Income Tax

1. WHAT IS INCOME TAX?

Income tax is a direct tax that a government levies on the income of its citizens. The income tax act, 1961, mandates
that the central government collect this tax. The government can change the income slabs and tax rates every year in
its union budget.
2. What is objective behind imposing tax ?
a. Generation of revenue needed for the govt
b. Prevention of concentration of money in the hands of a few.
c. Increase the habits of savings and productive investment by the people.
d. speedy economic development.
e. Generation employment opportunities..

3. Types of Income Tax

a. Direct taxes are paid in entirety by a taxpayer directly to the government. It is also defined as the tax where
the liability as well as the burden to pay it resides on the same individual. E.g Income tax, wealth tax, etc.
b. Indirect tax, It is a tax levied by the Government on goods and services and not on the income, profit or
revenue of an individual and it can be shifted from one taxpayer to another. E.g Goods and Service Tax (GST)
4. Components of the Income Tax Law:
A. The income tax act 1961
B. The finance act passes every year.
C. The income tax rules 1962. It is framed and amended by CBDT from time to time
D. Judgements of the court law.
E. Circulars, orders, notifications, and executive instructions issued by income tax department from time to time.

5. Income Tax Act 1961

The IT Act was enacted in the year 1961 and is the statute under which everything related to taxation is listed. This
includes levy, collection, administration and recovery of income tax. The act basically aims to consolidate and amend
the rules related to taxation in the country. The income tax Act contains a long list of sections, each of which deals
with different aspects of taxation in the country.
6. Central Board of Direct Taxes (CBDT):
Income Tax Department is headed by the apex body Central Board of Direct Taxes (CBDT).
Main responsibility of IT Department is to enforce various direct tax laws, most important among these being the
Income-tax Act, 1961, to collect revenue for Government of India. It also enforces other economic laws like the
Benami Transactions (Prohibition) Act, 1988 and the Black Money Act, 2015.
7. Finance Act:
A Finance Act is the fiscal legislation, enacted by the Indian Parliament, to give effect to the financial proposals of the
Central Government.
It is enacted once a year and contains provisions relating to income taxes, customs, excise, Central and Integrated GST
and other cess, exemptions, and reliefs.

8. Assessment year:
Sec. 2(9) section 2(9) defines an “assessment year” is “the period of twelve months starting from the first day of April
every year.”
An assessment year begins on 1st April every year and ends on 31st March of the next year.
For example, assessment year 2012-13 means the period of one year beginning on 1 st April, and ending on 31st
March, 2012.
In an assessment year, income of the assessee during the previous year is taxed at the rates prescribed by the relevant
finance act. It is therefore, also called as the “tax year”.
9. Previous Year:
Previous year- s. 2(34) & s. 3 definition: section 3 defines “previous year” as “the financial year immediately
preceding the assessment year”.
Income earned in one financial year is taxed in the next financial year.
The year in which income is earned is called the “previous year” and the year in which it is taxed is called the
“assessment year” common previous year for all source of income.

10. PERSON
PERSON –section 2(31) the term “person” includes:
a. An individual;
b. A hindu undivided family (HUF);
c. A company;
d. A firm;
e. An association of persons(aop) or a body of individuals, (BOI) whether incorporated or not;
f. A local authority; and every artificial juridical person not falling within any of the preceding categories.

11. Association of persons (AOP)

Association of persons (AOP) means an association in which two or more persons join in a common purpose to
produce income or gains,

12. Body of individuals (BOI)

Body of individuals (BOD) is a group of individuals without a common objective of making income, but they join
together for sharing some asset or income.
For example, mr X died leaving property worth of 50 lakhs. If there are three claimants for the property, income from
the property is taxable in the hands of the claimants under the status of body of individuals" until the ownership is
finally decided. Body of individuals shall include individuals only.

13. GROSS TOTAL INCOME (GTI) & TOTAL INCOME

U/s 14 the term “gross total income” [ GTI ] means aggregate of incomes computed under the following five heads :
a. Income under the head “salaries”
b. Income under the head “ house property”
c. Income under the head “profit and gains of business or profession”.
d. Income under the head “capital gain”.
e. Income under the head “ other sources”.
After aggregating income under various heads, losses are adjusted and the resultant figure is called “ gross total
income” [ GTI ].
From gross total income , deductions u/s 80 are allowed.
The resultant figure is called “total income” on which rates of taxes are applied.

14. INCOME
Income, in general, means a periodic monetary return which accrues or is expected to accrue regularly from definite
sources. However, under the income-tax act, 1961, even certain income which do not arise regularly are treated as
income for tax purposes e.g. Winnings from lotteries, Crossword puzzles.
Section 2(24) of the Act gives a statutory definition of income
A. profits and gains.
B. dividends.
C. voluntary contributions received by a trust/institution created wholly or partly for Charitable or religious
purposes or by an association or institution
D. the value of any perquisite or profit in lieu of salary taxable under section 17.
E. any special allowance or benefit other than the perquisite included above, specifically granted to the assessee
to meet expenses wholly, necessarily and exclusively for the performance of the duties of an office or
employment of profit.
F. Etc….
15. Casual Income:
Casual income any receipt which is of a casual and nonrecurring nature is called casual income.
Casual income includes the following receipts:
1. Winning from lotteries,
2. Winning from crossword puzzles,
3. Winning from races (including horse races),
4. Winning from card games and other games of any sort
5. Winning from gambling or betting of any form or nature.

16. Assessee:
Assessee : section 2(7) every person in respect of whom, any proceeding under the act has been taken for the
assessment of his income
or of the income of any other person in respect of which he is assessable
or of the loss sustained by him or by such other person or the amount of refund due to him
or to such other person may be called an assessee.

17. Deemed assessee:

A person who is bound to pay tax in respect of the income of another one is called deemed assessee.
For example, tax is payable by a guardian on the income of a minor or by a legal representative on the income of a
deceased assessee. In such cases, guardian or legal representative will be deemed to be an assessee for tax purposes.

18. Assessee in Default:

- When a person liable to comply with the legal requirements under the act fails to do so, he becomes an assessee in
default.
- Similarly, if a person who is bound to deduct tax at source and remit the amount to the government does not do so,
he becomes an assessee in default,
e.g., An employer is liable to deduct tax from the salary of the employee and remit the same to the government. When
he fails to do so he becomes an assessee in default.
- Further, any person who does not fulfil the legal requirements in connection with the income tax matters or any
assessment procedure as per the act and rules is an assessee in default', e.G., Failure to pay advance tax.

19. Accelerated Assessment (Assessment during the previous year itself):

Every assessee is liable to be assessed during the assessment year, for the income earned during the previous year.
However in certain circumstances the income of a person shall be assessed during the previous year itself. This is
called 'accelerated assessment.
The following are the situations in which accelerated assessment is done.
i) income of a non-resident from shipping business [sec. 172]
ii) income of persons leaving India [sec. 174]
iii) income of an AOP or BOI or an artificial juridical person [sec. 174 a]
Iv) transfer of property to avoid tax [sec. 175]
V) discontinuance of a business or profession [sec. 176]

20. Agriculture income:

Agriculture income agriculture income is exempt under the Indian income tax act.
This means that income earned from agricultural operations is not taxed.
However while computing tax on non-agricultural income agricultural income is also taken into consideration.

As per Income Tax Act income earned from any of the under given three sources meant Agricultural Income:
a. any rent received from land which is used for agricultural purpose.
b. any income derived from such land by agricultural operations including processing of agricultural produce,
raised or received as rent in kind so as to render it fit for the market, or sale of such produce.
c. income attributable to a farm house subject to the condition that building is situated on or in the immediate
vicinity of the land and is used as a dwelling house, store house etc.

21. Capital and revenue receipts and expenditure

A. "Capital receipts": Receipts which are non-recurring (not received again and again) by nature and whose
benefit is enjoyed over a long period are called "capital receipts",
e.g. Money brought into the business by the owner (capital invested), loan from bank, sale proceeds of fixed
assets etc. Capital receipt is shown on the liabilities side of the balance sheet.

B. "Revenue receipts": Receipts which are recurring (received again and again) by nature and which are
available for meeting all day to day expenses (revenue expenditure) of a business concern are known as
"Revenue receipts",
e.g. Sale proceeds of goods, interest received, commission received, rent Received, dividend received etc

22. Distinction between capital receipt and revenue receipt:

1. RR has short-term effect. The benefit is enjoyed within one accounting period.
CR has long-term effect. The benefit is enjoyed for many years in future.
2. RR occurs repeatedly. It is recurring and regular in nature. It does not occur again and again.
CR is nonrecurring and irregular in nature.
3. RR is shown in profit and loss account on the credit side. CR is shown in the balance sheet on the liability
side.
4. RR does not produce capital receipt.
CR, when invested, produces revenue receipt e.g. When capital is invested by the owner, business gets
revenue receipt (i.E. Sale proceeds of goods etc.).
5. RR this does not increase or decrease the value of asset or liability.
CR decreases the value of asset or increases the value of liability e.g. Sale of a fixed asset, loan from bank etc.

23. Capital expenditure and Revenue Expenditure:

Capital expenditures are typically one-time large purchases of fixed assets that will be used for revenue
generation over a longer period.
Revenue expenditures are the ongoing operating expenses, which are short-term expenses used to run the
daily business operations.

24. Difference between Capital Expenditure and Revenue Expenditure:

1. RE effect is temporary, i.e. The benefit is received within the accounting year.
CE effect is long-term, i.e. It is not exhausted within the current accounting year-its benefit is received for a
number of years in future.
2. RE - neither an asset is acquired nor is the value of an asset increased.
CE - an asset is acquired or the value of an existing asset is increased.
3. RE has no physical existence because it is incurred on items which are used by the business. Generally
CE has physical existence except intangible assets.
4. RE is recurring and regular and it occurs repeatedly.
CE does not occur again and again. It is nonrecurring and irregular.
5. RE hlps to maintain the business.
CE improves the position of the business.
6. RE - the whole amount of this expenditure is shown in trading P & LA/c or income statement.
CE- a portion of this expenditure (depreciation on assets) is shown in trading & P & L A/c and the balance are
shown in the balance sheet on asset side.
7. RE does not appear in the balance sheet.
CE appears in the balance sheet until its benefit is fully exhausted.
8. RE reduces revenue (profit) of the business.
CE does not reduce the revenue of the concern.
25. RESIDENTIAL STATUS:
a) Resident and Ordinarily Resident
- An assessee satisfying any one of the basic conditions and both the additional conditions is called 'resident and
ordinarily resident' in India for the previous year.
b) Resident but Not Ordinarily Resident
An assessee satisfying any one of the basic conditions but not satisfying both the additional conditions is 'resident but
not ordinarily resident' in India for the previous year. In other words, if a resident person satisfies only one additional
condition, he will be 'not ordinarily' resident. c) Non-Resident
c) 'non resident'
An assessee satisfying none of the basic conditions is 'non resident' in India for the previous year.

26. HUF : RESIDENT OR NON-RESIDENT A HINDU UNDIVIDED FAMILY

HUF : Resident or Non-Resident A Hindu undivided family is said to be resident in India if control and management
of its affairs is wholly or partly situated in India.
A Hindu undivided family is non-resident in India if control and management of its affairs is wholly situated outside
India.
A resident Hindu undivided family is an ordinarily resident in India if the karta or manager of the family (including
successive kartas) satisfies the following two additional conditions as laid down by section 6(6)(b).
Additional condition:
(i) Karta has been resident in India in at least 2 out of 10 previous years [according to the basic condition mentioned in
immediately preceding the relevant previous year) Additional condition
(ii) Karta has been present in India for a period of 730 days or more during 7 years immediately preceding the
previous year. If the Karta or manager of a resident Hindu undivided family does not satisfy the two additional
conditions, the family is treated as resident but not ordinarily resident in India.

27. Maximum Marginal Rate:

“maximum marginal rate” is defined as the rate of income-tax applicable to the highest slab of income in the case of
an individual, association of persons or body of individuals as specified in the Finance Act of each year. E.g the
maximum marginal rate on the income of an individual is 42.744%.

28. Converted Property:

Converted property means the self-acquired property of a member of a Hindu Undivided Family, which is transferred
to the common benefit of the family. Any income from the converted property is taxable in the hands of the transferor.
HUF is not laible to pay tax on the income from converted property.

29. List of exempted incomes:

1. Agricultural income
2. Receipt by a member of HUF
3. Share of a Partner in the Profits of a firm.
4. Interest on savings certificate.
5. Leave travel concession
6. Allowance or perquisites outside India
7. Gratuity (write procedure)
8. Pension (write procedure)
9. Encashment of earned leave. (Write procedure)
10. House rent allowance (write procedure)

30. Annual accretion

Annual accretion means employer’s contribution to the provident fund of an employee in excess of 12% of salary and
9.5% interest allowed by the employer on the balance of Provident fund exceeding the prescribed limit.

31. Transferred balance

When an unrecognized provident fund (UPF) is recognized by the Commissioner of Income Tax the balance standing
to the credit of the employee in the UPF is transferred to the RPF and it is called transferred balance.
32. Perquisites
Perquisites is defined as any casual emolument fee or profit attached to an office or position in addition to salary or
wages.
It may be in cash or kind or sometimes in the form of facilities or amenities.
e.g., medical benefits, residential accommodation, car facility etc.

33. Sweat equity shares

Equity shares issued by a company to its employees or directors free of cost or at discount or for consideration other
than cash or for providing know-how or making available rights in the nature of intellectual property rights or value
additions or the like.
The value of Sweat Equity shares allotted to an employee is taxable in the hands of the employee.