Taxation for Managers (MBA 402)

Christ University Institute of Management (CUIM)

Unit I Provisions of Income Tax Act 1961, Planning And
Fiscal Policies
Ganesh Krishnamurthy
June 6, 2015

Learning objectives

Develop an understanding of taxation

concepts;

Managerial understanding and

application of concepts;

Develop ability to plan within the

ambit of Indian tax laws

Case study based learning

Appreciate ethical and social

dimensions of taxation

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CONTENTS

Background
Definitions
Scope of Total income
Basis of charge
Residential Status

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Background

The provisions of Indian Income-tax are

governed by Indian Income-tax Act, 1961 which
extends to the whole of India and became
effective from 1st April 1962.
The Income-tax Act 1961 replaces the Indian
Income-tax Act, 1922
The objects of the revision was to simplify the
income tax laws
To simplify the Income-tax Act, 1961, Direct Tax
Code is in the offing
Applicable to whole of India.
S. 2(25A) of the Act defines India .
Includes
all States, Union Territories,
Territorial waters and air space above it
Consists of Twenty three chapters 298 sections
and 14 schedules.
S. 2 defines 48 definitions.
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Background

Section 4 of the Act states that income of the

previous year of every person shall be charged to
income tax at the rates prescribed in the annual
Finance Bill as applicable to the relevant
assessment year
Every year a Budget is presented before the
Parliament by the Finance Minister. One of the
most important components of the Budget is the
Finance Bill, which contains various amendments
which are sought to be made in the area of Direct
Taxes levied by the Central Government.

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Definitions
S. 2(9) defines assessment year means the period of twelve months
commencing on the 1st day of April every yea. It is one year head of the
previous year.
Though tax is levied in the assessment year, the income that is the subject
matter of charge is the income of the previous year during which income is
earned.
As per S. 3, previous year means the financial year immediately
preceding the assessment year
Business set up during the previous year.
At the rate or rates prescribed by the Finance Act.
S. 4 gives power to deduct tax at source or Advance tax on the principle
As you earn
Charge is on a person.

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Definitions Assessee s 2 (7)

Assessee means a person by whom any tax or any other sum of money is
payable under this Act.
It includes every person in respect of whom any proceeding has been taken
for the assessment of his income or assessment of fringe benefits.
Sometimes, a person becomes assessable in respect of the income of some
other persons. In such a case also, he may be considered as an assessee.
This term also includes every person who is deemed to be an assessee or an
assessee in default under any provision of this Act.

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Definitions (contd)
Assessment s 2 (8)
This is the procedure by which the income of an assessee is determined by the
Assessing Officer. It may be by way of a normal assessment or by way of
reassessment of an income previously assessed.

Person s 2(31)
The term person is important since the charge of income-tax is on every
person:
The definition is inclusive i.e. a person includes the following:
(i) an individual,
(ii) a Hindu Undivided Family (HUF),
(iii) a company,
(iv) a firm,
(v) an AOP or a BOI, whether incorporated or not,
(vi) a local authority, and
(vii) every artificial juridical person e.g., an idol or deity.

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Definitions (contd)
Income s 2(24)
Includes the following:
a) Profits and gains;
b) Dividend;
c) Voluntary contributions from charitable/religious trust etc
d) Perquisite.
e) Export incentives
f) Any interest, salary, bonus, commission or remuneration earned by a
partner of a firm from such firm;
g) capital gains
h) profits and gains of any business of insurance carried on by a mutual
insurance company or cooperative society
i) profits and gains of business of banking carried out by a co-op society with
its members
j) winnings from lotteries..
k) any sum received by the assessee from his employees towards welfare fund
e.g. PF, superannuation fund etc
l) sum received under a keyman insurance policy including bonus
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Definitions (contd)
Income s 2(24)
Includes the following:

m) non-compete fee and any compensation for non sharing of

intangible asset such as know-how, patent, trademark
n) any sum of money, moveable or immoveable property received as
gift as stipulated in s 56(2)
o) consideration received for issue of shares as exceeds the fair market
value of the shares

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Definitions (contd)
Assessment Year s 2 (9)
Means the period of twelve months starting from April 1 of every year and
ending on March 31 of the next year e.g. the asssessment year 2015-16 (which
has commenced on April 1, 2015) will end on March 31, 2016.

Previous year s 3 read with s 2(34)

Income earned in a year is taxable in the next year. The year in which
income is earned is known as the previous year and the next year in which
the income is taxable is known as assessment year.
Terminology Means v Includes
When a definition uses the word means the definition is self-explanatory,
restrictive and in a sense exhaustive. e.g. definition of agricultural income,
assessment year;
When a definition is intended to be widened in scope, the term includes
finds use e.g. Income, Person

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Definitions (contd)
Previous year s 3 read with s 2(34)
The first previous year commences on the date of setting up of the
business/profession and ends on the immediately following March 31. The
second and subsequent previous years are always of 12 months each (i.e. April
to March)

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Example
Example:
Mr Shah joins an Indian firm on 15 September 2014. He was not anywhere in
employment prior to this date and does not have any other source of income.
What are the previous years for the assessment years 2015-16 and 2016-17?

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Example
Example:

Mr D earns interest income (being his only source of income) till

February 28, 2014. On February 28, 2014 he commences a new
business of garment exports. Find out the taxable income of Mr D for
assessment years 2013-14 to 2015-16 based on the following
information:
Interest income Rs 24,000 p.a
Business income: Rs 55,000 for the period between February 28, 2014
to March 31, 2015 (out of which the income was Rs 15,000 between
February 28 to March 31, 2014)

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Definitions (contd)
Agricultural income s 2(1A)
- any rent or revenue derived from land, which is situated in India and is used
for agricultural purposes;
- any income derived from such land by agriculture or by the process of
rendering the produce fit for the market or by sale of such product by the
cultivator.
- any income derived from any building provided - (i) building is in the
immediate vicinity of the agricultural land and, (ii) it is occupied by the
cultivator or receiver of rent or revenue and, (iii) it is used as a dwelling house
or store house or out house and; (iv) the land is assessed to land revenue in
India or is not situated within the specified area
Specified area means any area not within the jurisdiction of a municipality or
cantonment board with prescribed population

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Definitions (contd)
Agricultural income s 2(1A)
Example
Assessee grows mulberry leaves, feeds them to silk worms and obtains silk
cocoons whether income is agricultural income?
Income derived from tilling and sowing and subsequently operations like
weeding, spraying pesticides and tilling

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Definitions (contd)
Agricultural income s 2(1A)
Example
Assessee grows mulberry leaves, feeds them to
silk worms and obtains silk cocoons whether
income is agricultural income?
Answer No, the agricultural process done
should be only to make the produce cultivated fit
for market and not to bring about an altogether
new commodity. Income attributable to growing
mulberry leaves alone should be treated as
agricultural income.

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Definitions (contd)
Agricultural income s 2(1A)
Example
Income derived from tilling and sowing and
subsequently operations like weeding, spraying
pesticides and tilling
Answer Income derived from cultivation is
agricultural income. Income resulting from the
aforementioned activities performed together
would constitute agricultural income

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Scope of Total Income

The objective of the Income Tax Act is to only tax income or items that are
construed as income.
The Act therefore draws a distinction between Revenue and Capital
Receipt.
Revenue receipts are generally received periodically and always treated as
income. Examples of revenue receipt are Salary, Rent, Share in Profit, Dividend
etc.
Capital receipts on the other hand are generally represent receipts which are in
the nature of capital. These are not taxed under the Act. Examples of Capital
Receipt will include Loan, Donations to the Corpus, Compensation for
termination of a source of income etc.
However the distinction between revenue and capital receipts is neither fixed
nor clear. The distinction must be made taking into account the facts and
circumstances.
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Scope of Total Income (contd.)

A Privy Council judgment in Kamakshya Narain Singh Vs CIT used the
analogy of trees and fruits to define revenue (income) and capital receipts.
While fruits were seen as income the fruit giving tree was defined as the source
or capital.
Section 2 (24) of the Act itself uses illustrations to define income. Some of the
illustrations used in the Act are profits and gains, dividend, voluntary
contributions received by a charitable entity, sum received under keyman
insurance policy, non-compete fees, movable or immovable property received
as gifts.
Compensation received by an employee from his employer on exit is treated as
income though it is in the nature of capital receipt.
Similarly, winnings from lottery though a one-off receipt are treated as
income.

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Scope of Total Income (contd.)

Diversion of Income
If there is an obligation on the recipient to part with a portion of income in
favour of the beneficiary who possesses the right to receive such income,
income so diverted is not taxed in the hands of the recipient.
Application of Income
An assessee voluntarily or otherwise foregoing or utilizing a portion of the
income for any purpose cannot claim exemption from payment of taxes. Once
income accrues, tax is payable.

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Scope of Total Income (contd.)

Example A and B prepare an article for a publication on the understanding
that the remuneration shall be shared by them equally. The article is
published in the June edition. On June 7, A receives the entire remuneration of
Rs 20,000 (the publication makes the payment to the first author as per
practice). What will be the income of A and B if any which will be subject to
income tax? Will the answer be different if A invests Rs 5,000 out of his
proceeds for personal expenses?

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Scope of Total Income (contd.)

Real Income
The Act seeks to tax only real income unless specifically provided for in the law.
When an employer provides free interest free housing loan to its employees, it
was held by Supreme Court that notional interest taking a market rate cannot
be deemed as perquisite and taxed as there is no real interest or income.
Subsequent to the decision, the law was amended to tax deemed perquisite
based on rate charged by SBI on housing loan.
In general, no notional interest income can be taken as perquisite on interest
free loan given by father to son or parent to group companies.
Income from copy right or trade mark is income and therefore compensation
received for infringement of copy right or trade mark is also income.
Compensation received for loss of capital or source of income is capital receipt
and hence not income. Conversely, compensation received for loss of profit, it is
revenue and hence treated as income.
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Scope of Total Income (contd.)

Real Income
Income does not arise in a transaction between head office and branch office,
even if goods are invoiced at a price higher than the cost price (a person
cannot make a profit by trading with himself)

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Scope of Total Income (contd.)

Keyman Insurance
Keyman insurance policy is a cover taken on the life of a person by another
person in whose organization the insured plays a key role.
The relationship between the two persons can be that of an employee and
employer or agent and principal or even a contractee and contractor.
The premium paid by the insuring person can be deducted as an expenditure,
provided it is to protect the interest of his business.
Unlike claims settled by insurance companies are exempt under section 10
(10D), receipts under the keyman insurance policy is treated as income in the
hands of the recipient.

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Scope of Total Income (contd.)

Subsidies
Subsidies can take various forms like refund of sales tax, import duties, power
tariff, water tariffs etc
Whether subsidy received constitutes income would depend upon the intention
of the subsidy.
If the subsidy is intended to assist the recipient in carrying on business
activities profitably, it is revenue in nature and hence income.
If the subsidy is intended to augment capital assets or expand business
capacity, it is capital in nature and hence not treated as income.
Similarly, subsidies provided with the objective of spurring economic and
industrial development to tackle the problem of unemployment in the State is
capital in nature.
Note that here, no capital asset is being created.

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Basis of charge (contd.)

Charge of income tax is on Income of previous year, exceptions:
(i)
Shipping business of non residents - (S. 172)
(ii)
Persons leaving India (S. 174)
(iii)
Persons trying to alienate their assets (S. 175)
(iv)
Discontinued business or dissolution (S. 176)

Charge is on total income

S. 2(45) defines Total Income. It means the total amount of income
referred to in S. 5, computed in the manner laid down in this Act.
Inclusion in and exclusion from Total Income.

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Basis of charge (contd.)

Subject to the provisions of this Act.
Charge on the basis of status.
i)
Resident
ii)
Resident but not ordinary resident.
iii)
Non resident
.
In case of resident
i)
Income is received or deemed to be received in India
ii)
Accrues or arises or deemed to accrue or arises in India.
iii)
Accrues or arises to him outside India.

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Basis of charge (contd.)

In case of resident but not ordinary resident.
-

Income mentioned in (i) and (ii) of resident and

Income accrues or arises to him outside India if it is derived from a
business controlled in or profession set up in India.

In case of non-resident.
i)
Income is received or deemed to be received in India.
ii)
Accrues or arises or deemed to accrue or arise in India
Income from whatever source derived.
source has not been defined.
S. 14 classifies the head of Income Five heads
Each head there could be different sources.
Income to be computed head wise.

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Basis of charge - Heads of income

Section 14 of the Act defines the following five heads of income subject to
income tax in India:
1.
2.
3.
4.
5.

Income from salary

Income from house property
Profits and gains from business and profession
Capital gains
Income from other sources

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Residential Status
For an Individual :
i) In India for a period or periods amounting in all to 182 days or more in that
year.
or
ii) Present in India for 60 days or more in that year and 365 days or more
within the four years preceding that year.
But any person, being citizen of India, who leaves India in any previous year as
a member of crew of an Indian ship or for the purpose of employment outside
India the period of 182 days instead of 60 days to be considered
or
A person being a citizen of India or a person of Indian origin, who being outside
India, comes on a visit to India , the period of 182 days instead of 60 days to be
considered.

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Residential Status (contd.)

For HUF/Firm/AOP/BOI
Said to be resident, when control and management of its affairs is situated
either wholly or partly in India.
For a company :
i)
It is an Indian Company; or
ii)
During the year, the control and management of its affairs is situated
wholly in India.

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Residential Status (contd.)

Not ordinarily resident
For Individual who has been non-resident in India in 9 out of10 previous
years preceding that year or has during the 7 previous years preceding that
year been in India for less than 730 days.
For HUF Manager/Kartas status be considered.
Control and Management:
- Where head and brain is situated - which directs the affairs of policy, finance,
disposal of profits etc.
- Not only a de jure control and management but a de facto control and
management
- Control is not shareholding control.

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Income tax rates

Individuals, HUF, AOP, BOI and Artificial juridical person
Income

Rates of tax

Upto Rs 2.5 lakhs

Nil

Rs 2.5 lakhs - Rs 5 lakhs

10%

Rs 5 lakhs Rs 10 lakhs

20%

Above Rs 10 lakhs

30%

An assessee being an individual resident in India whose income does not

exceed Rs 5 lakhs shall be entitled to a deduction of an amount equal to
100% of the income tax or an amount of Rs 2,000 whichever is less ( s 87A)
Surcharge - 10% on total income above Rs 1 crore
Education cess 2%; Secondary and Higher education cess 1%

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Income tax rates

Resident individuals aged 60 years and above but less than 80 years
Income

Rates of tax

Upto Rs 3 lakhs

Nil

Rs 3 lakhs - Rs 5 lakhs

10%

Rs 5 lakhs Rs 10 lakhs

20%

Above Rs 10 lakhs

30%

An assessee being an individual resident in India whose income does not

exceed Rs 5 lakhs shall be entitled to a deduction of an amount equal to
100% of the income tax or an amount of Rs 2,000 whichever is less ( s 87A)
Surcharge - 10% on total income above Rs 1 crore
Education cess 2%; Secondary and Higher education cess 1%

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Income tax rates

Resident individuals above 80 years (Super senior citizen)
Income

Rates of tax

Upto Rs 5 lakhs

Nil

Rs 5 lakhs Rs 10 lakhs

20%

Above Rs 10 lakhs

30%

Surcharge - 10% on total income above Rs 1 crore

Education cess 2%; Secondary and Higher education cess 1%
Rounding off of total income s 288A
Total income computed shall be rounded off to nearest multiple of ten
rupees.

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Computation of income tax (contd.)

Example Mr X aged 32 has taxable income of Rs 12,000,000 during AY
2015-16. Compute his tax liability.

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Computation of income tax (contd.)

Particulars

Amount
(Rs.)

Upto Rs 250,000

Nil

From Rs 250,001 to Rs 5 lakhs @10%

25,000

Rs 5 lakhs Rs 10 lakhs @ 20%

1,00,000

On the balance (Rs. 110,00,000) @30%

33,00,000

Sub total

34,25,000

Add surcharge@ 10% (since income exceeds Rs 1

crore)

3,42,500

Sub total

37,67,500

Add: Education cess @3% of Rs 37,67,500

113,025

Total tax liability

38,80,525
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Residential status (other than individuals)

HUF s 6(2)
Place of control

Residential status
of family

Ordinarily
resident or not

Wholly in India

Resident

Additional 2
conditions of s
6(6)(b) to be
fulfilled by the Karta

Wholly outside India

Non resident

Partly in India and partly outside

India

Resident

Additional 2
conditions of s
6(6)(b) to be
fulfilled by the Karta

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Residential status (other than individuals)

Firm and AOP s 6(2)
Place of control

Residential status

Wholly in India

Resident

Wholly outside India

Non resident

Partly in India and partly outside

India

Resident

Company s 6(3)
Place of control

Residential status
Indian
company

Other than an
Indian
company

Wholly in India

Resident

Resident

Wholly outside India

Resident

Non resident

Partly in India and partly outside India

Resident

Non resident
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Incidence of income and tax

Whether income is received or
deemed to be received in India
during the relevant years

Whether income accrues

or arises or deemed to
accrue or arise in India
during the relevant years

Status of
income

Yes

Yes

Indian Income

Yes

No

Indian Income

No

Yes

Indian Income

No

No

Foreign Income

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Incidence of income and tax

Individual and HUF
Resident and Ordinarily
resident in India

Resident but not

ordinarily
resident in India

Non resident
in India

Indian Income

Taxable in India

Taxable in India

Taxable in India

Foreign Income

Taxable in India

Only to the extent of

the following:
Business income
where business is
controlled wholly or
partly from India
and/or ;
Income from
profession set up in
India

Not taxable in
India

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Residential status
Exercise:
Mr Ram a citizen of Malaysia visited India and stayed for a period of 150 days
during previous year 2014-15. He stayed in India throughout the previous year
2010-11. However, he stayed in his home country for 330 days and 350 days
during the previous years 2008-09 and 2006-07 respectively. What is his
residential status during AY 2015-16?

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Residential status
Solution:
Mr Rams period of stay is summarised as below:
Previous Year

No. of days

Conclusion

2014-15

150

2013-14

Nil

2012-13

Nil

2011-12

Nil

2010-11

365

Satisfies condition in s
6(1) 60 days or more
in the previous year
and 365 days or more
in the 4 years prior to
the previous year
Hence he qualifies as a
resident

Conditions u/s 6(6) Not ordinarily resident since he is a non-resident for 9 out
10 years preceding the previous year or his period of stay in the 7 preceding
previous years is less than 730 days.
Mr Ram would therefore qualify as a resident but not ordinarily resident for AY
2015-16
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Incidence of income and tax

Exercise:
Sai Engineering Company, a Singapore based company and non-resident
under the Indian Income-tax Act derived the following income by way of
royalty. Advise about the taxability of these incomes in India:
1. Government of India paid Rs 10,00,000 under approved agreement;
2. Chennai based company paid Rs 12,00,000 for import of drawings and
designs for use in the project executed in Malaysia;
3. A South Korean company paid Rs 500,000 for use of know-how in South
Korea and Rs 750,000 for the formula used in India

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Thank You !