Direct taxes - 1 ( UNIT - 4 ) Assessment of HUF, FIRM, & COMPANY

  Assessment of   Hindu  undivided  family  ( HUF )

Hindu undivided family (HUF) is treated as a person u/s 2( 31) of the income tax Act, 1961. HUF is a separate entity for the purpose of assessment under the act.
    
       Under hindu law, an HUF is a family which consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters. An HUF cannot be created under a contract, it is created automatically in a hindu family.
Taxability of  HUF :
      In order to compute the income of an HUF, one has to first ascertain its income under the different heads of income. The following points should be keep in mind while computing income : 

• If funds of an HUF are invested in a company/ firm, fees/ remuneration received by the members as a director or a partner in the company/ firm may be treated as income of the family.
• However, if fees/ remuneration is earned for services rendered by the member in his personal capacity, it will be treated as the personal income of the member.
• If any remuneration is paid by the HUF to the karta/ any other member for services rendered by him, remuneration is deductible from income of HUF if such payment is genuine & not excessive & paid under a valid and bonafide agreement.

          The following incomes are not taxed as income of HUF : 

(1) If  a member has converted/ transferred without adequate consideration his self- acquired property into joint family property, income from such property is not taxable in hands of the family.

(2) Income of impartible estate (through it belongs to family) is taxable in hands of holder of estate and not in hands of HUF.

(3) Personal income of the members cannot be treated as income of HUF.

Deductions  from  Gross total income  :

   An HUF is entitled for deductions available under section 80, while calculating its taxable income.

Rate  of  tax  :   An HUF is taxed on same slab rates which are applicable to an individual.

Minimum alternate tax :  From the Assessment year 2013- 14, tax payable by an non- corporate assessee cannot be lessthan  18.5 % (plus education cess& secondary and higher education cess) of adjusted total income . The effective rate for the assessment years 2018- 19 & 2019- 20 is as follows :

1. If  adjusted total income is rs. 50 lakhs/ less-----A.yr 2018- 19 (19.055 % )      A.yr 2019- 2020 (19.24 %)
2. If adjusted total income is morethan rs.50 lakhs but not more than rs. 1 crore ----------A.yr 2018-19 ( 20.9605 % )    A.yr 2019- 20 ( 21.164 % )
3. If adjusted total income is more than rs.1 crore--------A.yr 2018- 19 (21.91325 % )    A.yr 2019- 20 ( 22.126 % )

                           Assessment  of  firms 

Firm is an association of two or more than 2 persons, who came together to do a business & share profits thereof. Section 4 of the partnership Act, 1932 defines partnership as '' relationship between persons who have agreed to share the profits of business carried on by all/ any of them acting for all''.

         The persons who have agreed to do business together are personally called partners & collectively called a firm. They are abiding by a deed called ' partnership Deed '. A partnership deed for partnership is same as AOP, trust deed for companies & trust respectively.

Taxation  of. Firms  :

1. The firm is taxed as a separate entity.i.e separate from its partners. No matter whether the firm is registered / not.
2. The share of partners in the income of the firm is exempted, while computing his individual income / share of partners in the firm is exempted in his hand.
3. Salary, commission, bonus / remuneration paid / payable to partners is allowed as deduction to the firm.
4. Interest paid to partners can be claimed as a deduction in firms assessment ( maximum rate of interest 12% per annum )
5. The income of a firm is taxed at a flat rate of 30%

Conditions  to  be  fulfilled  by  a   firm to be assessed  as  such  :

Section  184 : 

A firm has to satisfy these conditions to be assessed as a firm ;

1. The firm should be evidenced by an instrument.

2. Individual share of partners must be specified in the instrument.

3. Certified copy of the instrument should be submitted.

4. Revised instrument should be submitted whenever there is change in the constitution of firm/ profit sharing ratio.

Remuneration   paid  to  partners  :

To obtain deduction of remuneration paid to partners, conditions given by section  184 & 40( b) , should be satisfied.

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

1. Remuneration should be payable to working partners.

2. Remuneration must be authorised by the partnershipdeed.

3. Remuneration should not exceed the permissable limit.

Maximum  amount  as permitted  by  section 40 ( b ) :

1. If book profit is negative .--------Rs. 1,50,000 should be deductible.

2. In case of book profit is positive , On first 3 lakhs of book profit.........Rs.1,50,000 or 90 % of book profit which ever is more should be deductible.

3.On the balance of the book profit-------60 % of book profit should be deductible.

      The amount of remuneration paid / payable to partners as debited to profit& loss a/c.  (OR )   The remuneration amount permitted by section 40 ( b ) , which ever is lower, should be taken.

Book  profit - How to compute :

                                  It would be determined as under.

1. First we have to calculated the net profit / take net profit from profit & loss a/c.

2. Make adjustments as provided by section 28 to 44D

3. Add remuneration paid to partners, if debited to the profit & loss a/c.

                       Assessment   of   companies  

  A company is required to pay tax on every rupee of its total income at a flat rate, without there being any exemption limit. For the purpose of  assessment of companies the understanding of the meaning of a company and various types of companies is very essential.

                     

                                        Company

A company means :

(i) any indian company, or

(ii) any body corporate incorporated under the law of a foreign country, or

(iii) any institution, association or body which was assessable or was assessed as a company for any assessment year upto 1970-71, or

(iv) any institution, association or body , whether incorporated or not and whether indian or non- indian, which is declared by general or special order of the central board of direct taxes to be a company.

 Assessment  of  companies  : 

 The total income of a company is computed in the same manner as that of any other assessee.

1. Ascertain the taxable income under each head of income after deducting the losses and allowances brought forward from earlier years.

2. The total of the balances in each head is known as gross total income.

3. From the gross total income so computed, the following deductions are permissable u/s 80C to 80U.

        80G, 80GGA, 80GGB, 80IA, 80IAB, 80IC, 80ID, 80IE, 80JJA, 80JJAA, 80LA.

4.The resulting sum is net income.

Rate  of  tax : 

1. In case of a domestic  company :  

(i)Where its gross receipts/ turn over during the previous year doesnot exceed rs.50 crores------A.yr.2018- 19 ( 25 %)  & A.yr 2019- 20 ( N.A)

(ii) Where its total turn over/ gross receipts during the previous year doesnot exceed rs.250 crore------ A.yr 2018- 19 ( N.A)   & A.yr 2019- 20 ( 25% )

(iii) For any other domestic company -----A.yr2018- 19 (30 % )&   A.yr2019-20 (30 %)

2. In case of a foreign company :   (i) Royalty received from govt. or an indian concern in pursuance of an agreement made by it with the indian concern after march 31st,1961, but before April 1st, 1976-----------A.yr 2018-19 ( 50 %) & A.yr 2019-20 (50% )

(ii) Other income-------A.yr 2018-19 (40 %) & A.yr 2019-20 (40% .

Surcharge : 

1.Domestic company : If net income doesnot exceed rs.1 crore-----surcharge Nil., between 1 crore -10 crores ( 7 % ).,morethan 10 crores (12 % )

2. Foreign company : If net income doesnot exceeds rs. 1 crore---surcharge Nil, between 1 crore - 10 crores (2 %),  morethan 10 crores ( 5%  )

Education cess 2%

Secondary and higher education cess 1%

    Where the total income of an indian company includes any income by way of dividends declared, distributed / paid by a specified foreign company, the indian company shall be liable to pay tax @15 %

Minimum Alternate Tax :(  section  115 JB )

          For domestic & foreign company 18.5 % on book profit( plus surcharge if applicable , education cess, & secondary & higher education cess )

Tax liability :    Normal provision of tax liability ( OR ) Minimum alternative tax ( Which ever is higher should be paid by the company)