BUSINESS TAXATION AND PRACTICE

INTRODUCTION

TAXATION IN INDIA
Taxation is not merely considered as a tool to raise revenue . It is effectively utilized as a lever to direct the flow of our scarce resources in the desired channels of investments

TAXATION IN INDIA
India has a well developed tax structure with a three tier federal structure, comprising 1. 2. 3. The Union Government The State Government The Urban/Rural Local Bodies

TAXATION IN INDIA
1. Eg: The Union Government Income tax(Except tax on Agricultural Income) Customs duies Central Excise & Sales Tax Service Tax.

TAXATION IN INDIA
2. The State Government Eg: Sales tax( tax on intra-state sale of goods) Stamp Duty State Excise Land Revenue etc.,

TAXATION IN INDIA
3. The Urban/Rural Local Bodies Eg: Tax on properties Octroi, etc

TAXATION IN INDIA
Two major categories of Taxes are 1. 2. Direct Taxes - ( Administered by CBDT) Indirect Taxes

INCOME TAX
The levy of income tax in India is governed by the Income-tax Act, 1961. This Act came into force on the 1st day of April, 1962. The income tax is to be charged at the rate or rates fixed for the year by the annual Finance Act.

Section 2 - DEFINITIONS
Section 2(1A) defines Agricultural Income Agricultural Income : A. It may be broadly classified as

Agricultural rent or revenue Section 2(1)(a) Any rent or revenue derived from land which is situated in India and is used for agricultural purposes.

Agricultural Income
B. Income from agricultural produce and from the processing of the produce to make it marketable Section 2(1)(b) Any Income derived from such land by agriculture or by the process employed to render the produce fit for the market or by sale of such produce by a cultivator or receiver of rent in kind. C. Income from buildings Section 2(1)(c)

Agricultural Income
C. Income from buildings Section 2(1)(c) Any income derived from any building provided the following conditions are satisfied. 1. The building is in the immediate vicinity of the agricultural land 2. It is occupied by the cultivator or receiver of rent or revenue. 3. It is used as a dwelling house or store house or outhouse. 4. The land is assessed to land revenue or it is not situated within the specified area

Agricultural Income
The following items of income shall be considered as agricultural income. 1. Compensation received from an insurance company for damage of crop or garden. 2. Compensation received for being kept out of cultivation of agricultural land. 3. Income from sale of replanted trees of a forest 4. Interest on capital received by a partner from the firm engaged in agricultural income, etc.

Non Agricultural Income

The following items of income shall not be considered as agricultural income. 1. Income from sale of trees of spontaneous growth 2. Interest on arrears of rent on agricultural land 3. Dividend received from a company involved in Agriculture 4. Rent of the site of a flour mill, etc

Assessee - Section 2(7)

The term assessee is defined as meaning a person by whom any tax or any other sum of money(includes penalty or interest) is payable under the IT Act and it includes i) every person in respect of whom any proceeding has been taken under the Act for the assessment of his income or the income of any other person. ii) a person who is deemed to be an assessee under any provision of the Act.

Assessment Section 2(8)

The term assessment means computation of tax and procedure for imposing tax liability.

Person - Section 2(31)

It includes a) An individual b) A Hindu Undivided family c) A Company d) A firm e) An Association of persons or Body of individuals, whether incorporated or not f) A local authority, and g) Every artificial juridical person, not falling within any of the preceding sub-clauses.

Individual , HUF & AOP

Individual - The term individual means only a natural person ie., a human being. HUF - It consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters. AOP - When persons combine together for promotion of joint enterprise they are assessable as an AOP when they do not in law constitute a partnership

BOI & Firm

BOI - The expression BOI denotes the status of persons like executors or trustees who merely receive income jointly and who may be assessable in like manner and to the same extent as the beneficiaries individually. Firm - Under the Act the term firm, partner and partnership have the same meanings as assigned to them in the Indian Partnership Act.

Local Authority & Artificial person

Local Authority means a municipal committee, district board, body of port commissioners or other authority legally entitled to or entrusted by the Government with the control or management of a municipal or local fund. Artificial person - It is intended primarily to refer to private religious trusts.

Company Section 2(17)

Company - means i) any Indian company ii) any body corporate incorporated by or under the laws of a country outside India - foreign company iii) any institution, association or body which is or was assessable or was assessed as a company for any assessment year under the Indian IT Act, 1922 or for any assessment years commencing on or before 1st April, 1970 under the present Act

Company Section 2(17)

iv) any institution, association or body, whether incorporated or not and whether Indian or nonIndian which is declared by a general or special order of the CBDT to be a company.

Assessment Year Section 2(9)

The expression Assessment year means the period of twelve months commencing on the 1st day of April every year It is also known as income tax year It is a financial year immediately succeeding the relevant previous year.

Previous year - Section 3

Section 3 of IT Act defines previous year to mean the financial year immediately preceding the assessment year. It is the financial year in which the income is earned. In the case of a business or profession newly set up or a source of income newly coming into existence, the previous year shall be the period beginning with the date of setting up of the business or profession or the date on which the new source comes into existence and ending with 31st March of the said financial year.

INCOME - Section 2 (24)

According to the definition, income includes the following items of receipts. (i) Profits and gains (ii) dividends (iii) the value of any benefit by way of perquisite or profit in lieu of salary taxable as part of salaries under Section 17.

INCOME - Section 2 (24)

(iv) the value of any benefit or perquisite, whether convertible into money or not, obtained from a company either by a director or by a person having substantial interest in the company or by a relative of the director or of such person and any sum paid by any such company in respect of any obligation which, but for such payment, would have been payable by the director or other person aforesaid.

INCOME - Section 2 (24)

(v) any compensation or other payment chargeable to tax under Section 28(ii) or any amount chargeable to tax in the hands of a trader, professional or similar association under Section 28(iii) and the deemed profits assessable under Section 41 and 59 of the Act; (vi) the value of any profit or perquisite taxable as business income under Section 28(iv) (vii) any capital gains chargeable to tax under Section 45

INCOME - Section 2 (24)

(viii) the profits and gains of any business of insurance carried on by a mutual insurance company or by a co-operative society computed in accordance with Section 4 or any surplus taken to such profits and gains by virtue of the provisions contained in the First Schedule to the Act; (ix) any gratuity due or the commuted value of any annuity paid under Section 280D;

INCOME - Section 2 (24)

(x) voluntary contributions received by a trust created wholly, or partly for charitable purpose or by an institution established wholly or partly for such purposes, not being contributions make with a specific direction that they shall form part of the corpus of the trust or institution; and (xi) any winnings from lotteries, crossword puzzles, races including horse race, card games and other games of any sort or form, gambling or betting of any form or nature whatsoever.

Classification of Income Section 14

Income chargeable to income tax shall be classified under five heads of income for the purpose of computation of taxable amount subject to certain exemptions and deductions. a) Salaries - Sec 15 to17 b) Income from house property - Sec 22 to 27 c) Profits and gains of business or profession Sec 28 to 44D d) Capital gains Sec 45 to 55A e) Income from other sources - Sec 56 to 59

Gross Total Income

According to Sec 80B of the IT Act, Gross Total Income means total income computed in accordance with the provisions of the IT Act, before making any deduction under Chapter VIA.

Gross Total Income

The aggregate of taxable income under all the five heads of income, together with clubbed income/ deemed income and after giving effect to set off of current year and brought forward losses shall be known as Gross total Income.

Total Income - Section 2(45)

Total Income means the total amount of income referred to in Section 5, computed in the manner laid down in the IT Act. Gross Total Income reduced by Chapter VIA deductions results in Total Income

Capital/Revenue receipts
A receipt referable to fixed capital would be a capital receipt, whereas a receipt referable to circulating capital would be a revenue receipt. Capital receipt is exempt from tax while the revenue receipt is taxable

Capital/Revenue receipts
The distinction between capital receipt and a revenue receipt should be perceived based on the facts and circumstances of each case. The capital or revenue nature of receipt does not depend on factors such as 1. the basis of measurement 2. the quantum and periodicity 3. the nomenclature used by the parties 4. nature of the transaction etc.,