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ICWAI Double Taxation Relief-Supplement to Direct & Indirect Taxation 2008 (Problems & Solutions) (Applicable for December,2008 term of ICWAI Examinat

ICWAI Double Taxation Relief-Supplement to Direct & Indirect Taxation 2008 (Problems & Solutions) (Applicab...
DOUBLE TAXATION RELIEF

1. R a resident Indian, has derived the following income for the previous year relevant to theassessment year 2008-2009.Particulars Rs.(1) Income from profession(2) Share income from a partnership in country X (tax paid in country Y for thisincome in equivalent Indian rupees Rs 25,000)(3) Commission income from a concern in country Y (tax paid in country Y at20%) converted in Indian rupee.(4) Interest from schedule banks.3,00,0002,00,00040,00020,000R wishes to know whether he is eligible to any double taxation relief, if so, its quantum. India doesnot have any Double Taxation Avoidance Agreement with countries X and Y.Solution: (a) Computation of total incomeParticulars Rs Rs(a) Income from business:(i) Income from profession 3,00,000(ii) Share income in partnership firm in country X 2,00,000 5,00,000(b) Income from other sources:(i) Interest from schedule bank(ii) Commission earned in country Y, assumed from20,00040,000 60,000Total income5,60,000(b) Computation of tax liability :Tax on total income of Rs. 5,60,000Add : Education cess @ 2%Add : SHEC @ 1%1,17,0002,3401170120,510Less : Double taxation relief : (2,00,00 + 40,000) x 21.52%51,648Tax payable 68,862Tax payable to be rounded off to the nearest multiple of Rs 10 (Sec. 288B)68,860Note: (i) Average rate of tax in the foreign country 20%.(ii) Average rate of tax in India:1,20,510 X 100 = 21.52%5,60,000Whichever is less, is applicablehttp://success-gurus.blogspot.com


2. Mr. Prasad, ordinarily resident in India, furnished the following particulars of his income/savings duringthe previous year 2007-2008.Rs(i) Income from foreign business (Including Rs 2,00,000 from businessconnection in India) accruing outside India(ii) Loss from Indian business(iii) Income from house property(iv) Dividends gross from Indian companies(v) Deposit in Public Provident Fund(vi) Tax paid in foreign countryThere is no double taxation avoidance treaty.Compute the tax liability12,00,000(-) 2,00,0004,00,00060,00070,0002,50,000Solution: (a) Computation of total incomeParticulars Rs Rs1. Income from house property2. Income from business :(a) Income from Indian business(b) (I) Income from foreign business accruing or arising outside India(ii) Income from foreign business deemed to accrue or arise in India


3. Income from other sourcesDividends from Indian companies exempt [Sec. 10(34)]Gross total incomeLess : Deduction for approved savings (Sec. 80C) : PPF DepositsTotal incomeTax liability on total income :Income-tax on slab ratesAdd: Surcharge on income tax @ 10%Add : Education cess : 2% on the aggregate of income tax and surchargeAdd : SHEC @ 1%Tax liabilityLess : Double taxation relief on foreign business profits, not deemed toaccrue or arise in India (Sec. 91) 10,00,000 x 20.833%Tax payableTax payable to be rounded off to thenearest multiple of Rs 10 (Sec.,288B)(-) 2,00,000(+) 10,00,000(+) 2,00,000(+) 10,00,0004,00,00010,00,000Nil14,00,00070,00013,30,0003,48,00034,8003,82,8007,6563,8283,94,2842,08,3301,85,9541,85,950Note: 1. Relief is allowed on the doubly taxed income either at average rate of Indian tax oraverage rate of foreign income tax, whichever is lower;(a) Average rate of Indian income tax : 3,94,284 / 13,30,000 x 100 = 29.65%(b) Average rate of foreign income tax: (2,50,000/12,00,000) x 100 = 20.833%http://success-gurus.blogspot.com2.Income from foreign business, accruing outside India 12,00,000


2. The amount of doubly taxed income has been worked out as under: RsLess: (i) Income from business connection deemed to accrue orarise in India which is not entitled to double taxation relief. 2,00,000Doubly taxed income 10,00,000


3. Loss from Indian business has been set-off against profits from foreign business which isdeemed to accrue or arise in India.The mode of set-off increases the amount of double taxation relief.3. The Income-tax Act, 1961 provides for taxation of a certain income earned by X. The DoubleTaxation Avoidance Agreement, which applies to X, excludes the income earned by X from thepurview of tax. Is X lilable to pay tax on the in come earned by him? Discuss.Answer: Where any conflict arises between the provisions of the Double Taxation AvoidanceAgreement and the Income- tax Act, 1961, the provisions of the Double Taxation AvoidanceAgreement would prevail over those of the Income-tax Act.X is, therefore, not liable to pay tax on the income earned by him.4. Explain briefly the proposition of law in case of any conflict between the provisions of the DoubleTaxation Avoidance Agreement (DTAA) and the Income-tax Act, 1961.Answer: Where there is conflict between the provision as contained in the tax treaty and theprovisions of Income Tax Act, a payer can take advantage of those provisions which are morebeneficial to him. Thus, tax treaties override the provisions of Income Tax Act which can beenforced by the appellate authorities/courts.


5. Arif, a resident both in India and Malaysia in previous year 2007-2008, owns immoveableproperties (including residential house) at Malaysia and India. He has earned income of Rs 50 lakhfrom rubber estates in Malaysia during the financial year 2007-2008. He also sold some property inMalaysia resulting in short-term capital gain of Rs 10 lakh during the year. Arif has no permanentestablishment of business in India. However, he has derived rental income of Rs 6 lakh fromproperty let out in India and he has a house in Lucknow where he stays during his visit to India. TheArticle 4 of the Double Taxation Avoidance agreement between India and Malaysia provides thatwhere an individual is a resident of both the contractting States, he shall be deemed to be residentof the Contracting State in which he has permanent home available to him. If he has permanenthome in both the Contracting States, he shall be deemed to be a resident of the Contracting Statewith which his personal and economic relations are closer (centre of vital interests).You are required to state with reasons whether the business income of Arif arising in Malaysia and thecapital gains in respect of sale of the property situated in Malaysia can be taxed in India.Answer: Where the Central Government has entered into an aggreement with the government ofany other country for granting relief to tax or for avoidance of double taxation, the provisions of theIncome-tax Act, 1961 are applicable in such case to the extent they are more beneficial to theassessee.Arif has a residential house both in Malaysia and India. Thus, he has a permanent home in both thecountries. However, he has no permanent establishment of business in India. The Double TaxationAvoidance Agreement (DTAA) with Malaysia provides that where an individual is a resident of bothcountries, he is deemed to be resident of that country in which he has a permanent home and if hehas a permanent home in both the countries, he is deemed to be resident of that country, which isthe centre of his vital interests, i.e. the country with which he has closer personal and economicrelations. Arif owns rubber estates in Malaysia from which he derives business income. However,Arif has no permanent establishment of his business in India. Therefore, his personal and economicrelations with Malaysia are closer, since Malaysia is the place where—(a) the property is located and(b) the permanent establishment (PE) has been set-up. Therefore, he is deemed to be resident ofMalaysia for AY 2008-2009.So, in this case, Arif is not liable to income tax in India for assessment year 2008-2009 in respect ofbusiness income and capital gains arising in Malaysia.http://success-gurus.blogspot.com


6. Sania , a resident Indian, furnishes the details for the assessment year 2008-2009.Rs(1) Income from profession(2) Share income from a partnership in country X(Tax paid in country X for this income in equivalent Indian rupees Rs 8,000)(3) Commission income from concern in country Y(Tax paid in country Y at 20%) converted in Indian rupee)(4) Interest from scheduled banks1,04,00040,00030,00020,000Sania wishes to know whether he is eligible to any double taxation relief, if so, its quantum. Indiadoes not have any Double Taxation Avoidance Agreement with countries X and Y.Solution : (a) Computation of total incomeParticulars Rs Rs(a) Income from business:(i) Income from profession(ii) Share income in partnership firm in country X(b) Income from other sources:(i) Interest from schedule bank(ii) Commission earned in country Y, assumed from other sourcesTotal income1,04,00040,00020,00030,0001,44,00050,0001,94,000(b) Computation of tax liabilityParticulars RsTax on total income of Rs 1,94,000Add: Surcharge on income taxEducation cess @ 2%SHEC @ 1%Less : Dobule taxation relief : 70,000 x 4.94%Tax payableRounded off u/s 288BNote : (I) Average rate of tax in the foreign country : 20%(ii) Average rate of tax in India : 9579 x 100 = 4.94%1940009300Nil9300186939579345861216120http://success-gurus.blogspot.com


7. A is a musician deriving income from foreign concerts performed outside India, Rs 50,000. Tax ofRs 10,000 was deducted at source in the country where the concerts were given. India does nothave any agreement with that country for avoidance of double taxation. Assuming that Indian incomeof A is Rs.2,00,000, what is the relief due to him under Sec. 91 for the assessment year 2008-2009.Solution(a) Computation of total income: Rs(i) Indian income(ii) Foreign incomeGross total income or total income(b)Computation of tax liability:Income tax on total income at slab rates:Add: (i) Surcharge on income tax(ii) Education cess @ 2%(iii) SHEC @ 1%Less : Double taxation relief under Sec. 91: Rs 50,000 x 9.9%Tax payable2,00,00050,0002,50,00024,00048024024,7204,95019,770Note: 1. Average rate of Indian income tax: = 24720 x 100 = 9.9%2500002. Average rate of foreign income tax:Relief is allowed either at the average rate of Indian income tax or te average rate offoreign income tax,10,000 x 100 = 20%50,000whichever is lower. Accordingly, the relief has been allowed at the average rate of Indian incometax.


8. A resident assessee, earned foreign exchange of Rs 78,800. The foreign income was also subjectedto tax deduction of Rs 8,800 at source in the foreign country with which India had no agreement foravoidance of double taxation. The asses- see claimed relief under Sec. 91 of the Income-tax Act inrespect of the whole foreign income. Discuss his contention withreference to decided case laws.Answer: Where any income is taxed outside India as well as in India, a resident assessee is entitledto claim double taxation relief on such doubly taxed income provided such income is not deemed toaccrue or arise in India. If any income arising outside India, is not subjected to tax in India, suchforeign income does not form part of doubly taxed income for the purposes of Sec. 91. Theexpression "doubly taxed income" refers to foreign income which also suffered tax in India.Where any foreign income, taxed outside India, is also eligible to deduction in computing totalincome in India, double taxation relief would be allowed only on such income as forms part of totalincome.Double taxation relief will be allowed on such doubly taxed income either at the average rate offoreign income tax or Indian income tax, whichever is lower out of the two.

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