INCOME TAX LAW AND PRACTICE (RCCCM12)

INTRODUCTION
Before one can embark on a study of the law of income-tax, it is absolutely vital
to understand some of the expressions found under the Income-tax Act, 1961. The
Purpose of this Chapter is to enable the students to comprehend basic expressions.
Therefore, all such basic terms are explained and suitable illustrations are
Provided to define their meaning and scope.
OBJECTIVES
Concept of assessment year and previous year
Meaning of person and assessee
How to charge tax on income
What is regarded as income under the Income-tax Act
What is gross total income
Income-tax rates
ASSESSMENT YEAR (2013-2014)
Assessment year means the period starting from April 1 and ending on March
31 of the next year. Example- Assessment year 2013-14 which will commence on April 1, 2013, will
End on March 31, 2014 Income of previous year of an assessee is taxed during the next following
Assessment year at the rates prescribed by the relevant Finance Act.
PREVIOUS YEAR (2012-2013)
Income earned in a year is taxable in the next year. The year in which income is
earned is known as previous year and the next year in which income is taxable is
Known as assessment year. In other words, previous year is the financial year immediately
preceding the assessment year.


PERSON
The term person includes:
a. an individual;
b. a Hindu undivided family;
c. a company;
d. a firm;
e. an association of persons or a body of individuals, whether incorporated or not;
f. a local authority; and
g. every artificial juridical person not falling within any of the preceding categories.
These are seven categories of persons chargeable to tax under the Act. The
aforesaid definition is inclusive and not exhaustive. Therefore, any person, not 4
falling in the above-mentioned seven categories, may still fall in the four corners
of the term person and accordingly may be liable to tax.
ASSESSEE
Assessee means a person by whom income tax or any other sum of money is
payable under the Act. It includes every person in respect of whom any
proceeding under the Act has been taken for the assessment of his income or loss
or the amount of refund due to him. It also includes a person who is assessable in
respect of income or loss of another person or who is deemed to be an assessee, or
an assessee in default under any provision of the Act.

MEANING OF INCOME
The definition of the term income in section 2(24) is inclusive and not
exhaustive. Therefore, the term income not only includes those things that are
included in section 2(24) but also includes those things that the term signifies


according to its general and natural meaning.
GROSS TOTAL INCOME
As per section 14, the income of a person is computed under the following five
heads:
1. Salaries.
2. Income from house property.
3. Profits and gains of business or profession.
4. Capital gains.
5. Income from other sources.
The aggregate income under these heads is termed as gross total income. In
Other words, gross total income means total income computed in accordance with
The provisions of the Act before making any deduction under sections 80C to 80U.
HOUSE PROPERTY
Formula to Calculate Income or Loss on House Property (negative value implies
loss)
Income or Loss on
House Property
= (Annual Rental Value of House property Property
Tax) 30% of (Annual Rental Value-property tax)-
Interest paid on Housing Loan


Annual Rental Value : The basis of calculating Income from House property is the annual value. It is
not necessary, as we have seen earlier, that the property should actually be let. Where the actual rent
received is more than the reasonable return, it has been specifically provided that the actual rent will be
the annual value. Where, however, the actual rent is less than the reasonable rent , the latter will be the
annual value. The municipal value of the property, the cost of construction, the standard rent, if any,
under the Rent Control Act, the rent of similar properties in the same locality are all pointers to the
determination of annual value. From the said annual value tax paid, From the annual value as determined
above, municipal taxes are to be deducted. Also, deduction equal to 30% of the annual value (Rental
value-Tax paid), irrespective of any expenditure incurred by the taxpayer (S.24(a)).




Some incomes from house property are exempt from tax. They are neither taxable
nor included in the total income of the assessee for the rate purposes. These are:
1. Income from a farm house [section 2(1A) (c) and section 10(1)].
2. Annual value of one palace in the occupation of an ex-ruler [section
10(19A)].
3. Property income of a local authority [section 10(20)].
4. Property income of an approved scientific research association [section
10(21)].
5. Property income of an educational institution and hospital [section
10(23C)].
6. Property income of a registered trade union [section 10(24)].
7. Income from property held for charitable purposes [section 11].
8. Property income of a political party [section 13A].
9. Income from property used for own business or profession [section 22].
10. Annual value of oneself occupied property [section 23(2)].


LET OUT HOUSE PROPERTY
Income from house property is determined as under:
Gross Annual Value xxxxxxx
Less: Municipal Taxes xxxxxxx
Net Annual Value xxxxxxx
Less: Deductions under Section 24
- Statutory Deduction (30% of NAV) xxxxxxx


- Interest on Borrowed Capital xxxxxxx
Income From House Property xxxxxxx

INCOME FROM SALARIES
Salary-definition:
Any amount or benefit received by an employee in consideration of his services from his
employer is called salary.
Employer-employee relationship between provider and receiver
It may be received from more than one employer in any previous year.
It should be a real one.
It is deemed to accrue at the place where the service is rendered
Specified Assessee Sec.17 (2)(III)
Perquisites Sec.17 (2)
Types of Perquisites:
Perquisites-Taxable for all assessee
Perquisites- Taxable for specified assessee
Perquisites-Exemption for all assesses
Fringe Benefits:
Following are the various benefits available to the employee which are covered under Fringe
Benefit Tax [FBT]:
Free meal
Boarding and lodging facilities
Entertainment
Gifts
Festival celebrations



Profits in lieu of salary (Sec.17(3))
Provident fund:
It can be classified into four types:
Statutory Provident Fund (SPF)
Recognized Provident Fund (RPF)
Unrecognized Provident Fund (URPF)
Public Provident Fund (PPF)

Rent Free Accommodation:
If the employee is provided rent free accommodation (R.F.A), it is a taxable in all cases except for
the judges of High Courts, or the supreme court , officials of parliament , union ministers & leader
of opposition .
Taxable value:
There are two categories:
Government employees
Non-government employees/ other employees
Salary for rent free
Basic
D.A
Bonus
Commission
Fees
Taxable Portion of all allowances
Gratuity:
Gratuity is a lump sum payment made by the employer to the employee in appreciation of
his/her past services. It is a retirement benefit scheme.


Pension:
Pension is the periodical payment made by the employer to his employee after the laters
retirement. If the employee desires, he can convert it into a lump sum.
Tax treatment:
Uncommitted pension /pension
Commuted pension
Leave salary:
An employee is entitled to various type of leave during his service. If an employee has not
availed his earn leave, he can encash it whenever he is in need of money.
Tax treatment:
Leave salary during service
Leave salary during termination of service
Deduction from Gross salary (sec. 16)
Entertainment allowance (sec. 16(ii))
Professional tax

Tax treatment:
Leave salary during service
Leave salary during termination of service
Deduction from Gross salary (sec. 16)
Entertainment allowance (sec. 16(ii))
Professional tax (sec. 16(iii))
Deductions (80C):
Savings are important for the economic development of any country



INCOME FROM BUSINESS OR PROFESSION

Business
The main motive of any business is to earn profit. It includes any trade, commerce,
manufacture or any adventure or concern in the nature of trade, commerce or manufacture.
Profession:
It is an occupation, which requires specialized knowledge & skill in a particular field of
activity.
Vocation:
It means natural ability of a person for a particular work.

Basis of charge: (sec.28)
Computation of profits & gains from business or profession
Admissible Deduction
Expenditure on Building
Expenditure on plant, Machinery and Furniture
Depreciation
Blocks of Assets
Expenditure on Scientific Research
Expenditure on acquisition of patent Right or Copyright
Expenditure on know how
Expenditure on eligible projects or schemes
Payment to Rural Development Programmes
Amortization of preliminary
Expenditure on Amalgamation or Demerger


Amortization of expenditure Incurred under Voluntary Retirement scheme
Other Deductions
General Deductions
Inadmissible Expenses
Payment Exceeding RS. 20,000
Procedure for computing Professional Income
Format for Doctors or Medical Practioners
Professional Receipts /income
Consultation free xxx
Visiting free xxx
Sale of medicine xxx
Gifts and presents from clients xxx
Operation fees xxx
Nursing home receipts etc., xxx
xxxx

Less: professional payments / Expenses:
Dispensary expenses xxx
Cost of medicines xxx
Depreciation of surgical equipment xxx
Depreciation on x-ray machines xxx
Cost of professional books xxx
Motor car expenses xxx
Depreciation on motor car etc. Xxx


xxxx
_____
Professional Income xxxx


CAPITAL GAINS
Capital gain arising from transfer of capital assets shall be taxable in the previous year in
which the assets is transferred
Capital asset :( sec. 2(14))
Capital asset means any kind of property held by an assessee
Assets not considered as Capital assets Basis of charge: (sec. 45)
Types of Capital Assets
Long term Capital Asset: (sec .2(29))
Short term capital asset :( sec.2 (42 A))
Income from Other Sources
It is residuary head of Income which must satisfy the following conditions:-
There must be an income;
This income is NOT exempt under the IT Act 1961; and
This income is not chargeable to tax under the other heads of income viz. "Salary", "House
property", "Business or Profession" and "Capital Gains".
Example of Income from Other Sources
Some examples of certain incomes normally taxed under this head are given below:-
Interest on bank deposits, loans or company deposits,
Dividend;
Family pension (received by legal heirs of an employee),
Income from sub-letting of house property by a tenant,


Agricultural income from agricultural land situated outside India,
Interest received from IT Dept. on delayed refunds,
Remuneration received by Members of Parliament,
Casual receipts and receipts of non-recurring nature,
Insurance commission,
Examiner-ship fees received by a teacher (not from employer),
Income from royalty,
Director's commission for standing as guarantor to bankers,
Winnings from Lotteries, Crossword Puzzles, Horse Races and Card Games,
Interest on securities,
Income from letting out of machinery, plant or furniture, etc.
Any sum exceeding Rs. 50,000/- received without consideration shall be treated as income provided
that the sum of money is not received from any relative or on the occasion of marriage of the
individual or under a will or inheritance etc.
Computation of Income from Other Sources
Income from this source is computed after deducting the following:-
Expenditure incurred during the previous year;
Expenditure incurred wholly and exclusively for the purpose of earning the said income;
After deducting allowances and deduction provided in Section 57 of the IT Act 1961;
And after disallowing the following:-
Expenditure relating to personal expenses
Interest, salary payable outside India on which TDS not made,
Income / Wealth Tax paid, excessive-payments to relatives etc.
Expenditure in respect of royalty and technical fees received by a foreign company;
Expenditure in respect of winning from lottery.


Individual resident below 60 years of age (i.e. born on or after 1st April1953) or any NRI / HUF /
AOP / BOI / AJP *
Income-tax:Calculate Tax Liability for AY 2013-14
Income Slabs Income Tax Rate
i. Where the total income does not exceed Rs. 2,00,000/-. NIL
ii. Where the total income exceeds Rs. 2,00,000/- but does not exceed Rs.
5,00,000/-.
10% of amount by which the total income exceeds Rs. 2,00,000/-
iii. Where the total income exceeds Rs. 5,00,000/- but does not exceed Rs.
10,00,000/-.
Rs. 30,000/- + 20% of the amount by which the total income exceeds Rs.
5,00,000/-.
iv. Where the total income exceeds Rs. 10,00,000/-. Rs. 130,000/- + 30% of the amount by which the total income exceeds
Rs. 10,00,000/-.
Surcharge: Nil
Education Cess: 3% of the Income Tax.
* Abbreviations used:

NRI - Non Resident Individual; HUF - Hindu Undivided Family; AOP - Association of Persons; BOI -
Body of Individuals; AJP - Artificial Judicial Person

I. Individual resident who is of the age of 60 years or more but below the
age of 80 years at any time during the previous year (i.e. born on or after
1st April 1933 but before 1st April 1953)
Income-tax:Calculate Tax Liability for AY 2013-14
Income Slabs Income Tax Rate
i. Where the total income does not exceed Rs. 2,50,000/-. NIL
ii. Where the total income exceeds Rs. 2,50,000/- but does not exceed Rs.
5,00,000/-
10% of the amount by which the total income exceeds Rs. 2,50,000/-.
iii. Where the total income exceeds Rs. 5,00,000/- but does not exceed Rs.
10,00,000/-
Rs. 25,000/- + 20% of the amount by which the total income exceeds Rs.
5,00,000/-.
iv. Where the total income exceeds Rs. 10,00,000/- Rs. 125,000/- + 30% of the amount by which the total income exceeds Rs.
10,00,000/-.
Surcharge: Nil
Education Cess: 3% of the Income Tax.


II. Individual resident who is of the age of 80 years or more at any time
during the previous year (i.e. born before 1st April 1933)
Income-tax:Calculate Tax Liability for AY 2013-14
Income Slabs Income Tax Rate
i. Where the total income does not exceed Rs. 5,00,000/-. NIL
ii. Where the total income exceeds Rs. 5,00,000/- but does not exceed Rs.
10,00,000/-
20% of the amount by which the total income exceeds Rs. 5,00,000/-.
iii. Where the total income exceeds Rs. 10,00,000/- Rs. 100,000/- + 30% of the amount by which the total income exceeds Rs.
10,00,000/-.
Surcharge: Nil
Education Cess: 3% of the Income Tax.
III. Co-operative Society
Income-tax:Calculate Tax Liability for AY 2013-14
Income Slabs Income Tax Rate
i. Where the total income does not exceed Rs. 10,000/-. 10% of the income.
ii. Where the total income exceeds Rs. 10,000/- but does not exceed Rs.
20,000/-.
Rs. 1,000/- + 20% of income in excess of Rs. 10,000/-.
iii. Where the total income exceeds Rs. 20,000/- Rs. 3.000/- + 30% of the amount by which the total income exceeds Rs.
20,000/-.
Surcharge: Nil
Education Cess: 3% of the Income-tax.
IV. Firm
Income-tax: 30% of total income.Calculate Tax Liability for AY 2013-14
Surcharge: Nil
Education Cess: 3% of the Income Tax.
V. Local Authority
Income-tax: 30% of total income.Calculate Tax Liability for AY 2013-14
Surcharge: Nil


Education Cess: 3% of the Income Tax.
VI. Domestic Company
Income-tax: 30% of total income.Calculate Tax Liability for AY 2013-14
Surcharge: The amount of income tax as computed in accordance with above rates, and
after being reduced by the amount of tax rebate shall be increased by a surcharge at the
rate of 5% of such income tax, provided that the total income exceeds Rs. 1 crore.
Education Cess: 3% of the total of Income Tax and Surcharge.
VII. Company other than a Domestic Company
Income-tax:Calculate Tax Liability for AY 2013-14

@ 50% of on so much of the total income as consist of (a) royalties received from
Government or an Indian concern in pursuance of an agreement made by it with the
Government or the Indian concern after the 31st day of March, 1961 but before the 1st
day of April, 1976; or (b) fees for rendering technical services received from Government
or an Indian concern in pursuance of an agreement made by it with the Government or
the Indian concern after the 29th day of February, 1964 but before the 1st day of April,
1976, and where such agreement has, in either case, been approved by the Central
Government.

@ 40% of the balance
Surcharge: The amount of income tax as computed in accordance with above rates, and
after being reduced by the amount of tax rebate shall be increased by a surcharge at the
rate of 2% of such income tax, provided that the total income exceeds Rs. 1 crore.
Education Cess: 3% of the total of Income Tax and Surcharge.