Return Filing is the first step to your annual assessment of Income by the Income Tax Department. Though with introduction of simplified forms the task appears to be simple, practically the task is not that simple and one has to take care of all the aspects of his/her annual income with relevant supporting documents and papers and the same is to be enclosed along with the return of income. We provide professional assistance in the filing of both individual and Corporate Returns along with guidance to minimise your tax incidence.

How to compute Tax liability in case of Individuals , Hindu Undivided Families and Firms :

Tax liability

An individual is liable to pay tax in respect of his own income, and the income of certain other persons by virtue of sections 60 to 65.

How to compute taxable income -

First, ascertain gross total income, ignoring income exempted under section 10, 10A or 10B, if any. Then deduct admissible deductions under sections 80CCC, 80D, 80DD, 80DDB, 80E, 80G, 80GG, 80GGA, 80HHB, 80HHBA, 80HHC, 80HHD, 80HHE, 80HHF, 80-I, 80-IA, 80-IB, 80-JJA, 80L, 80-O, 80R, 80RR, 80RRA and 80U.

Special provisions relating to non-residents [Sections 115C to 115-I] -

'Non-resident Indians' can take the benefit of special provisions under sections 115C to 115-I

Who can claim the benefit of special provisions-

The benefit of special provisions can be claimed by non-resident Indians. The following are "non-resident Indians" for this purpose :

a. citizen of India who is a non-resident ; or
b. a person of Indian origin who is a non-resident.
A person shall be deemed to be of Indian origin if he, or either of his parents or any of his grand-parents, was born in undivided India.

Incomes which are qualified for special treatment -

The provisions under sections 115C to115-I are applicable only in respect of the following incomes derived by a non-resident Indian :
a. investment income derived from a "foreign exchange assets", not being dividends covered under section 115-O;
b. long-term capital gains on sale or transfer of "foreign exchange assets".
Foreign exchange asset - It means those "specified assets" (which are given below) which the assessee has acquired or purchased with, or subscribed to in, convertible foreign exchange.

The following are "specified assets" for this purpose

a. shares in an Indian company (public or private) ;
b. debentures issued by an Indian company which is not a private company ;
c. deposits with an Indian company which is not a private company (for instance, deposit with Indian public limited companies, banks, etc.) ;
d. any security of the Central Government ; and
e. such other assets as the Central Government may specify in this behalf by notification in the Official Gazette [no notification has been issued so far].

How To Calculate Investment Income -

In computing the investment income of a non-resident Indian, no deduction in respect of any expenditure or allowance shall be allowed under any provision of the Act. Moreover, no deduction under sections 80CCC to 80U shall be allowed in respect of investment income of non-resident Indians.

How to calculate long-term capital gain -

- Long-term capital gain on sale or transfer for foreign exchange assets shall be calculated subject to the following points :

1. The benefit of indexation under second proviso to section 48 is not available in respect of sale or transfer of foreign exchange assets
2. No deduction is permissible in respect of long-term capital gain under sections 80CCC to 80U.
3. By investing sale consideration in another asset, the non-resident Indian can claim exemption under section 115F

Tax on investment income and long-term capital gain -

Non-resident Indians are chargeable to tax on investment income at the rate of 20 per cent. and long-term capital gain (as computed above) at the rate of 101 per cent.

Return of income not to be filed in certain cases -

In cases where a non-resident Indian has income only from a foreign exchange asset or income by way of long-term capital gains arising on transfer of a foreign exchange asset, or both, and tax deductible at source from such income has been deducted, he is not required to file the return of income under section 139(1).
The income from foreign exchange assets and long-term capital gains arising on transfer of such assets would be treated as a separate block and charged to tax at a flat rate as explained above. If the non-resident Indian has other income in India, such other income is treated as an altogether separate block and charged to tax in accordance with the other provisions of the Act.

Benefit available even after the assessee becomes resident -

Where a person, who is a non-resident Indian in any previous year, becomes assessable as resident in India in any subsequent year, he may furnish to the Assessing Officer a declaration in writing (along with his return of income under section 139 for the assessment year for which he is so assessable) to the effect that the special provisions shall continue to apply to him in relation to the investment income derived from any foreign exchange asset being debentures of and deposits with, an Indian public limited company and Central Government securities. If he does so, the special provisions shall continue to apply to him in relation to such income for that assessment year (and for every subsequent assessment year) until the transfer or conversion (otherwise than by transfer) into money of such assets.

Special provisions not to apply if the assessee so chooses [section 115-I] -

- A non-resident Indian may opt that the special provisions relating to taxation of the investment income and long-term capital gains at a flat rate should not apply to him. This option is exercisable by a taxpayer by making a declaration to that effect in his return of income for the relevant assessment year. In cases where such an option is exercised by a non-resident Indian, the whole of his total income (including income from foreign exchange assets and long-term capital gains arising on transfer of a foreign exchange asset) is charged to tax under the general provisions of the Income-tax Act.

Special provision relating to retail trade in certain cases [Secs. 115K to 115N] -
The salient features of simplified procedure as applicable for the assessment years 1992-93 to 1997-98, are as follows :

Conditions -
If the following conditions are satisfied, then special provisions under sections 115K to 115N are applicable.
1. These provisions apply only in the case of an individual or Hindu undivided family.
2. Such person has not been assessed to income-tax up to the assessment year 1992-93.
3. Such person is engaged in the activities given below (column 1) and turnover and total income from such activity (for the assessment year 1997-98) should not exceed the amount given (in columns 2 and 3, respectively) infra :

4. Such person does not have any income in excess of Rs. 5,000 chargeable to tax from any source other than those given in column 1 supra.

Amount of income -

If all the aforesaid conditions are satisfied then it will be assumed that income of the person from business or vocation is Rs. 49,330. However, such assumption will be valid subject to the following :
1. Such person shall submit a statement in Form 4A (Form 4B in the case of a specified HUF) which contains the name of such person, his address, nature of business or vocation and a declaration that his turnover and income from the business does not exceed the amounts mentioned in columns 2 and 3 supra. Such statement shall be submitted on or before March 31 of the previous year along with proof of payment of tax.
2. Such person shall be liable to pay tax on or before March 31 of the previous year. Income and tax shall be computed as under :

a. income from business or vocation shall be Rs. 49,330;
b. other income (actual) shall be added;
c. no deduction under sections 80CCC to 80U (except under section 80L) shall be allowed;
d. rebate under sections 88 and 88B is not permissible; and
e. tax shall be computed at the rate applicable for payment of advance tax for the previous year.

Other points -

One should also note the following points:
1. The aforesaid scheme is optional.
2. Person opting for the aforesaid scheme is not required to file any return of income. Chapter XIV of the Act relating to "Procedure for assessment" is not applicable in his case.
3. There will be no enquiry or assessment.
4. No proceeding under any other provision of the Income-tax Act will be initiated against a person opting for the scheme in respect of his income from retail trade, etc., for the assessment year for which the statement under the scheme has been filed, unless the Department has evidence in its possession that the statement furnished by the person is untrue.

How to compute taxable income -

First ascertain gross total income ignoring incomes exempted under section 10, 10A, or 10B, if any. Then, deduct admissible deductions under sections 80D, 80DD, 80DDB, 80G, 80GGA, 80HHB, 80HHBA, 80HHC, 80HHD, 80HHE, 80HHF, 80-I, 80-IA, 80-IB, 80JJA, 80L and 80-O. For ready reference of different deductions available to HUFs under the Income-tax Act,

Scheme of taxation of firms from the assessment year 1993-94 onwards

From the assessment year 1993-94, a new scheme of taxation of firm has been formulated by amending different sections of the Income-tax Act. The salient features of the scheme are as under:

• The firm will be taxed as a separate entity. There will be no distinction between registered and unregistered firms.
• The share of the partner in the income of the firm will not be included in computing his total income.
• Any salary, bonus, commission or remuneration by whatever name called, which is due to or received by partner will be allowed as a deduction subject to certain restrictions.
• Where a firm pays interest to any partner the firm can claim deduction of such interest from its total income. However, the maximum rate at which interest can be allowed to a partner will be 18 per cent per annum (12 per cent from the assessment year 2003-04 onwards).
• The income of the firm will be taxed at a flat rate of 40 per cent for the assessment years 1993-94 to 1997-98 and 35 per cent from the assessment year 1998-99 onwards.

Types of firm -

Under the new scheme of taxation of firms, applicable from the assessment year 1993-94, partnership firms will be of two types :
a. partnership firms assessed as such (hereinafter referred to "PFAS"), and
b. partnership firms assessed as association of persons (hereinafter referred to as "PFAOP").
While paras 185 to 195 discuss the assessment of PFAS and partners, paras 196 to 202 deal with the assessment year of PFAOP and partners.

Partnership Firm Assessed As Such (Pfas)

Conditions a firm should fulfil to avail the status of PFAS
There are three basic conditions which a firm has to satisfy if it wants to avail the status of PFAS:

• The firm is evidenced by an instrument [section 184(1)(i)]
• The individual shares of the partners are specified in that instrument [section 184(1)(ii)]
• A certified copy of the instrument of partnership shall accompany the return of income of the previous year relevant to the assessment year 1993-94 (or subsequent year in respect of which assessment of the firm is first sought) [section 184(2)]
  Apart from the basic conditions, there are some additional conditions which a firm has to satisfy to get the status of PFAS. These conditions are as follows :
• Whenever during the previous year a change takes place in the constitution of the firm or in the profit-sharing ratio of partners, a certified copy of the revised instrument of partnership shall be submitted along with the return of income of the concerned assessment year.
• There should not be any failure on the part of the firm as is specified in section 144.

Once a firm is assessed as a PFAS, by fulfilling the aforesaid conditions, it will be assessed as a PFAS, for every subsequent year provided there is no change in either firm's constitution or the partners profit-sharing ratio. It is, however, subject to the condition that the firm has not committed any failure attracting provisions of section 144.

Basic conditions

There are three basic conditions which a firm has to satisfy to get the status of PFAS.

• A firm must be evidenced by an instrument [Section 184(1)(i)]
  To get the status of PFAS the firm should be evidenced by an "instrument". The word "instrument" means a document of legal nature by which any right or liability is or purports to be created transferred, limited, extended, extinguished or recorded. "Instrument" does not mean only a regular partnership deed but it may constitute any other formal document. If the terms of a partnership are contained in a number of documents or in the correspondence between the parties, the documents or letters would constitute "instrument" for the purpose of section 184(1)(i).
• Individual share of partners must be specified in instrument - A firm cannot get the status of PFAS unless the instrument of partnership (i.e., partnership deed) specifies the individual shares of partners in profits of the partnership. Evidence regarding the shares of the partners should be afforded within the four-corners of the instrument and should not be made to depend on a reference and scrutiny of a number of documents. In other words, instrument of partnership must specify the individual shares of partners in the profits of the partnership.
• Certified copy of the instrument should be submitted - This condition requires that a certified copy of the instrument of partnership should accompany the first return of income of a firm.

The instrument for the purpose would include all documents and deeds if the arrangement is reflected in more than one deed or documents. Accordingly, certified copies of all documents/deeds will have to be submitted. For the purpose of section 184, the copy of the instrument (maybe xeroxed copy), shall be certified in writing by all partners (other than minors). If, however, the return is made after the dissolution of the firm, it should be certified by all partners (other than minors) who were partners in the firm immediately before the dissolution and by the legal representative of any such partner who is deceased.
The certified copy of the instrument of partnership shall accompany the return of income of the firm of the previous year relevant to the assessment year commencing on or after April 1, 1993 in respect of which the assessment in the status of PFAS is first sought.

Additional conditions -

There are two additional conditions which one has to satisfy.

• Revised instrument should be submitted whenever there is change in the constitution of firm/profit-sharing ratio.
  If there is any change in the constitution of the firm or the profit-sharing ratio during any previous year, a certified copy of the revised instrument of partnership should be filed along with return of income of the relevant assessment year. Even if, there is a change in remuneration/payment of interest to partners but there is no change in profit-sharing ratio, a copy of the revised instrument of partnership should be submitted along with return to comply with the provisions of section 40(b).
• There should not be any failure as is mentioned in section 144 -
  To get the status of PFAS there should not be any failure as is mentioned in section 144. If there is any failure as is mentioned in section 144, the firm shall not be assessed as PFAS but would be assessed as PFAOP. What is important is type of failure in section 144 and not an assessment under section 144.

Computation of income -

While computing the income of a firm assessed as such, the following provisions should be specifically kept in view:

• Provision relating to deductibility of remuneration paid to partners by firm.
• Provision relating to deductibility of interest paid by firm to partners.
• Provision for allowance of unabsorbed depreciation or investment allowance or other loss.

Remuneration paid to partners -

To obtain deduction of remuneration paid to partners certain general conditions [as specified by section 37(1)] [see para 48.39] as well as specific conditions [as specified by section 40(b)] [see para 189.1] should be satisfied.

Specific conditions -

The following specific conditions, as prescribed by section 40(b), should be satisfied:

• Remuneration should be paid only to a working partner.
• Remuneration must be authorised by the partnership deed.
• Remuneration should not pertain to period prior to partnership deed.
• Remuneration should not exceed the permissible limit.

Payment Should Be To A Working Partner - Any payment of salary, bonus, commission or remuneration to any partner who is not a working partner is not allowable as deduction.
For this purpose, "working partner" means an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner [Explanation to section 40(b)].
As per the aforesaid definition a "working partner" means :
a. an individual who is a partner of a firm ; and
b. such an individual is actively engaged in conducting the affairs of the business/profession of the firm.
Broadly speaking, a partnership firm would usually have to fulfil the following functions :

• Establishing business policies
• Implementing business policies
• Effecting transactions
• Conducting day-to-day administration
• Attending to routine jobs.

The above functions would involve the (a) planning, (b) organising, (c) directing, (d) staffing, and (e) controlling of the core area of business, namely : production, marketing, finance and personnel.
The following persons would qualify as being working partners :
a. partner carrying out all or most of the above functions ;
b. a partner who attends to framing of business policies even though he does not participate in their implementation and other routine jobs ;
c. a partner who attends to business decision-making even though he is not attending to business administration and routine jobs ; d. a partner who is effecting business transactions even though he is not attending to administration and routine jobs ;
e. a partner who attends to general administration of the firm whether or not he participates in decision-making;
f. a partner who attends to routine job whether or not he participates in decision-making.
The most important and noteworthy observation is that there is no requirement of "full time" attendance to any/all the above tasks. A mere consideration of the total time devoted to the business is not a relevant criterion.
The following persons would not qualify as being "working partners" :
a. a partner who does not have any knowledge of the business and is a partner on account of relationship and/or capital ;
b. a partner who does not take part/or interest in the business ;
c. a partner carrying out some business tasks temporarily, in the absence of the regular working partner.

Remuneration Must Be Authorised By Partnership Deed -

Any payment of salary, bonus, commission or remuneration by whatever name called to a working partner is not allowed as deduction in the following cases:
a. if the payment is not authorised by the partnership deed; or
b. if it is not in accordance with the terms of the partnership deed.
To claim deduction of remuneration paid to a partner, it should not only be authorised by the partnership deed, but should also be in accordance with the terms of the partnership deed.

Board's Clarification -

The Board have received representations seeking clarification regarding disallowance of remuneration paid to the working partners as provided under section 40(b)(v). In particular, the representations have referred to two types of clauses which are generally incorporated in the partnership deeds. These are :
a. the partners have agreed that the remuneration to a working partner will be the amount of remuneration allowable under the provisions of section 40(b)(v) of the Income-tax Act; and
b. the amount of remuneration to working partner will be as may be mutually agreed upon between partners at the end of the year.
It has been represented that the Assessing Officers are not allowing deduction on the basis of these and similar clauses in the course of scrutiny assessments for the reason that they neither specify the amount of remuneration to each individual nor lay down the manner of quantifying such remuneration.
The Board have considered the representations. Since the amended provisions of section 40(b) have been introduced only with effect from the assessment year 1993-94 and these may not have been understood correctly the Board are of the view that a liberal approach may be taken for the initial years. It has been decided that for the assessment years 1993-94 to 1996-97 deduction for remuneration to a working partner may be allowed on the basis of clauses of type mentioned at (a) supra.
In cases where neither the amount has been quantified nor even the limit of total remuneration has been specified but the same has been left to be determined by the partners at the end of the accounting period, in such cases payment of remuneration to partners cannot be allowed as deduction in the computation of firm's income.
It is clarified that for the assessment years subsequent to the assessment year 1996-97, no deduction under section 40(b)(v) will be admissible unless the partnership deed either specifies the amount of remuneration payable to each individual working partner or lays down the manner of quantifying such remuneration-Circular No. 739, dated March 25, 1996.

It should not pertain to the period prior to partnership deed -
The remuneration to the working partners as per the partnership deed, should be payable after the date of deed. In other words, if such payment is made from a date prior to the date of partnership deed, it would not be allowed as deduction, unless the earlier deed provides for such payment. An exception is, however, provided for the previous year 1992-93. It has been provided that the remuneration, etc., is allowable as deduction for the previous year 1992-93, even if it is authorised by the partnership deed at any time (maybe on the last day) during the previous year 1992-93.

Remuneration Should Not Exceed The Permissible Limit -

Where any salary, bonus, commission other remuneration is paid to any working partner, in accordance with, and as authorised by, the terms of the partnership deed and in relation to any period falling after the date of the partnership deed, it may be allowed as deduction in the hands of the firm. However, the maximum amount of such payment to all the partners during the previous year should not exceed the limits given below :

In case of a firm carrying on a profession referred to in section 44AA or which is notified for the purpose of that section-

In the case of any other firm-

Profession Referred To In Section 44aa

The following professions have been referred to in section 44AA : legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other profession as is notified by the Board (i.e., the profession of an authorised representative, film artist, company secretary and information technology).

Book Profit - How To Compute -

- It would be determined as under:

Step one - Find out the net profit of the firm as per the Profit and Loss Account.

Step two - Make adjustments as provided by sections 28 to 44D.

Step three - Add remuneration to partners if debited to the Profit and Loss Account.

The resulting amount is "book profit".
It may be noted that under Step Two only adjustments as specified under sections 28 to 44D will be made and, consequently,-
a. income chargeable to tax under the heads "Income from house property", "Capital gains" and "Income from other sources" will not be a part of "book profit";
b. brought forward business losses will not be deducted from "book profit"; and
c. permissible deductions from gross total income under sections 80CCC to 80U shall be ignored from computing "book profit".

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