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INSTITUTE OF TECHNOLOGY
DEPARTMENT
OF
MBA & RESEARCH CENTRE
DIRECT TAXATION
Subject Code: 18MBAFM303
Prof.DEVARAJU N, Assistant Professor
DIRECT TAXATION – (18MBAFM303)
UNIT - 01
Introduction & Basic Concepts
Income Tax Act, 1961, Basic Concepts and definitions, Capital and revenue – receipts,
expenditures, Basis of charge and scope of total income, Residential Status and Incidence of
Tax, Incomes which do not form part of Total Income (Sec.10), Tax Planning, Tax Evasion and
Tax Management. (Problems on residential Status of Individual assessee).
At present, this law is governed by the Act of 1961 which is commonly known as Income Tax
Act, 1961 which came into force on and from 1st April 1962. It applies to the whole of India.
Any law is in itself is not complete unless the gaps are being filled. The law of Income Tax in
India governed by the Income Tax Act of 1961 and the gaps are being filled by the Income Tax
Rules, Notifications, Circulars and judicial pronouncement including rulings by the Tribunal.
1. Income Tax Act, 1961: The Act contains the major provisions related to Income Tax in
India.
2. Income Tax Rules, 1962: Central Board of Direct Taxes (CBDT) is the body which
looks after the administration of Direct Tax. The CBDT is empowered to make rules for
carrying out the purpose of this Act.
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DIRECT TAXATION – (18MBAFM303)
3. Finance Act: Every year Finance Minister of Government of India presents the budget to
the parliament. Once the finance bill is approved by the parliament and get the clearance
from President of India, it became the Finance Act.
4. Circulars and Notifications: Sometimes the provisions of an act may need clarification
and that clarification usually in a form of circulars and notifications which has been
issued by the CBDT from time to time. It includes clarifying the doubts regarding the
scope and meaning of the provisions.
Types of Taxes:
Taxes are levied by the government on the taxpayer. Taxes are broadly divided into two parts
namely, Direct Tax and Indirect Tax.
Direct Tax is levied directly on the income of the person. Income Tax and Wealth Tax are the
part of Direct Tax.
Whereas, in indirect taxes, the person who pays the tax, shifts the burden to the person who
consumes the goods or services. Before 2017 the Indirect Tax comprises of various taxes and
duties like Service Tax, Sales Tax, Value Added Tax, Customs Duty, Excise Duty and etc. From
July 1st, 2017 all such Indirect Taxes are submerged in one tax law which was named as „The
Goods and Services Tax Act, 2017”.
Definition of Tax: “Prof. Seligman” defines a tax which is compulsory contribution from the
person to the government to defray the expenses incurred in the common interest of all national,
without reference to special benefits conferred.
Definition of Income Tax: The Income Tax is the annual charge levied on the income viz.
Salary, wage, commission, dividend, bonus, etc. of an individual, company or a firm. For each
assessment year, the rate of tax levied on different income levels, as prescribed in the slab, is
defined in the Union Budget (Finance Act).
Objectives of Tax:
Economic Development
Revenue generation
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DIRECT TAXATION – (18MBAFM303)
“Income Tax is levied on the total income of the previous year of every person”. To understand
the basic concept. It is very important to know the various other concepts.
Concept of Income:
In common parlance, Income is known as a regular periodic return to a person from his activities.
However, the Income has broader classified in Income Tax law. The Income Tax Act, even take
consideration of income which has not arisen regularly and periodically. For instance, winning
from lotteries, crossword puzzles, income from winning of shows is also subject to tax as per
income tax.
Cash or Kind
Legal or Illegal Income
Temporary or Permanent
Receipt basis or Accrual basis
Gifts
Lump sum or Installments.
Assessment Year:
“Assessment Year” means the year in which income of the previous year of an assessee is taxed.
The timed lap of assessment year is of twelve months beginning from the 1st April every year.
The period starts from 1st April of one year and ending on 31st March of next year. Broadly,
assessment year is defined under section 2 (9) of the Act, also called as income tax year.
Previous Year:
Income earned during the year is taxable in the next year. The definition of “Previous Year” is
given under section 3 of the Act. Previous Year is the year in which income is earned. Previous
year is the financial year immediately preceding the relevant assessment year.
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DIRECT TAXATION – (18MBAFM303)
1. Self Assessment
2. Provisional Assessment
3. Regular Assessment
4. Best Judgment Assessment
5. Re- assessment
Assessee:
An assessee is a taxpayer means a person who under the income tax act is subject to pay taxes or
any other sum of money, as defined under section 2 (7) of the Act. The expression „any other
sum of money‟ includes other such obligations payable, for instance fine, interest, penalty and
other tax or sometimes he is liable to pay tax on income of other person is known as “deemed to
be assessee”.
Person:
Income tax is levied on the total income of the previous year of every person, as per Section 2
(31), the term Person includes:
An individual,
A Hindu undivided family (HUF),
A company: a legal entity incorporated under the company act 1956.
A firm: a separate taxable entity distinct from its partners.
An association of persons (AOP) or a body of individuals (BOI), whether incorporated or
not: is the integration of two or more persons for a common purpose, and primarily with an
intention to earn some income.
A local authority: Municipal Corporation, board, other legally entitled or entrusted to the
government.
every artificial juridical person (AJP): all artificial person with judicial personality like
councils, university, library, idol etc.,
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DIRECT TAXATION – (18MBAFM303)
The definition of Person starts with the word includes, therefore, the list is inclusive, not
exhaustive.
Income:
The income is defined in Section 2(24) of the Act, "income is the sum of all the wages,
salaries, profits, interest payments, rents, and other forms of earnings received in a given period
of time.
Or the term income includes: profits & gains, dividend, voluntary contribution received by trust,
perquisites in the hands of employee, any special allowance, dearness allowance, city
compensatory allowance, capital gains, insurance profit, winning from lottery, horse race, cross
word puzzle etc., For the tax purpose incomes are divided in to the following heads.
Heads of Income:
Income from salary
Income from house property
Income from business or profession
Income from capital gain
Income from other sources
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DIRECT TAXATION – (18MBAFM303)
cumulative income which is computed under the five heads of income, i.e. salary, house
property, business or profession, capital gain and other sources but before making deductions
under section 80C to 80U.
Total Income:
Sec – 2 (45) explains, Total Income is the income on which tax liability is determined. It is
necessary to compute total income to ascertain tax liability. Section 80C to 80U provides certain
deductions which can be claimed from Gross Total Income (GTI). The balance amount of
income left over after providing deductions under section 80C to 80U is called Total Income.
Section -5 of Income Tax Act, 1961 provides Scope of total Income in case of person who is a
resident, in the case of a person not ordinarily resident in India and person who is a non-resident
which includes. Income can be Income from any source which (a) is received or is deemed to be
received in India in such year by or on behalf of such person; or (b) accrues or arises or is
deemed to accrue or arise to him in India during such year; or (c) accrues or arises to him outside
India during such year.
Capital Receipt: Capital receipts are the income received by the company which is non-
recurring in nature. They are part of the financing and investing activities rather than operating
activities. The capital receipts either reduce an asset or increases a liability. The receipts can be
generated from the following sources:
Issue of Shares
The issue of debt instruments such as debentures.
Loan taken from a bank or financial institution.
Government grants.
Insurance Claim.
Additional capital introduced by the proprietor.
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DIRECT TAXATION – (18MBAFM303)
Revenue Receipt: Revenue Receipts are the receipts which arise through the core business
activities. These receipts are a part of normal business operations that is why they occur again
and again however its benefit can be enjoyed only in the current accounting year as its effect is
short term. The income received from the day to day activities of business includes all the
operations that bring cash into the business like:
Capital Expenditure: The amount spent by the company for possessing any long-term capital
asset or to enhance the working capacity of any existing capital asset, or to increase its lifespan
to generate future cash flows or to decrease the cost of production, is known as Capital
expenditure. As a huge amount is spent on it, the expenditure is capitalized, i.e. the amount of
expenditure is spread over the remaining useful life of the asset.
The expenditure which is done for initiate current, as well as the future economic benefit, is
capital expenditure. It is a long-term investment done by the entity, in the name of assets, to
create financial gain for the years to come. For example – Purchase of Machinery or installation
of equipment to the machinery which will improve its productivity capacity or life years.
Revenue Expenditure: The expenditure which is incurred on a regular basis for conducting the
operational activities of the business are known as Revenue expenditure like the purchase of
stock, carriage, freight, etc.. As per the accrual accounting assumption, the recognition of
revenues is done when they are earned while expenditure is recognized when they are incurred.
Therefore, the revenue expenditure is charged to the Income Statement as and when they occur.
This satisfies the fundamental principle of accounting i.e. Matching Principle in which the
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DIRECT TAXATION – (18MBAFM303)
expenses are recorded in the period of their incurrence. The benefit generated by the revenue
expenditure is for the current accounting year.
The examples of revenue expenditure are as under – Wages & Salary, Printing & Stationery,
Electricity Expenses, Repairs and Maintenance Expenses, Inventory, Postage, Insurance, taxes,
etc.
Residential status:
The taxability of an individual in India depends upon his residential status in India for any
particular financial year. Residence in India – is determined by Section 6 of the Income Tax Act
1961.
For Individuals & HUF For Firm, Company, AOP, BOI, local
authority, artificial or judicial persons
An individual is said to be resident in India if he satisfies any one of the following basic
conditions:
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DIRECT TAXATION – (18MBAFM303)
NOTE: Both days i.e. the day when one left & the day on which he came to India is considered
for Number of days of stay in India.
Leaves India for employment outside India: In case of an individual, who is a citizen
of India and who leaves India in any previous year for the purposes of employment
outside India, the condition No. 2 shall not be applicable for the relevant previous year in
which he leaves India.
Leaves India as he is a crew member of an Indian ship.
Comes to visit India: In case of an individual, who is a citizen of India, or is a person of
Indian origin, who, being outside India comes on a visit to India in any previous year, the
condition No. 2 mentioned above in his case also shall not be applicable. In other words,
he shall not be a resident in India unless his stay in India is at least 182 days during the
relevant previous year in which he visits India.
An individual who is resident in India, shall be resident and ordinarily resident in India if he
satisfies both the following conditions
a. He has been 'Resident in India' for at least 2 out of 10 previous years immediately
preceding the relevant previous year.
And
b. He has been in India for 730 days or more, during 7 previous years immediately
preceding the relevant previous year.
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DIRECT TAXATION – (18MBAFM303)
Resident & ordinarily resident: if he / she fulfill one basic condition & both the
additional condition.
Resident & but not ordinarily resident: if he / she fulfill one basic condition but fail to
fulfill one or both the additional conditions.
Non-resident: if he / she fail to fulfill none of basic conditions.
Incidence of Tax:
The incidence of tax on a taxpayer depends on his residential status and also on the place and
time of accrual of receipt of income. Section 5 deals with the incidence of income tax; this
section gives a discussion on different types of income taxable in the hands of ordinary resident,
not ordinary resident & non-resident.
i) If income is received (or deemed to be received) in India during the previous year and at the
same time it accrues (or arises or is deemed to accrue or arise) in India during the previous year;
ii) If income is received (or deemed to be received) in India during the previous year but it
accrues (or arises) outside India during the previous year;
iii) If income is received outside India during the previous year but it accrues (or arises or is
deemed to accrue or arise) in India during the previous year;
Foreign income: If the following conditions are satisfied, then such income is foreign income:
ii) Income does not accrue or arise (or does not deemed to accrue or arise) in India.
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DIRECT TAXATION – (18MBAFM303)
No No Foreign Income
Table showing the tax liability on total income of individuals with their residential status:
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DIRECT TAXATION – (18MBAFM303)
Any income which is received in India, during the previous year by any assessee, is liable to tax
in India, irrespective of the residential status of the assessee and the place of accrual of such
income.
Receipts means the first receipt: The receipt of income refers to the first occasion when the
recipient gets the money under his own control. Once an amount is received as income, any
remittance or transmission of the amount to another place does not result in receipt within the
meaning of this clause at the other place.
The following incomes shall be deemed to be received in India in the previous year even in the
absence of actual receipt:
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DIRECT TAXATION – (18MBAFM303)
In computing the total income of a previous year of any person, any income falling within any of
the following clauses shall not be included
Tax liability of an individual can be reduced through 3 different methods- Tax Planning,
Tax avoidance and Tax evasion. All the methods are different and interchangeable.
Tax Planning:
Tax Planning can be understood as the activity undertaken by the assessee to reduce the tax
liability by making optimum use of all permissible allowances, deductions, concessions,
exemptions, rebates, exclusions and so forth, available under the statute. Having no intension to
deceit the legal spirit behind the tax law would naturally face within the ambit of tax planning.
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DIRECT TAXATION – (18MBAFM303)
Minimal Litigation: There is always friction between the collector and the payer of tax.
In such a situation, it is important that the compliance regarding tax payment is followed
and used properly so that friction is minimum.
Productivity: Among the most important objectives of tax planning is channelization of
taxable income to various investment plans.
Reduction of Tax Liability: As a tax payer, you can save the maximum amount from
payable tax amount by using a proper arrangement of your enterprise working as per the
required laws.
Healthy Growth of Economy: The growth in an economy depends largely upon the
growth of its citizens. Tax planning estimates generation of white money that is in free
flow.
Economic Stability: Stability is supplemented when the tax planning behind a business.
Tax avoidance:
Tax avoidance is the practice of adjusting your financial affairs in such a manner that you avoid
paying tax to the government. Here, one makes use of shortcomings and loopholes in the law
unfairly for personal benefit. When you indulge in tax avoidance, you don‟t violate the tax law
but you override the intent of the law. It is not as severe as tax evasion but can be equally bad.
Tax avoidance is the use of legal methods to modify an individual's financial situation to lower
the amount of income tax owed. This is generally accomplished by claiming the permissible
deductions and credits.
Tax Evasion:
Tax Evasion is an illegal way to minimize tax liability through fraudulent techniques like
deliberate under-statement of taxable income or inflating expenses. It is an unlawful attempt to
reduce one‟s tax burden. Tax Evasion is done with a motive of showing fewer profits in order to
avoid tax burden. It involves illegal practices such as making false statements, hiding relevant
documents, not maintaining complete records of the transactions, concealment of income,
overstatement of tax credit or presenting personal expenses as business expenses. Tax evasion is
a crime for which the assessee could be punished under the law.
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Features and differences between Tax evasion, Tax avoidance and Tax Planning:
1. Nature: Tax planning and Tax avoidance is legal whereas Tax evasion is illegal
2. Attributes: Tax planning is moral. Tax avoidance is immoral. Tax evasion is illegal and
objectionable.
3. Motive: Tax planning is the method of saving tax .However tax avoidance is dodging of tax.
Tax evasion is an act of concealing tax.
4. Consequences: Tax avoidance leads to the deferment of tax liability. Tax evasion leads to
penalty or imprisonment.
5. Objective: The objective of Tax avoidance is to reduce tax liability by applying the script of
law whereas Tax evasion is done to reduce tax liability by exercising unfair means. Tax planning
is done to reduce the liability of tax by applying the provision and moral of law.
6. Permissible: Tax planning and Tax avoidance are permissible whereas Tax evasion is not
permissible.
Conclusion: Tax planning and Tax avoidance are the legal ways to reduce tax liabilities but Tax
avoidance is not advisable as it manipulates the law for one‟s own benefit. Whereas tax planning
is an ideal method.
Tax Management:
Every assessee liable to pay tax needs to manage his/her taxes. Tax management relates to
management of finances for payment of tax, assessing the advance tax liability to pay tax in time.
Tax management has nothing to do with planning to save tax it is just related with operational
aspect of payment of tax i.e. while managing his taxes a person ensures that he/she is making
timely payment of taxes without running out of the money and he is complying with all the
provisions of the law.
Tax management means, the management of finances, for the purpose of paying tax, the
objectives are:
The objective of Tax Management is to comply with the provisions of Income Tax Law
and its allied rules
Tax Management deals with filing of Return in time, getting the accounts audited,
deducting tax at source etc.
Tax Management relates to Past, Present, and Future.
Past – Assessment Proceedings, Appeals, Revisions etc.
Present – Filing of Return, payment of advance tax etc.
Future – To take corrective action
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