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Income received in advance

Raj (ABC) (84 Points)

19 November 2014

1. Could you please anyone guide, where to show "income received in advance" in ITR 4 AY 2014-15?

2. Also, if somebody has given gift to relative, for ex: 5 lac then Where we need to show same in ITR 4 AY 2014-15 OR it's not required to show in ITR?

Thanks,

Raj

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19 Replies

Ajay (CA Job) (512 Points)
Replied 19 November 2014

Dear Raj

1. Can you be specific as to the nature of the income because the taxability of an income received in advance depends on the head of income under which it is classified for income tax purposes. That is,

Head of Income for Income Tax	Taxability
Salary	At the time it has become due or at the time of receipt, whichever is earlier
Income from House Property	Annual Value is taxable irrespective of actual receipt (However, unrealised rent may be deducted subject to certain conditions)
Profits & Ganis of Business or Profession	Taxable as per the method of accounting "regularly employed" by the assessee. That is, it could either be Accrual (Due) basis or Cash (Receipt) basis of accounting.
Capital Gains	Full Value of consideration is taxabke in the year of "transfer" irrespective of whether it is actually received or not (except cases of compulsory acquistion of an asset or coversion of a capital asset into stock-in-trade)
Income from Other Sources	Taxable as per the method of accounting "regularly employed" by the assessee. That is, it could either be Accrual (Due) basis or Cash (Receipt) basis of accounting.

2. Gift from a relaitve - if taxable it can be shown under the head "Income from Other Souces" under the sub Item "Others". Or, if it is received from a "relaitve" which is exempt as per the Act, it may be disclosed under Schedule EI (Exempt Income) towards the end of the ITR under the sub-item "Others".

Regards

Ajay

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Raj (ABC) (84 Points)
Replied 19 November 2014

Thanks Ajay for your response!

1. Actually nature of income is "Profits & Gains of Business or Profession", so in this case customer made some payment in advance in March-2014 for the April-2014. So, on accural basis this payment is of AY 2015-16, so this is advance payment, right? Also, do we mention somewhere that whether we are following accural basis OR cash basis in ITR 4, if YES, then where we specify that?

If this income can be recognised as "advance income", then please guide me, where we can specify/show in ITR 4 (AY 2014-15), so that it is clearly visible that this amount of advance income & will be considered as income in AY 2015-16.

2. On Gift, its exemption case (blood relative), so here the case is, person A has given gift to his relative B, and the question is: Is it require to show in ITR 4 (AY 2014-15) of person A that he has given this much of gift to Blood Relative B, who also files ITR. So, please guide where we need to show Gift in both A & B ITR 4 (AY 2014-15)?

Thanks,

Raj

Raj (ABC) (84 Points)
Replied 20 November 2014

Dear Experts,

Could you please anyone respond on the queries?

thanks,

Raj

Ajay (CA Job) (512 Points)
Replied 21 November 2014

Dear Raj

Very sorry for a late reply.

1. a. Yes, from the fact, it is definitely an advance. I hope you had not raised the invoice for the amount received till 31.03.2014 and the revenue was recongnised only in April 2014 as per AS-9. If so, it is an advance from customer according the accrual system of accounting.

1.b. Yes, there is an option to mention in the ITR the system of accounting followed by the assessee under OI (Other information) schedule of ITR. Please note that this item can be optionally filled in case you are not liable to tax audit under Sec.44AB of thr Income Tax Act, 1961. And, if you are liable to get the books audited, you will have to compulsorily fill these details in the said schedule along with other information sought therein.

1.c. Your "Advance from Customers" can be shown as a Current Liability in the Balance Sheet Schedule of the ITR. Are you maintaining accounts for your business? If so, it will be there in the Balance Sheet you have prepared (there also, it should be appearing either as a credit balance in the Sundry Debtor (or equivalant A/c) or as a Current Liabilites named "Customer Advance"( or any equivalant A/c) and the said Balance Sheet schedule of the ITR has to be filled using the information from the one prepared by you.

1.d. Once you mention the customer advance as above, it will imply that you will be booking the revenue in any of the subsequent financial years, which in your case will be FY 2014-15 (AY 2015-16). This need not be specifically mentioned otherwise.

2. Gift - If it an exemption case, you can show it under Exempt Income (EI Schedule) towards the end of ITR-4. Even though this schedule does not affect your income tax computation as such, ideally all your exempt income should be disclosed here so as to avoid any questions in future.

There is no specific need to show the amount Gifted in the ITR of the person who is gifting you. The amount gifted will however, be reflected in his Balance Sheet in the Cash A/c and Drawings A/c (if he is a person engaged in a business keeping accounts) and/or in the cash flow statement of that individual. Again, if the person gifting you the sum has debited his Profit and Loss account (this is applicable in case she/he is a business person maintaining accounts), then it will be disallowed in her/his return of income being in the nature of personal expenditure.

However, kindly note that in certain cases, like transfer of asset between spouses, income earned from the investments made from the cash so gifted will be clubbed with income of the spouse who has gifted.

I am sorry if the whole answer seems too comlicated in any way. Please do ask if anything is not clear.

Regards

Ajay

Raj (ABC) (84 Points)
Replied 22 November 2014

Thanks a lot Ajay for your response!!

Few Queries:

1. In ITR 4 AY 2014-15 (Image Attached) we don't have option to show "Income received in advance". Could you please guide, How should I show/add this in Current Liabilities?

2. On Gift, Person who has received the Gift will show same in "Schedule EI" under "Others, (including exempt income of minor child)", right? Also, Gift Can be of amount 7 lac given to spouse for property purchase? And, there will not be any clubbed income, right?

And, as I have understand, Person who has given gift in this case Spouse, will not specify anything in ITR 4 but just will be considered as Drawings, right?

Thanks again Ajay for help!

Thanks,

Raj

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Ajay (CA Job) (512 Points)
Replied 23 November 2014

Dear Raj

1. You could show the advance against the item "Sundry Creditors". But let me remind you once again that, the Balance Sheet particulars in the ITR are to be filled using the Balance Sheet which you must have prepared (which may even be audited) for the financial year. So, please refer to the Balance Sheet in your hands and see where your "Customer Advance" is "classified" in that.

2.a. Yes, the receipient of the Gift can show the same under EI Schedule.

2.b.Yes, as far the gift is between "relatives" as deifned for Sec.56(2)(vii), any amount is not taxable in the hands of the receipient.

2.c. If the transfer is between spouses, for eg. you are gifting your wife Rs.7 lakhs to purchase a property (I assume it is house property?), then the income from such house property (which was purchased by your wife from the amount gifted by you) arising in the hands of your wife will be taxable in your hands due to the operation of clubbing of income provisions as per Sec.64(1)(iv).

There are two things involved here - one is the gift amount (principal amount) and the other is the income accruing from the investment of such gift amount. First one being the gift amount is exempted in the hands of the receipient as per Sec.56 whereas, the second item, that is the income arising from such gifted amount will be clubbed in the hands of the giftor/transferror as per Sec.64(1)(iv)

2.d. Yes, the amount will be a drawings in the hands of the tranferor or the giftor who is gifting and such person need not show in the ITR specifically. Instead, it will be reflected in the Capital A/c or Current A/c, as the case maybe, as appearing in the Balance Sheet of the person who is gifting/transferror.

Hope it is clear.

Regards

Ajay

Raj (ABC) (84 Points)
Replied 24 November 2014

Thanks Ajay for your response!!

1. On advance income, it has been shown as "Prepaid Income" under current liabilites in Balance Sheet, but as we see we don't have option to sepecify same in "Current Liablities" under ITR 4 AY 2014-15, but same option we have in ITR 5 AY 2014-15 as "Income received in advance".

And, On Sundry Creditors, I have read following defination from somewhere:

Any person who supplies the goods or services or consumable items to a business firm on credit basis, will be called as sundry creditor by the firm who avails this facility. The suppliers of various items relating to expenses on credit basis, are also called sundry creditors.

Sundry creditors are the liabilities of the firm because the firm is supposed to pay the outstanding amount in future as per terms and conditioned agreed upon by both the parties. They are called as trade creditors also. But at the time of preparing the final accounts, the amount payable to the creditor is shown as sundry creditors. It is shown in balance sheet in liability side because it is a liability.

So, I think according to definition, it can not be as "Sundry Credtors", right?

So, Please guide, How should I show this?

2. On Gift, It's house property but no income till yet on that since it's in construction phase, so Is it still the case of clubbed income? Also, both husband & wife are tax payers & files return, so if we consider this point as well then Is it still the case of clubbed income?

Also, Can we also show same as interest free unsecured loan? Or is it there any complication on it?

Thanks,

Raj

Raj (ABC) (84 Points)
Replied 25 November 2014

Hi Ajay,

Could you please respond on the queries?

Thanks,

Raj

Raj (ABC) (84 Points)
Replied 26 November 2014

Dear Experts,

Please respond on the queries.

Thanks,

Raj

Ajay (CA Job) (512 Points)
Replied 26 November 2014

Dear Raj

1. Yes, you are right. In strict sense, the income received in advance from customers is not a "creditor" balance. It is a current liability anyhow. However, here, since there is no option to show "other current liabilities", you can show it under "sundry creditors" being the nearest possible option. Keep a note of it and in case it comes up for scrutiny, you can easily explain to the AO the circumstances under which you showed the same as a Sundry Debtor.

Another possible option is to keep a credit balance in the Sundry Debtor account and you can show the net balance as the "Sundry Debtor". But since it already appears in the audited balance sheet under liability, I think you can go for the first option. I do not think it is a big issue.

2. Clubbing will apply only when the construction is complete. And, the fact that both the husband and wife files return is not relevant here.

On a side note, sometimes this is even considered as a possible area of tax planning in the sense, suppose in your case, you fall under a higher tax slab and but you already own a self occupied property. Now you gift cash to your wife who has no property on her own. In this case, income from the house property will be computed in her hands as a self occupied property and the resulting income will be clubbed in the hands in your hands and the net tax outgo would be less than what would have been if you had held the property in your own name. Again, here, it is not relevant that both are filing returns. Clubbing provisions are not optional.

Regards

Ajay

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Raj (ABC) (84 Points)
Replied 26 November 2014

Dear Ajay,

Can husband give interest free unsecured loan to wife? In this case, Can we also consider same as interest free unsecured loan instead of gift?

And, what is the better approach out of "interest free unsecured loan" & "Gift"?

Thanks,

Raj

Ajay (CA Job) (512 Points)
Replied 27 November 2014

Dear Raj

As long as you can explain the source, I do not think there is any restriction regarding advancing an interest free loan to your spouse.
Before discussing if in your case, the amount can be "considered" as an interest free loan or not, you must be specifically clear as to the fact that a loan obviously implies a condition of repayment, with or without interest.
A loan means a delivery by one party to and receipt by another party a sum of money upon agreement expressed or implied condition, to REPAY it with or without interest (Legal Lexicon as quoted from Chandrakant H. Shah Vs. ITO 121 TTJ 145 (Mum. ITAT)) whereas a gift is a delivery of a sum and receipt by another party without any consideration with intention NOT to repay the same.
Option 1 - To Gift - if you gift your wife some money, then the cosequences for Income Tax purposes, I have already given in the earlier reply. Gift doen't entail a repayament as in the case of a loan and also it being made to a relative, is not taxable in the hands of your wife. But the clubbing provisions could apply to the income from the property bought using the gifted sum.
Option 2 - To advance Interest Free Loan - If so, clubbing provisions won't apply according to me. A loan is not a transfer for the purpose of Sec.64 and expansive definition of ‘transfer’ under section 63 does not govern provisions of section 64 - CIT v. Vinoda Rao [1993] 200 ITR 50/68 Taxman 96 (Kar.).
Caveat for Option 2 - Since there is only a thin line between a gift and an interest free loan, make it a point to make necessary documentary proof that the amount advanced to your wife is a loan by making it abundantly clear the characteristcis of a loan such as "repayment" and even a "repayment schedule". Even a later waiver of such loan made could change the colour of the same to a "gift". Even in the happening of such a situation, since the gift is made to your wife (relative), the same may not be taxable in her hands, however, clubbing provisions will apply then.
So basically you have to make sure that when you make an interest free loan to your wife, she should be able to repay it back to you in some time. That is, the transaction is not a not paper transaction and in substance is not a gift to your wife.
The above are mostly theoratical propositions. So please do take the advice of your CA or tax consultant for any other practical issues.

Regards
Ajay

Raj (ABC) (84 Points)
Replied 29 November 2014

Thanks Ajay for your help & response!!

One last query:

If a house property given on rent then what are the expenses (direct & indirect) can be considered in Profit & Loss, also MCD Tax / Property Tax will also be consider as expenses?, if yes then in which category?

Thanks,

Raj

Ajay (CA Job) (512 Points)
Replied 29 November 2014

Dear Raj

In simple words, it can be said that the taxation of rental is very peculiar under our Income Tax Act. Any income from a house property is taxable under the head "Income from House Property". So this is so even if you are a person involved in the business of renting of properties. There are very exceptional cases, where it may be treated as business income. One typical example is you let out a property to your staff which is incidental to your business. It can be said that as a general rule, any property income will be taxed as Income from House Property.

The implication of above is that, under "inocme from House Property", only 3 deductions are possible namely municipal taxes (on payment basis) and as stated u/s 24 , standard deduction of 30% of Net annual value and interest on borrowed loan (on accrual basis).

So, you cannot claim any other expenses debited in your P&L a/c. All expenses are assumed to be included in the standard dedcution of 30%. So, whether your actual expenses are higher or lower than the said 30%, you are entitled to claim the same. And of course you can claim the MCD tax on payment basis and interest on loan on accrual basis.

Since you mentioned about the expenses debited in your P&L A/c, I assume maintain an Investment Property in your business books. Anyway, the taxation remains as above.

Regards

Ajay