1.Basic Concepts - College

8/11/2019 1.Basic Concepts - College

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Basic concepts

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Charge of tax

Section 4

Tax shall be charged at the ratesprescribed for the year by the annual Finance Act.

Tax is charged on a personspecified u/s 2(31).

Tax is chargeable on the total income earned during the previous year and not

the assessment year.

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Concept of income

Definition of the term incomeu/s 2(24) is an inclusivedefinition.

Income may be a periodic monetary return or may not arise regularly e.g.

winnings from lotteries, crossword puzzles etc.

Income normally refer to revenue receipts. Capital receipts are not taxable unless

specifically included e.g. capital gains.

Income means net receipts after deducting expenses incurred, to the extent

permitted under the Act.

Income taxable under the head Profits and gains of business or profession or

Income from other sources is taxable on due basis or receipt basis, depending

upon the method of accounting regularly employedby the assessee.

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Concept of income

Income earned in a previous year is chargeable to tax in the assessment year.

Previous year is the financial year ending on 31stMarch in which the income has

accrued / received.

Assessment year is the financial year ending on 31stMarch, following the previous

year. Income of the previous year is assessed during the assessment year

following the previous year.

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Computation of total income and tax payable

1. Determination of residential status

- Resident

Resident and ordinarily resident

Resident but not ordinarily resident

- Non resident

2. Classification of income under different heads

- Salaries

- Income from House Property- Profits and gains of business or profession

- Capital gains

- Income from other sources

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3. Exclusion of income not chargeable to tax

- Partial exclusion

- Total exclusion

4. Computation of income under each head and aggregation of income

5. Clubbing of income of spouse, minor child etc.

6. Set off or carry forward and set off of losses

7. Computation of gross total income

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8. Deductions from gross total income

- Deductions in respect of certain payments

- Deductions in respect of certain incomes

- Other deductions

9. Computation of total income

Total income = Gross total income

Less : Deductions

10. Rounding off of total income to the nearest multiple of Rs.10.

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DefinitionsAssesseeSec. 2(7)

Assesseemeans a person by whom any tax or any other sum of money is payableunder this Act, and includes

(a) every person in respect of whom any proceeding under this Act has beentaken for the assessment of

his income or 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 to such other person ;

(b) every person who is deemed to be an assessee under any provision of this Act;

(c) every person who is deemed to be an assessee in default under any provisionof this Act ;

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DefinitionsAssessmentSec. 2(8)

Assessment is the procedure by which the income of an assessee is determined

by the Assessing Officer.

Assessment includes reassessment.

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DefinitionsPersonSec. 2(31)

Personincludes

(i) an individual

(ii) a Hindu undivided family

(iii) a company

(iv) a firm

(v) an association of persons or a body of individuals, whether incorporated ornot,

(vi) a local authority, and

(vii) every artificial juridical person, not falling within any of the preceding sub-clauses.

Explanation.For the purposes of this clause, an association of persons or a body ofindividuals or a local authority or an artificial juridical person shall be deemed to be aperson, whether or not such association or body or authority or juridical person wasformed or established or incorporated with the object of deriving income, profits orgains.

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(i) Individual

Individualmeans a natural person i.e. a human being.

Includes males and females.

Also includes a minor or person of unsound mind. In such a case assessment may

be made u/s 161(1) on the guardian or manager of the minor or lunatic.

In the case of deceased person, assessment would be made on the legal

representative.

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(ii) Hindu Undivided Family (HUF)

Hindu undivided family has not been defined under the Income tax Act.

HUF defined under the Hindu law as a family, which consists of all males lineally

descended from a common ancestor and includes their wives and unmarried

daughters.

A male member continues to be a member of the HUF until there is a partition of

the family. After partition, he becomes a member of another smaller HUF.

A female member ceases to be a member of the HUF in which she was born, when

she gets married. On marriage, she becomes a member of her husbandsHUF.

HUF may contain many members, but members within four degrees (including the

head of the family i.e. Karta)are called co-parceners.

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(iii) CompanySec. 2(17)

Company" means

(i) any Indian company, as defined u/s 2(26) or

(ii) any body corporate incorporated by or under the laws of a country outsideIndia, i.e. any foreign company or

(iii) any institution, association or body which is or was assessable or wasassessed as a company for any assessment year under the Indian Income-taxAct, 1922 or which is or was assessable or was assessed under this Act as acompany for any assessment year commencing on or before the 1st day ofApril, 1970, or

(iv) any institution, association or body, whether incorporated or not andwhether Indian or non-Indian, which is declared by general or special orderof the Board to be a company for such assessment years as may be specifiedin the CBDTsorder.

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Domestic CompanySec. 2(22A)

Classes of Companies

1. Domestic companies

2. Foreign companies

1. Domestic company [Sec. 2(22A)]Domestic company" means

- an Indian company,

- or any other company

which, in respect of its income liable to tax under this Act,

has made the prescribed arrangements for the declaration and payment, within India,

of the dividends (including dividends on preference shares) payable out ofsuch income.

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Domestic Company Sec. 2(22A)

Prescribed arrangements for the declaration and payment of dividends within India

(Rule 27) :

1. Share register for all shareholders shall be maintained at the principal place of

business within India from 1stApril of each assessment year.

2. The general meeting of the shareholders for passing the accounts of the previous

year and declaring dividends in respect thereof shall be held only at a place within

India.

3. The dividends declared shall be payable only within India to all the shareholders.

Non-Indian companies will be treated as domestic companies only if they make

the prescribed arrangements for the declaration and payment of dividends in

India.

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Indian CompanySec. 2(26)

"Indian company" means a company formed and registered under the CompaniesAct, 1956 and includes

(i) a company formed and registered under any law relating to companies formerlyin force in any part of India, other than the State of Jammu and Kashmir and theUnion territories specified in sub-clause (iii) of this clause;

(ia) a corporation established by or under a Central, State or Provincial Act ;

(ib) any institution, association or body which is declared by the Board to be acompany under clause (17) ;

(ii) in the case of the State of Jammu and Kashmir, a company formed and registeredunder any law for the time being in force in that State ;

(iii) in the case of any of the Union territories of Dadra and Nagar Haveli, Goa, Daman

and Diu, and Pondicherry, a company formed and registered under any law forthe time being in force in that Union territory

Provided that the registered or, as the case may be, principal office of thecompany, corporation, institution, association or body in all cases is in India ;

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Foreign companySection 2(23A)

2. Foreign company [Sec. 2(23A)]

Foreign company" means a company which is not a domestic company.

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(iv) FirmSec. 2(23)

Firm" shall have the meaning assigned to it in the Indian Partnership Act, 1932.

Includes a limited liability partnership as defined in the Limited Liability PartnershipAct, 2008.

Partner" shall have the meaning assigned to it in the Indian Partnership Act, 1932.

Includes(a) any person who, being a minor, has been admitted to the benefits of partnership;

and

(b) a partner of a limited liability partnership as defined in the Limited LiabilityPartnership Act, 2008.

Partnership" shall have the meaning assigned to it in the Indian Partnership Act,1932.

Includes a limited liability partnership as defined in the Limited Liability PartnershipAct, 2008.

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(iv) Firm Sec. 2(23)

A partnershipis

- the relation between persons

- who have agreed to share the profits of business

- carried on by all or any of them acting for all.

The persons who have entered into partnership with one another are called

individually partnersand collectively a firm.

The Finance (No. 2) Act, 2009 has incorporated the taxation scheme of LLPsin the

Income tax Act on the same lines as applicable for general partnerships, i.e. tax

liability would be attracted in the hands of the LLP and tax exemption would beavailable to the partners.

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(v) Association of persons & Body of individuals

In order to constitute an Association of persons

- two or more persons

- must join in a common purpose

- and their object must be to produce income.

It is not enough that the persons receive the income jointly.

Co-heirs, co-legatees, co-donees joining together for a common purpose or actionwould be chargeable as an AOP.

Body of individuals denotes the status of persons like executors or trustees who merely

receive the income jointly and who may be assessable in like manner and to the sameextent as the beneficiaries individually.

Income tax shall not be payable by an assessee in respect of the receipt of share ofincome by him from BOI and on which the tax has already been paid by such BOI.

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(vi) Local authority & (vii) Artificial persons

Local authority means a municipal committee, district board, body of port

commissioners or other authority legally entitled to or entrusted by the

Government with the control and management of a municipal or local fund.

Artificial persons would cover every artificial juridical person not falling under

other heads e.g. an idol or diety.

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IncomeSec. 2(24)

Section 2(24)defines the term income. The definition is an inclusive definition and

not exhaustive. Thus, it gives scope to include more items in the definition of income

as circumstances may warrant.

Incomeincludes

(1) Profits and gains

(2) Dividend

(3) Voluntary contributions received by a trust / institution created wholly or partly

for charitable or religious purposes or by an association or institution referred to

in section 10(21), or by a fund or trust or institution referred to in Section

10(23C)(iiiad) / (iiiae) / (iv) / (v) / (vi) / (via) or by an electoral trust.

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Income Sec. 2(24)

Section Entity

10(21) Research association approved u/s 35(1)(ii)

10(23C)(iiiad)

& (vi)

Universities and other educational institutions

10(23C)(iiiae)& (via) Hospitals and other medical institutions

10(23C)(iv) Notified funds or institutions established for charitable purposes

10(23C)(v) Notified trusts or institutions established wholly for public religious

purposes or wholly for public religious and charitable purposes

13B Electoral trust

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Income Sec. 2(24)

(4) The value of any perquisite or profit in lieu of salary taxable under clauses (2)

and (3) of Section 17.

(5) Any special allowance or benefit, other than 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 ofprofit.

(6) Any allowance granted to the assessee either to meet his personal expenses at

the place where the duties of his office or employment of profit are ordinarily

performed by him or at a place where he ordinarily resides or to compensatehim for the increased cost of living.

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Income Sec. 2(24)

(7) 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 asubstantial interest in the company, or by a relative of the director or suchperson, and any sum paid by any such company in respect of any obligationwhich, but for such payment, would have been payable by the director or otherperson aforesaid.

(8) The value of any benefit or perquisite, whether convertible into money or not,obtained by any representative assessee under section 160(1)(iii) and (iv) or byany beneficiary and any sum paid by the representative assessee in respect ofany obligation which, but for such payment, would have been payable by thebeneficiary.

(9) Deemed profits chargeable to income-tax under Section 41 or Section 59.

(10) Profits and gains of business or profession chargeable to tax under Section 28.

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Income Sec. 2(24)

(11) Any capital gains chargeable under Section 45.

(12) The profits and gains of any business of insurance carried on by a mutual

insurance company or by a co-operative society, computed in accordance with

Section 44 or any surplus taken to be such profits and gains by virtue of

provisions contained in the First Schedule to the Act.

(13) The profits and gains of any business of banking (including providing credit

facilities) carried on by a co-operative society with its members.

(14) Any sum received by the assessee from his employees as contributions to anyprovident 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.

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Income Sec. 2(24)

(17) Any sum referred to in clause (va) of Section 28.

Thus, any sum, whether received or receivable in cash or in kind

- under an agreement for

not carrying out any activity in relation to any business; or

not sharing any know-how, patent, copyright, trade mark, licence,

franchise or any other business or commercial right of a similar nature;or

not sharing any information or technique likely to assist in themanufacture or processing of goods or provision of services.

(18) Any sum of money or value of property referred to in Section 56(2) (v), (vi), (vii)

or (viia).

(19) W.e.f. 1-4-2013 any consideration received for issue of shares as exceeds the fairmarket value of the shares referred to in Section 56(2) (viib).

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Capital v/s revenue receipts

The Act contemplates a levy of tax on income and not on capital (unless specifiede.g. capital gains).

Criteria to distinguish between capital and revenue receipts

1. A receipt referable to fixed capital is a capital receipt, whereas a receipt referableto circulating capital is a revenue receipt.

2. Profits arising from sale of a capital asset are chargeable to tax as capital gains u/s45, whereas profits arising from sale of a trading asset is taxable as businessincome u/s 28.

3. Profits arising from transactions which are entered into in the course of thebusiness regularly carried on by the assessee, or are incidental to or associatedwith the business of the assessee, would be revenue receipts.

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4. Profits from sale of shares and securitiesNature of profit to be ascertained from

the motive or purpose for which they were bought.

If shares acquired as an investor or with a view to acquiring a controlling interest

or for obtaining a managing or selling agency profit or loss on sale is of capital

nature.

If shares acquired in the ordinary course of business as a dealer in shares profit

or loss on sale is of revenue nature.

5. Even a single transaction may constitute a business or an adventure in the natureof trade. Thus a bulk purchase followed by a bulk sale or a series of retail sales

would constitute an adventure in the nature of trade and income arising

therefrom would be taxable.

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6. Annuities payable periodic intervals of time would be of a revenue nature.

Annuity received from an employertaxable as incomefrom salaries.

All other annuitiestaxable as incomefrom other sources.

Annual / installment payments of capitalcapital receipts, not taxable.

7. A receipt in substitution of a source of income is capital receipt.

Compensation received for termination of agency business, being the only source

of incomecapital receipt but taxable u/s 28(ii).

Compensation received from employer on premature termination of the service

contracttaxable u/s 15.

8. A lumpsum paid in commutation of salaries, pension, royalties or other periodic

paymentsincome taxable under the respective heads.

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9. Subsidies or grants received to supplement the income from businessrevenue

receipt.

Subsidies or grants received for a specific purpose (e.g. to enable the company to

relieve unemployment or promote family planning) and not to supplement the

income from businesscapital receipt.

10. Mining royaltiesrevenue receipts irrespective of whether received in lump sum

or by way of a fixed annual sum.

Royalties paid for usetaxable as income.

Payments received in lieu of total or partial assignment of patent under which the

owner ceases to own the patent as a capital assetcapital receipt.

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Assessment yearSec.2(9)

Assessment year" means the period of twelve months commencing on the 1st day of

April every year.

The year in which tax is paid is called the assessment year, while the year in

respect of the income of which the tax is levied is called the previous year.

For example for AY 2013-14, the relevant previous year is 2012-13 (1-4-2012 to 31-

3-2013).

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Previous yearSec.3

Previous year" means the financial year immediately preceding the assessment year.

The income earned in the previous year is taxed in the assessment year.

In the case of a business or profession newly set up during the financial year, the

previous year shall be the period beginning with the date of setting up of the

business or profession and ending with 31stMarch of the said financial year.

If a source of income comes into existence, in the said financial year, the previous

year shall be the period beginning with the date on which the source of income

newly comes into existence and ending with 31stMarch of the said financial year.

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