its acquisition date the exempt capital gain will be chargeable in such year as LTCG.

4.      (Sec. 115H) Benefit under this chapter can be availed even after the assessee becomes resident :

         Where a Non-resident-Indian becomes resident in subsequent year, the provision of this chapter will continue to apply on Investment Income derived from specified assets, provided he furnished to the A.O. a declaration in writing alongwith return u/s 139(1) to the effect that this chapter shall continue to apply.

5.      (Sec. 115I) Chapter not to apply if assessee so choose :

Note :    It is important to note that this option is given for Chapter XXA (Sec. 115C to 115H) and this option is not applicable for provision of Chapter XX regarding determination of tax in certain special cases.

6.      Sec. 115 AB Tax on income or capital Gain from units purchased in foreign currency by overseas financial organisation. Where total income of an Overseas Financial Organisation (Fund, Institution, Association or Body approved by SEBI) includes :

         Income in respect of units of Long Term Capital Gain (LTCG) in respect of such units purchased in foreign currency. The Income tax payable shall be 10% of such income on gross basis. No deduction u/s 28 to 44C or 57 and chapter VI A shall be allowed.

Note :    Unit means unit of mutual fund specified. u/s 10(223D) or of the Unit Trust of India.

7.      Sec. 115AB Tax on non-resident sportsman or sports associations :

         Where a non-resident and a non citizen sportsman has any income by way of participation in —

(1)    any game or sport in India, or

(2)    advertisement, or

(3)    contribution of articles relating to any game or sport in India in any newspaper, magazines or journals or where a non-resident association has any Income by way of guarantor in relation to any game or sport played in India.

         Such income will be taxed @10% and no deduction for any expenditure or allowance shall be allowed from these incomes under any provision of this Act. However the assessee will not be required to furnish any return u/s 139(1) for the above income if T.D.S. is already made.

8.      (Sec. 115 AC) Tax on income from Bonds of shares purchased in foreign currency :

         Income tax @10% shall be payable in case of following incomes.

(a)    Income by way of interest on notified bonds of an Indian Company issued in accordance with such scheme as notified by C.G. or on bonds of a public sector company sold by the government and purchased in foreign currency.

(b)    Income by way of dividends on GDRs—

        Issued against the initial issue of shares of an Indian Company issued in accordance with such scheme as notified by C.G. and purchased in foreign currency; or Issued against the share of a public sector Company sold by Govt. and purchased in foreign currency through an approved intermediary; or  Issued or Reissed against the exiting share of an Indian Company issued in accordances with such schemes as notified by C.G. and purchased in foreign currency.

9.      (Sec. 115 AD) Tax on Income of Foreign Institutional Investors from securities or capital gains arising from their transfer :

Where a notified Foreign Institutional Investor receives income or LTCG or STCG in respect of securities, other than on units referred in Sec. 115AB no deduction u/s 28 to 44C, 57 (i) & 57 (iii) or 80D to 80U shall be allowed. The assessee shall not been entitled to index cost nor conversion into Foreign Currency shall be allowed while computing LTC Gains.

10.     (Sec. 115A) Tax on dividends, interest, royalty and technical service fees in case of foreign companies.

         Tax @20% is charged on following income

(a)    Dividend

(b)    Interest from Govt. or on Indian Concern on monies borrowed by Govt. or the Indian Concern in foreign currency.

(c)    Income from units of U.T.I. or M.F. purchased in foreign currency

Note :    Income by way of Royalty & fees for technical services received from Govt. or an Indian concerned in pursuance of an agreement after 31.3.76 but before 1.6.97 and agreement approved by C. Govt. Tax @30% is charged.

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Assessment of Association of Person (AOP) or Body of Individual (BOI)

An A.O.P. or B.O.I is an association of person for profits or gains or for the promotion of  a joint enterprise. It is an A.O.P. provided it is not  a H.U.F., firm, company, or a local authority.

1.   Method of Computing a member’s share in the Income of A.O.P. or B.O.I. Sec. 67A.

      The share of a member of A.O.P. (other than a company or Co-operative or society registered under the Societies Registration Act, 1860 or any law corresponding to that Act in force in any part of India) shall be computed in the following manner: (when the shares are determinate and known).

a)      Compute total income of the A.O.P. while computing the total income, the appropriation items like interest, salary, bonus, commission or remuneration by whatever name called paid to the members is to be disallowed. [sec. 40(ba)]

b)      Now the allocation is to be done. Initially allocate the appropriation items like interest salary, bonus etc., and balance is to be allocated to the members in their profit sharing ratio.

c)      Where the individual who is a member in a representative capacity is paid interest otherwise than as member in a representative capacity, such interest shall not be disallowed.

      If the AOP or BOI pays interest on capital a/c but charges interest on debit balance in current a/c of members only net interest paid to members is disallowed u/s 40(ba).

      If an individual represents his HUF in a AOP or BOI interest paid by the AOP or BOI on loan, given by the individual out of his personal funds, is allowed u/s 40(ba).

            However, interest on loan paid by the AOP or BOI to the member is disallowed u/s 40(ba).

 

Sec. 267 – Where as a result of appeal any change is made in assessment of BOI or AOP, the Commissioner (A)/ITAT shall pass an order authorising AO to amend/make fresh assessment on any member.

ILLUSTRATION 1 :

X, Y and Z are the thee partners of a firm, sharing profit and losses as 2 : 3 : 5. It is constituted by a deed of partnership, but there has been a change in the profit sharing ratio in the Financial Year 2009-10 from the earlier year. The firm did not submit a certified copy of the new deed of partnership and it had been treated as an AOP.

The profit and loss account of the firm for the year ended on 31st March, 2010 shows the following :

 

Determine the tax of the partnership assessed as on AOP as also of X, Y and Z.

Solution :

Computation of Total Income & Tax Liability of the Firm

Assessed as AOP for the A.Y. 2010-11

 

At what rate AOP will pay tax depends upon the total income of individual members of AOP, which is computed as follows, for application of rate of tax by this computation we are showing total income and tax liability of individual members.

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Assessment of Firm

Firm means association of two or more person with the object to earn profit. From the taxation point of view, partners and firm both have seperate entity. For the purpose of income-tax the following conditions are required to be assessed as a firm under section 184 of Income Tax Act, 1961.

1.      Conditions :

(i)   A partnership firm is formed by an instrument (means partnership Deed);

(ii)   The individual share of profit must be specified in the instrument;

(iii)  A certified copy of the instrument of partnership must accompany the first income-tax return of the firm;

(iv)  If there is any change in the constitution of the firm or in the profit sharing ratio during the previous year, a certified copy of revised instrument should be filed alongwith the Income-tax return of the relevant assessment year.

(v)  No default should be made in compliance of section 144 of Income-tax Act.

         If any of the condition is not satisfied the firm shall be assessed as an Association of person (AOP).

2.      Computation of Total Income of Firm :

         Gross Total Income of the firm following head of income shall be included :

�    Income from House Property.

�    Income from Business or Profession.

�    Capital Gain

�                Income from other sources.

As per provisions under Income Tax Act, 1961 following deductions are given to firm under chapter VIA. 

 

3       Computation of Business/profession income of the firm :

         Following points should be kept in mind while calculating income from Business Profession :

(i)   Remuneration to partner : While computing the taxable income from business or profession, the remuneration paid by the firm, to its partner shall be allowed in accordance with the provision of section 40(b) of the Income-tax Act.

These are as under :

Remuneration is allowed to working partners and not to non-working partners.

Remuneration shall be authorised by partnership deed.

Remundration should not for the period prior to the date of the partnership deed.

Remuneration to working partners shall not exceed the following limit which is based on Book

Profit. Here book profit means profit before deducting remuneration paid to working partner

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Assessment of Hindu Undivided Family (HUF)

Assessment of H.U.F. :

A HUF is a separate entity for tax purpose and taxable as an individual at individual’s tax rate. Family means a group and plurality of persons is required. A single member whether male or female can not form an H.U.F. It is also not essential to have two or more male members to form an H.U.F. A sole surviving male coparcener and sister of widowed mother can form an HUF. A HUF or JHF is same. It consists of males descended, their wife’s and unmarried daughters and daughter-in-law. A daughter is a member of the family till her marriage and after that she ceases to be a member of the father’s family and becomes a member of the family of her husband as a daughter-in-law.

The male members of the family are coparcener. A coparcener must be a member of the family but a member of the family need not be a coparcener. A coparcenery is a creation of law. It cannot be created by an Act of parties. It consists of person who have a right by birth.

1.      H.U.F. Property : Existence of joint property or income is not an essential feature to form a H.U.F. Creation may be associated with the family property - by gift, blending etc. Property may be ancestral, acquired or transferred. But self acquired property mixed with joint family property is not much beneficial from tax point of view.

         W.e.f 09-09-2005, the dauhter besides becoming member of the husband’s family will also remain coparcener in her father’s HUF.

2.      Assessment : An H.U.F. is assessable as a separate and distinct unit. Coparcener’s interest in H.U.F.is not liable to taxed in the hands of coparceners as per Sec. 10(2) of Income Tax Act and Sec 5(ii) of Wealth Tax Act.

3.       Deductions available : While computing income of HUF, the following deductions can be   

          allowed from its GTI :

Partition :

1.     Sec.  171 - (a) Partial (b) Total or complete.

(a)    Partial Partition is no partition after 31.12.78 provided assessed before so far as Income Tax Act or Wealth Tax Act is concerned. Such family shall continue to be liable to be assessed under this Act & Wealth Tax Act as if no partition had taken place.

(b)    Total Partition - After total partition the family no longer exists as an H.U.F. It will only be recorded after the A.O. has made an inquiry in this matter. The total income of the joint family upto the date of partition shall be assessed as if no partition had taken place. And each of the member shall be jointly and severally liable for tax liability if any. 

5.      Sec. 171(4) Partition during the accounting year :

         Where there is total partition during the accounting year, the total income of the joint family in respect of pre-partition period is assessed in the status of HUF as if no partition has taken place. And deduction, exemptions available to the HUF are to be allowed and such income tax is to be tax at the rate applicable to the HUF. Each member or group of members is jointly and severally liable for the tax assessed on such income. The post-partition income is to be taxed as individual income of the member concerned. Exemptions, deductions, rebate, relief and tax rates applicable to individual will apply.

6.      Person entitled to a share on partition :

         The following persons are entitled to a share

(a)    All Co-parceners.

(b)    A son in the womb of his mother at the time of partition though born after partition.

(c)    Mother- On partition between sons after the death of father, the mother gets an equal share.

(d)    Wife - On partition between father and son, the wife gets an equal share to that of a son.

         Hindu Law - Primarily there are two schools of Hindu Law - Mitakshara and Dayabhaga. In Mitakshara Hindu Law, a male child acquires a right in the joint family property from the movement he is born. But in Dayabhaga Hindu Law a son gets a right in joint family property only after the death of his father. The father enjoys an absolute right to dispose of the property of the family according to his desire.

7.      General Principles :

     GTI and TI of HUF shall be computed in the same way as in case of an individual.

     A HUF can become a partner in a firm.

     Salary paid to the member of family or to HUF shall be allowed provided it is not excess and such

     person of the family taken active part in carrying on the business.

     Income earned by personal efforts of a member of HUF shall be treated as member’s personal income

     and not the income of family.

     Income from personal business of a member shall be taxed in the hand of members.

              Income from property transferred to a member if family is governed by Mitakshra School, the Karta has 

             a right to transfer any moveable property to any member within reasonable limit. 

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