Income Tax Law and Practice
Unit – I
Introduction
Basic
concepts: Income, Agricultural income, Person,
Assessee, Assessment year, Previous year,
Gross total income, Total income, Maximum marginal rate of tax,
Permanent Account Number (PAN)
Residential Status: Scope of total income
on the basis of residential status, Exempted income under section 10.
1. Assessee [Section 2(7)]
“Assessee” means a person by whom any tax
or any other sum of money is payable under this Act. In addition, it includes –
i. Every person in respect of whom any
proceeding under this Act has been taken for the assessment of
* his income; or
* assessment of fringe benefits; or
* the income of any other person in respect of which he is
assessable; or
* the loss sustained by him or by such other person; or
* the amount of refund due to him or by such other person.
ii. Every person who is deemed to be an
assessee under any provision of this Act;
iii. Every person who is deemed to be an
assessee-in-default under any provision of this Act.
2.
Assessment year [section 2(9)]: Assessment year means the period of 12 months
commencing on the first day of April every year. It is therefore, the period
from 1st of April to 31st of March, for example, the
assessment year 2020-2021 will commence on 1.4.2020 and will ends on 31.3.2021.
The tax is levied, in each assessment year, with respect to or on the total
income earned by the assessee in the previous year.
3.
Previous Year [section 3]:
According to section 3, previous year means the financial year immediately
preceding the assessment year. Financial year means a year which starts on 1st
April and ends on 31st March. Income tax is payable on the income
earned during the previous year and it is assessed in the immediately
succeeding financial year which is called assessment year. Therefore, the
income earned during the previous year 1.4.2019 to 31.3.2020 will be assessed
or charged to tax in the assessment year 2020-2021.
Business
or Profession newly set up during the financial year:
In
such a case, the previous year shall be the period beginning on the date of
setting up of the business or profession and ending with 31st March
of the said financial year.
If
a source of income comes into existence in the said financial year, then the
previous year will commence from the date on which the source of income newly
comes into existence and will end with 31st March of the financial
year.
4.
Definition of Income [section 2(24)]:
The definition of income as per the Income-tax Act, 1961 begins with the words “Income includes”. Therefore, it is an inclusive definition and not an exhaustive one. Section 2(24) of the Act gives a statutory definition of income. The term income includes the following:
i. Profits and Gains;
ii. Dividends;
iii. Voluntary contributions received
by a trust/institution created wholly or partly for charitable or religious
purposes or by certain research association or universities and other
educational institutions or hospitals and other medical institutions or an electoral
trust.
iv. The value of any perquisite or
profit in lieu of salary taxable under section 17;
v. Any special allowance or benefit
other than the perquisite included above, specially granted to the assessee to
meet expenses wholly, necessarily and exclusively for the performance of the
duties of an office or employment of profit.
vi. 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 who has a substantial interest in the
company, or by a relative of the director;
vii. Deemed profits chargeable to tax
under section 41 or section 59;
viii. Profits and gains of business or
profession chargeable to tax under section 28.
ix. Any capital gains chargeable
under section 45;
x. The profit 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 44 or any surplus
taken to be such profits and gains by virtue of the provisions contained in the
first schedule to the Act.
xi. The profits and gains of any
business of banking (including providing credit facilities) carried on by a
co-operative society with its members.
xii. Any winnings from lotteries,
crossword puzzles, races including horse races, card games and other games of
any sort or from gambling or betting of any form or nature whatsoever;
xiii. Any sum received by the assessee
from his employees as contributions to any provident fund or superannuation
fund or any fund set-up under the provisions of the employees state insurance
Act, 1948; or any other fund for the
welfare of such employees;
xiv. Any sum received under a key man
insurance policy including the sum allocated by way of bonus on such policy.
Gross
total income:
In order to find out the gross total income of an assessee, it is necessary
that first of all income under different heads should be computed separately.
In order to calculate the taxable income under each head, certain deductions
have to be made from gross income of that head. There are separate sections in
the income tax Act for calculating the taxable income under different heads.
Moreover, certain exemptions are allowed under section 10 to compute the
taxable income under different heads of income:
i.
Salaries;
ii.
Income from House Property;
iii.
Profit and gains of Business or Profession;
iv.
Capital gains;
v.
Income from other source.
Aggregate of incomes computed under the above
five heads, after applying clubbing provisions and making adjustments of set
off and carry forward of losses but before any deduction under chapter VI-A is
known as gross total income.
Total
Income or Taxable Income:
In order to find out the gross total income of an assessee, it is necessary
that first of all income under different heads should be computed separately.
In order to calculate the taxable income under each head, certain deductions
have to be made from gross income of that head. There are separate sections in
the income tax Act for calculating the taxable income under different heads.
Moreover, certain exemptions are allowed under section 10 to compute the
taxable income under different heads of income:
i. Salaries;
ii.
Income from House Property;
iii.
Profit and gains of Business or Profession;
iv.
Capital gains;
v.
Income from other source.
Aggregate of incomes computed under the above five heads, after applying clubbing provisions and making adjustments of set off and carry forward of losses but before any deduction under chapter VI-A is known as gross total income from which the assessee has a right to deduct certain deductions under chapter VI-A i.e. deductions under section 80C to 80U, which are available to him depending upon the residential status and the balance so found is the total income or taxable income.
Concept
of Income:
The word income covers receipts in the shape of money or money’s worth which
arise with certain regularity or expected regularity from a definite source.
However, all receipts do not form the basis of taxation under the Act. Broadly,
an analogy is drawn of a tree and the fruits of that tree. The tree symbolizes
the source from which one gets fruits which symbolizes income. The receipt
arises from the sale of tree itself is, therefore, considered a capital receipt
which is not an income; but the receipts flowing from this source viz., fruits
is income.
.
Charge
of income tax [section 4]:
No
tax can be levied or collected in India except under the authority of law.
Section 4 of the income tax Act gives such authority for charging of income
tax.
The
following basic principals immerge from the charging sections:-
a.
Income tax is an annual tax on income;
b.
Income of previous year is taxable in the next following assessment year at the
rate or rates applicable to that assessment year. However there are certain
exceptions to this rule;
c.
The tax rates are fixed by the Annual Finance Act;
d.
Tax is charged on every person as defined in section 2(31);
e.
The tax is charged on the total income of every person computed in accordance
with the provisions of this Act.
f.
Income tax is to be deducted at the sources or paid in advance as provided
under the provision of the Act.
g.
The scope of tax liability of an income will depend on the residential status
of the assessee as per the provisions of section 6.
Person
[section 2(31)]:
Person includes:
i.
An Individual;
ii.
A Hindu Undivided Family;
iii.
A Company;
iv.
A Firm;
v.
An Association of Persons (AOP) or a Body of Individuals (BOI).
vi.
A Local authority;
vii.
Every artificial juridical person not falling within any of the preceding
sub-clauses.
i.
An individual means a natural person i.e. a human being. It includes a male,
female, minor child. However, the income of a minor is now generally included
in the income of a parent. Since minor is not competent to contract, his income
shall be taxable through his legal guardian.
ii.
A Hindu Undivided Family has not been defined under the tax laws. However, as
per the Hindu law, it means a family which consists of all persons lineally
descended from a common ancestor including their wives and daughters.
iii.
A Company means a joint stock company.
iv.
A firm shall have the meaning assigned to it in the Indian partnership Act,
1932 and shall include a limited liability partnership.
v.
Association of persons: Association of persons means two or more persons who
join for a common purpose with a view to earn an income. It need not be on the
basis of a contract. Therefore, if two or more persons join hands to carry on a
business but do not constitute a partnership, they may be assessed as an
Association of Persons (AOP)
Body
of Individuals:
Body of Individuals means a conglomeration of individuals who carry on some
activity with the objective of earning some income. It would consist of
individuals. Entities like companies or firms cannot be members of a Body of
Individuals.
vi.
The term 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.
vii.
This category could cover every artificial juridical person not falling under
other heads. An idol, or deity would be assessable in the status of an
artificial juridical person.
Agricultural Income [Section 10(1)]
Section 10(1) provides that an agricultural
income is not to be included in the total income of the assessee. The reason
for totally exempting agricultural income from the scope of central income-tax
is that under the constitution, the Central Government has no power to levy a
tax on agricultural income.
Definition of agricultural income [Section
2 (1A)]
This definition is very wide and covers the
income of not only the cultivators but also the land holders who might have
rented out the lands. Agricultural income may be received in cash or in kind.
Agricultural income may arise in any one of
the following three ways:
i. It may be rent or revenue derived from
land situated in India and used for agricultural purposes.
ii. It may be income derived from such land
Through agriculture; or
The performance of a process ordinarily
employed by a cultivator or receiver of rent in kind to render the produce fit
to be taken to the market; or
Through the sale of such agricultural
produce in the market.
iii. Lastly, agricultural income may be
derived from any farm building required for agricultural operations.
Examples of Agricultural income
For better understanding of the concept,
certain examples of agricultural income and non-agricultural income are given
below:
Agricultural income
a. Income derived from the sale of seeds.
b. Income from growing of flowers and
creepers.
c. Rent received from land used for grazing
of cattle required for agricultural activities.
d. Income from growing of bamboo.
Non- Agricultural income
a. Income from breeding of livestock.
b. Income from poultry farming.
c. Income from fisheries.
d. Income from dairy farming.
Residential
Status of an Assessee:
Section
5 of the income tax Act, states that the income of an assessee is determined
with reference to his residential status in India during the previous year. All
taxable entities are divided in the following categories for the purpose of
determining residential status.
A.
An individual
B.
A Hindu undivided family
C.
A firm or an association of persons or a body of individuals
D.
A joint stock company
A.
Residential status of an individual
An
individual may be:
a.
Resident and ordinarily resident in India; or
b.
Resident but not ordinarily resident in India; or
c.
Non-resident in India
a.
Resident and ordinarily resident in India
During
an assessment year an individual will be resident in India, if he satisfies any
one of the following two conditions known as basic conditions in the previous
year under section 6(1):
i.
He is physically present in India for 182 days or more in all during the
previous year.
ii.
He is physically present in India for at least 365 days during the immediately
preceding four previous years and is in India for at least 60 days during the
current previous year.
However, in case of an individual
being a citizen of India:-
Who
leaves India any previous year for the purpose of employment outside India or
as a member of the crew of an Indian ship shall be resident if he is in India
for at least 182 days in place of 60 days mentioned above.
Who
being outside India or a person of Indian origin, comes on a visit to India in
any previous year on leave, vacation, shall be resident if he is in India for
at least 182 days in place of 60 days mentioned above.
An
individual should also satisfy both the following additional conditions as per
section 6(6) besides satisfying any one of the two basic conditions under
section 6(1) before he is considered as a resident and ordinarily resident in
India.
i.
He was resident in India in at least two out of 10 previous years [according to
basic condition as per section 6(1)] immediately preceding the current previous
year.
ii.
He was physically present in India for at least 730 days during the seven
previous years immediately preceding the current previous year.
b. Resident but not ordinarily resident in
India
An
individual who satisfies any one of the two basic conditions mentioned under
section 6(1) but does not satisfy both the additional condition under section
6(6) is said to be not ordinarily resident in India.
c.
Non-resident in India
An
individual is considered as non-resident in India if he does not satisfy any
one of the two basic conditions mentioned under section 6(1).
B.
Residential status of a HUF
A
HUF may be:
a.
Resident and ordinarily resident in India; or
b.
Resident but not ordinarily resident in India; or
c.
Non-resident in India
a.
Resident and ordinarily resident in India
A
HUF is said to be resident in India if control and management of its affairs is
wholly or partly situated in India during the relevant previous year.
A
resident HUF is an ordinarily resident in India, if Karta or manager of the
family satisfies the following two additional conditions as laid down by
section 6(6):-
i.
He was resident in India in at least two out of 10 previous years [according to
basic condition as per section 6(1)] immediately preceding the current previous
year.
ii.
He was physically present in India for at least 730 days during the seven
previous years immediately preceding the current previous year.
b.
Resident but not ordinarily resident in India
A
resident HUF is said to be resident and not ordinarily resident, if Karta or
manager of HUF does not satisfy the two additional conditions.
c.
Non-resident in India
A
HUF is considered non-resident in India, if control and management of its
affairs is wholly situated outside India.
C.
Residential status of a Firm, AOP or a BOI and other persons (Except company)
A Firm or an AOP or a BOI may be either:-
a. Resident
b. Non-resident
a.
Resident
A
partnership firm and an AOP are said to be resident in India if control and
management of their affairs are wholly or partly situated within India during
the relevant previous year.
b.
Non-resident
If
the control and management of the affairs of these entities is wholly situated
outside India during the relevant previous year then they are said to be non-
resident.
D.
Residential status of a Company
A
company may be either:-
a. Resident
b. Non-resident
a.
Resident
A
company is said to be a resident in India in any previous year If,
i.
It is an Indian company
ii.
During the relevant previous year, the control and management of its affairs is
situated wholly in India.
b.
Non-resident
A
company is said to be a non resident in India in any previous year if,
i.
It is not an Indian company
ii.
The control and management of its affairs is wholly or partly situated outside
India.
Exempted income under section 10
1. Agricultural income [section 10(1)]:
Agricultural income is totally exempt, provided it falls within the definition
of agricultural income given under section 2(1A). Agricultural income, though
exempt, is to be aggregated in case of certain assessee for the purpose of
determining the rate of tax on non-agricultural income.
2. Sum received by a member from HUF
[section 10(2)]: Any sum received by an individual, as a member of a Hindu
undivided family, shall be exempt in the hands of the member.
3. Share of profit of a partner from a firm
[section 10(2A)]: In case of a person being a partner of a firm (which includes
limited liability partnerships) his share in the total income of the firm shall
be exempt from tax.
4. Interest on Non-resident (External)
Account [section 10(4)]: In case of an individual assessee any income by way of
interest or money standing to his credit in a non-resident(External) Account in
any bank in India shall also be exempt if certain conditions are satisfied.
5. Allowances or perquisites outside India
[section 10(7)]: Any allowances or perquisites paid or allowed, as such,
outside India by the government to a citizen of India, for rendering services
outside India, are exempt.
6. Tax on non-monetary perquisites paid by
employer [section 10(10CC)]: The income tax actually paid by the employer
himself on a non-monetary perquisite provided to the employee shall be exempt
in the hands of the employee.
7. Provident fund [section 10(11)]: Any
payment from a provident fund to which the Provident Fund Act, 1925 applies or
from Public Provident Fund set up by the Central Government shall be exempt.
8. Scholarships granted to meet the cost of
education [section 10(16)]: Scholarships
granted to meet the cost of education are exempt.
9. Annual value of one palace of the
ex-ruler [section 10(19A)]: The annual value in respect of any one palace which
is in the occupation of an ex-ruler is exempt from tax.
10. Income of an approved research
association [section 10(21)]: Under this clause income of a research
association, which is approved is exempt from tax if certain conditions are
satisfied.
11. Income of specified news agency [section
10(22B)]: Any income of such news agency, set up in India solely for collection
and distribution of news, as the central government may notify, in this behalf,
is totally exempt.
12. Income of trade union [section 10(24)]:
Income from house property and income from other sources of a registered union,
within the meaning of the Indian Trade Union Act, 1926 or an association of
such Trade Unions, formed primarily for the purpose of regulating the relations
between workman and employers or between workmen and workmen is exempt from
income tax.
13. Income of a member of scheduled tribe
residing in certain specified areas [section 10(26)]: Section 10(26) grants
exemption to certain incomes of a member of a scheduled tribe residing in
certain specified areas or in the states of Arunachal Pradesh, Manipur, Mizoram
or Ladakh region of Jammu & Kashmir if certain conditions are satisfied.
14. Dividend to be exempt in the hands of
the shareholders [section 10(34)]: Any dividend declared, paid or distributed
by a domestic company is liable to dividend distribution tax. Hence, such
dividend received by the shareholder shall be exempt in his hands.
15. Income of an individual being a
Sikkimese [section 10(26AAA)]: The following income, which accrues or arise to
a Sikkimese individual, shall be exempt from income tax-
a. Income from any source in the state of
Sikkim; or
b. Income by way of dividend or interest on
securities.
However, this exemption will not be
available to a Sikkimese woman who, on or after 1.4.2008, marries a non-
Sikkimese individual.
Scope of Total Income
Section 5 provides the scope of total
income in terms of the residential status of the assessee because the incidence
of tax on any person depends upon his residential status. The scope of total income
of an assessee depends upon the following three important considerations:
(i) the residential status of the assessee;
(ii) the place of accrual or receipt of
income, whether actual or deemed; and
(iii) the point of time at which the income
had accrued to or was received by or on behalf of the assessee.
The ambit of total income of the three
classes of assessee would be as follows:
(1) Resident and ordinarily resident
The total income of a resident assessee
would, under section 5(1), consist of:
(i) income received or deemed to be
received in India during the previous year;
(ii) income which accrues or arises or is
deemed to accrue or arise in India during the previous year; and
(iii) income which accrues or arises
outside India even if it is not received or brought into India during the
previous year.
In simpler terms, a resident and ordinarily
resident has to pay tax on the total income accrued or deemed to accrue,
received or deemed to be received in or outside India.
(2) Resident but not ordinarily resident
Under section 5(1), the computation of
total income of resident but not ordinarily resident is the same as in the case
of resident and ordinarily resident stated above except for the fact that the
income accruing or arising to him outside India is not to be included in his
total income.
However, where such income is derived from
a business controlled from or profession set up in India, then it must be
included in his total income even though it accrues or arises outside India.
(3) Non-resident
A non-resident’s total income under section
5(2) includes:
(i) income received or deemed to be
received in India in the previous year; and
(ii) income which accrues or arises or is
deemed to accrue or arise in India during the previous year.
Residential status and Scope of Total Income
Define the term previous year and
assessment year. What are the exceptions to the rule that income of a previous
year is assessed to tax in the assessment year?
Ans:
Previous Year [section 3]: According to section 3, previous year means the
financial year immediately preceding the assessment year. Financial year means
a year which starts on 1st April and ends on 31st March.
Income tax is payable on the income earned during the previous year and it is assessed
in the immediately preceding succeeding financial year which is called
assessment year. Therefore, the income earned during the previous year 1.4.2019
to 31.3.2020 will be assessed or charged to tax in the assessment year
2020-2021.
Business
or Profession newly set up during the financial year:
In
such a case, the previous year shall be the period beginning on the date of
setting up of the business or profession and ending with 31st March
of the said financial year.
If
a source of income comes into existence in the said financial year, then the
previous year will commence from the date on which the source of income newly
comes into existence and will end with 31st March of the financial
year.
Assessment
year [section 2(9)]: Assessment year means the period of 12 months commencing
on the first day of April every year. It is therefore, the period from 1st
of April to 31st of March, for example, the assessment year
2020-2021 will commence on 1.4.2020 and will ends on 31.3.2021. The tax is
levied, in each assessment year, with respect to or on the total income earned
by the assessee in the previous year.
The income of an assessee for a previous
year is charged to income-tax in the assessment year following the previous
year. For instance, income of previous year 2019-2020 is assessed during
2020-2021. Therefore, 2020-2021 is the assessment year for assessment of income
of the previous year 2019-2020.
However, in a few cases, this rule does not
apply and the income is taxed in the previous year in which it is earned. These
exceptions have been made to protect the interests of revenue. The exceptions
are as follows:
(i) Shipping business of non-resident
[Section 172]
Where a ship, belonging to or chartered by
a non-resident, carries passengers, livestock, mail or goods shipped at a port
in India, the ship is allowed to leave the port only when the tax has been paid
or satisfactory arrangement has been made for payment thereof. 7.5% of the
freight paid or payable to the owner or the charterer or to any person on his
behalf, whether in India or outside India on account of such carriage is deemed
to be his income which is charged to tax in the same year in which it is
earned.
(ii) Person leaving India [Section 174]
Where it appears to the Assessing Officer
that any individual may leave India during the current assessment year or
shortly after his expiry and he has no present intention of returning to India,
the total income of such individual for the period from the expiry of the
respective previous year up to the probable date of his departure from India is
chargeable to tax in that assessment year.
(iii)
AOP / BOI / Artificial Juridical Person formed for a particular event or
purpose and the Assessing Officer apprehends that the AOP/BOI is likely to be
dissolved in the same year or in the next year, he can make assessment of the
income up to the date of dissolution as income of the relevant assessment year.
(iv) Persons likely to transfer property to
avoid tax [Section 175]
During the current assessment year, if it
appears to the Assessing Officer that a person is likely to charge, sell,
transfer, dispose of or otherwise part with any of his assets to avoid payment
of any liability under this Act, the total income of such person for the period
from the expiry of the previous year to the date, when the Assessing Officer
commences proceedings under this section is chargeable to tax in that
assessment year.
(v) Discontinued business [Section 176]
Where any business or profession is discontinued in any assessment year, the income of the period from the expiry of the previous year up to the date of such discontinuance may, at the discretion of the Assessing Officer, be charged to tax in that assessment year.
Short notes on: Permanent Account Number (PAN) [Section 139A]
1. Sub-section (1) requires the following persons, who have not been allotted a Permanent Account Number (PAN), to apply to the Assessing Officer within the prescribed time for the allotment of a PAN–
(i) Every person whose total income or the total income of any other person in respect of which he is assessable under this Act during any previous year exceeded the basic exemption limit; or
(ii)
Every person carrying on any business or profession whose total sales, turnover
or gross receipts exceed or are
likely to exceed Rs. 5 lakh in any previous year;
2. The Central Government is empowered to
specify, by notification in the Official Gazette, any class or classes of
persons by whom tax is payable under the Act or any tax or duty is payable
under any other law for the time being is force. Such persons are required to
apply within such time as may be mentioned in that notification to the
Assessing Officer for the allotment of a PAN [Sub-section (1A)].
3. For the purpose of collecting any
information which may be useful for or relevant to the purpose of the Act, the
Central Government may notify any class or classes of person, and such persons
shall within the prescribed time, apply to the Assessing Officer for allotment
of a PAN [Sub-section (1B)].
4. The Assessing Officer, having regard to
the nature of transactions as may be prescribed, may also allot a PAN to any
other person (whether any tax is payable by him or not) in the manner and in
accordance with the procedure as may be prescribed [Sub-section (2)]
5. Any person, other than the persons
mentioned in (1) to (4) above, may apply to the Assessing Officer for the
allotment of a PAN and the Assessing Officer shall allot a PAN to such person
immediately.
6. Such PAN comprises of 10 alphanumeric
characters and is issued in the form of a laminated card.
7. Quoting of PAN is mandatory in all
documents pertaining to the following prescribed transactions:
a.
In all returns to or correspondence with, any income-tax authority;
b.
In all challans for the payment of any sum due under the Act;
c.
In all documents pertaining to such transactions entered into by him, as may be
prescribed by the CBDT in the interests of revenue.
Short Note on: Maximum marginal rate and Average Rate of
tax
As per section 2(10), “Average Rate of tax”
means the rate arrived at by dividing the amount of income-tax calculated on
the total income by such total income.
Section 2(29C) defines “Maximum marginal
rate” to mean the rate of income-tax (including surcharge on the income-tax, if
any) applicable in relation to the highest slab of income in the case of an
individual, AOP or BOI, as the case may be, as specified in Finance Act of the
relevant year.
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