TAXATION AND JURIDICAL PERSONALITIES

(LW 4918)

PROJECT
ON

“PROCESS OF CALCULATING THE TAX LIABILITY

OF AN INDIVIDUAL”

SUBMITTED TO: SUBMITED BY:

ANAMIKA
Prof. MR. BINEET KEDIA 1682014
BBA.LLB(a)
8th Sem.
[email protected]
 What is tax liability?

Tax liability is the amount of money you owe to tax authorities, such as your local,
state, and federal governments (e.g., the IRS). When you have a tax liability, you have
a legally binding debt to your creditor. Both individuals and businesses can have tax
liabilities.

The government uses tax payments to fund social programs and administrative roles.
For example, Social Security tax funds retirement and disability benefits.

Tax liabilities are current liabilities. Current liabilities are short-term debts you must
pay within a year. Generally, you incur short-term liabilities from normal business
operations. Report tax liabilities with other current debts on your small business
balance sheet.

Failing to pay a tax liability can result in back taxes, a tax lien, penalties, interest, and
even jail time. If you can’t pay taxes due to money constraints, you might be able to
work out a payment arrangement.

What do you mean by heads of income?

Profits and Gains of Business or Profession: This1 head of income broadly covers
income earned by a person as a result of some business or professional set-up by him

Sources of income:

1.) Earned Income

Earned Income is the money that you earn by doing something or by spending
your time e.g. the money that you make in your job, the salary you get by working
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 for someone else. Now, this is where your quality of life will suffer the most,
because you will be trading your time for money. In most cases, jobs will pay you
just enough to stay over broke. Quite obviously JOB means Just Over Broke.
Now, the reason why most people are not able to think beyond earning money
through a job is because Job will provide you with a 'relatively' comfortable zone.
Different Heads of income of an indivisidual

2.) Profit Income

Money that you earn by selling something for more than it costs you to make. e.g.
Businesses selling their goods at a profit, whether at the retail or wholesale level, as
distributors or manufacturers. You need to be an entrepreneur for earning profits

3.) Interest Income

'Interest Income' money is the money you get as a result of lending your money to
someone else to use, e.g. putting it in the bank, lending it to the government in the
form of buying Treasury Bills etc.

4.) Dividend Income

This income gets even better than Interest Income. It is equally passive and not
only that, it also makes you a shareholder of a company. This is the money that you
get as a return on shares of a company you own. For e.g. the dividend that most
companies announce at the year end. The better this stream of income sounds, the
more ignored and neglected is this source of income.

5.) Rental Income

This is the money that you get as a result of renting out an asset that you have, like
a house, or a building. Now, this income is even better but there are inherent
drawbacks of this kind of income over the above 4 types of incomes.

6.) Capital Gains

This is the money that you get as a result of increase in value of an asset that you
own. is your capital gain. There are different tax laws in different countries on
capital gains. However, there are ways to come around taxes as well.
7.) Royalty Income
This is the money you get as a result of letting someone use your products, ideas, or
processes. They make all the revenues, they do all the hard work and you get a
small percentage of what ever they earn.

 Heads of income

1.) Income for salary include wages, pension, annuity, gratuity, fees, commission,
profits, leave encashment, annual accretion and transferred balance in recognised
Provident Fund (PF) and contribution to employees pension account.

2.) Rental Income from properties owned by a person other than those which are
occupied by him are charged as income from house property. If property is vacant
then a notional income is included under this head.

3.) Income from business or profession includes profit/loss from a business entity or
a profession, any interest, salary or bonus to a partner of a firm.

4.) Income from capital gains includes long term capital gains (LTCG) and short
term capital gains (STCG) on sale of any capital assets.

5.) Income from other sources includes interest on bank deposits and securities,
dividend, royalty income, winning on lotteries and races and gifts received among
others.
PROCESS OF CALCULATING THE TAX LIABILITY UNDER :

1. Taxation of Income under Business/Profession;

 Business: It referred to any economic activity carried for earning profits.

Economic activity refers to any trade, Commerce, Manufacturing Activity,
Trading Activity or any other concern in nature of all.It is not compulsory for
continuation of similar transaction or a series of transaction or carried the
business permanently.
 Profession: It refer that a person provides services against their skill &
knowledge like that of CA, Doctor, Engineer, etc. In Profession a person can earn
their livelihood through their intellectual or manual skills.

Basis of Charge of Income Under Business/Profession:

There are some of the income which are taxable under the head 2“Profit & gains of
Business or Profession”

 The profit & gains earned by the assesses from the business/profession carried
at any time during the previous year.
 If any person had receive/due any compensation or payment managing the
whole or substantially the whole of the affairs of an Indian Company, in
connection with the termination of his management or the modification of the
terms & conditions relating thereto;
 Income derived from performing specific services for its member by trade,
profession or any other similar association.
 Any perquisite or benefit arising from business or profession, whether
convertible into money or not.
 Any Interest income,Commission,Salary or bonus due or received by any
partner from that Company.
 Any amount received under a Key man Insurance Policy including the
amount allocated by way of bonus on such policy.
 Income received from any speculative transaction.

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  Any profit received from the transfer of Duty Entitlement Pass book scheme.
 Any Profit Received on the transfer of the Duty Free Replenishment
Certificate.
 Any profit received on sale of a license granted under the Imports (Control)
Order, 1955, made under the Imports and Exports (Control) Act, 1947 (18 of
1947)
 Any amount received or receivable,in cash or in kind under such agreements:

If a person not carrying out any activity in relation to any business OR, If a person is
not sharing any Know-how,patent, copyright, trade-mark, licence, franchise or any
other business or commercial right of similar nature

Method of Accounting:

Under Sec.145, income under Business & Profession shall be computed in accordance
with the method of accounting regularly followed by the assesses. The two recognized
methods are Cash system and Mercantile system of accounting.

 Cash System: In this system,all expenses & income are booked when they
receive.
 Mercantile System of Accounting : All Income & expenses are booked on
accrual basis.
 Speculative Business: Speculative business is one which carries speculative
transaction. It is consider to be a separate business.
 Speculative Transaction: These are those transaction which in which their is a
contract for sale/purchase of shares,stock.

Computation of Income:

 Deductions not Admissible:

1. Losses due to illegal trade practices.

2. Expenses not related to the business.

3. Expenses related to Capital Assets

4. Loss on sale of shares.

5. Future Anticipated Losses

6. Advance paid for commencement of new business which is not established

 Computation of Business Profits:

Business Profit should be calculated through profit & Loss Account.In Profit & Loss
Account there are some expenses which are partly allowed or disallowed under
Income Tax Act. On the Credit side of Profit & Loss A/c there are some Income
which are tax free or not taxable under the head Business/Profession.

Balance as per P & L A/c (+) Profit

(-) Loss Amount

Add Expenses claimed but not allowed under the Act

1. All Provisions & Reserves (Provision for Bad Debt/Depreciation/Income)

2. All Taxes (Except Income Tax, Wealth Tax etc.) except sales Tax,Excise

3. Duty,& Local Taxes of premises used for business.

4. All Charities & Donations

5. All personal Expenses

6. Any type of Fine / Penalty

7. Speculative Losses

8. All Capital Losses

9. Any Difference in Profit & Loss Account

10. Previous year Expenses

11. Rent paid to self

12. All expenses related to other head of Income

13. Payments made to the partner (in terms of salary,commission or any other way.)

14. All capital expenses except scientific research

15. Loss by theft

16. Expenses on Illegal Business

17. Rent for Residential portion

18. Interest on Income tax, TDS etc

Total of these Items is added to the profit or adjusted from loss

While calculating the Profit/Loss of Professional all receipt are recorded as their
Income & irrespective of that all the expenses paid in providing the services,office
expenses are deducted from the Income.
2. Income Chargeable under The Head Salaries

Charging Section of Salary:-

As per sec 15 of the Income Tax Act 1961 3salary is taxable:-

a) On due or receipt basis whichever is earlier

b) Any arrears of salary received are fully taxable in the year of receipt subject to
relief u/s 89(1).

Salary in common parlance means any amount paid by an employer to his employees
in lieu of services rendered by them. However income tax act 1961 defines the term
“ salary” u/s 17(1) to include the following monetary as well as non monetary
payments :-

a) Wages

b) Annuity or pension

c) Any Gratuity

d) Any fees, commission, perquisite or profits in lieu of or in addition to any salary or

wages

e) Any Advance of Salary

f) Leave Encashment

g) Employers contribution to provident fund in excess of 12% of Salary

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h) The contribution by the central government or any other employer in the Previous
year to the account of an employee under a pension scheme u/s 80CCD

All wages received in consideration of services rendered are taxable under the Income
Tax Act, 1961.

Taxability of Annuity

 Annuity received from present employer is taxed as “ Salary”

 Annuity received from past employer is taxed as “ Profits in Lieu of Salary”
 Annuity received from a person other than employer is taxed under “Income
from Other Sources”, such as “LIC ANNUITY”.

All annuities received are chargeable to tax and there is no exemption whatsoever.

Taxability of Pension

Pension is any amount of periodic payment made by an employer to the employee in

consideration of past service payable after retirement.

Pension is of two Kinds:-

Uncommuted Pension- Uncommuted pension is pension received periodically. It is

fully taxable in the hands of both government and non government employees.

Commuted Pension- Commuted pension means lump sum amount taken by

commuting the whole or part of the pension

 Commuted pension received by employees of the central government/local

authorities/ statutory corporation/members of the defence services is fully
exempt from tax.
 Commuted pension received by non government employees is taxable subject
to exemption u/s 10(10A) of the Income Tax Act, 1961 as under:-

a) Where the employee has also received gratuity

b) Where the employee has not received gratuity

Taxability of Gratuity

Gratuity is a voluntary payment made by an employer in appreciation of services

rendered by an employee.

 Any death cum retirement gratuity received by Central/State government

employees is fully exempt.
 Any gratuity received by an employee during the period of service is fully
taxable.

 Gratuity received by Non government Employee

Gratuity received by non government employees is fully taxable under the income tax
act 1961 subject to exemption provided by sec 10(10) which is described as under:-

Where the employee is covered by payment of gratuity act 1972:-

Least of the following is exempt:-

a) Rs 20,00,000

b) Gratuity received

c) 15/26 * Last drawn salary * no of completed year of service or part thereof in

excess of 6 Months (Where an employee has worked for 8 years 7 months, the
completed year of service shall be considered 9)

Salary for this purpose means: Salary + Dearness Allowance

Least of the following is exempt:-

 Taxability of Advance salary

Salary is taxable on due or receipt basis whichever is earlier. As such if any salary has
been received by an assessee in advance, the same is taxable in the year of receipt.

 Taxability of Leave Encashment

Leave encashment means the amount received by an employee from his employer on
account of encashment of un availed leaves standing to the credit of his account.

 Leave salary received by an employee during the period of service is fully

taxable.
 Leave salary received by a government employee at the time to retirement is
fully exempt from tax.
 Maximum entitlement for leaves under the income tax law is 30 per year.
 In case of government employees, leave encashment is taxable subject to the
exemption provided u/s 10(10AA).

As per the provisions of sec 10(10AA), least of the following is exempt from leave
encashment:-

a) Rs 3,00,000

b) Leave salary actually received

c) 10 months salary (on the basis of average salary of last 10 months preceding date of
retirement)

d) Leave due * Average salary p.m.

30 Days

(Average salary to be calculated on the basis of average salary of last 10 months

preceding date of retirement)

(Note: Salary for this purpose means Salary + Dearness allowance ( If provided in
terms of employment for retirement benefits) + commission as a % of turnover.)
 4
Gifts not chargeable to tax [Sec. 56(2)(vii)]

Any sum of money or property received by any person [on or after 01-04-2017] in the
following circumstances shall not be chargeable to tax:

a) Gifts received from relatives;

b) Gifts received by an individual on occasion of his/her marriage;

c) Gifts received by way of Inheritance/will;;

d) Gifts received in contemplation of death of the payer;

e) Gifts received from any local authority;

f) Gifts received from any fund, foundation, university, educational institution,

hospital, medical institution, any trust or institution referred to in Section 10(23C);

g) Gifts received from any trust or institution registered under section 12A/1

h) Share received as a consequences of demerger or amalgamation of a company

under clause (vid) or clause (vii) of section 47, respectively.

i) from such class of persons and subject to such conditions as may be prescribed

** ‘Relative’ shall mean:

1. Spouse of the individual

2. Brother or sister of the individual

3. Brother or sister of the spouse of the individual

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4. Brother or sister of either of the parents of the individual

5. Any lineal ascendant or descendant of the individual

6. Any lineal ascendant or descendant of spouse of the individual

7. Spouse of the person referred in point 2-6 above

 Deductions [Sec. 57]:

The following expenditures are allowed as deductions from income chargeable to tax
under the head ‘Income from Other Sources’:

S.N. Section Nature of Income Deductions allowed

1. 57(i) Dividend or Interest on Any reasonable sum paid

securities by way of commission or
remuneration to banker
or any other person for
purpose of realizing
dividend (other than
dividends referred to
in section 115-O) or
interest on securities

2. 57(ia) Employee’s If employees’

contribution towards contribution is credited
Provident Fund, to their account in
Superannuation Fund, relevant fund on or
ESI Fund or any other before the due date
fund setup for the
welfare of such
employees
3. 57(ii) Rental income letting Rent, rates, taxes,
of plant, machinery, repairs, insurance and
furniture or building depreciation etc.

4. 57(iia) Family Pension 1/3rd of family pension

subject to maximum of
Rs. 15,000.

5. 57(iii) Any other income Any other expenditure

(not being capital
expenditure) expended
wholly and exclusively
for earning such income

6. 57 (iv) Interest on 50% of such interest

compensation or (subject to certain
enhanced compensation conditions)

7. 58(4) Proviso Income from activity of All expenditure relating

owning and to such activity.
maintaining race
horses.

Expenses not deductible [Section 58]:

1) 58(1)(a)(i) Personal expenses

2) 58(1)(a)(ii) Interest chargeable to tax which is
payable outside India on which tax has
not been paid or deducted at source

3) 58(1)(a)(iii) ‘Salaries’ payable outside India on

which no tax is paid or deducted at
source

4) 58(1A) Wealth-tax

5) 58(2) Expenditure of the nature specified

in section 40A

6) 58(4) Expenditure in connection with

winnings from lotteries, crossword
puzzles, races, games, gambling or
betting
4. Income Chargeable under The Head Capital Gain

Any Income derived from a Capital asset movable or immovable is taxable under the
head 5Capital Gains under Income Tax Act 1961. The Capital Gains have been
divided in two parts under Income Tax Act 1961. One is short term capital gain and
other is long term capital gain.

1.) Short Term Capital Gains : If any taxpayer has sold a Capital asset within 36
months and Shares or securities within 12 months of its purchase then the gain arising
out of its sales after deducting therefrom the expenses of sale(Commission etc) and
the cost of acquisition and improvement is treated as short term capital gain and is
included in the income of the taxpayer.

The deduction u/s 80C to 80U can be taken from the income from short term capital
gain apart from the short term capital gain u/s111A

 Taxability of short term capital gains: Section 111A of the Income tax Act
provides that those equity shares or equity oriented funds which have been sold in
a stock exchange and securities transaction tax is chargeable on such transaction
of sale then the short term capital gain arising from such transaction will be
chargeable to tax @10% upto assessment year 2008-09 and 15% from assessment
year 2009-10 onwards.

The short term capital gains other than those u/s 111A shall be added to the
income of the assessee and no such benefit is available on short term capital gains
arising in other cases and they will be taxed normally at slab rates applicable to the
assessee.

If an assessee does the business of selling and purchasing shares he cannot take
advantage of section 111A or section 10(38). In this case income will be treated as
business income.

 Capital gains in case of depreciable assets : According to section 50 of Income

tax act if an assessee has sold a capital asset forming part of block of assets

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 (building, machinery etc) on which the depreciation has been allowed under
Income Tax Act, the income arising from such capital asset is treated as short
term capital gain.
 Capital asset transferred by the partner to the partnership firm: As per
section 45(3) of the Income Tax Act 1961 if any partner in a firm transfers his
asset to the firm then the capital gain on such asset as arising to the partner shall
be calculated by presuming the sale value of such asset as is shown in the books
of accounts of the firm and not the market value of the asset.

whether such gain is treated as long term or short term will be decided as below:

a) If the depreciation has been claimed on the asset transferred to the firm then in
view of section 50(2) the gain arising there from will be treated as short term capital
gain.

b) If the partner has been the owner of the asset for more than 36 months and no
depreciation has been claimed on it then the gain arising from such asset shall be
treated as long term capital gain.

 Capital gain in case of Dissolution of a Firm: As per section 45(4) of the

Income Tax Act where any partnership firm or AOP or BOI is dissolved and the
Capital assets of the such firm or AOP or BOI are transferred by way of
distribution of assets to the partners at the time of Dissolution in such case the
gain arising from such transfer to the partners will be treated as capital gain and
the firm will be liable for paying tax on it in the year of distribution of the assets.

For the purpose of section 48 the fair market value of the asset on the date of such
transfer shall be deemed to be the full value of the consideration received or
accruing as a result of the transfer.

2.) Long Term Capital Gain: A Capital Asset held for more than 36 months and 12
months in case of shares or securities is a long term capital asset and the gain arising
therefrom is a long term capital gain. Long term capital gains are arrived at after
deducting from the net sale consideration of the long term capital asset the indexed
cost of acquisition and the indexed cost of improvement
of the asset.

The Central govt notifies cost inflation index for every year. The indexed cost of
acquisition is calculated by multiplying the actual cost of acquisition with C.I.I of
the year in which the capital asset is sold and divided by C.I.I of the year of
purchase of capital asset. Similarly the indexed cost of improvement can be
calculated by using the C.I.I of the year in which the capital asset is improved.
Where the capital asset was acquired before the year 1981 then the cost of
acquisition shall be the fair market value or the actual cost of its acquisition which
ever is higher. The Fair market value of a capital asset can be known by the
valuation of the registered valuer.

 Taxation of Long term capital gains: The long term capital gains are taxed @
20% after the benefit of indexation as discussed above. No deduction is allowed
from the long term capital gains from section 80C to 80U. But in case of
individual and HUF where the income is below the basic exempted limit the
shortage in basic exemption limit is adjusted against the long term capital gains.

Section 112(1) provides that any capital gain arising from a long term capital asset
being the listed securities which are sold outside the stock exchange the long term
capital gain shall be calculated on such securities as below:

a)Tax arrived at @ 20% on such long term capital gain after indexation u/s 48 or
b) Tax arrived at @ 10 % on such long term capital gain without indexation
Whichever is less.

The long term capital gain on equity shares or units of equity oriented mutual fund
which are sold in the stock exchange and on which securities transaction tax is paid,
is exempt u/s 10(38).

Section 50C: Section 50C has been introduced with effect from 01-04-2003 and is a
very important section while calculating capital gain on land &
building. Section 50C provides that Where the consideration received
or accruing as a result of the transfer by an assessee of a capital asset,
 being land or building or both, is less than the value adopted or
assessed or assessable by stamp valuation authority) for the purpose of
payment of stamp duty in respect of such transfer, the value so adopted
or assessed or assessable shall, for the purposes of section 48, be
deemed to be the full value of the consideration received or accruing as
a result of such transfer.

It means that the capital gain will be calculated by considering the sale value of the
capital asset as equal to the value adopted or assessed by the stamp valuation authority
for that capital asset if the actual sale value is less than the value assessed by stamp
valuation authority.

If the assessee claims that the value adopted by the stamp valuation authority exceeds
the fair market value then the assessing officer may refer to the valuation officer for
valuation of the fair market value of the asset. If the fair market value declared by the
valuer is more than the value adopted or assessed or assessable by the stamp valuation
authority, the value so adopted assessed or assessable by the stamp valuation authority
will be taken as full value of consideration of the capital asset.
5. Taxation of Income from House Property

Income from 6House Property covers the rent earned from the House property which
is chargeable to tax. Sometimes, the owner may have to pay tax on ‘deemed rent’ in
case the property is not let out or vacant. The income from house property would be
taxable if it satisfies the following three essential conditions:

 The assessee is the owner of that property

 The property must consist of house, buildings and/or land.
 The property may be used for any purpose except used by the owner for the
purpose of running his business or profession.

 Who is owner for Income from House Property Computation

It is legal owner who is chargeable to tax in respect of property income. Transfer of

house property by the individual without adequate consideration to his or her spouse
or to his minor child is considered as “deemed owner”of the house property.

 Steps involved in the Computation of Income from House Property

(1) Computation of Gross Annual Value

(2) Computation of Net annual Value

(3) Computation of Deduction available U/s 24

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 Basis of computing of Income from House Property:

Income from House property is computed as under :

Particulars Amount (Rs)

Gross Annual value **********
Less : Municipal Taxes (*********)

(It is deductible when it is born by the owner and

actually paid by him during the year. )

Net Annual value **********

Less : Deduction U/s 24
(i)Standard Deduction @ 30% (Section 24(a)) (*********)
(ii)Interest on borrowed Capital (Section 24(b)) (*********)
Income from House Property **********

 Deductions against Income from House Property

Following two types of deductions from annual value are available u/s 24 of the
Income Tax Act to arrive at the taxable income from HP.

1. Standard deduction @ 30% of Net Annual value (Note 2)

2. Deduction of Interest on borrowed capital

(Note 2: No other deduction towards expenditure such as insurance, repairs,

electricity, water supply etc. is allowed.)
 Taxability is based on nature of occupancy of House Property

a. Income from self occupied property (SOP) :

1. A self occupied property is one which is owned and used by the owner for his
own residential purposes.

2. This is to be occupied by the owner throughout the year. Thus, a property or a

house not occupied by the owner for his/her residence cannot be treated as a
self-occupied property

3. No other benefit is derived from such property

 Exception to self-occupied house property :

a.) There is an exception to the above rule. If the following conditions are satisfied
even though the property can be treated as self-occupied:

1. If the tax payer owns a property

2. If the property mentioned above is not let-out at any time during the year. (The
property should not be letout in the whole year or any part of the year )

3. If such property could not be occupied by the owner, by reason of the fact that
owing to his employment, business or profession carried on at any other place

4. No other benefit is derived from such property.The annual value of the self
occupied property will always be Nil. No other deduction will be allowed from it
except interest to the extent of Rs 2,00,000 .The interest will be considered as loss
under the head income from house property and adjustable with other source of
income under the same head or in another head. Only one house can be declared as
self-occupied property.

b.) Income from Let out House Property:

In case the property is let out, owner will receive rent from your tenant(s). This rent
income will be taxed as your income from house property. In short, rental income
received by the owner from letting out the house property will be taxed under income
from house property. Some times second house property (owned by the owner) is
vacant (not let out), in those cases rent will not be received but same would be
considered as deemed let-out.
 BIBLIOGRAPHY

 Income Tax Act, 1961

 https://taxguru.in/

 Guide to income tax on Salaries

 Taxation law and practise