Unit VI

Income Tax Act

Session Objectives
 To understand what is income and tax on income in India.
 To understand some of the definitions.
 Introduction to different heads of income.
 Concept of deductions / exemptions / rebates.
 Who has to file a return of income?
 What if a person fails to file a return of income?
 What are the due dates for filing the return of income?
 How to pay the tax?
 What is TDS?
 Study a Practical example of Computation of Income Tax.
 Authorities under Income Tax and their hierarchy.
 Open forum.
 Income Tax in India
 Which is the governing law in India?
it’s The Income Tax Act, 1961.

 Income Tax in India was introduced by Sir James Wilson on 24 July 1860.
 Prior to The Income Tax Act, 1961, Indian Income Tax Act, 1922 was in force.

 Is the law amended every year?

Yes, every year in the month of February, Finance Minister presents Finance Bill which proposes the
fiscal policies for upcoming Financial Year.

These fiscal proposals require ascent from the President of India to become enforceable.

 In India we follow financial year beginning from 01 st April and ending on 31st March every year.

 India has a Financial Year and Assessment Year Concept.

Meaning and Types

 Tax is a fee charged by a government on a product,

income or activity for better society.
 There are two types of taxes . Direct taxes and
indirect taxes.
 Iftax is levied directly on the income or wealth of a
person, then it is a direct tax e.g. income-tax,
wealth tax.
 Iftax is levied on the price of a good or service,
then it is called an indirect tax e.g. excise duty,
custom duty, service tax and sales tax or value
added tax. In the case of indirect taxes, the person
paying the tax passes on the incidence to another
Income Tax Act, 1961

 Came into force w.e.f. 1st April, 1962

 Extends to whole of India
 The Act determines which persons are liable to
pay tax and in respect of which income.
 However, the Act does not prescribe the rates of
Income Tax
 The rates of Income-tax are prescribed every year
by the Finance Act (popularly known as “The
Budget”)
 At present, the tax rates are same for all
corporate assessees and partnership firms (30%)
and there are different slabs for Individual tax
payers
 We also have surcharge for corporate assessees
and education cess for all assessees
Important definitions
 “Assessee” means a person by whom any tax or any other sum of money is payable
under this Act
 “previous year” means the financial year immediately preceding the assessment
year
 "assessment year" means the period of twelve months commencing on the 1st day of
April every year
 "block of assets" means a group of assets falling within a class of assets comprising
tangible assets and intangible assets
 “person” includes an individual, a HUF, a company, a firm, an association of persons,
a local authority and every artificial judicial person, not falling within the previous
clauses.
Some more definitions

 “short-term capital asset” means a capital asset held by an

assessee for not more than[thirty-six] months immediately
preceding the date of its transfer
 “short-term capital gain” means capital gain arising from the
transfer of a short-term capital asset
 “long-term capital asset” means a capital asset which is not a
short-term capital asset
 “long-term capital gain” means capital gain arising from the
transfer of a long-term capital asset
Residential status
 Residential status of an assessee is important in determining the
scope of income on which income tax has to be paid in India.
 The different types of Residential Status are:-
Resident (R)
 An individual or HUF assessee who is resident in India may be
further classified into resident and ordinarily resident (ROR) and
resident but not ordinarily resident (NOR).
Non Resident (NR)
 To be determined in each previous year (1 April to 31 March next)
Importance of Residential Status
 Resident –
World income is taxable in India
 Non Resident –
Only income arising or accruing in India is taxable in India
 Resident but Not Ordinarily Resident –
Income accruing or arising outside India may also be taxable in
India
Resident (u/s 6)

 An individual is said to be resident in India in any

previous year, if he satisfies any of the 2 basic
conditions –
a. Physical presence in India for 182 days or more
in a previous year
OR
b. Physical presence in India for 60* days or more in
the previous year and 365 days or more during
the 4 years preceding the previous year
Resident (u/s 6)

* the above is subject to the following

i. Citizen leaves for employment or as member of crew of an
Indian ship – instead of 60 days, it is 182 days

 ii. Citizen or Person of Indian Origin already abroad on a visit -

instead of 60 days, it is 182 days
Some more definitions

 Person: Includes an Individual, a HUF, a Company, a

Firm, an AOP or BOI whether incorporated or not, a
Local Authority, every AJP.

 Assessment Year: “Assessment year" means the

period of twelve months commencing on the 1st day
of April every year; thus the year in which tax is
paid and or determined is called assessment year.
 Heads of Income

 Section 14 classifies the income in five different

heads:

a. Salaries;
b. Income from House Property;
c. Profits and Gains of Business or profession;
d. Capital Gains;
e. Income from Other Sources.
Salaries: What is Taxable

 Salary due. Whether received or not

 Any salary paid though not due
 Any arrears of salary paid if not charged to income-
tax for any earlier previous year.

Exclusions:
Salary received by a partner of a Partnership Firm is
specifically excluded from this head.
 Income from House Property
 What is a House Property?
 Annual value of property consisting of any buildings or lands appurtenant
thereto of which the assessee is the owner.

Specific deductions:
 Taxes paid to Local Authority.
 A sum equal to 30% of the annual value.
 Amount of interest payable where the property has been acquired,
constructed, repaired, renewed or reconstructed with borrowed capital.

The deduction is restricted to Rs. 2.00 Lacs where the property is Self
Occupied.
Profits & Gains from Business &
Profession
 Sec 2(13) defines Business as:
business" includes any trade, commerce or manufacture or any
adventure or concern in the nature of trade, commerce or
manufacture;

 Sec. 2(36) Profession includes vocation.

 What is a profession?
It’s Occupation, practice, or vocation requiring mastery of a
complex set of knowledge and skills through formal education and
/ or practical experience. 
PGBP continued…

 Global Principle : expenses incurred for earning the income are

allowed as deduction
 General deductions u/s 36 and 37
 Disallowances : section 40 to 43B
 Tax Audit u/s 44AB
Income from Capital Gains
 What is a Capital Gain?
Section 45(1) : any profits and gains arising from the transfer of a capital asset effected in the previous
year shall be chargeable to income tax under the head “Capital Gains” and shall be deemed to be the
income of the previous year in which the transfer took place.

In simple words, Profit earned on sale of a Capital Asset is a Capital Gain.

 What is a Capital Asset?

Section 2(14) defines a Capital Asset as:

(a) property of any kind held by an assessee, whether or not connected with his business or profession;
(b) any securities held by a Foreign Institutional Investor which has invested in such securities in
accordance with the regulations made under the Securities and exchange Board of India Act, 1992 (15
of 1992),
Income from Capital Gains
continued….
 but does not include—
(i) any stock-in-trade [other than the securities referred to in sub-clause (b)]],
consumable stores or raw materials held for the purposes of his business or
profession ;
(ii) personal effects, that is to say, movable property (including wearing apparel
and furniture) held for personal use by the assessee or any member of his family
dependent on him, but excludes—
(a)  jewellery;
(b) archaeological collections;
(c)  drawings;
(d)  paintings;
(e)  sculptures; or
(f)  any work of art.
Types of Capital Assets and
Capital Gains
 Long Term Capital Asset
 Short Term Capital Asset
 A Depreciable Asset

 Long Term Capital Gains

 Short Term Capital Gains

 Is there a tax on sale of an Agricultural Land?

 Various exemptions under Sec. 54 to 54GB

 How Capital Gain is calculated?

Income from Other Sources
 Sec 56: sub section (1) covers any income which does not fall under any other
head of income.
 Sub section (2) specifically covers nine incomes which are always taxable under
the head IOS.
1. Dividend.
2. Winning from lotteries etc.
3. Employees contribution towards staff welfare scheme.
4. Interest on securities.
5. Rental income of machinery, plant or furniture.
6. Rental income of machinery, plant or furniture along with letting out of building
and the two lettings are not separable.
7. Sum received under Key man insurance policy.
8. Gift.
9. Interest on compensation or enhanced compensation.
Income from Other Sources
Thus IOS comes in to picture only when:

 There is income.
 Income is not exempt
 Income is not covered by any other head.

Some common examples of IOS

 Income from sub-letting;
 Int. on bank deposits and loans;
 Income from royalty;
 Director’s fee;
 Agri. income received from outside India;
 Remuneration received by a person from other than his employer
 Rent of plot of land.
Concept of Deductions

 Commonly known deductions are:

1. Mediclaim Insurance Premium paid.
2. Donations paid eligible u/s. 80G
3. Deduction to Physically Handicapped Person u/s. 80U.

 Eligible Investments allowed as deductions: examples

1. Life Insurance Premium Paid
2. Purchase of National Savings Certificate (NSC).
3. Investment in a PPF account.
4. Repayment of Housing Loan Principle.
Who has to file a return of income

 Every person whose income is above the basic exemption limit.

 Every person who has incurred a loss in a financial year and intends
to get a set off in future.
 Every person who is served with a notice u/s. 148.

What if the person fails to file a return of income?

 A penalty of Rs. 5,000/- u/s. 271F could be levied.
 He can file a belated return within a period of one year from the end
of relevant assessment year.
 In case of loss returns, loss is not allowed to be carried forward and
set off except depreciation loss.
Due dates for filing return of
income
In General:
 31st July of the assessment year for Individuals, HUF, Firm, AOP and BOI
who are not subjected to audit u/s. 44AB
 30th September of the assessment year for individuals HUF, Firm, AOP
and BOI who are subjected to audit u/s. 44AB.
 30th September of the assessment year for a working partner of a firm
whose accounts are required to be audited under this Act or under any
other law for the time being in force
 30th September of the assessment year for persons required to get their
books audited under any other law for the time being in force.
 30th day of November of the assessment year in the case of an assessee
who is required to furnish a report referred to in section 92E, the;
How to pay the Tax?

 Through Advance Tax payment

What are the dates for payment of Advance Tax?

 Through Self Assessment Tax after the end of the financial year.
 Delayed payment / non payment of Advance Tax* will attract
interest.
What is TDS? Who is suppose to
deduct the tax?
 It stands for Tax Deduction at Source.
 What is the need?
 Tax to be deducted on eligible payments.
 Every person being an individual or a HUF whose accounts are required
to be audited u/s. 44AB in the immediately preceding previous year
 Every person being a Firm, a Company or a Trust irrespective of
applicability of provisions of Sec. 44AB.
 Quarterly Return of TDS is required to be filed on or before 31 st day of
subsequent month.
 The deducter is responsible for issuance of TDS certificate to the
deductee.
Authorities under Income Tax and their
hierarchy. Ministry of
Finance

Central Board of Direct Taxes (CBDT) CBEC

Department of Income Tax

PCCIT

CCIT

PCIT

Addnl. CIT

JCIT

DCIT

ACIT

ITO