income tax-1st module

8/7/2019 INCOME TAX-1st module

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INCOME TAXINCOME TAX


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Important source of revenue for thegovernment.

The administration and collection of income tax is vested in the Centralgovernment but the net proceeds of thetax are apportioned between the Centreand the States.


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List of excluded items:-

i. The corporation taxii. The proceeds of tax attributable to union

territories.iii. Tax payable in respect of unionemoluments-paid out of the consolidatedfund of India.

iv. Surcharge on income tax for the purposeof the Union, if any.


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The amount excluded from the divisiblepool goes to the Central Government.

The principles regarding the distribution of the remaining amount are determined bythe Finance Commission.


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Income Tax Act

The Income Tax Act, 1961 has beenbrought into force w.e.f 1 st April, 1962.

It applies to the whole India ( includingJ&K).

It also applies to Sikkim w.e.f 1 st April1990.


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Legislation to Tax Incomes inIndia:-

The law of income tax is contained in:-

Income Tax Act,1961Income Tax Rules,1962

Finance Act


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Income Tax Act is the main enactmentwhich deals with:-

The method of computation of income under theprescribed heads.

The procedure of making an assessment.

Collection and recovery of tax.

Refund, penalties and prosecutions, appeals,rectification proceedings and powers of theincome tax authorities.


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Finance Act

The finance Act is passed by the Parliamentevery year.

It fixes the rates of tax for the relevantassessment year, rates for deduction of tax atsource and advance payment o tax.

Now it is also being used to effect substantialamendments to the Income Tax Act.


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Where in any assessment year theFinance Act has not been passed on 1 st

April, the tax shall be charged at the ratesin force in the preceding assessment year or at the proposed rate in the Finance Bill

then before Parliament, whichever is

favourable to the assessee.


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Decision of the High Court in the case of one assessee accepted by the

Department and not challenged itscorrectness. Not open to the Department

to challenge in the case of other assessees, without just cause.


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Important Definitions

Under Sections 2 and 3 of the Income TaxAct, 1961, definitions of important termsused in the Act have been given.


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Gross Total Income [Sec. 80B(5)]

It means the total income computed inaccordance with the provisions of this Act(under the heads salaries, income from

house property, profits and gains of business and profession, capital gains andincome from other sources), beforemaking any deductions under Sections80CCC to 80U . However the broughtforward losses shall be deducted from theincome to arrive at the gross total income..


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Total Income [Sec.2(45)]

It means the total amount of incomecomputed in the manner laid down in the

Income Tax Act. In other words, theincome after making permissible

deductions u/s 80CCC to 80U from grosstotal income is known as total income.


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Person [Sec.2(31)]

The term person includes:i. An individual-a natural human being. He

may be a male, female, minor or major,sane or insane.

ii. A Hindu undivided family-it consists of allpersons lineally descended from acommon ancestor and includes their wives and unmarried daughters.


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iii. A company:

a) Any Indian company, or

b) Any body corporate incorporated by or

under the laws of a country outsideIndia, or


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c) Any institution, association or body,whether incorporated or not and whether Indian or non-Indian, which is declaredby general or special order of the Boardto be a company provided that it will bedeemed to be a company only for the

assessment years specified in the order.


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iv. A firm

v. An association of persons or body of individuals

whether incorporated or not.

vi. A local authority-Municipal Committee, DistrictBoard, Municipal Corporation, body of Port

commissioners or other authority legally entitled bythe Government to the control and management of a municipal or local fund.


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vii. Every artificial juridical person, not fallingwithin any of the preceding sub-clause.A Hindu idol or a Hindu deity(assessable through its shebaits) or auniversity falls under this clause.


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Assessment Year [Sec.2(9)]

Assessment Year means the period of twelve months commencing on the firstday of April every year.

Current Assessment Year is 2010-2011.


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Previous Year (Sec.3)

Previous year means the financial year immediately preceding the assessmentyear.. Financial Year commences on the

first day of April and ends on thirty-firstday of March.

The current assessment year 2010-2011and the previous year relevant to it is2009-2010.


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Previous year in the case of newsource o income:

Where a business or profession is newly set-upor a source of income newly coming intoexistence in the financial year, the previous year

shall be the period beginning with the date of setting up of the business or profession or thesources of income comes into existence andending with the said financial year. Suppose a

business is set-up on 1-7-2004, the previousyear shall commence on 1.7.2004 and end on31.3.2005.


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Average Rate of Income Tax[ Sec.2(10)]

It means the rate arrived at by dividing theamount of income tax calculated on thetotal income, by such total income.


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Maximum Marginal Rate[Sec.2(29C)]

It means the rate of income tax ( includingsurcharge on income tax, if any)

applicable in relation to the highest slab of income in the case of an individual,association of persons or body of

individuals as specified in the Finance Actof the relevant year.


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Heads of Income

u/s 14 of the Income Tax Act, all incomes for the purpose of Income tax and computation of total income, have been classified under five

heads of income-1. Salaries

2. Income from house property

3. Profits and gains of business or profession4. Capital gains

5. Income from other sources


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In order to calculate the taxable incomeunder each head, certain deductions haveto be made from gross income of thathead.

These deductions are different for eachhead.


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Sections in Income Tax for computingthe taxable income under each head

1. Salaries- sections 15 to 172. Income from house property- sections 22

to 273. Profits and gains of business or

profession- sections 28 to 444. Capital gains- sections 45 to 55 and5. Income from other sources- sections 56

to 59


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Income which falls within one head cannotbe assigned to or taxed under another

head..

Income computed under each distincthead is not separately chargeable to tax.

Income tax is only one tax levied on theaggregate of income classified andchargeable under the different heads


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Residence and tax liability

Section 5 of the Income Tax Act deals withthe scope of the total income of a person.It states that the scope of the total incomeof the person is determined by referenceto his residence in India in the previous

year.


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On the basis of residence persons aredivided into three categories:-

1. Persons who are resident in India,popularly known as ordinarily resident.

2. Persons who are not ordinarily residentin India.

3. Persons who are non-resident in India


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Types of residents

ResidentNon-resident

Ordinarilyresident

Not ordinarilyresident


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Residence of an individual [Sec.6(1)]

1. Ordinarily Resident. An individual is saidto be ordinarily resident in India in anyprevious year if he satisfies any onecondition of Part I and both theconditions of Part II.


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Conditions of part I or basic conditions

a) He is in India in the previous year for a periodor periods amounting in all to 182 days or moreor

b) He has been in India for a period or periodsamounting in all to 365days or more during thefour years preceding the previous year andhas been in India for sixty days or more duringthe previous year.


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But

In the case of an individual being a citizenof India, who leaves India in any previousyear as a member of the crew of an Indianship or for the purpose of employmentoutside India, the period of sixty days inclause (b) will be extended to 182 days.


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In the case of an individual being a citizenof India or a person of Indian origin, whobeing outside India, comes on a visit to

India in any previous year, the period of 60days in clause (b) will be extended to 182

days.


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Conditions of Part II or additionalconditions

He has been resident in India( accordingto basic conditions) in at least two out of the ten previous years preceding theprevious year, and

He has been in India for a period or periods amounting in all to 730 days or more during the seven previous yearspreceding the previous year..


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2. Not Ordinarily Resident

If an individual satisfies any one of the basicconditions (a) or (b) of Part I, but doesnot satisfy both the additional conditionsof Part II, he is said to be Not Ordinarily

Resident


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If an individual satisfies any one conditionof Part I and any one condition of Part IIeven then he is not ordinarily resident inIndia


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If an individual satisfies any one condition of Part I and.

I. He has been a non-resident in India in nine

out of the ten previous years preceding thatyear, or

II. He has during the seven years preceding thatyear been in India for a period of, or periodsamounting in all to 729 days or less.


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3. Non-resident:-If an individual does notsatisfy any of the aforesaid conditions (a)or (b) of Part I, he is said to be Non-Resident.

R id f Hi d U di id d F il


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Residence of a Hindu Undivided Family,Firm or Other Association of Persons

[Sec.6(2)]I. Resident. A HUF, firm or other association of

persons is said to be resident in India anyprevious year in every case , except where

during the previous year, the control andmanagement of its affairs is situated whollyoutside Indiai.e., if even a part of their

control and management is situated in India

during the previous year, they will be calledresident in India.


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II. Not ordinarily resident. Firm and other association of persons cannot be notordinarily resident.

A HUF is not ordinarily resident in India, if control and management of its affairs issituated wholly or partly in India duringthe previous year, but its manager (karta) is not ordinarily resident in India.


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III. Non-resident. They are non-residentonly when the control and managementof their affairs is situated wholly outsideIndia.


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Residence of a company [Sec.6(3)]

1. Resident. A company is said to beresident in any previous year, if:

It is an Indian Company; or

During that year the control andmanagement of its affairs is situatedwholly in India.


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2. Not Ordinarily Resident- A company isnever not ordinarily resident.

3. Non-resident- if the company is neither an Indian company nor the control andmanagement of its affairs is situatedwholly in India is said to be a non-resident, company.


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Residence of every other person[Sec.6(4)]

Every other person is said to be residentin India in any previous year in every case,except where during that year the controland management of its affairs is situatedwholly outside India.


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Residential status and incidence of tax [Section.5]

Residential status is very important indetermining the tax liability becausethe incidence of tax is different onassessees of different residentialstatus.

Tax is levied on the total income onthe basis of residential status of theassessee.


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a) Resident and ordinarilyresident

The total income of a person who isresident in India includes:-

1. Any income received or deemed to bereceived in India during the previousyear by or on behalf of such person or

2. Accrues or arises or is deemed to accrue

or arise to him in India during theprevious year or 3. Accrues or arises to him outside India

during the previous year


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b) Resident but not ordinarilyresident

The total income of a person who is notordinarily resident in India includes:-

1. Any income received or deemed to be

received in India during the previous year by or on behalf of such person or

2. Accrues or arises or is deemed to accrue or arise to him in India during the previous year or

3. Accrues or arises to him outside India from abusiness controlled from India or professionset up in India.


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c) Non-resident

The total income of a person who is non-resident in India includes:-

1. Any income received or deemed to bereceived in India during the previousyear by or on behalf of such person or

2. Accrues or arises or is deemed to accrueor arise to him in India during theprevious year.


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Assessee [Sec .2(7)] Under Income Tax Act assessee means a

person:i. Who is liable to pay any tax; or

ii. Who is liable to pay any other sum o moneyunder this Act, (e.g., interest, penalty etc.); or

iii. In respect of whom any proceeding under thisAct has been taken for the assessment of hisincome or assessment of fringe benefits; or


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iv. In respect of whom any proceedingunder this Act has been taken for theassessment of the income of any other person in respect of which he isassessable; or

v. In respect of whom any proceedingunder this Act has been taken for theassessment of loss sustained by him or by such other person; or


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vi. In respect of whom any proceeding under thisAct has been taken for the assessment of the

amount of refund due to him or to such other person; or

vii. Who is deemed to be an assessee under anyprovisions of this Act; or

viii. Who is deemed to be an assessee in default

under any provisions of this Act.


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Deemed assessee

A person who is deemed to be anassessee for some other person, is calleddeemed Assessee .

Example:-after the death of a person, hislegal representative is treated as anassessee.


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Assessee in default

When a person is responsible for doing any workunder the Act and he fails to do it, he is called anAssessee in Default.

Example:- If a person while making any paymentto another person, liable to deduct income taxthereon at source, does not deduct income taxthere from, or having deducted it, does notdeposit it in the Government Treasury, he will betreated as an assessee in default..


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Agricultural Income [Sec.2(1A)]

Agricultural Income means:-1. Any rent or revenue derived from land

which is situated in India and is used for agricultural purposes.

2. Any income derived from such land by:iii. Agriculture


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ii. The performance by a cultivator or receiver of rent-in-kind of any processordinarily employed to render theproduce it for the market.

iii. The sale by a cultivator or receiver of rent-in-kind of the produce raised or

received by him, in respect of which onlythe aforesaid process has beenperformed.


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3. Any income derived from any buildingowned and occupied by the receiver of

the rent or revenue of any such land or occupied by the cultivator or receiver of rent-in-kind of any land, provided that:

i. The building is on or in the immediatevicinity of the land and is a buildingwhich cultivator or receiver of rent or

rent-in-kind requires as a dwelling house,or as a store house or other out-buildingin connection with the land, and


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ii. The land is either assessed to landrevenue in India or is subject to localrate assessed and collected by officersof the government and where the land isnot so assessed to land revenue or subject to a local rate, it is not situated in

urban area.


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Income

There is no specific definition of income butfor statutory purposes there are certainitems which are listed under the headincome. These items include those headsalso which normally will not be termed asincome but for taxation we consider them

as income. These items are includedunder section 2(24) of the income tax act,1961.

A h d fi i i i i 2(2 )


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As per the definition in section 2(24),the term income means and includes:-

I. profits and gains

II. dividends

III. voluntary contributions received by:-

a trust created wholly or partly for charitableor religious purposes, or an institution established wholly or partly for

such purposes , or


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Scientific research association, or

Games or sports association, or

Any institution or fund established for

charitable or religious purposes.


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IV. Any interest, salary, bonus, commission or remuneration received by a partner from a

firm.

Example:- X is a partner in ABC, a partnershipfirm. He gets Rs.2,000 per month as salaryfrom the firm. Rs.2,000 per month is treated

as income of X.


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V. Any sum received for not carrying out anyactivity in relation to any business or not to

share any know-how, patent, copyright, trade-mark etc .

Example:-X Ltd. gets a sum of Rs.60,000 from A Ltd. for

not carrying out the activity of selling goods in

Agra for a period of 2years from June 1,2010. Rs.60,000 is treated as income of XLtd.


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VI. profits on sale of a licence granted under the imports (control) order, 1955.

Example:- A profit o Rs.2,50,000 is receivedby X Ltd. on sale of licence granted under

the imports (control) order, 1955.

Rs.2,50,000 is treated as income of XLtd.


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VII. Income derived by a trade, professionalor similar association from specific

services performed for its members.

XY is a trade association of chemicalmanufacturers. XY gets a payment of

Rs.80,000 from its members for advising them on how to reduce the

cost of manufacturing. Rs.80,000 istreated as income of XY.


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VIII. Cash assistance received or receivable byany person against export under anyscheme of the government of India.

Example:-a sum of Rs.30,000 is received by BLtd. as cash assistance against exports

from the Government of India. It is treatedas income of B Ltd.


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IX. Any duty of customs or excise repaid as

drawback to any person against exports.

(Duty Drawback-import duties or taxes repaid by a government in whole or inpart, when the imported goods are re-exported or used in the

manufacture of exported goods.)

Example:- Y Ltd exports goods outside India.During the PY 2009-10, it gets as duty

drawback of a sum Rs.95,000. Rs.95,000 istreated as income of X Ltd.


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x. The value of any non-monetary benefit or perquisite arising from business or the

exercise of profession.

Example:- the car owned by a partnership firm

is used by one of the partners for privatepurposes. The perquisite value o the car is

income in the hands of the partner.


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XI. Any capital gain under section 45 is treatedas income.

XII. Any insurance profit computed under section44 is treated as income.

XIII. Income from banking business carried on bya co-operative society with its members is

treated as income from the AY 2007-2008


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XIV.any winnings from lotteries , crosswordpuzzles, races , including horse races,card games and games of any sort or

from gambling or betting of any form or

nature whatsoever

XVII A i d b l f hi


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XVII.Any sum received by an employer from hisemployees as employees contribution to the

following is treated as income of the employer:

Employees contribution to any provident fund.

Employees contribution to superannuationfund.

Employees contribution to any fund set upunder the provisions of the Employees State

Insurance Act, 1948.


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XVIII.Any sum received under KeymanInsurance Policy ( including bonus) is

treated as income in the hands of recipient.


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XIX.Gift exceeding Rs.50,000 received

without consideration is taxable asincome:-

If an individual or a HUF receives on or after October 1,2009, a sum of moneyor property without consideration, it is

chargeable to tax in the hands of therecipient under the head income fromother sources.

XX A i i fi i li f l


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XX. Any perquisite or profit in lieu of salaryis treated as income in the hands of

the employee.

Example:- X is employed by A Ltd. Apart

from salary he has been provided arent-free house by the employer. The

value of the perquisite in respect of rent-

free house is taxable as income in thehands of X.


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XXI.Any special allowance or benefit, other than thoseincluded above granted to the assessee to meet expenseswholly, necessarily or exclusively for the performance of

the duties of an office or employment is treated asincome.

Example:- X is employed by A Ltd. He gets Rs.5000 asconveyance allowance apart from salary. Rs.5,000 is

treated as income .


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XXII.Any allowance granted to the assesseeeither to meet his personal expenses atthe place where he performs his duties

or to compensate him for the increasedcost of living.

Example:- Dearness allowance or citycompensatory allowance.


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XXIII. any non-monetary benefit or

perquisite to a representative assessee( like a trustee appointed by a trust) is

treated as income.

Example:- X is one of the trustees of acharitable trust. The trust provides him

a residential accommodation. Theperquisite value of the accommodationis treated as income of X .

XXIV.A non-monetary benefit perquisite is treated


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V. o o eta y be e t pe qu s te s t eatedas income in the hands of the following:-it is given by a company to a director or a

relative ( husband, wife, bother, sister etc) of the director; or If it is given by a company to a person who

has a substantial interest in the company (whohold 20% or more of equity share capital); or a relative of such person

(and any sum paid by any such company inrespect of any obligation which, but or suchpayment, would have been payable by thedirector or other person aforesaid).

Income tax rates or slabs for the AY


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Income tax rates or slabs for the AY2010-2011(PY 2009-2010)

Income tax slabs Rate(%)

Up to 1,60,000Up to 1,90,000 (women) NILUp to 2,40,000 (senior citizen)

1,60,001-3,00,000 10

3,00,001-5,00,000 20

5,00,001 upwards 30



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1,60,001-5,00,000 10

5,00,001-8,00,000 20

8,00,001 upwards 30



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2,00,001-5,00,000 10

5,00,001-10,00,000 20

10,00,001 upwards 30


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Departmental Structure

Chairman Board Members of Direct Taxes

Chief Commissioner

Commissioner Additional Commissioner Joint Commissioner

Deputy Commissioner Assistant Commissioner

Income Tax Officer Tax Inspector Tax Assistant


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Document [Sec.2(22AA)]

It includes an electronic record as defined inthe Information Technology Act, 2000.


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Insurer [sec.2(28BB)]

It means an Indian Insurance Company,which has been granted a certificate of registration u/s 3 of the Insurance Act,

1938.

income tax-1st module

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