Query No. 1 : (Method of Accounting vis-a-vis ICDS – 2016)
In case of Income from Profession Cash system is followed. However income from Other Sources (interest on FD etc.) is declared up to 31-3-2016 (A.Y. 2016-17) following mercantile system.
Assessee desires to follow cash system since 1-4-2016 (A.Y. 2017-18) even in respect of Income from Other Sources.
Assessee is liable to get his accounts audited u/s. 44AB r.w.s. 44ADA of the Act.
It appears that the change in method of accounting is necessitated for bringing uniformity in respect of two heads of Income and as such must be held to be bona fide.
In Form No. 3CD what type of disclosure should be made ? In A. Y. 2017-18 if no interest income is actually received. Income to be offered to tax would be ₹ NIL. Is it correct?
The Finance Act, 1995 amended section 145 of the Income-tax Act, 1961 with effect from assessment year 1997-98 to provide that income chargeable under the heads “Profits and Gains of Business or Profession” or “Income from Other Sources” must be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. The hybrid system of accounting viz mixture of cash and mercantile is not permitted from assessment year 1997-98 and ownwards. However, assessee may adopt mercantile system of accounting for business and cash system of accounting for income from other sources.
So, now from the assessment year 2017-18, the assessee would like to follow cash system of accounting for income from other sources which was hitherto followed mercantile system of accounting. But this system should be followed by the assessee consistently in future to prove the consistency.
In clause 13(b) of Form No. 3CD the assessee would have to show change in method of accounting employed for computing income from other sources vis-a-vis method employed in the immediately preceding previous year. If due to change in the method of accounting, no interest income is received, then, it would have show NIL.
ICDSs, are mandatorily apply to all taxpayers (other than an individual or a HUF who is not subject to the audit u/s. 44AB of the Act) following mercantile system of accounting for the purpose of computation of income under the head “Profits and Gains of Business or Profession” or “Income from Other Sources”, so they are not applicable to cash system of accounting.
From the query it is clear that the assessee is entitled to get accounts audited u/s. 44AB r.w.s. 44ADA of the Act. These sections are applicable if income falls under the head “Profits and Gains of Business or Profession” and not when income falls under the head “Income from Other Sources”.
Query No. 2 : (Gift by HUF)
A’s HUF consists of karta A and Members Mrs. A, S-1 and D-1. The HUF derives income of ₹ 3 lakhs as interest on FD with bank and agri. income of ₹ 10 lakhs.
Now HUF can make a reasonable gift to its members. Also income received by a member out of the HUF income is also exempt u/s. 10 (2).
What are the tax implications of receiving gift in the hands of member taking into account provisions of Sec. 10 (2) and Section 56 (2) (x) ?
It appears that there would be no liability in the hands of member concerned u/s. 56(2)(x) since the income itself is exempt u/s. 10(2). Is it correct ?
S. 56(2)(vii) was applicable up to March 31, 2017, which is yet on statute.
From April 1, 2017, clause (x) of S. 56(2) is applicable, wherein the expression “relative” shall have the same meaning as assigned to it in the Explanation to clause (vii), which provides that any gift received by a member from HUF is not liable to tax. Otherwise also income in the hands of member is not liable to be included in the total income u/s. 10(2) of the Act.
Query No. 3 : (Sec. 44AD – Profits & gains of business on presumptive basis)
A firm carrying of eligible business having an annual turnover of ₹ 1.25 crore declares income from business as per accounts at ₹ 13 lakhs which is higher than the deemed income of ₹ 10 lakhs u/s. 44AD.
Can such firm claim deduction from its income on account of remuneration/ interest to partners?
One possible interpretation is that it is only when income as per accounts is less than deemed income of 8% and the assessee returns income at 8% the firm will not be allowed to claim such deduction. To put it differently, when income declared is more than 8% (as in the above example), benefit of deduction u/s. 40 (b) would be available.
The presumptive scheme of taxation has been introduced for sparing the small assessee from need for compulsory maintenance of accounts u/s. 44AA and tax audit under section 44AB.
In such case, the assessee shall be assessed on the presumptive income. The section provides the presumptive “‘income @ 8% of the total turnover or gross receipts of business or as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee, shall be deemed to be the profits and gains of such business”.
From the facts, it is clear that assessee is maintaining books of account and wants to offer higher than 8% of the total turnover i.e. real income as per his accounts, then S. 44AD would not be applicable as per the Tribunal in Shivani Builders vs. ITO [295 ITR (AT) 281 (Ahd)]. Therefore, claiming expenses in other provisions of the Act are not prohibited while calculating the business income.
Query No. 4 : (Clubbing of income u/s. 64 and Deduction u/s. 54F)
Mr. X owns more than one residential house property. He makes a gift of ₹ 80 lakhs to Mrs. X who does not own any house property. She buys a commercial property using the gift amount and sells it after 4 years. She then purchases a residential house in her name and claims deduction u/s. 54F of the Act.
Even if clubbing provisions are applicable it appears the net income i.e. amount of Capital Gain after claiming deduction u/s. 54F, only could be clubbed with the income of Mr. X. Is it correct ?
Yes, the income will have to be computed as if it is being assessed in the hands of the spouse or minor child and then translated into the hands of other spouse or parent, as the case may be.
In CIT v. Lalji Agarwal [234 ITR 820 (All.)] it has been held that where the salary payment is genuine, but all the same, is required to be clubbed with the income of husband, because wife does not have technical or professional qualification, the income that should be clubbed, is only net income after standard deduction.
On this principle, it would seem that, if the income in question is exempt from inclusion in the hands of the spouse or child, either by reason of general exemption for a category of income i.e. agricultural income or by reason of limit up to which it is exempt, it cannot be assessed in the hands of other spouse or parent either.
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