INTEREST FROM SPV – TAXABLE

SPECIAL PURPOSE VEHICLE

INTEREST FROM SPV – EXEMPT U/S 10(23C)
NON RESIDENT/FOREIGN CO – 5%(TDS @ 5% U/S
194LBA)

OTHERS – NORMAL RATES(TDS @ 10% U/S 194LBA)

SPV IS NOT LIABLE TO PAY DDT

FROM SPV + OTHERS SPV IS NOT LIABLE TO FROM SPV + OTHERS (COMPANY) U/S 115 – O IF SPV IS A

REAL ESTATE INVESTMENT TRUST

(COMPANY) PAY DDT U/S 115 – O IF SPECIFIED DOMESTIC COMPANY
- COMPANIES ARE LIABLE TO PAY
SPV IS A SPECIFIED
-EXEMPT DDT EXEMPT U/S 10(23FC) [EVEN
DOMESTIC COMPANY
- EXEMPT U/S 10(34) THOUGH DDT PROVISIONS ARE
SECTION 115BBDA - EXEMPT U/S 10(23FD) NOT APPLICABLE]
NA
- SECTION 115BBDA APPLICABLE
UNIT HOLDERS

Other Income
RENT FROM PROPERTY RENT FROM LONG TERM
OWNED BY REITS PROPERTY CG SHORT TERM
OTHER
LONG TERM CG/SHORT OWNED BY CG COVERED
NON RESIDENT/FOREIGN TAX @ 10% INCOME
TERM CG AND OTHER REITS BY 111A
CO – NORMAL OR 20% AS
INCOME MMR
RATES%(TDS U/S 195) EXEMPT U/S PER SECTION TAX @ 15%
EXEMPT U/S 10(23FD) 10(23FCA) 112/112A
OTHERS – NORMAL
RATES(TDS @ 10% U/S
194LBA)

SPECIFIED DOMESTIC COMPANY MEANS A COMPANY - WHOSE 100%

SHAREHOLDING IS WITH REITS (EXCLUDING GOVERNMENT SHARE) AND PROFITS OUT
OF WHICH DIVIDEND IS DISTRIBUTED ARE EARNED AFTER ACQUISITION OF 100%
HOLDING
 INTEREST FROM SPV – TAXABLE

SPECIAL PURPOSE VEHICLE

INTEREST FROM SPV – EXEMPT U/S 10(23C)
NON RESIDENT/FOREIGN CO – 5%(TDS @ 5% U/S
194LBA)

OTHERS – NORMAL RATES(TDS @ 10% U/S 194LBA)

SPV IS NOT LIABLE TO PAY DDT

INFRASTRUCTURE INVESTMENT TRUST

FROM SPV + OTHERS SPV IS NOT LIABLE TO FROM SPV + OTHERS (COMPANY) U/S 115 – O IF SPV IS A
(COMPANY) PAY DDT U/S 115 – O IF SPECIFIED DOMESTIC COMPANY
- COMPANIES ARE LIABLE TO PAY
SPV IS A SPECIFIED
-EXEMPT DDT EXEMPT U/S 10(23FC) [EVEN
DOMESTIC COMPANY
- EXEMPT U/S 10(34) THOUGH DDT PROVISIONS ARE
SECTION 115BBDA - EXEMPT U/S 10(23FD) NOT APPLICABLE]
NA
- SECTION 115BBDA APPLICABLE
UNIT HOLDERS

Other Income
LONG TERM
RENT FROM
CG SHORT TERM
PROPERTY OTHER
CG COVERED
OWNED BY TAX @ 10% INCOME
LONG TERM CG/SHORT BY 111A
IITS OR 20% AS
RENT FROM PROPERTY TERM CG AND OTHER MMR
OWNED BY IITS PER SECTION TAX @ 15%
INCOME MMR
112/112A
EXEMPT U/S 10(23FD) EXEMPT U/S 10(23FD)

SPECIFIED DOMESTIC COMPANY MEANS A COMPANY - WHOSE 100%

SHAREHOLDING IS WITH IITS (EXCLUDING GOVERNMENT SHARE) AND PROFITS OUT
OF WHICH DIVIDEND IS DISTRIBUTED ARE EARNED AFTER ACQUISITION OF 100%
HOLDING
1. Business Trust means

A) Real Estate investment Trust registered under SEBI regulations 2014 + units of Trust are listed on RSE

B) Infrastructure investment Trust registered under SEBI regulations 2014 + units of Trust are listed on RSE

2. Units of business trust received in exchange of shares of SPV by shareholders is a non-taxable transfer
[Section 47 (xvii)].

Taxability arises at the time of Transfer of Units.

Cost of units = Cost of Shares [ section 49(AC)]

Holding period = holding period of shares + Holding period of Units

3. Tax rate applicable on transfer of units

Long Term Capital Gain – 112A section applies

Short Term Capital gain – 111A section applies

4. Holding Period = 36 MONTHS

[Link] CLASSES FINAL C.A. – DIRECT TAX

TAXATION OF POLITICAL PARTY

Section 13A of the Income-tax Act, 1961 grants exemption from tax to political parties in respect
of their income specified below:

Income from
house
property

Voluntary
Contribution
Exempt Income from
Other
received
Income Sources

Income from
Capital Gains

The aforesaid categories of income would qualify for exemption provided additional conditions for
availing the benefit of the said section which are as under are met:

Maintains such books of account and other documents to enable the A.O. to properly deduce its
income therefrom

Maintains a record of each such voluntary contribution (other than electoral bonds) in excess
of ` 20,000 and the name and address of the contributor

Audit of accounts of the political party by a chartered accountant

No donation exceeding ` 2,000 to be received otherwise than by an A/c

payeecheque/bank draft or use of ECS through a bank account or electoral bond

Submission of report u/s 29C(3) of the Representation of the People Act, 1951 for the
financial year

Furnishing of return of income for the P.Y. in accordance with section 139(4B)

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[Link] CLASSES FINAL C.A. – DIRECT TAX

TAXATION OF ELECTORAL TRUST

Section 13B provides exemption in respect of voluntary contribution received by an electoral trust
approved by the CBDT in accordance with the scheme to be made by the Central Government.

Voluntary contribution received by an electoral trust would be treated as its income under section
2(24), but shall be exempt under section 13B if the trust distributes to a registered political party
during the year, 95% of the aggregate donations received by it during the year along with surplus
brought forward from any earlier years.

Another condition for availing the benefit under this section is that the electoral trust should
function in accordance with the rules framed by the Central Government.

It may be noted that the exemption under section 13B will be available only in respect of
voluntary contribution received by an electoral trust. The exemption cannot be claimed in respect
of any other income of the electoral trust.

:5: REVISION NOTES – MAY ‘19

[Link] CLASSES FINAL C.A. – DIRECT TAX

TAXATION OF SECURITISATION TRUST

Particulars Securitisation Trust Unit Holder

Income earned Exempt under section 10(23DA) Taxable @ Normal
by Investment fund is liable to deduct TDS u/s Rates
Securitization 194LBC
Trust Time of Deduction – Payment or Credit
Whichever is earlier
Rate of TDS –
Resident Payee
Individual/HUF – 25%
Other than I/HUF – 30%

Non-resident Payee/Foreign Company –

Rates as per Finance Act.
Other Points:
1. Section 115TCA (1) provides that the income accruing or arising to, or received by, a
person, being an investor from the securitisation trust, out of investments made in the
securitisation trust, shall be taxable in the hands of investor in the same manner as if
the investor had made investment directly in the underlying assets and not through
the trust.

2. The income paid or credited by the securitisation trust shall be deemed to be of the
same nature and in the same proportion in the hands of the investor of the
securitisation trust, as if it had been received by, or had accrued and arisen to, the
securitisation trust during the previous year.

3. Deemed credit on the last day of the previous year (if amount is not credit or paid)

4. The person responsible for crediting or making payment of the income on behalf of
an securitization trust and the securitization trust are required to furnish, to investors
and to the prescribed income-tax authority, a statement. Such statement should give
details of the nature of the income paid or credited during the previous year and such
other relevant details (30th June of AY – to Unit Holder) (30th November of AY – to
Income tax authority)

:6: REVISION NOTES – MAY ‘19

[Link] CLASSES FINAL C.A. – DIRECT TAX

TAXATION OF AOP/BOI

Section 40(ba) - In the case of Association of persons or body of individuals,

following amounts shall not be deducted in computing the business income

Any payment of interest, salary, commission, bonus or remuneration made by an association

of persons or body of individuals to its members will also not be allowed as a deduction in
computing the income of the association or body.

Note – Rent is not covered by 40(ba). Therefore Rent paid is allowed subject to section
40A(2).

Explanation 1 - Where interest is paid by an AOP or BOI to a member who

has paid interest to the AOP/BOI, the amount of interest to be disallowed
under clause (ba) shall be limited to the net amount of interest paid by
AOP/BOI to the partner.
Explanation

Explanation 2 - Where an individual is a member in an AOP/BOI in a

representative capacity, interest paid by AOP/BOI to such individual or by
such individual to AOP/ BOI otherwise than as member in a representative
capacity shall not be taken into account for the purposes of clause (ba).
Explanation 3 - Where an individual is a member in his individual capacity,
interest paid to him in his representative capacity shall not be taken into
account.

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[Link] CLASSES FINAL C.A. – DIRECT TAX

Section 167B - Tax Rate Applicable to AOP/BOI

Shares of Members are

Shares of Members are known known at the time of
formation

Any one
All Members There is
members One member There is no
Income <= BEL Foreign
income > BEL is a Foreign Foreign
+ No Foreign Company
+ No Foreign Company Company
COmpany
Company

MMR MMR HIGHER RATE

SLAB
RATES SHARE OF FOREIGN
COMPANY – HIGHER
RATE OTHER MEMBER
SHARE - MMR

1. MAXIMUM MARGINAL RATE – 35.88% (30%+15%+4%)

2. HIGHER RATE - 43.684%

3. Special rate income will be taxed at special rate

4. If taxability is covered by situation 1 then for levy of surcharge income

amount is to be considered.

Taxation of Member’s Share

If AOP / BOI is taxed at MMR / higher rate Share of member shall not be
included in his total income.
If AOP / BOI is taxed at rates applicable to an Share of members shall be
Individual. (i.e. normal tax rates) included in his total income but
subject to rebate u/s 86.
If no Income tax is chargeable on total income of Share of members shall be fully
AOP / BOI charged to tax & NO REBATE
u/s 86.

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[Link] CLASSES FINAL C.A. – DIRECT TAX

Rebate u/s 86
Calculate Total Tax Payable (after giving effect of rebate u/s 87A ,
surcharge , health and education cess ) XX
Less : Rebate u/s 86

Tax payable by member * Members share in AOP / BOI u/s 67A

/ Total income of member (including share from AOP / BOI) (XX)
Total Tax payable XX

Section 67A : Method of Computing Share of a Member of AOP / BOI

Step 1 Total Income of AOP / BOI
Less: Remuneration / interest to members
Balance to be distributed in PSR
Step 2 Share of member in distributable income
Add: remuneration / interest from AOP / BOI

The share of the member in the income or loss of

AOP / BOI shall be apportioned under the
various heads of income in the same manner in
which the income or loss of AOP / BOI has been
determined under each head of income.

:9: REVISION NOTES – MAY ‘19

[Link] CLASSES FINAL C.A. – DIRECT TAX

TAXATION OF FIRM

Section 40(b) – Allowability of interest and remuneration to Firm/LLP

Conditions for allowability of interest

A) Authorization in partnership deed
B) Payment of interest shall be accordance with the terms of
partnership deed.
C) Period for which interest is paid shall not preceed the date of
authorization
D) Maximum interest allowed 12%
E) Partner = Working or Non-Working

Other Points

1. Where an individual is a partner in a firm in a representative capacity

interest paid by the firm to such individual otherwise than as partner in a
representative capacity shall not be taken into account for the purposes of
this clause.

2. Where an individual is a partner in a firm otherwise than in a representative

capacity, interest paid to him by the firm shall not be taken into account if
he receives the same on behalf of or for the benefit of any other person.

3. If amount is utilized to earn Income which is exempt Interest is not allowed

as deduction.

4. If partnership authorizes payment of interest only on credit balance in

capital account and not on credit balance in current account then interest
paid on balance in current account is not allowed as deduction. (Novel
Distributing Enterprises v. DCIT (2001) Kerala HC)

5. For disallowance of interest assessing officer cannot invoke section 40A(2).

CIT v. Great City Manufacturing Co. (2013) (All)

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[Link] CLASSES FINAL C.A. – DIRECT TAX

Conditions for allowability of remuneration

A) Authorization in partnership deed

B) Payment of remuneration shall be accordance with the terms of

partnership deed.

C) Period for which remuneration is paid shall not preceed the date of
authorization

D) Partner = Working or Non-Working

E) Maximum Remuneration

In case of Book loss or BOOK PROFIT `150000 or 90% of book profit whichever
upto ` 300000 is higher
On the balance of books profits 60%

Book Profit means the net profit as shown in the profit and loss account for the
relevant PY, computed in the manner laid down in sections 28 to 44D as increased by
the aggregate of the remuneration paid or payable to all partners of the firm if such
amount has been deducted while computing the net profits.

Analysis
- only Income under the head PGBP is to be considered
- Current year and b/f depreciation is to be deducted
- B/f Losses and Chapter VI-A will not be deducted
- before remuneration and after interest which is deductible.

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[Link] CLASSES FINAL C.A. – DIRECT TAX

Section 78(1) – Where a change has occurred in the constitution of a firm, then
nothing shall entitle the firm to have carried forward and set off so much of the
loss proportionate to the share of a retired or deceased partner as exceeds his
share of profits, if any, in the firm in respect of that previous year. However
Unabsorbed depreciation is allowed to be carried forward.

Section 28 - Any interest, salary, bonus, commission or remuneration, by whatever name

called, due to or received by a partner of a firm from such firm will be deemed to be income
from business.(only to the extent it was allowed to partnership firm)

Section 10(2A) – Share in profits received by partners is exempt from tax.

Circular 8/2014 – Even if firm is not liable to pay tax on income because of exemption or
deduction. Share in Profits received by partners is exempt u/s 10(2A).

Assessment as a firm [Sec. 184]

a) A firm shall be assessed as a firm, only when the following conditions are satisfied:
i) The partnership is evidenced by an instrument in writing;
ii) The shares of each partner are specified in such instrument;
iii) A copy of the partnership instrument as certified by all the partners is enclosed with
the return of income in respect of the first assessment year for which the status of
firm is claimed;
b) The firm does not commit any default-as mentioned in sec.144 (empowering the
Assessing Officer to make a best judgment assessment).
Assessment when Sec.184 is not complied with [Sec.185]
1. Where a firm does not comply with any of the provisions of sec.184 for any assessment
year, the firm shall be continued to be assessed as firm for that assessment year.
2. However, in such cases, no deduction shall be allowed in respect of payment of any
interest, salary, bonus, commission or remuneration to partners.
3. The amount of interest or salary etc. so disallowed in the hands of the firm shall not be
chargeable to tax in the case of respective partners.

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[Link] CLASSES FINAL C.A. – DIRECT TAX

Change in constitution [Sec.187]

a) Where at the time of making an assessment u/s.143 or u/s.144, it is found that a change
has occurred in the constitution of a firm, the assessment shall be made on the firm as
constituted at the time of making the assessment. (i.e., single assessment shall be
made).
b) For the purpose of assessment of a firm "change" in constitution of firm would mean the
following:
i) If one or more partners cease to be partners or one or more new partners are
admitted, in such circumstances that one or more of the persons who were
partners of the firm before the change, continue as partner(s) after the change; or
ii) All the partners continue with a change in their respective shares or in the shares
of some of them.
Where the firm is dissolved on the death of any of its partners it will not be considered as a
change in the constitution of the firm as per point (i) given above. It will be covered under
section 189 (discussed later).

Succession of a firm [Sec.188]

Where a firm carrying on a business or profession is succeeded by another firm and the case
is not covered by sec.187 (i.e., not a change in constitution) then separate assessments shall
be made in the following manner:
a) The predecessor firm shall be liable to be assessed in respect of income of previous
year in which the succession took place up to the date of succession. The successor
firm shall be liable to tax in respect of the income of that previous year derived after the
date of succession.
b) Liability of successor firm is same as stipulated in sec. 170.

Joint and several liability of partners for the tax payable by the firm [Sec. 188A]
Where any tax, penalty or any other sum payable by a firm for any assessment year is due,
then every person who was the partner of the firm during the relevant previous year and the
legal representative of any such person who is deceased shall be jointly and severally liable
in respect of such sum payable by the firm.
Note: The liability of the legal representative of a deceased partner cannot exceed the value
of estate inherited by him from such deceased partner - Sec. 159(6).

Dissolution of firm (or) discontinuance of business or profession [Sec. 189]

a) Where a firm is dissolved or the business or profession is discontinued, for the purpose
of any proceeding pending under the Income-tax Act, the firm shall be deemed to be
in existence and the proceedings shall be continued accordingly.
b) For the purpose of initiating any proceeding against such firm, the firm shall be deemed
to be in existence.
c) In respect of any tax, interest, penalty or any other sum payable by the firm, all persons
who were partners, together with the legal heirs of any deceased partner, during the
previous year when dissolution or the discontinuance took place shall be jointly and
severally liable to pay any such amount.

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[Link] CLASSES FINAL C.A. – DIRECT TAX

Case Laws
(CIT v. Great City Manufacturing Co)
Can remuneration paid to working partners as per the partnership deed be considered as
unreasonable and excessive for attracting disallowance under section 40A(2)(a) even though
the same is within the statutory limit prescribed under section 40(b)(v)?
The Allahabad High Court, therefore, held that the question of disallowance of remuneration
under section 40A(2)(a) does not arise in this case, since the Tribunal has found that all the
three conditions mentioned above have been satisfied. Hence, the remuneration paid to working
partners within the limits specified under section 40(b)(v) cannot be disallowed by invoking the
provisions of section 40A(2)(a).

Rashik Lal and Co., vs. CIT, 229 ITR 458 (SC).
Where a person is a partner in a partnership firm in his representative capacity as the karta of a
HUF, he occupies a dual position. Qua the partnership, he functions in the personal capacity;
qua the third parties, in his representative capacity. As regards the firm, such a partner does not
act in his representative capacity but only in his personal capacity like any other partner. If any
remuneration is paid or commission is given to such a partner, the provisions of sec. 40(b) shall
apply. The partner may be under an obligation to hand over the money received by him to the
person whom he is representing. That will not change the character of the payment by the firm
to its partner or the status of the partner in the firm. The provisions of sec. 40(b) shall clearly
apply to such payment

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[Link] CLASSES FINAL C.A. – DIRECT TAX

TAXATION OF INVESTMENT FUNDS

Particulars Investment Fund Unit Holder
Income under the head Taxable Exempt under
“Profits and gains of Company or Firm – Rate as per Finance Act section
business or profession” Other - MMR 10(23FBB)
of the Investment Fund
Income, other than Exempt under section 10(23FBA) Taxable @
profits and gains of Normal Rates
business or profession Investment fund is liable to deduct TDS u/s
194LBB
Time of Deduction – Payment or Credit
Whichever is earlier
Rate of TDS –
Resident Payee – 10%
Non-resident Payee/Foreign Company – Rates
as per Finance Act.
Other Points:
1. Any income accruing or arising to, or received by, a person, being a unit holder of an
investment fund, out of investments made in the investment fund shall be chargeable to
income-tax in the same manner as if it were the income accruing or arising to, or received by,
such person had the investments made by the investment fund, been made directly by him.

2. The income paid or credited by the investment fund shall be deemed to be of the same
nature and in the same proportion in the hands of the unit holder as if it had been received
by, or had accrued or arisen to, the investment fund

3. Deemed credit on the last day of the previous year (if amount is not credit or paid)

4. The person responsible for crediting or making payment of the income on behalf of an
investment fund and the investment fund are required to furnish, to unit holders and to the
prescribed income-tax authority, a statement. Such statement should give details of the
nature of the income paid or credited during the previous year and such other relevant details
(30th June of AY – to Unit Holder) (30th November of AY – to Income tax authority)

5. If in any year there is a loss at the fund level, either current loss or the loss which remained to
be set off, such loss shall not be allowed to be passed through to the investors but has to be
carried over at fund level to be set off against income of the next year in accordance with the
provisions of Chapter VI

: 15 : REVISION NOTES – MAY ‘19