1. Mr. Fernandez has a portfolio of equity shares worth Rs.

2 crores by current market

valuation. He had inherited the shares from his father 10 years ago. He has become
extremely concerned about the introduction of 10% LTCG tax on equity shares in
thisyear’s Union Budget. Not sure about the impact of this newly introduced tax, he is
contemplating selling of all the shares before 31st March 2018, and escaping the taxation.
He has sought your opinion on this. Prepare a detailed report citing the implications of the
LTCG tax, and guide Mr. Fernandez in his decision making.

Answer: The profits and gains arising from the transfer of a long-term capitalasset are treated as
long-term capital gains. Since long-term capital gainsrepresent accumulation of income over a
period of time, these could turn outto be illusory in real terms. Accordingly, the cost of the asset
is adjusted forinflation during the period of holding. The increased cost is set-off againstthe sale
consideration of the long-term capital asset to determine the longtermcapital gain. Such long-
term capital gain is subjected to a concessionalrate of tax to eliminate the bunching effect.

“The cost of acquisition for the purposes of computing capital gains referred to in sub-section (1)
in respect of the long-term capital asset acquired by the assessee before the 1st day of February,
2018, shall be deemed to be the higher of—
(i) the actual cost of acquisition of such asset; and
(ii) the lower of—
(a) the fair market value of such asset; and
(b) the full value of the consideration received or accruing as a result of the transfer
of the capital asset.”

In Budget speech, Mr. ArunJaitly mentioned this new taxation as below.

“I propose only a modest change in the present regime. I propose to tax such long-term capital
gains exceeding `1 lakh at the rate of 10% without allowing the benefit of any indexation.
However, all gains up to 31st March 2018 will be grandfathered. For example, if an equity share
is purchased six months before 31st January 2018 at Rs.100/- and the highest price quoted on
31st January 2018 in respect of this share is Rs.120/-, there will be no tax on the gain of Rs.20/-
if this share is sold after one year from the date of purchase. However, any gain in excess of
Rs.20 earned after 31st March 2018 will be taxed at 10% if this share is sold after one year. The
gains from equity share held up to one year will remain short-term capital gain and will continue
to be taxed at the rate of 15%.“.

Long Term Capital Gains Tax On Equity

1. The tax liability will accrue only when the income from sale of equity/ equity mutual
funds is over Rs. one lakh. For instance, if you buy Rs. 5 lakh worth shares on April 1
and sell the shares on April 2 the year after for Rs. 5.8 lakh then no tax liability will occur
on account of capital gains because the profit is Rs. 80,000 only and not Rs. one lakh or
higher. However, if you sell the shares for Rs. 6,01,000 then you will have to pay tax at
the rate of 10% on the profit of Rs. 1.01 lakh.

2. In case the shares are sold for a price which is over Rs. one lakh higher than the cost price
but in less than one year of the purchase, then also no tax liability will accrue on account
 of the capital gains since the long term capital gain (LTCG) tax accrues only when shares
are sold after one year.

3. When shares are sold in less than one year, the tax liability will be as per the short term
capital gains rules. The existing rate of short term capital gains is 15%.

4. No indexation is allowed in case of sale of equity shares. In case of capital gains on

jewellery and real estate, the tax department allows indexation on account of inflation.
But this will not be allowed in case of share sale. This means the rate at which inflation
rises, the cost is also increased so as to calculate the profit. By giving the indexation
benefit, the tax assessee get the benefit of lower tax liability. Depriving the assessee of
this benefit means that their tax liability will rise further.

5. If the shares are sold before March 31, the profit so earned will not be taxed. The profits
earned uptoMarch 31 will be grandfathered.

Example, Mr. X purchase shares for a total value of Rs.10 Lakh (cost of acquisition) on 1st
April 2018. The price of the share appreciates and the value of investment goes up year after year
as under:
April 1, 2018 Rs. 10 Lakh
April 1 2019 Rs.10.50 Lakh
April 1, 2020 Rs.11.25 Lakh
April 1, 2021 Rs.12.20 Lakh
If Mr. X sells the shares on April 1, 2021, his total Long Term Capital Gain (LTCG) would be
Rs 2.20 Lakh (Rs 12.20 lakh–Rs 10 lakh) in the FY 2021-2022 (AY 2022-2023). However,
LTCG of 10% will be payable on Rs.1.2 lakh (Rs 2.2 lakh less Rs 1 lakh).

Thus, even though the appreciation in each year is less than Rs 1 lakh, still as long as the total
gain realized in the year of sale is more than Rs 1 lakh, there would be LTCG implication.

Conclusion: Mr. Fernandez has a portfolio of equity shares worth Rs. 2 crores by current market
valuation. He had inherited the shares from his father 10 years ago. Mr. Fernandez held these
shares for more than 1 year i.e 10 years, so it will result in long term capital gain tax. If Mr.
Fernandez sells these shares before 31st march 2018, long term capital gain will be exempt from
tax. However, if MrFernandez sell these shares after 31st march 2018 he will be liable to long
term capital gain tax @10%. Therefore, it is advisable to sell these shares before 31 st march
2018.

2. ABC Ltd.’s profit before tax as per P&L account was Rs. 240 crores. The following
information was available regarding ABC Ltd on scrutiny:
 During the year, it had paid royalty of Rs. 40 crores to a German company, but TDS
was not deposited with the IT department till the time of filing income tax returns.
 For a bill of Rs. 30000, ABC Ltd made cash payment of Rs. 30000 to the vendor on
29th January 2018.
Critically analyze whether the above expenditures will be allowed or disallowed as
deductions, with reasons, discussing the applicable sections. What will be the impact of
such allowance / disallowance on the computation of Profits and Gains from Business or
Profession of ABC Ltd for the AY 2018 – 19?

Answer: a) TDS ON PAYMENTS TO NRI U/s 195

TDS is the initial step of payment of income tax to the income tax department. Among all the
TDS provisions only very few are there to which we should give more priority in interpretational
sense. Sec 195 is one of those few sections. This section is wider in scope than all the other TDS
sections as all payers are covered and there is also no threshold exemption is there.

Any person responsible for paying to a non resident, not being a company, or to a foreign
company, any interest (not being interest on securities) or any other sum chargeable under the
provisions of this Act (not being income chargeable under the head” Salaries”) shall, at the time
of credit of such income to the account of the payee or at the time of payment thereof in cash or
by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income tax
thereon at the rates in force:

Provided that in the case of interest payable by the Government or a public sector bank within
the meaning of clause (23D) of section 10 or a public financial institution within the meaning of
that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the
issue of a cheque or draft or by any other mode.

Due date for deduction

Earlier of the following is the due date for deduction
1) Date of crediting the party or
2) Date of actual payment.

Rate of TDS
Considering the Double taxation avoidance agreements between India the country of payee rate
is to be determined. Generally rate would be as said in the act or rate as per DTAA which ever is
beneficial provided all the conditions as per DTAA are met. If the payee doesn’t have a PAN
then rate could be rate as per the law in force or 20% which ever is higher.

Consequences if payer doesn’t deduct TDS

1. Disallowances of the amounts paid under Section 40 (a)(i).
2. Penalties for non deduction
3. Simple Interest at 12 % pa on month to month basis.

Royalty income: Income by way of royalty payable by Government or an Indian concern in

pursuance of an agreement made by it with the Government or the Indian concern where such
royalty is in consideration for the transfer of all or any rights (including the granting of a licence)
in respect of copyright in any book on a subject referred to in the first proviso to sub-section
(1A) of Section 115A of the Income-tax Act, to the Indian concern, or in respect of any computer
software referred to in the second proviso to sub-section (1A) of Section 115A of the Income-tax
Act, to a person resident in India is 10%.
Income by way of royalty [not being royalty of the nature referred to point g) above E] payable
by Government or an Indian concern in pursuance of an agreement made by it with the
Government or the Indian concern and where such agreement is with an Indian concern, the
agreement is approved by the Central Government or where it relates to a matter included in the
industrial policy, for the time being in force, of the Government of India, the agreement is in
accordance with that policy is 10%.

ABC Ltd has not deducted TDS royalty payment to German company therefore following are the
consequences:
1. Disallowances of the amounts paid under Section 40 (a)(i). i.e 40 crores paid will be
disallowed and will be added back in the profits of the company.
2. Penalties for non deduction of TDS will be applicable.
3. Simple Interest at 12 % pa will be charged on month to month basis.

b) Section 40A(3)(a) of the Income-tax Act, 1961 provides that any expenditure incurred in
respect of which payment is made in a sum exceeding Rs.20,000/- otherwise than by an account
payee cheque drawn on a bank or by an account payee bank draft, shall not be allowed as a
deduction.Ifexpenditure is incurred in business or profession by payment of cash over Rs. 20,000
in a day, entire expenditure is disallowedPayment over Rs. 20,000 should be made by cheque or
demand draft. In the recent amendment, it changed to Rs.10,000 only.

The following category of payments exceeding ₹10,000 are allowed to made in a mode other
than account payee cheque or bank draft.
 RBI (Reserve Bank of India) or any other bank
 SBI (State Bank of India) and its subsidiaries
 Land mortgage bank or Co-operative bank
 LIC (Life Insurance Corporation of India)
 Primary credit society or Primary agricultural society
 When payment is made to the government when such a payment is required to made in
legal tender under specified rules.
 When the payment is made in certain modes such as letter of credit issued by the bank,
telegraphic or mail transfer initiated through a bank, an adjustment made in books of
accounts from a bank account, bill of exchange payable to the bank only, electronic
clearing system made through a bank account and payments made using debit/credit card.
 Adjustments made in the books of account where the payment is an adjustment made to
offset the liability incurred by the assessees to the payee for the goods/services rendered.
 When the payment is made towards procurement of products manufactured by cottage
industries without the aid of electrical power.
 When the payment is made to a person residing or carrying our business in a town/village
which is not served by a bank. Such payee must be carrying out the business/profession
in the place with no access to banking services.
 When the payment made by the assessee is in relation to the salary paid after deducting
the income tax. Such as employee should be posted temporarily for 15 days or more,
outside his/her normal place of duty.
  When the payment is made on a day where banks were closed due to bank holiday or
strike.
 When the payment is made by the assessee to their agent who is in turn makes payments
for procuring goods or services on behalf of the assessee.
 When the payment is made by the assessee to purchase foreign currency or travellers
cheques. Such payments should only be made to authorized money changers.

Therefore, Payments made in cash exceeding Rs.10,000/- will be disallowed to ABC Ltd.
That is, Rs. 30000 paid to the vendorin cash will be disallowed. This Rs. 30000 will be added
back in the profit of the company.

3. A) Harish, an Indian citizen, leaves India for the first time on May 22, 2015 forLondon
and returns on April 9, 2017, and stays in the country thereafter.Determine the residential
status of Harish for the assessment year 2018-19?
3. B) During the assessment year 2018 – 19, Harish (the above mentioned person) hadthe
following details of income:
Particulars Amount (Rs.)
Interest on UK Development Bonds 100000
(50% of the interest amount is received in India)
Income from a business in Chennai 2000000
LTCG on sale of shares of an Indian company 200000
Dividend from an Indian Company 500000
Compute the taxable income in the hands of Harish for the AY 2018 – 19.

Answer: A) The computation of total income of a person and incidence of tax depends on his
residential status. The residential status has nothing to do with the citizenship of a person. The
residential status of an assessee is determined with reference to his residence in India during the
previous year. To determine the taxable income of a person the residential status is required to be
determined for each assessment year.

Rules for determining residential status of individuals

There are two conditions to determine the residential status of an individual viz.
 Basic conditions and
 Additional conditions

(i) Basic conditions

There are two basic conditions. They are:
(a) An individual has been in India for 182 days or more during the previous year (P.Y) or
(b) An individual has been in India for 60 days or more during the previous year and 365 days or
more during four years preceeding the relevant previous year.

Exceptions to the above basic conditions (b):

 In case of an Indian citizen who leaves India during the previous year for the purpose of
employment or as a member of crew of Indian ship or,
  In case of an Indian citizen or a person of Indian origin who comes on a visit to India
during the previous year. The presence of 60 days required, is extended to 182 days or
more in India during the previous year. In other words basic conditions (b) referred above
is not applicable for such individuals mentioned above.

(ii) Additional conditions

There are two additional conditions which are as follows:
(a) He has been resident in India for at least two out of ten years immediately preceeding the
relevant previous year and,
(b) He has been in India for at least 730 days or more, during seven years immediately
preceeding the relevant previous year.

Rules for determining the residential status

Ordinarily Resident Not Ordinarily Resident Non Resident
Must satisfy at least one of Must satisfy at least one of the None of the basic conditions
the basic conditions and both basic conditions and none or are satisfied. So the additional
the additional conditions. one of the additional conditions. conditions are immaterial.

Conclusion:
 In 2015 Harish is inIndia only for 51 (30+21) days – therefore he is not ordinary resident
 In 2016 he was in London for the whole year - therefore he is not ordinary resident
 In 2017 he is in India for 356 (365-9) days - therefore he is an ordinary resident

Harish, an Indian citizen, leaves India for the first time on May 22, 2015 for London and returns
on April 9, 2017, and stays in the country thereafter. Therefore, Harish is and ordinary resident
because he is satisfying one of the basic conditions and both the additional conditions. He is
staying in India for 356 days during previous year and He has been resident in India for at least
two out of ten years immediately preceeding the relevant previous year and he has been in India
for at least 730 days or more, during seven years immediately preceeding the relevant previous
year.

b) As mentioned in part A of this question that Mr. Harish is an ordinary resident. Therefore his
income will be calculated in following manner:

Statement showing computation of income in the hands of Mr. Harish

PARTICULARS Amount (Rs.)
Interest on UK Development Bonds 50000
(50% of the interest amount is received in India)
Income from a business in Chennai 2000000
LTCG on sale of shares of an Indian company 200000
Dividend from an Indian Company 500000
Gross total income 2750000