Income Year & Assessment Year Ranjan Kumar Bhowmik rews Former Member National Board of Revenue Income y [1] As per section 2(35) of the Income Tax Ordinance, 1984, Income year is usually the financial year immediately preceding the assessment year. [2] But in case of bank, insurance and non-banking financial institution income year must be the English calendar year commencing from the 1* day of January. [3] And in case of foreign company including its branch or liaison office the DCT may allow a similar income year for the purpose of consolidation [4] Income year may be less than 12 months in certain situations especially business starting, business discontinuance, person leaving Bangladesh, non-resident shipping etc. but usually it cannot exceed 12 months. Assessment year: ‘Assessment year means the year following the financial year, i.e. income year. Thus, the assessment year always begins on 1* July and ends on 30" June every year. This period is also known as the financial year. Accordingly, it s the current financial year in which income of the immediately preceding financial year (known as income year) is assessed. As per section 2(9) of the Income Tax Ordinance, 1984; the term "Assessment year" means the period of 12 months commencing on the first day of July every year_in case of business discontinuance, person leaving Bangladesh etc. income year related financial year shall be deemed to be the assessment year in respect of the income of the broken period. From the following example, we can see how to find out the assessment year and tax day: Example [Income year Income year ‘Assessment year Tax Day ended on ae For company taxpayer [30.06.2022 2021-22 2022-23 15.01.2023 30.09.2021 | 01/10/20 to 30/9/21 2022-23 15.09.2022 [31-12.2027 2021 | 2022-23, 15.09.2022 [31.03.2022 | 0174/21 to 3173/22 2022-23 15.10.2022 [31.07.2022 | 0178/21 to 31/7/22 2023-24 75.09.2023 Generally, income is taxed in the subsequent year to the income year. But, in certain cases, to protect the interests of revenue, the income is taxed in the year of earning itself. a nent neem ene Income year &assessment year Ranjan Kumar Bhowmik FEMA asamended up to 24/3/2022 Page 1of2 @Thus, in those cases the assessment year and the income year may be the same. The exceptions to the normal rule of assessment year are discussed as under: [1] Income of discontinued business [Section 89(2)]: Where any business or profession is discontinued in any assessment year, the income of the period from the expiry of the last income year up to the date of such discontinuance may be charged to tax in that assessment year. [2] Persons leaving Bangladesh [Section 92)(b)]:Whenever any person is leaving Bangladesh and has no intention to come back, the DCT may proceed to assess him for all the completed income years for which his assessments remain pending as well as for the broken period up to the probable date of his departure from Bangladesh. Here is deviation from the usual practice as the assessment of the broken period may be completed before the commencement of the relevant assessment year. [3] Income of non-resident shipping companies [Section 102(2)]: Section 102(2) of the ITO, 1984, provides for the taxation of income of non-resident shipping companies in the year in which they eam their income in Bangladesh, provided that such companies do not have any representative here. ‘The End Income year &assessment year Ranjan Kumar Bhowmik FMA ‘asamended up to 24/3/2022Taxation system on Interest on Securities Ranjan Kumar Bhowmik rows Former Member National Board of Revenue [1] Introduction ‘As per section 22 of ITO 1984, “Interest on Securities” includes interest receivable on any security of the Government or approved by the Government and aiso interest receivable on debentures or other securities issued by or on behalf of a local authority or a company. Thus section 22 deals with interest on securities issued by (i) the Government, (ii) a local authority, or (iii) a company. Debentures or other securities issued by @ company also fall within the scope of this section. All other securities, e. g. securities issued by a foreign Government, etc. are outside the ambit ofthis section, and interest thereon would be charged u/s 28 or 33 of ITO 1984. The shares of a company cannot be called securities rather shares and stocks are capital assets. Dividends on shares would be taxable under the residuary head of section. 33, [2] Allowable deduc ins in computing Interest on Securities Deductions permissible in determining income from interest on securities as per section 23 are: (i) Commission/charges deducted by the bank realizing the interest. (ii) Interest payable on money borrowed for the purpose of investment in the securities. To claim relief for interest on borrowed fund, such fund must be borrowed solely for investment in ‘securities and should be so used throughout, even if the moneys borrowed for business purpose are invested in securities for a period under some legal compulsion, no deduction for interest Under this section is allowed [Indian Steamship Co. V. CIT (1953) |. T.R. 448] No deduction shall be allowed on account of interest of tax-free Government securities. Likewise, deduction will not also be allowed in respect of interest payable outside Bangladesh on which tax has not been paid or deducted. rn Tnton Securities Hand-oat prepared by Ranjan Kumar Bhowrnik roa Ex Member, NBR 2500 06/3/2022 Page 1 @[3] When Interest on Securities are taxable Under section 22, tax is payable in respect of interest ‘receivable’ by the assessee on securities. But interest on securities becomes income only when it is actually received and not when it, due or capable of being received by the assessee. The word ‘receivable’ in this section has reference to the quantum of interest taxable and not to the time of taxabiliy. If interest is actually received some times after it becomes due and receivable, the date of taxabilty is the date when it is received and not the date when it becomes due. [Case reference: Lalbhai Dolpatbhai. Vs. CIT (1952) 221. TR. 13}, [4] Types of securities In terms of taxability, securities may be classified as either Government securities (securities issued or approved by the Government) or Commercial securities (securities issue by others) Tax free Government Less tax cana Debenture Commerciat Un-approved Zero coupon bonds Government securities: Securities issued or approved by the Government fall under this Category. It may be tax free if tax is not imposed on interest or may be less tax on the reasoning that the assessee will enjoy some exemption on interest income, ‘Tax free Government securities: These are the securities issued by the government for which no tax is paid hence it is declared tax-free. (Sixth Schedule, Part A, Para 24 and 24A]. Income from interest on tax-free government securities is not included in computation of taxable income. ‘Tax_deductible Government securities: These are the government securites including treasury billbond and Islamic securities on which tax is to be deducted at source at the time of Payment on maturity at specified rate [current TDS rate is 5%] ities: Securities issued by or on behalf of a local authority or a company and ‘approved by the SEC willbe considered as commercial securities. These types of securities may be either debenture or zero-coupon bonds, Debenture: These are the securities issued by or on behalf of a local authority or a company and ‘approved by the SEC. Thus, debentures are approved securities. Zero-coupon bond: A Zero-coupon bond is such type of bond where coupon (interest) is zero. ‘This type of securities is initially sold at a price lower than its face value and the owner receives the face value at maturity. Thus, the gap between the purchase price and face value is the benefit of buying such security to the owner. Any income derived from Zero-coupon bond received by a person other than Bank, Insurance or any Financial Institution is fully tax free [Sixth Schedule, Part A, Para 40] Tht on Secures ‘3500 06/3/2022 Page?[5] Interest grossing up As tax @5% is deductible from interest on securities at the time of maturity, so net interest needed to be grossed-up. [6] Nature of securities Dealings of securities may have various purposes from the part of the investors. For example, it may take any of the following three natures: >>} Trading securities Securities + ‘Available for sale securities {+} Held to maturity securities Trading securities are those types of securities where the main purpose is to eam profit through trading (buying and selling) of securities. Held to maturity securities are those types of securties where investment is made for a specific time period Available for sale securities fall in between which is not an investment for long time or where the dealing is not so frequent. ‘The investors wait for a while to see how to maximize profit on the deal. As interest on securities is a separate head of income, even if the securities are held as trading assets within the course of business undertaken by a bank or an insurance company or a stock broker, the interest must be charged under this head and not under section 28 as income from business or profession or under section 33 as income from other sources [Central Exchange Bank LTD. V. C.1.T. (1955) LTR. 167]. [7] Bond washing transactions through sale and buy back of securities When some transactions happened between two parties to wash-out the impact of interest on taxable income and thus avoiding the taxes on that mutually by both of the parties, such type of transaction is referred to as bond washing transaction. It is a smart way of tax avcidance. In this, case, securties are sold cum interest with an agreement to re-sell or re-transfer the securities. Securities are sold to a person whose income is less than the minimum taxable limit and then he doesn't need to pay any tax on interest on securities since his income is less than the taxable limit. On the other hand, since securities especially shares and stocks are capital asset: no tax will be given on the disposal value of the securities by the seller. In this way both the seller and buyer can avoid tax. To prevent the avoidance of tax in this manner, section 106(1) of the ITO, 1984 provides that where a security owner transfers the Securities on the eve of due date of interest and reacquires them eventually, the interest received by the transferee/purchaser will be deemed as income of the transferoriseller and, accordingly, it will be included in the total income of the transferor/seller ‘and not the transferee/purchaser. ‘There is wide scope to avoid tax in this way and section 106 has given sufficient authority to the DCT to handle those cases of tax avoidance. It should be mentioned here that stocksishares are also defined as securities at section 106 or nn TntonSecuriues Nand-oat prepared by Ranjan Kumar Shown ra Ex Member, NER 250n 06/3/2022 Page 3 @[8] List of tax-free interest on securities Interest income is exempted from taxes in the following occasions as per ITO, 1984: Name of the securities Reference Tax-free government securities Sixth Schedule, Part A, Para 24 [1] Wage earners development bond [2] US dollar premium bond [3] US dollar investment bond [4] Euro premium bond Sixth Schedule, Part A, Para 248 [6] Euro investment bond [6] Pound steriing premium bond [7] Pound sterling investment bond ‘Zero-coupon bond ‘Sovth Schedule, Part A, Para 40 Sources: [*] Income Tax Ordinance, 1984 [2] Court case references ‘The End __ IntonSecurties— Hand-out prepared by Rania Kumar Bhowmik ena Ex Member, NER 13501 06/3/2022 PagesIncome Tax computation on House Property Income Ranjan Kumar Bhowmik revs Former Member National Board of Revenue 1] Introduction As per Income Tax Ordinance, 1984 house property means any building (including furniture, fixture, fittings etc.) and land appurtenant thereto owned by the assessee and rented for commercial or residential purposes. Property situated outside Bangladesh should also be assessed according to the same provision of section 24 of the Income Tax Ordinance, 1984, Rental income derived from vacant plots of land will not be treated as house property income rather it will be treated as income from other sources w/s 33.If an assessee let out his machinery, plant or furniture along with building and the letting out building is inseparable from the letting of machinery, plant or furniture, the income must necessarily be assessed as income from other sources and in such a case there is no room for disintegrating the rent or assessing a part of the rent as income from house property. 2] Ownership of the property The tax on house property income is upon the owner (either legal or beneficial) and not upon the occupant. The mere existence of a dispute regarding the title to ownership of a certain property cannot of itself hold up an assessment even if a suit has been filed, otherwise it would be open to an assessee to delay assessment indefinitely. The DCT has prima facie the power to decide whether the person sought to be taxed is the owner of the property. 3] Annual ue Income tax is levied not upon the actual income from the property but upon the notional income based an annual value. Thus, the annual value will be the higher one between rent received shown by the assessee and reasonable rent determined by the DCT. It may require some adjustments as shown below: Annual Higher one Rent actually received/shown Reasonable Adjusted for 1. Tenants’ expense borne by the Less landlord Add 2. Landlords’ expense borne by the Add Prepared by Ranjan Kumse Bhowmik asamended upto 248/202 based on Finance Act,2022 Page tof[4] Assessment of Co-owner, As per section 24(2), where property is owned by two or more persons and their respective shares are definite and ascertainable, the co-owners should not be assessed in respect of their income from such property as an association of persons (AOP), but each co-owner must be assessed individually in respect of his share of house property income. Though the property may be possessed jointly by co-heirs under the Muslim law, the shares of co-heirs under that law are definite and ascertainable, and therefore each of the heirs must be separately assessed ws 24 in respect of his share of house property income. [5] Self-occupied property In respect of house property, no tax is payable if the owner occupies the property for his ‘own residence or for the purpose of his business or profession the profits of which are assessable to tax ws 28. (6] Grossing- 2n the owner's burden born It is necessary to take into account the whole of the consideration exacted by the owner for the right to use and occupy the property. For example, where the tenant agrees to pay the service charge which is actually payable by the owner, the total consideration paid by the tenant is the house rent plus the service charge and that is the figure which may be taken as evidence of the annual value by grossing-up. (71 Treatm ivance when it is not adju: inst house rent In case the advance received by the owner is not adjustable against house rent then such advance will be treated as house property income as per section 19(22) of the Income Tax Ordinance, 1984.However, such advance may be allocated into 5 years including 1* year in equal proportion if the assessee opts so. Where such advance or part thereof is refunded by the owner then the amount so refunded shall be deducted if it is taken as income as per section 19(22). [8] Treatment of advance exceeding Tk. 2 lakh other than bank transfer Advance rent received exceeding Tk. 2 lakh other than bank transfer which is adjustable against rent receivable shall be deemed to be the income from house property w/s 19(22A). (91 Treatment of advance received thi wnsfer, but n in 5 vears If such amount is received through bank transfer, the amount must be adjusted within five years. Otherwise, unadjusted amount shall be deemed to be income after expiry of aforesaid period w/s 19(22A). Prepared by Ranjan Kumar Bhownik ssamended up to24/82022 based on Finance Act2022 Page of10] Maintenance of bank account by the owner of the hot 8A) Where any person having ownership or possession of any house property, whether used for residential or commercial purpose, receives any rent exceeding Tk. 25,000/- per month shall have to operate a bank account for the purpose of depositing rent and advance (if any) received from such house property. He shall also maintain a separate register for recording particulars of tenants and amount received or receivable from the tenants. Penalty can be imposed by the DCT as per section 123(2) for any violation of this rule. The maximum penalty is 50% of tax payable on house property income or Tk. 5,000/- whichever is higher. 11] Dedu in of | source fr it and hotel rent Tax is to be deducted @ 5% at source from any amount of house rent by the following tenants: Go NGO MCO AOP Any authority Body corporate Project, program or activity where Govt. has any financial or operational involvement. 8. JV or consortium 9. Company 10. Financial Institution 11. Co-operative bank 12. Co-operative society 13. School, college, institute or University 14. Hospital, clinic or diagnostic center 15. Any trust or fund 16. Firm 17. Any PPP 18.A foreign contractor, foreign enterprise or an association or body established outside Bangladesh. 19. Any artificial juridical person not covered above Aaya ye 12] Exemption from payment of tax (1) Income from house property held under trust or other legal obligation wholly for religious or charitable purpose is exempt from payment of tax as per 6" schedule (part-A) paragraph- (1). However, this provision will not be applicable for NGO. Prepare by Ranjan Kumar Bhownie ssamended up to 24/8/2022 based on Finance Act.2022 Page3 of 4 é(2) House property income of any chamber of commerce and industry is completely tax free as per SRO no: 210 dated 01/7/2013 [13]_Allowable deductions from annual value to derive income from house property In computing house property income, the following allowances are deductible from the annual value: - (1) Repairs and maintenance: - The following expenditure relating to repairs, maintenance and provision of basic services is granted as a deduction even if no evidence for such expenditure is produced. Where the property is let out for residential purposes the allowable deduction is 1/4th of the annual value and where it is let out for commercial purpose the allowable deduction is 30% of the annual value: (a) Repairs; (6) Expenditure relating to collection of rent; (©) Water and sewerage; (@) Common electricity; (©) Salaries of darwan, security guard, pump man, liftman and caretaker. (8 Allother expenditure related to maintenance and provision of basic services. But if itis not really spent or partly spent then the remaining unspent amount shall be deemed to be the income from house property as per section 19(30) (2) Land development tax; (3) Municipal tax; (4) Ground rent; Insurance Premium, (5) Vacancy allowance (if the property remains vacant during a part of the year); (6) Where the let-out property is acquired, constructed, repaired, renewed or reconstructed with loan from any bank or financial institution then the interest payable for the year on such loan; (7) Where the let-out property has been constructed with borrowed capital from bank or financial institution and there was no house property income during the period of construction, the interest payable during the period of construction will be allowable in 3 equal installments from first 3 years of letting out; ‘The End Prepared by Ranjan Kumar Bhowmik asamended upto 24/8/2022 based on Finance Act 2022 Page dof 4