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INCOME TAX LAW &

PRACTICES

UNIT-1
Basic concepts of Income Tax

INTRODUCTION
Taxation is the practice of collecting taxes (money) from

citizens based on their earnings and property.


The money raised from taxation supports the government and
allows it to fund police and courts, have a military, build and
maintain roads, along with many other services.

Importance and Role of Taxation

Source of revenue to the Governments


Has potential for raising the funds to meet the development

and defense needs of a nation.

Type of Taxation
1. Direct taxes: a tax which is born and paid directly by the
person on whom it is imposed is a direct tax. Example: income
tax, wealth tax, gift tax etc.
It is directly paid by the taxpayer to the Govt. without any
intermediaries & it comes from own pocket.
2. Indirect tax: if a tax is passed on by the taxpayer to some
other person as it is, is an indirect tax. E.g. sales tax, VAT etc.
It is not directly paid by the person on whom it is levied, but is
paid indirectly through the medium of other persons.

Source of Income Tax law in India

Income Tax Act, 1961

CBDT

Annual Finance Act

Income Tax Rules, 1962

Judicial Decision

Income U/S 2(24)


No precise definition of the word Income is attempted under

the Income-tax Act, 1961.


The definition of Income as given in Section 2(24) of the Act
starts with the word includes therefore the list is inclusive not
exhaustive. The definition enumerates certain items, including
those which cannot ordinarily be considered as income but are
treated statutorily as such.

As per section 2(24), the term income means and includes


profits and gains
Dividend
Voluntary contributions: Voluntary contributions received by :

a trust created wholly or partly for charitable or religious purposes


a scientific research association; or
a fund or trust or institution established for charitable purposes or
An electoral trust.
The value of any perquisite or profit in lieu of salary taxable.
Any special allowance or benefit specifically granted to the assessee to
meet expenses wholly, necessarily and exclusively for the performance of
the duties of an office or employment of profit.

Contd
City Compensatory Allowance/ Dearness allowance
Benefit or Perquisite to a Director
Any Benefit or perquisite to a Representative Assessee
Capital Gain
Insurance Profit
Banking income of a Co-operative Society
Winnings from Lottery
Employees Contribution Towards Provident Fund
Amount Received under Keyman Insurance Policy
Gift received for an amount exceeding 50,000
Consideration received for issue of shares

Person
Income-tax is charged in respect of the total income of the previous year of

every person. Hence, it is important to know the definition of the word person.
As per section 2(31), Person includes:
an individual:
a Hindu undivided family:
a company
a firm
an association of persons or a body of individuals whether incorporated or not:
a local authority: every artificial, juridical person, not falling within any of the
above categories

Assessee
In common parlance every tax payer is an assessee.
However, the word assessee has been defined in Section 2(7) of the Act

according to which assessee means a person by whom any tax or any other sum
of money (i.e. interest, penalty etc.) is payable under the Act and includes:
(a) every person in respect of whom any proceeding under this Act has been
taken for the assessment of his income or assessment of fringe benefits or of
the income of any other person in respect of which he is assessable or to
determine the loss sustained by him or by such other person or to determine the
amount of refund due to him or to such other person.
(b)every person who is deemed to be an assessee under any provision of this
Act.
(c) every person who is deemed to be an assessee in default under any
provision of this Act.

CONTD..
Accordingly, assessee is a person by whom tax or any other sum is payable

under the Act.


The expression other sum of money includes fine, interest, penalty and tax
or person to whom any refund of tax etc. is due under the Act or if any
proceeding under the Act has been taken against any person, he is also an
assessee.

Deemed Assessee
A person who is deemed to be an assessee for some other

person is called deemed assessee. For example:


(I) After the death of a person, his legal representative will
be treated as an assessee for that income of the deceased
on which tax has not been paid by the deceased before his
death.
(II) A person representative of a foreigner or a minor or a
lunatic is treated as an assessee for the income of such
foreigner or minor or lunatic.

ASSESSMENT YEAR [SECTION 2(9)]


Assessment

year means the period of twelve months


commencing on 1st April every year and ending on 31st March of
the next year. Income of previous year of an assessee is taxed
during the following assessment year at the rates prescribed by
the relevant Finance Act.

PREVIOUS YEAR (SECTION 3):

Income earned in a year is taxable in the next year. The year in which

income is earned is known as previous year.


From the assessment year 1989-90 onwards, all assessees are required
to follow financial year (i.e. April 1 to March 31) as previous year. The
uniform previous year has to be followed for all sources of income.
In case of newly set up business or profession or a source of income
newly coming into existence, the first previous year will be the period
commencing from the date of setting up of business/profession or as the
case may be, the date on which the source of income newly comes into
existence and ending on the immediately following March, 31.

Cases in which tax on income earned has to be paid


In the previous year itself instead of assessment year
Income from shipping business of Non- Residents
Income of persons Leaving India
AOP or BOI , artificial juridical person formed for a particular event or

purpose.
Income of persons from transfer of property to avoid tax
Income of discontinued business

Gross Total Income & Total Income


Acc to Sec 14 of IT Act, total of incomes computes under five

heads viz. salaries, income from house property, profits and


gains of business or profession, capital gains and income from
other sources after making adjustments for set off and carry
forward of losses, is gross total income.
From gross total income deductions u/s 80C to 80U are made to
find out total income.

Computation of Total Income


Determination of Residential status
Classification of income under 5 heads
Aggregation of income
Application of Clubbing of income
Set- off and carry forward of losses
Gross total income
Deductions from Gross total income
Net total income

Agricultural Income Section 10(1)


Agricultural income as defined in Section 2(1A) is exempt from income-tax in

the case of all assesses. This exemption has been granted on account of the
constitutional provisions relating to the powers of the Central and the State
Governments for levying tax on agricultural income.
Under the Constitution only the State Governments are empowered to levy tax
on agricultural income. Hence, the Central Government while imposing
income-tax on incomes of various types has specifically excluded agricultural
income from the purview of Central income-tax. This exemption would,
however, be available only in cases where the income in question constitutes
agricultural income within the meaning of Section 2(1A).

Definition of Agricultural Income


As per section 2(1A) of the Act, agricultural income is defined as follows:
Agricultural income means

(a) Any rent or revenue derived from land which is situated in India and is used for
agricultural purposes;
(b) Any income derived from such land by (i) agriculture; or
(ii) the performance by a cultivator or receiver of rent-in-kind of any process
ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce
raised or received by him fit to be taken to market; or
(iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or
received by him, in respect of which no process has been performed other than a process
of the nature described in paragraph (ii) of this sub-clause ;
(c) Any income derived from any building owned and occupied by the receiver of the
rent or revenue of any such land, or occupied by the cultivator or the receiver of rent-inkind, of any land with respect to which, or the produce of which, any process mentioned
in paragraphs (ii) and (iii) of sub-clause (b) is carried on:

Agricultural Income means and includes


Rent received from the land used for agricultural purposes
Revenue income derived from agriculture
Income from making the produce fit to be taken to market
Income from sale of produce
Income from Building

Income Connected with Land but not Agricultural Income


There are certain incomes which are derived from land but they are not agricultural incomes
because the requisite conditions - land must be used for agricultural purposes and it must be
the primary source of income - are not satisfied in such cases.
Some of the examples of such incomes are as follows:
(a)Income from spontaneous growth of grass, trees or bamboos;
(b)Dividend from a company engaged in agriculture;
(c) Salary of a farm manager
(d) Income from mines;
(e) Income from stone quarries;
(f) Income from fisheries;
(g) Income from brick making;
(h) Income from supply of water for irrigation purposes;
(i) Profit accruing from the purchase of a standing crop and resale thereof after harvest;
(j) Income from animal kingdom.

Exempted income under section 10

Section 10 of Income Tax Act has given a long list of incomes which are

totally exempt from tax and so these incomes are not included in the
gross total income of the assessee. In other words, such incomes are
totally Tax-Free.
While calculating Total Income in any previous year of any person, any
income coming under the following clauses shall be exempted.

Receipt by a member from HUF


Share of profit received by partners from a partnership firm
Compensation received by the victims of Bhopal Gas Leak Disaster
Income of minor (exemption upto Rs. 1500)
Fee for technical services and royalty received by specified foreign

companies.
Subsidy received from Tea Boards
Subsidy received by assessee engaged in the business of growing and
manufacturing rubber coffee cardamom
Income of 100% EOU (Export Oriented Units)
Allowances of members of Parliament
Pension to gallantry award winners

Family pension received by family members of Armed forces


Income of professional institutions.
Income of trade Unions
Income of SAARC fund

Agricultural income
Dividend received from any Indian company.
Capital gain on the transfer of units
Capital gain on compulsory acquisition of urban agricultural land
LTCG on transfer of equity shares/ units in cases covered by
Securities Transaction Tax

Residential Status

RESIDENTIAL STATUS AND TAX LIABILITY (SECTION 6)

Total income of an assessee cannot be computed unless the persons

residential status in India during the previous year is known. According


to the residential status, the assessee can either be;
(i) Resident in India or
(ii) Non-resident in India
However, individual and HUF cannot be simply called resident in India. If
individual or HUF is a resident in India, they will be either;
(a) Resident and Ordinarily resident in India (ROR) or
(b) Resident but not Ordinarily resident in India (RNOR).
In case of persons other than individual and HUF, he will be either
resident in India or non-resident in India.

Contd..
Section 6 of the Income-tax Act prescribes the tests to be applied to

determine the residential status of all tax payers for purposes of income-tax.
There are three alternative tests to be applied for individuals, two for
companies and Hindu Undivided Families and firms, associations of persons,
bodies of individuals and artificial juridical persons.
An assessees residential status must be determined with reference to the
previous year in respect of which the income is sought to be taxed (and not
with reference to the assessment year).

TEST FOR RESIDENCE OF INDIVIDUALS

An individual may either be a

(i) Resident in India or


(ii) Non-resident in India
However, individual cannot be simply called resident in India. If
individual is a resident in India he will be either;
(a) Resident and Ordinarily resident in India (ROR) or
(b) Resident but not Ordinarily resident in India (RNOR).

Basic Condition for a person to be Resident


An individual is said to be resident in India in any previous year if:
(a) He is in India for atleast 182 days or more during the previous year
(b) has been in India for at least 365 days during the four years preceding the previous
year and has been in India for at least sixty days (60 days) during the previous year .
Exception to the 2nd basic condition:.
Citizen of India, who leaves India in any previous year as a member of the crew of an
Indian ship, or for the purpose of employment outside India, or
Citizen of India or Person of Indian origin engaged outside India (whether for rendering
service outside or not) and who comes on a visit to India in the any previous year.

A person is deemed to be of Indian origin if he, or either of his parents or any of


his grandparents, was born in Undivided India. It may be noted that
grandparents include both maternal and paternal grand parents

Non-Resident
If an individual does not satisfy any of the above basic condition

then, he will be treated as Non-Resident.


Additional Conditions for a person to be resident and ordinary

resident (ROR): An individual may become a resident and


ordinarily resident in India if he has satisfy both the following
conditions:
(i) he is a resident in atleast any two out of the ten previous years
immediately preceding the relevant previous year, and
(ii) he has been in India for 730 days or more during the seven
previous years immediately preceding the relevant previous year .

Resident and not ordinary resident (RNOR)


If resident individual is not able to satisfy both the additional conditions,
then he will be resident but not ordinary resident (RNOR).

Summary of Residential Status of an Individual

Resident & Ordinarily


Resident (Satisfies any
one condition from 1&2
and condition 3

Not Ordinarily
Resident (Satisfies any
condition from 1 & 2)

Non Resident (Does


not satisfy any
condition from 1& 2)

Condition 1: If individual is in India in the previous year for a total period of 182 days or more.
Condition 2: If he has been in India for at least 365 days during the 4 years preceding the previous
year and has been in India for at least 60 days during the previous year. However this clause will not
be applicable if he is a:
Citizen of India, who leaves India in any previous year as a member of the crew of an Indian ship,
or for the purpose of employment outside India or
Citizen of India or of Indian origin engaged outside India (whether for rendering service outside or
not) and who comes on a visit to India in the any previous year.
Condition 3: An individual who has been a non-resident in India in at least nine out of the ten
previous years preceding that year, and has during the seven previous years preceding that year been
in India for a period of, or periods amounting in all to 729 days or less.

TESTS OF RESIDENCE FOR HINDU UNDIVIDED FAMILIES, FIRMS


AND OTHER ASSOCIATIONS OF PERSONS

A HUF, firm or other association of persons is said to be resident in


India within the meaning of Section 6(2) in any previous year, if
(i) during that year the control and management of its affairs is
situated wholly or partly in India.
(ii) If the control and management of its affairs is situated wholly
outside India during the relevant previous year, it is considered
non resident.

If Karta of Resident HUF satisfies both the following additional conditions (as

applicable in case of Individual) then Resident HUF will be ROR, otherwise it will be
RNOR:
Additional Conditions :
(1) Karta of Resident HUF should be resident in atleast 2 previous years out of 10
previous year immediately
preceding relevant previous year.
(2) Stay of Karta during 7 previous year immediately preceding relevant previous year
should be 730 days or more.HUF can be not ordinarily resident
Firms, association of persons, local authorities and other artificial juridical
persons can be either resident (ordinarily resident) or non-resident in India but
they cannot be not ordinarily resident in India.

HUF, Firm or Association of Persons

Resident

Non- Resident

If during that the previous year


the control and management of
its affairs is situated wholly or
partly in India

If the control and management


of its affairs is situated wholly
outside India during the previous
year.

TESTS OF RESIDENCE FOR COMPANIES


All Indian companies within the meaning of Section 2(26) of the Act are always

resident in India regardless of the place of control and management of its affairs.
In the case of a foreign company the place of control and management of the affairs is
the basis on which the companys residential status is determinable.
a non-Indian company would be resident in India only if the whole of the control and
management of its affairs throughout the relevant previous year are exercised from
India. In other words, even if a negligible part of the control and management is
exercised from outside India the company would be a nonresident for income-tax
purposes. Thus, a foreign company with its registered office outside India could be
treated as resident in India if the control of its affairs is exercised wholly from India.
Like other tax payers, a company may also be resident in more places than one
although it can have only one registered office.

Scope of Total Income on the basis of Residential Status

MEANING AND SCOPE OF TOTAL INCOME

(SECTION 5)
Section 4 of the Act imposes a charge of tax on the total or taxable income of

the assessee. The meaning and scope of the expression of total income is
contained in Section 5.
The total income of an assessee cannot be determined unless we know the
residential status in India during the previous year. The scope of total income
and consequently the liability to income-tax also depends upon the following
facts:
(a) whether the income accrues or is received in India or outside,
(b) the exact place and point of time at which the accrual or receipt of income
takes place, and
(c) the residential status of the assessee.

Scope of Total income has been defined on the basis of


Residential status
(A) Resident and Ordinarily Resident Assessee
According to Sub-section (1) of Section 5 of the Act the total income of a resident and ordinarily resident
assessee would consist of:
(i) income received or deemed to be received in India during the accounting year by or on behalf of such
person;
(ii) income which accrues or arises or is deemed to accrue or arise to him in India during the accounting
year;
(iii) income which accrues or arises to him outside India during the accounting year. It is important to
note that under clause (iii) only income accruing or arising outside India is included. Income deemed to
accrue or arise outside India is not includible
(B) Resident but Not Ordinarily Resident In India
the total income in case of resident but not ordinarily resident in India
(i) income received or deemed to be received in India during the accounting year by or on behalf of such
person;
(ii) income which accrues or arises or is deemed to accrue or arise to him in India during the accounting
year;
(iii) income which accrues or arises to him outside India during the previous year if it is derived from a
business controlled in or a profession set up in India

(C) Non-Resident
Sub-section (2) of Section 5 provides that the total income of a non-resident
would comprise of:
(i) income received or deemed to be received in India in the accounting year by
or on behalf of such
person;
(ii) income which accrues or arises or is deemed to accrue or arise to him in India
during the previous year.

Residential Status & Incidence of tax liability


Classification of Income

ROR

RNOR

NRI

1. Income received or deemed to be received in India

YES

YES

YES

2. Income accrued (for arises) or deemed to be accrued


in India

YES

YES

YES

3. Income received or accrued outside India from a


business controlled or profession set up in India

YES

YES

NO

4. Income received or accrued outside India from a


YES
business controlled and professional set up outside India

NO

NO

5. Income other than from business or profession


received and accrued outside India.

YES

NO

NO

6. Income which accrues or arises outside India &


received outside India during the year preceding the
previous year and remitted to India during the previous
year

NO

NO

NO

Practical Question
Mr. X earns the following income during the financial year 2014-15:
Amt (Rs.)
(a)

Interest from an Indian company received in London

1,20,000

(b)

Pension from former employer in India received in USA

1,80,000

Profits earned from a bussiness in Paris which is controlled in


India, half of the profits being received in India

2,00,000

(d)

Income from agriculture in Bhutan & remitted to India

1,25,000

(e)

Income from property in England received there.

4,00,000

(f)

Past foreign income bought to India

10,000

Compute his income for the assessment year 2015-16 if he is:


(I) Resident & ordinarily resident in India (II) Not ordinarily resident in India
(III) Non Resident in India

THANK YOU