Income Tax Law and Practice

BBA – 5th Sem

BBA - 301
 Income Tax Act 1961
• Important Website Link –
https://www.incometaxindia.gov.in/Pages/tut
orials.aspx
Let’s Start
 What is Tax?
• One of the most important financial term
• Taxes are involuntary fees levied on individuals
or corporations and enforced by a government
entity – whether local, regional or national.
• It is levied in order to finance government
activities
 Purpose of Tax
• vital for the country’s economic progress, sustenance and
development
• primary source of funding for several important government
welfare schemes. 
•  help to reduce economic inequality in society through
redistribution of wealth.
• helps the government to build roads, schools, health care
institutes and finance law enforcement and the judicial
system.
• The Indian Constitution under Article 246 enlists different
taxations in the country between the Centre and the State.
How many types of Taxes do we Pay???

Three Levels of
Government

Taxes
Imposed by

Central /
State Level Local Level
Union Level
 Central Level Taxes
(Imposed by the Central Government)

Direct Taxes Indirect Taxes

Imposed on Imposed on Goods
Persons and Services

Income Tax Excise duty

Wealth Tax Sales Tax

Service Tax

Custom Duty
 State Level Taxes
(Imposed by the State Government)

State Excise
duty

Value Added
Tax

Entertainment
Tax

Luxury Tax

Road Tax

Stamp Duty
 Local Level Taxes
• Property Tax (Municipal Tax)
 Income Tax
• Tax levied on the income earned by persons.
• A type of Direct Tax
• Real Income and Taxable Income are different
• Direct and Indirect Tax
 1. Direct Taxes
• These taxes are paid directly by the citizen to the
government and cannot be remitted to others. 
• In India, the Central Board of Direct Taxes or CBDT is the
governing authority on direct taxes. The most common 
examples of direct taxes are income tax, property tax,
personal property taxes and taxes on assets.
• These taxes are based on the ability-to-pay principle. It is
a kind of disincentive as it leads to people working hard
more and earning more money, because the more
money a person earns, the more taxes he is likely to pay.
 2. Indirect taxes
• These taxes are collected by the producer or retailer
from the supply chain and is paid to the government.
• These taxes are generally levied on goods and services.
• In India, the Goods and Services Tax (GST) is the most
common example of indirect tax.
• Before the implementation of the GST, there were
several indirect taxes such as Octroi, Value Added Tax
(VAT), Entertainment Tax, Entry Tax, Luxury Tax, etc.
• However, these taxes are now all subsumed under GST.
In other words, GST has replaced all these taxes now.
• It’s the duty of every citizen of the country to
pay taxes responsibly for the purpose of
nation building.
• Tax Planning
• Tax Avoidance
• Tax Evasion
 Income Tax Law
Comprises of the following:
1. Income Tax Act, 1961
2. Income Tax Rules, 1962
3. Government Notifications
4. Finance Act, Annual
5. Circular and Clarification of CBDT
6. Judicial Decisions
 Income Tax Act, 1961
•  It extends to the whole of India, it came into
force on the 1st day of April, 1962.
• The most striking feature of the act is that it
states the mode of computation of income for
income-tax purpose but does not state the
rates at which tax is payable.
• The rate is prescribed by the Finance Act
which is stated every year.
• Income tax Act 1961 is an act to levy , administrate ,
collect and recover Income Tax in India.
• Income Tax including surcharge (if any) & cess is
charged for any person at the rate as prescribed by
Central Act for that assessment year. 
• Income-tax Act has provided separate provisions with
respect to levy of tax on income received in advance
as well as the income with respect of which the
amount has not yet been received.
• A person also has to keep track of his TDS deducted
while calculating his final tax liability at the end of the
year.
 Basic Concepts
• Previous Year: previous year is defined as the financial
year which immediately precedes the assessment year.
• In case the source of income is new or the business set
up is new, previous year for that entity will start from
the date of setting up of that business or profession or
from the date when the source of income of this new
existence starts and ends in the said financial year.
• The financial year in which income is earned is known
as previous year. It is of 12 months period commencing
from April 1 and ending on March 31 of the next year.
 • Previous year may be less than 12 months in
the following cases
Starting with the date of
Newly Set-up Business or commencement of
Profession business or profession Ending with 31st
March

New Source of Income Starting with the date

when income comes into
existence
• Example-
A is running a business from 2015 onwards.
Determine the previous year for the
Assessment Year 2020-21.
• A Chartered Accountant sets up his profession
on 1st July, 2019. Determine the previous year
for the Assessment year 2020-21.
 2. Assessment Year [sec.2 (9)]
• Assessment Year is the year in which one file
income tax returns of the year prior to it (i.e.
Financial Year). It is the year in which the income
that one has earned in the financial year that is
just ended is evaluated. E.g. For Financial Year
2014-15 the Assessment Year will be 2015-16.
• Year in which income earned in the PY is taxed is
known as Assessment year.
• Immediately follows PY
• In most of the cases income earned in the PY
is taxable in the immediately following
Assessment Year.
• But this rule has certain exceptions-
 5 Exceptions to this rule
• Income of Non-Resident from Shipping
• Income of Persons leaving India either
permanently or for a long period of time.
• Income of Bodies (Associations) formed for
short duration
• Income of a person trying to alienate his
assets with a view to avoid tax
• Income from a Discontinued Business
 Person [sec. 2 (31)]
1. Individual
2. Hindu Undivided Family
3. Company
4. Firm and Limited Liability Partnership
5. Association of Persons (AOP) / Body of Individuals
(BOI)
6. Local Authority – Gram Panchayat, Municipality
7. Artificial Judicial Persons (not falling withing any of
the preceding categories)
 Assessee [sec. 2 (37)]
1. A person by whom Income-Tax or any other sum of
money (interest or penalty) is payable under this Act.
2. Person in respect of whom any proceeding under the
Act has been taken for the assessment of his income
or loss.
3. Person who is deemed to be assessee
4. Person who is deemed to be an assessee in default.
– fails to comply with the provisions of TDS or Fails
to pay advance tax
 Examples
• Income of X aged 35 years is Rs. 2,50,000 for
the assessment year 2018-19. He does not file
his return of income because his income is not
more than the amount of exempted slab.
• Income of Y aged 38 years is Rs. 2,55,000 for
AY 2018-19. He does not file his return of
income (although he is supposed to file his
return of income as his income is more than
exempted slab of Rs. 2,50,000).
• Income of Z aged 51 years is Rs. 75,000 for the
AY 2018-19. He files his return of income even
if his income is less than 2,50,000. Assessment
order has been passed by the Assessing
Officer.
• Income of A for AY 2019-20 is (-) Rs. 60,000.
He files his return of income. He is an
assessee.
 Income
• Inclusive definition
• Income is a periodical monetary return with
some sort of regularity.
• May be recurring or non-recurring
• Defined as increase in wealth which comes to
a person during a fixed period of time.
 Income Sec. 2 {24}
• Regular and Definite source
• Tainted or Illegal Income
• Disputed Income
• Pin Money
• Income must come from Outside
• Income in Cash or Kind
• Receipt basis or accrual basis
• Capital and Revenue Receipts
• Notional Income
 Gross Total Income
• Sum of Five heads of Income is Gross Total
Income
1. Salaries
2. Income from House Property
3. Profits and Gains of Business or Profession
4. Capital Gains
5. Income from Other Sources
 Significance of Heads of Income
• Income charged under a particular head
cannot be charged under any other head.
• Heads of Income is differentiated from
Sources of Income.
 Total Income
• Total income is gross total income as reduced
by the amount permissible as deduction under
section 80C to 80U.
 Computation of Total Income
Particulars Amount
Salaries ****
Income from House Property ****
Profits and Gains of business or Profession ****
Capital Gains ****
Income from other sources ****
Gross total Income ****
(Less ) Deductions u/s 80C to 80U ****
Total Income ****
• Rounding off of Income : The taxable income
shall be rounded off to the nearest multiple of
ten rupees.
• Rounding off of taxes: The tax payable shall be
rounded off to the nearest ten rupees.
Income before rounding off Income after rounding off
7,80,514.99
7,80,515.00
7,80,515.99
7,80,519.99
7,80,524.99
Income before rounding off Income after rounding off
7,80,514.99 7,80,510
7,80,515.00 7,80,520
7,80,515.99 7,80,520
7,80,519.99 7,80,520
7,80,524.99 7,80,520
• Income tax is an annual tax on income.
• Income of PY is chargeable to tax in the next
following AY at the tax rates applicable for the
AY. (subject to 5 exceptions)
• Tax rates are fixed by the annual Finance Act,
not by the Income tax Act.
• Tax is charged on every person.
• Tax is levied on the total income of every
assessee computed in accordance with the
provisions of the act.
Diversion and Application of Income
• Diversion of Income: Where by virtue of an
obligation, income is diverted before it
reaches to the assessee, it is known as
Diversion of Income and it is not taxable.
• Application of Income: means to discharge an
obligation (which is gratuitous or self-
imposed) after such income reaches the
assessee and hence it is taxable.