DIRECT

TAX – I

DIBRUGARH UNIVERSITY

BCOM SEMESTER 5
DISCLAIMER: Tax laws are subjected to amendments

Unit 1: INCOME TAX LAW

INTRODUCTION - CONCEPT OF TAX
Tax is a compulsory payment to be made by every eligible
individual to the government. Evasion of tax, resistance to pay
tax or avoidance of payment of tax is punishable offence.
Payment of tax by an individual does not bring back any kind of
direct benefit in return to him.
The public authorities and government require funds for
various social welfare activities such as defense, development
of nation and provision of infrastructural facilities. They collect
tax to finance them.
All the taxes can be divided into two categories –
A. Direct Taxes – Tax levied by government on income and
wealth of household of individual and business
B.Indirect Taxes – Tax levied by government on goods and
services which are passed on to ultimate consumer.

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DISCLAIMER: Tax laws are subjected to amendments

OVERVIEW OF INCOME TAX LAW IN INDIA

Under the constitution of India, Central Government has been
empowered to levy and collect Income Tax under ‘The Income
Tax Act, 1961’.
‘The Income Tax Act, 1961’ is applicable to whole of India and it
became applicable from 1/4/1962.
Income Tax is a direct tax, i.e, it is to be paid by the person on
whom it is imposed.
In India, Income Tax is payable by every person on his total
Income which is calculated on the basis of residential status.
Income Tax is payable at the rate of tax applicable for
assessment year on the income earned during previous year.
‘The Income Tax Act, 1961’ has 23 chapters and 298 sections in
all.

LEVY OF INCOME TAX

Taxes in India are levied by Central Government and State
Government. Income Tax is levied by Central Government. GST
is levied simultaneously by Central and State Government in
case of Intra State transactions. The authority to levy a tax is
derived from the Constitution.

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DISCLAIMER: Tax laws are subjected to amendments

Levy of Income tax on the basis of nature of Income –

a. Indian Income – Indian Income is an :
Income which is earned in India whether or not
received in India
Income which is received in India whether or not
earned in India
Indian Income is taxable for Resident and ordinary resident
[ROR], Resident and non ordinary resident [NOR] and Non-
resident [NR].

b. Foreign Income – Income which is earned and received

outside India. Foreign Income is taxable for Resident and
ordinary resident [ROR]. For Non-Resident [NR] foreign
income is not taxable in India.
For Resident and non ordinary resident [NOR] only the
income of Business and Profession is taxable in India if
Business is controlled from India or Profession is setup in
India.
To avoid the situation of double taxation, India has entered into
Double Taxation Avoidance Agreement [DTAA] with the
government of foreign countries.

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DISCLAIMER: Tax laws are subjected to amendments

INCOME
Income refers to the amount earned by an individual.
As per the provisions of relevant sections of Income Tax Act,
1961, Income includes –
A. Profits and Gains

B. Dividend

C. Capital Gains

D. Voluntary contributions received by trust

E. Salary and benefits given to an employee and partner

F. Gifts received from person other than relative above the

amount of rupees 50000

G. Interest Income

H. Commission

I. Amount of winnings from lottery, betting, card games,

horse race or any other similar sort

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DISCLAIMER: Tax laws are subjected to amendments

J. Subsidy, grant or cash incentive other than those received

from Government

K. Donations by nonprofit organization

L. Earnings from Rent, royalty, amount received by keyman

insurance policy and others

DEFINITION: ASSESSEE
Assessee means a person by whom any tax or any other sum of
money is payable under the Income Tax Act, 1961.
Assessee shall include the following –
A. Representative Assessee
B. Every person whose assessment has been started either
for his own income or of any other person from whom he
is liable.
C.Assessee in default
Assessment is the procedure by which income of assessee is
ascertained by the assessing officer.

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DISCLAIMER: Tax laws are subjected to amendments

ASSESSMENT YEAR
Assessment Year [AY] is a period of 12 months commencing
from 1st date of April every year.
According to the Income Tax Act, 1961, Income is earned during
one financial year is disclosed to the Income Tax Department in
another financial year.
The year in which the income is disclosed to the Income Tax
Department is called Assessment Year. Tax is paid at the rate of
tax applicable for Assessment Year.
For Example – Mr. M earned Rs.600000 during 2017-2018 and
discloses the same during 2018-19 then Assessment year is
2018-19

PREVIOUS YEAR [PY]

Previous Year [PY] means the financial year immediately
preceding the Assessment Year [AY].
Income is earned during one financial year is disclosed to the
Income Tax Department in another financial year.
Thus, the year in which income is earned is called Previous Year
[PY]

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DISCLAIMER: Tax laws are subjected to amendments

For Example – Mr. M earned Rs.600000 during 2017-2018 and

discloses the same during 2018-19 then Previous year is 2017-
18.

PERSON
As per the provisions of relevant sections of the Income Tax
Act, 1961, persons shall include the following –
A. Individual – Individual means a natural person, i.e, human
being. It shall include males and females, major and minor,
human being with sound or unsound mind. It shall also
include Sole Proprietor.
B. Hindu Undivided Family [HUF] – HUF is family business
controlled by the head of the family called the Karta.
C. Company – Company is an artificial person having legal
entity. Company shall include both Indian company and
foreign company.
D. AOP and BOI – AOP [Association of Persons] is a voluntary
association of two or more persons who come together for
a particular activity or particular time period for a
particular venture.
BOI [Body of Individuals] is a group of individual formed
by Income Tax Officer for the purpose of Income and tax
liability calculation. It must be noted that BOI cannot be
formed voluntarily.

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DISCLAIMER: Tax laws are subjected to amendments

E. Local Authority – Local Authority includes municipality,

Municipal Corporation, panchayat or any other body which
has the responsibility of maintaining the area and control
and management of funds of government.
F. Artificial Judicial Persons – It includes all the categories of
persons not included in the above categories. It shall
include –
a. Political Parties
b. Religious Organizations
c. Not for Profit Organizations

CONCEPT OF INCOME
The concept of Income is inclusive and not exhaustive. Thus
apart from definition, there are some more concepts which will
fall under the category of Income. Thus it includes –
a. Cash Income and Kind Income – Cash Income is the
income earned which is received in monetary form
generally cash.
Kind Income is the income earned which is not received in
monetary form but in the form of benefits through goods
and services
Both Cash and Kind income are taxable.

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DISCLAIMER: Tax laws are subjected to amendments

b. Legal Income and Illegal Income – Legal Income is the

income earned through operations and activities which are
permitted by law.
Illegal Income is income earned through illegal activities
and operation such as black marketing, smuggling, etc.
Both legal and illegal incomes are taxable.

c. Receipt and Accrual – If income is taxed on accrual basis

than it is not taxed when it is received and vice versa.
d. Diversion of Income and Application of Income –
Diversion of Income is not taxable. Application of Income
is taxable.
Diversion of Income means when the income of assessee
is handed over to some other person and that person
hands over the income to assessee.

Application of Income means the when the income

received on the first instance by the assessee.
e. Capital Income and Revenue Income – Revenue receipts
refer to circulating capital. For example, Sale of stock in
trade is revenue receipt, payment received to compensate
loss of earnings, service charge etc.
Capital receipts refer to receipts from sale or extinction of
source of income. For example, Sale of parking lot in a
mall, sale of debenture, etc.

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CHARGE OF INCOME TAX

Section 4 is Charging Section of Income Tax under Income Tax
Act, 1961. It gives the right of collection of taxes to Central
Government.
The provision of this section provides that tax will be charged
on total income earned by an individual during previous year at
the rate of tax applicable for assessment year after allowing
deduction and exemptions.

RETURN OF TAX / TAX RETURN

Income Tax Returns must be filled every year by individuals and
business. Return of Income contains the details regarding the
income earned by individual or business classified and
categorized in a proper manner. The last dates of filling income
tax return as per Income Tax Act, 1961 is 31 August for
Companies, Political Parities, Schools, Colleges, HUF and
Partnership firm whose accounts were required to be audited
during the previous financial year and 30 September, for
individual and others.

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DISCLAIMER: Tax laws are subjected to amendments

GROSS TOTAL INCOME

Gross Total Income means the aggregate of incomes under the
five heads of income –
A. Income from House Property
B. Income from Business and Profession
C. Income from Salary
D. Income from Capital gains
E. Income from Other sources
Gross Total Income means sum total of income under five
sources of income.

SCOPE OF TOTAL INCOME

Total Income means the total amount of income computed
after allowing deduction/deductions from gross total income.
In other words, the amount arrived at after allowing deductions
under Sections 80C to 80U from the gross total income is
known as Total Income.
Total Income is also called Taxable Income.
The amount of total income is rounded off to the nearest of
rupees of 10 under Section 288A. Tax Liability is calculated on
the basis of total income.

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DISCLAIMER: Tax laws are subjected to amendments

RESIDENTIAL STATUS
The tax incidence of an assessee does not depend upon his/her
citizenship but on the basis of residential status during the
Previous Year [PY]. We use residential status for two purposes –
A. To calculate the total income
B. To determine the rate of tax to be used for calculation
of tax liability
Residential status of various types of Assessee –
A. Individual – An individual can be either resident or
nonresident.
Individual is resident if any one of the following basic
condition are satisfied:
Stay in India during the relevant previous year is
equal to or more than 182 days ;

OR

Stay in India during the relevant previous year is

equal to or more than 60 days and stay in India
during 4 previous years preceding relevant previous
year is equal to or more than 365 days;
Individual can either be further Resident and ordinary
resident [ROR] or Resident and non ordinary resident

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[NOR]. Individual is Resident and ordinary resident

[ROR] if he satisfies one of the basic conditions and two
additional conditions:
Individual is resident of India in atleast 2 out of 10
Previous Year [PY] from relevant Previous Year [PY]

AND

Individual stays in India is more than or equal to

730 days in 7 previous years preceding the
relevant previous year.
Individual is Resident and non ordinary resident
[NOR] is he is unable to satisfy any one or both of the
additional conditions.

B. Hindu Undivided Family [HUF] – Hindu Undivided Family

[HUF] is resident of India if full or partial control and
management of the business affairs of the HUF is located
in India. Management and control of HUF is in hands of
Karta and in some cases Defacto Karta. If Karta or Defacto
Karta has taken atleast one decision in India than HUF is
resident of India.
HUF is Resident and ordinary resident [ROR] if Karta
satisfies both the additional conditions:

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DISCLAIMER: Tax laws are subjected to amendments

Karta is resident of India in atleast 2 out of 10

Previous Year [PY] from relevant Previous Year [PY]

AND

Karta stays in India is more than or equal to 730

days in 7 previous years [PY] preceding the
relevant previous year.

C. Company – Company is resident of India if following are

satisfied:
If it is an Indian Company. Indian company can never
be non-resident.

It is a foreign company having place of effective

management [POEM] located in India. Place of
effective management [POEM] means the location
where decisions are taken regarding working of the
company. Decisions are taken by the Board of
Directors. Thus, place of effective management
[POEM] means the place where board meetings are
held. If all the Board meetings are done in India than
Company is resident of India but if atleast one

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decision is taken outside India than it is a Non

Resident.

D. Firm, Association of Person [AOP] and Body of Individual

[BOI]: Firm, Association of Person [AOP] and Body of
Individual [BOI] is resident of India if full or partial control
and management of the business affairs is located in India.

Firm, Association of Person [AOP] and Body of Individual

[BOI] is non-resident of India if full control and
management of the business affairs is located outside
India.

TAX LIABILITY
Tax Liability is the amount of debt by the individual,
corporation or any other entity to a taxing authority, i.e., the
Income Tax Department.
Tax Liability arises due to earning of profit, salary, rental
income and gain on sale of capital asset, etc. Tax Liability is
rounded off to nearest of Rupees 10 under Section 288B.
Tax Liability of an individual can be calculated on the basis of
slabs.

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DISCLAIMER: Tax laws are subjected to amendments

EXEMPT INCOME U/S 10

Income that does not form part of Total income is also called
income exempt from Tax. Exempt income under section 10 is as
follows –
A. Agricultural Income [Section 10(1)] – Agricultural income
from land located in India is totally exempt but shall be
included in case of certain companies for the purpose of
determining the rate of tax on non agricultural income.

B. Sum received by members from HUF [Section 10(2)] –

Share of profit received by members of HUF from HUF
shall be exempt.

C. Share of profit of a partner from the firm [Section

10(2A)] – The partners share in the total income shall be
exempt from tax if the firm is being assessed.

D. Exemption on Interest [Section 10(4)] – A non resident

who earns income from interest on government securities
and bonds including income by the way of premium on
redemption shall be exempt from tax. Also, any income by
the way of interest on money standing in credit in a Non
Resident External Account [NRE A/c] in any bank of India.

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DISCLAIMER: Tax laws are subjected to amendments

E. Interest on Securities [Section 10(15)] – Followings

interest earned are exempt:

• Interest on Gold Deposits Bonds issued under the

Gold Deposits Schemes, 1999
• Interest on Deposits Certificates issued under the
Gold Monetization Scheme
• Interest on Post office Savings Bank Account upto
rupees 3500 in case of individual account and rupees
7000 in case of joint account

• Payment from Sukhanya Samriddhi Account [Section

10(11A)] – Interest accruing on deposits in and withdrawal
from any account from this scheme would be exempt from
tax.

F. Approved Superannuation funds transferred to national

pension scheme [Section 10(13)] – Any payment from an
approved superannuation fund which is transferred to the
NPS account of the employee shall be exempt from tax.

G. Income from Awards [Section 10(17A)] – Any payment in

cash or kind as an award, which is in public interest, is
given by Central Government and State Government shall
be exempt from tax.

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DISCLAIMER: Tax laws are subjected to amendments

H. Dividend from the units of Mutual Funds [Section 10(35)]

– Dividend from mutual funds and Dividends from UTI are
exempt.

I. Any Capital Gains earned from the compulsory

acquisition of urban agricultural land [Section 10(37)] -
Any Capital Gains earned from the compulsory acquisition
of urban agricultural land by the government for which
compensation has been received by individual or HUF shall
be exempt from tax.

J. Dividends [Section 10(34)] – Dividends earned by

shareholders from domestic company are exempt.

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