Chapter 3
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Transcript of Chapter 3
CHAPTER 3: LEARNINGS AND EXPERIENCE
Internship programme was of great help to me. It helped me to understand the practical
application of Income tax in real life. Internship programme gave me the much needed
exposure which I was looking for. During my training session my main focus was on
The following key areas
• Assessment of Individuals, Firms and Companies
• Filing of returns and Forms of Returns
• Payment of advance Tax and TDS
It was not easy to cover the entire portion of the above mentioned subject within the given
duration of one month. My main focus was to understand the basic aspect of the above
mentioned subject and also to know how these concepts were used in real life. The internship
programme threw in a lot challenge for me. The greatest challenge for me was to adapt to the
new situation (The corporate life) initially, I founded it very difficult to cope with it, but as the
days went by I was able to gain the much needed confidence to perform my task. This
programme has installed in me the much needed confidence to face the real challenges in a
working environment. It was surely a wonderful experience for me personally because I feel at
present I am ready to face any new Challenges thrown at me. I was also able to understand
that there is a glaring difference between learning a subject and practical application.
Assessment of Individuals
In the training programme I went through the main 5 heads of Incomes
• Income from salary
• Income from House property
• Income from capital gains
• Income from Business and Profession
• Income from other sources
An individual, firms and companies earn from the above mentioned Heads of income
Income from salary
Any person employed gets compensated by the way of remuneration for the services
rendered. It is received in cash or in kind by the way of amenities benefits and perquisites.
Every payment made by an employer to his employee for services rendered would be
chargeable to tax as income from salary.
Taxability allowances: These are allowances that are fully taxable without any exemptions
1) Basic Salary
2) Dearness allowances
3) Advance salary
4) Arrears of salary
5) Bonus
6) Fees
7) Lunch allowances
8) Overtime allowances
9) Servant allowances
10) Family allowances
Allowances that are exempted based on certain criteria’s
House Rent Allowances (Conditions for claiming exemptions)
• . Assessee should be in receipt of H.R.A
• . Pay rent
• . Rent paid should be more than 10% of the salary
A person can claim House rent Allowances only if the above three conditions are fully
satisfied. These conditions are very essential for a person to claim exemptions.
Least of the following should be exempted
. Actual amount received xxx
. 50% salary (metro cities) 40% (other places) xxx
. Rent paid less 10% of salary xxx
Salary for House rent allowances = Basic salary+ Dearness allowances+ Commission
In House rent allowances only the least of the above mentioned can be exempted. The
remaining amount would be fully taxable to the employee.
Leave Travel Assistance (LTA)
Any individual can avail the benefit of leave travel assistance offered by his employer twice
in a block of four years. Leave Travel Assistance is provided by the employer to employee
and his entire family. Leave travel assistance is provided for following reasons
• . In connection with his proceeding on leave to any place in India, while in service
• . Proceed to any place in India after retirement or termination from service.
Leave Travel Assistance is taxable only if it is
1) Encashed without performing journey is fully taxable
2) Expenses reimbursed other than fare like boarding or Lodging is fully taxable
3) Amount received from employer in excess of cost of traveling on the shortest route
In Leave Travel Assistance only boarding or lodging fare is reimbursed. The remaining
amount is fully taxable. Traveling expenses is not taxable but any amount in excess of
traveling through the shortest route is fully taxable under Leave Travel Assistance. In short
only boarding, lodging, and traveling expenses are not taxable under Leave Travel
Assistance. The remaining amount is fully taxable. Leave travel Assistance cannot be
claimed every year. It can be claimed only twice in a block of four years, Example between
1998 and 2002 Leave travel assistance can be claimed only two times. If an employee
Encashes money and does not commence journey the entire amount of money claimed is
fully taxable.
Pension
Commuted Pension is the total amount of pension received in a lump sum. Pension is taxable
Government Employees (Central/ State/ Local) – Fully exempted
Non Government Employees who has received gratuity- Actual amount received
Less; 1/3 of full value of commuted pension
Non Government employees who has not received gratuity- Actual amount received
Less; ½ of full value of commuted p
Gratuity
Government Employee: Fully exempted from tax u/s 10
Non government employee: (Employee covered by Payment of gratuity act, 1972)
Computation of Taxable Gratuity: Least of the following is exempted
• Actual amount received xxx
• . 15/26 x last drawn salary x No of years of completed service xxx
• . Maximum limit 3,50,000
Employees not covered by payment of Gratuity act 1972(Least of following)
. Actual amount received xxx .
. ½ average salary No of completed year of services xxx
. Maximum limit 3,50,000
Allowances that are fully exempted
Traveling allowances - To meet cost of official tour and traveling expenses
Daily expenses - It should be spent by the employee for meeting daily charges
Conveyance allowance - It is given to an employee to meet expenses in performance of an
oficial duty.
Helper allowances - It is given to the helpers
Uniform allowances - It is given to the employee of an organization
Other Allowances
Transport allowances - 800 per month and 1600 per month for handicapped and
Bind employees
.
Children Education Allowances - 100 per month per child restricted up to two children
Children Hostel Expenditure - 300 per month per child restricted up to two children
Running allowances - Running expenses are for transport sector employees
for meeting personal expenditure incurred during transport from one place to another.
Perquisites
Section 17(2) perquisites are classified in the following manner
1. The value of rent free accommodation provided to the assessee by his employer
2 Any concession in rent in respect of accommodation provided to the assessee by his employer
3 Value of any benefits or amenities granted free of cost or at a concessional rate to the
following categories of employees.
• . A director of a company
• . An employee who has substantial interest in the company (An employee who is the
beneficial owner of at least 20% of ordinary shares
• . Any other employee, whose income under the head salaries exclusive of all non monetary
benefits exceeds 50000.
• . Any sum paid by the employer in respect of any obligation but for such payment would
have been payable by the assessee.
• Any sum paid by the employer to their respective employees, other than (provident fund or
an approved superannuation fund) to effect an assurance on the life of the assessee or to
affect contract fee annuity.
Perquisites are the benefits provided to the employee of an organization by his
respective employee. Perquisites are known as perks and it is taxable in the hands of the
employee. Perquisites are classified under Section 17(2).
Profit in Lieu of Salary
It is compensation received from present and former employees in connection with
• . Termination of employment
• . Modifications in terms and condition of employment
• . Sum received from Keysum Insurance Policy including bonus
• It is received in lump sum either prior to employment or after employment
Voluntary Retirement Compensation
An employee who has retired under Voluntary Retirement Scheme should not be employed in
another company of the same management. An employee should not have received voluntary
Retirement Compensation before from any other employer. It can be claimed only once in a
lifetime by the employee.
Least of the following is exempted
• . Actual amount received from the employer by the employee
• . Maximum limit 5, 00,000
Highest of the following items
• . Last drawn salary x 3 x Number of completed years of service
• . Last drawn salary x Balance of number of months of service left
Under Voluntary retirement Scheme least of the above mentioned items would be exempted
from tax liability.
Deductions against salary
From the gross salary the below mentioned items are deducted
1) Entertainment allowances
2) Professional Tax
Entertainment allowances
It can be deducted only from government employees. It is applicable only for government staffs
Least of the following will be allowed as Deduction
• . Actual amount of Entertainment Allowance received
• . 20 % of basic salary of the individual.
• . 5000
Professional Tax
It is tax on Employment paid by an employee under a state act. Such deductions are available
only on the actual payment. If an employer pays tax on behalf of his employee it would first be
included in the salary as perquisites and then would be deducted from the total salary as the
deductions that are allowable.
An employer has to make sure salary is paid to the employee after deducting Tax
Deduct at source. T.D.S is deducted by the employer on behalf of its employees. T.D.S should
be deducted by the employer while paying salary. T.D.S deduction is a legal obligation an
employer must follow if the salary exceeds a prescribed figure.
Income from House Property
During my Internship under Income from House Property the main focus was on Section 54
related to capital gain arising out of transfer of various Capital Assets
Section 54.( Capital gain arising out of transfer of residential House Property)
The important conditions to be noted under Section 54 are:
• . It is applicable to individual/ Hindu undivided family
• . It is applicable only if Capital Gain arises out of transfer of Residential property
• . The capital gain arising should be invested only in residential property within a period of
two years if a residential house is purchased and within three years if a land is purchased
and a house is constructed.
• . The exemption got earlier would be cancelled if the house property is sold within three
years
Section 54B (Capital gain arising out of transfer of agricultural land)
• . It is applicable to in case of individuals
• .It is applicable only if capital gain arises out of transfer of agricultural land
• . The land should be used for agricultural purpose for two years preceding sale.
• .The capital gain should be invested only in agricultural land within a period of two
years. The exemption got earlier would be cancelled if it is sold within a period of
three years. This is applicable for short term and long term assets.
Section 54 D (Capital gain arising out of compulsory acquisition of land)
• . It is applicable for any persons
• . It is applicable only if capital gain arises out of compulsory acquisition of land.
• .The land should be used for Industrial purpose for two years preceding sale.
• . The capital gain should be invested within three years for industrial purpose.
• . This is applicable for short term and long term assets.
Section 54 EC (Capital gain arising out of transfer of long term capital assets )
• . It is applicable for any persons
• . It is applicable only if capital gain arises out of transfer of long term capital assets.
• . The capital gain should be invested in long term bonds (Bonds issued by National
Highway Authority of India or by Rural Electrification Corporation Limited)
• . The capital gain should be invested within a period of six months
• . It is applicable only in transfer of long term capital assets.
• . The bonds should not be sold for a period of three years.
The bonds if sold within a period of three years
The capital gain exemption got earlier would be chargeable in the financial year in which
asset is sold as long term capital asset. The capital gain got out of transfer of the property
(Sold within three years would be termed as short term capital gain.
Section 54 F( Capital gain arising out of transfer of all long term capital assets
accept capital gains from transfer of House Property)
• . It is applicable for Individual and Hindu undivided family
• .The capital gain should be invested only in House Property
• It should be invested within a period of two years if purchasing a House Property and a
period of three years if House is constructed after purchasing a land.
• . It is applicable only in case of long term capital assets.
• . The asset should not be sold within three years from the date of transfer. If the asset is
sold within three years the exemption got earlier would be removed.
Additional Condition
• . The assessee shall have only one House Property excluding the new House Property.
• . The assessee shall not purchase any other House property within three years from the date
of transfer of the original property.
Amount of Capital gain exempted are;
Cost of new house x Capital gains/ Net Sales Consideration
Amount of unutilized amount in Scheme of Deposit to be taxed;
Amount unutilized x Amount of original Capital gain/ Net Sales Consideration
Income from other sources
The following items are covered under Income from other sources.
• . Winnings from lottery, crosswords puzzles
• . Income from ground rent
• . Income from royalties
• . Interest on bank deposits
• .Income from ground rent.
• . Income from interest on securities
Interest on securities would be assessed under this head only if they are not chargeable under
the head Profits and gains of the business.
Deductions under Income from other sources
The followings items can be deducted from Income from other sources
• . In respect of income in the nature of family pension a deduction of 33% of such income
• . Any other expenditure (not being in the nature of capital expenditure) laid out or
expended wholly for the purpose of making such Incomes.
• . Deprecation in respect of: buildings, machinery plant and furniture’s
• . Premium paid in respect of Insurance against risk of damage or destruction.
• . Amount paid on account of current repairs to premises, machinery, plant and furniture’s.
• . Benefits of: unabsorbed deprecations.
Income from profession
This income is calculated for Individuals who earns income from a distinguished profession like
(Chartered Accountant, Lawyers, and Doctors etc). During my Internship programme I came
across only one file which involves Income from profession. To compute the Income from
profession you must add all professional receipts and less all professional payments.
Computation of professional income of an auditor
Professional receipts
. . Consultation fees xxx
. Audit fees xxx
. Tribunal expenses xxx
. Miscellinious receipts xxx
Total professional receipts xxx
Professional payments
. Office rent xxx
. Subscription of journals xxx
. Salary to staffs xxx
. Institute fees xxx
Total professional payments xxx
Professional Income = Total Professional Receipts – Total Professional payments
Income from Business
During my Internship programme I noted that the auditing firm I worked in maintains a Profit
and loss account and a capital account. When asked on it they told me they prepare two separate
accounts to compute Income from business. Initially, I was confused with the capital account
because in college we never prepared a separate account for capital. The more I worked out
problems the more I came to learn about Income from Business. This is one incidence where I
realized theoretical study is completely different from real life practical application.
Computation of Income from Business
Net profit from the profit and loss account xxx
Add: Disallowable expenses (Examples of Disallowable expenses)
Capital expenses xxx
Reserves and provisions xxx
Less: Disallowable Income (Example of Disallowable Incomes)
Post office saving interest xxx
Bad debts recovered xxx
In my Internship training programme I was told to deduct items like Interest received,
commission received, and rent received from Net profit because they would be included under
Income from other sources. The other think which took my attention was adding and
subtracting deprecation to this they told me that, you add deprecation amount in the books of
account and deduct the amount of deprecation stated by the Income Tax Authority.
Advance tax
Every person is liable to pay advance tax if the advance tax payable is 10,000 or more. An
assessee who is liable to pay advance tax is required to estimate his current income and pay
advance tax without having to submit any estimate or statement of income to the assessing
authorities. After making payment for first and second installment of advance tax an assessee
can revise the remaining installments of advance tax, in accordance with his revised estimate of
current income and pay tax accordingly. In simple words you compute advance tax payable by
calculating the actual tax to be paid and by deducting the T.D.S.
Calculation of TDS
Tax on the total Net Income 276000
Add: Educational Cess (3% on net income) 8280
Total Tax Liability 284280
Less: T.D.S 263380
Advance tax 20900
In the above mentioned case an assessee has to pay advance tax because the amount of
difference between the actual amount of tax liability and the actual amount of T.D.S is more
than the prescribed limit of 10000. So the assessee has to pay advance tax in the assessment
year of 2010-2011. The advance tax should be computed well before the actual payment of tax.
If the advance tax forecasted by the assessee is lesser than the actual amount of advance tax
payable then an assessee must pay penalty to the concerned Authority
Advance Tax Payment (Dates to be filed)
In case of corporate assessee
Due Date Tax to be paid
On or before June 15 15% of advance tax is payable
On or before September 15 30% of advance tax is payable
On or before December 15 30% of advance tax is payable
On or before March 15 25% of advance tax is payable
In case of non corporate assessee
On or before September 15 30% advance tax is payable
On or before December 15 30% advance tax is payable
On or before March 15 40% advance tax is payable
Any payment of advance tax which is made before March 31st is treated as advance tax that is
paid during the financial year. When the advance tax is payable by the virtue of notice of
demand issued by the assessing officer the whole amount or the appropriate part of advance tax
should be payable in the remaining installments. The assessing officer shall fine an interest on
the amount due or on the entire amount of advance tax assessed. Section 208 and 210 deals with
non payment of the advance tax. Advance tax payment is a must for all the assessee if the
difference between tax paid and TDS is more than the prescribed limit of 10000 or more. An
assessee is required to estimate his current income before computing advance tax.
Tax Deduct at Source (TDS)
Tax deduction at source is a must and it must be paid by the persons concerned within the given
period of time. When a person does not deduct tax at source or after deducting fails to pay
whole or any part of tax as required by the act, then such person would be liable for payment of
tax with interest and penalty. TDS is deducted in the following cases.
TDS in case of salary
• . It is paid by the employer of an organization
• . It is deducted from employee’s salary.
In case of salary TDS is deducted by the employer on behalf of its employees.
TDS in case of interest on securities
• . It is paid by any person issuing the securities
• . It should be deducted from any person receiving interest on securities.
TDS should be deducted only if a person receives interest of more than 10000 from securities.
Winnings from Horse race
• . It is paid by the company giving the winning sum.
• . It is deducted from any person.
• . Rate of 30%
TDS should be deducted only if a person receives more than 2500 from Horse race.
Rent received
. It is paid by any persons except Individual and Hindu undivided family.
. It is deducted from any person.
TDS should be deducted only if a person receives rent of 120000 or more.
Insurance Commission
. It is paid by any person who is giving the Insurance commission
. It can be deducted from any resident persons
TDS should be deducted only if a person receives Insurance Commission of 5000 or more
Interest other than interest on securities
. It is paid by any person other than individuals and HUF.
. It can be deducted from any resident in India
TDS should be deducted only if a person receives interest on securities exceeding 5000
in a year or 10000 in case of banking company or co-operative society, deposits with post
office. These are certain cases where TDS should be deducted by the respective persons. TDS
deducted should be deposited to the respective Authorities within the prescribed time. TDS is
deducted only if the amount received exceeds a certain limit. It is a must to deduct TDS if they
are not deducted properly a fine is levied on the person who is responsible for deductions.
Computation of Income of Companies
Companies earn Income from three main sources of Income
• . Income from business
• Income from House Property
• . Income from Capital gains
For Companies the main source of Income would be from Income from Business. The Income
from Business starts with the Net profit. During my Internship training I came across items
which should be added and deducted from the Net profits. Items like rent received should be
deducted from the Net profits
Computation of Incomes of Firms
During my Internship training I noted that the auditor computed Income of the firm and the
partners together in one statement. I realized that’s a practice followed in almost all auditors
firm if both the firm and the partner are clients of the same auditor. The firm earns income from
• . Income from House Property
• . Income from Capital gains
• . Income from Business and Profession
For the firm though they receive Incomes from the other heads of Income, the main source of
Income would be Income from Business and profession.
CHAPTER 5: Conclusions
During Internship training my main focus was on to cover the topics as mentioned below.
• . Assessment of Individuals, Firms and Companies
• . Filing of returns and Forms of Returns
• . Payment of Advance Tax and TDS
It was not easy to cover the above mentioned Topics within the allotted time of 30 days. I tried
my level best to cover the above mentioned topics within the given time. It was a wonderful
experience working in an auditing firm. It gave me a real feel of the corporate world. It put be
into a group which was filled with real life performers, so I had to put in that extra bit of effort
to work with them. I was very lucky to work in such a reputed firm which had very rich
experience in the field of auditing. The most important think I learned during my training
session was that there is a glaring difference between what I learned and what I practiced.
This training period made me matured as an Individual and as a team member in the
organization. The real challenge for me was to adapt to the corporate environment. Initially, I
founded it very difficult to cope with it, but as the days went by I grew in confidence and was
ready to face new challenges thrown at me. The work environment was simply superb and it
gave me a chance to acquire new skills. I was also able to observe the manner in which each
client was treated in the organization. This programme has done a world of good to my
confidence and it has given me a wonderful experience of working in a top auditing firm.
Chapter 6: Feedback
The Internship programme was of great help to me as it gave me the much needed exposure to
face the challenges thrown in by the corporate world. I was not able to look into the topic given
in detail, because of the lack in duration in the training programme. I personally would like the
Internship training to be extended by a month. It gave me the much needed exposure to the
practical aspect of Income Tax. I was also able to pick up new traits from my auditor in relation
to handling of clients and building a good customer relationship.
It would be great, if we had a chance to do our Internship programme after studying
the theoretical aspect of Income Tax in full. I spent a majority of time in understanding the
concepts like TDS, Advance tax and computation of Incomes from different heads of Incomes.
The auditor told me I could work on various files only if I know such basic concepts. It took me
nearly two weeks to study these concepts, as a result of which time I did not have enough time
to practice all the above mentioned concepts. It would have been really good if our Internship
programme is extended by a month. Internship programme has a whole was excellent and I
really enjoyed this beautiful experience, which helped me a lot to develop personally and also to
live up to the expectations of my auditor. The stand out thing of this entire programme was it
gave all of us the much needed exposure and also a lot of scope to expand and develop our
skills, which would be very essential for us to face new challenges thrown at us. This training
programme was a real blessing to us. I would like to thank my College, teachers and the auditor
for their whole hearted support.
Income from House Property
. The auditor computes the gross annual value with the details given by the clients. From the
gross annual value municipal tax is been deducted and that would give you the Net annual
income of the House property. From the Net Annual value of the House property you deduct
30% as standard deductions. The next deduction available from the Net Annual income is
deduction on the Interest on loan borrowed and pre-construction interest..
An Illustration to explain Income from House Property (In case of let out House)
Gross Annual Income xxx
Less: Municipal tax paid xxx
Net Annual Income xxx
Less: Standard deductions xxx
Less; Interest on loan borrowed xxx
Less: Pre-construction interest xxx xxx
Total Income from House Property xxx
This is applicable only in case of House that are deemed to be let out. Gross annual value of
House that is self used is taken to be nil. Interest on loan borrowed and pre-construction interest
claimed should not be more than 30000. It can be raised provided three conditions are satisfied.
. Loan must be taken on or before 1.4.19
. Loan should be taken only for construction or for acquisition
. It must be repaid within three years from the end of financial year in which loan is taken.
Chapter 1.1: Introduction
Loyola College was established and owned by the Loyola College society. It was founded by
Rev.Fr. Francis Bertram and a band of dedicated Jesuits, who came to Chennai. The foundation
stone was laid on March 10th 1924 and the college started functioning in July of the following
year (1925) with seventy-five students on roll in undergraduate courses of Mathematics, History
and Economics. Loyola College is ranked as the Number one College in India by the top
magazines. Many eminent personalities of India have graduated from Loyola College and it is
surely any students dream and, I personally am very lucky to be a part of Loyola. The Internship
programme was mainly included in the curriculum to help the students understand the practical
application of Income tax in detail and also to give the students the much needed exposure.
During our Internship training our main focus was on
. Assessment of Income for Individuals
. Assessment of Income for Firms and Companies
. Tax Deduction at Source
. Advance tax payment
The other main purpose of this programme was to help the students understand the glaring
difference between theoretical study and practical application of various Income tax concepts.
Internship programme was very successful in fulfilling the objectives they were formed for. It
was a wonderful learning experience for me personally, as I was able to learn a lot of new
concepts in Income Tax which would be very useful for me.
Chapter 1.2: Profile of the Organization
The firm Kushal Raj and Co was formed in the year 1975 with a minimal number of two
employees. The firm at present has over thirty-five employees with a very rich experience in the
field of auditing for over thirty-five years. The firm’s office is situated in Sowcarpet; Chennai
opposite to Indian Overseas Branch (Parry’s branch). The firm deals with clients, who are from
various diversified Portfolio like
• . Manufacturing
• . Trading
• . Banking and Finance
• . Software
• . Publishing and Distribution
• . Hospitals
• . Advertising
• . Entertainment
The firm has grown in size on the audit and tax foundation, it is fairly very large in size and
very diverse. It provides internal audit service to a selected few companies and also offers
Project Management services to companies setting up Greenfield projects. The firm at present
has over hundred clients, which is been growing steadily every year. The firm is one of the
leading auditing firms in Chennai and has about five Interns who contribute immensely to the
growth of the firm.
Chapter 2: Profile of the work guide
Mr. Kushalraj:
He is a fellow member of the Institute of Chartered Accountancy and was also the youth wing
member of the forum for many years. He graduated from college in the year 1968 and also has
rich experience in the field of law. The firm was started by him in the year 1975. He holds an
F.C.A degree and has a very rich experience in the field of auditing for over thirty-five years.
His area of interest is
• . Project management
• . Tax advisory service
• . Compliance and Exchange control
• . Development system design
Mr. Anand Nahar:
He graduated from college in the year 1985. He joined the firm in the year 1993 and has a very
rich experience in the field of auditing for over twenty years. He holds an F.C.A degree and is
also a fellow member of the Institute of Chartered Accountancy. His area of Interest is
• . Project consultancy
• . Business planning
• . Development system Design
• . Tax advisory service
Chapter 4: Forms used in Income Tax procedure