Income Tax Fundamental Concepts

FUNDAMENTAL CONCEPTS UNDER INCOME TAX ACT, 1961.

-: Complied By :-Prof. Rajesh Jain

[email protected]

Classification of Taxes

Direct Taxes Indirect Taxes

Meaning It is a tax where incidence as well as impact of tax is on one and the same person. In other words, it is borne by the assessee and cannot be passed on to the customer.

It is a tax where the incidence is on one person but the impact is on the customer. In other words, the person on whom tax is levied passes on the tax burden to the customer.

Example a) Income Taxb) Wealth Tax

a) Sales taxb) VATc) Excise dutyd) Customs dutye) Service tax

Burden Burden not felt by all persons Burden shouldered by all persons

Charge of Income Tax [ Section 4 ]

As provided in Section 4, the total income of the previous year of every person shall be charged to Income Tax at the rates prescribed in the annual Finance Act as applicable to the relevant assessment year

Important Definitions1. Person [Sec 2(31)] :

The income tax is charged in respect of total income of the previous year of every person. Here, the person means,

a. Individual

b. Hindu Undivided Family [ HUF ]

c. Association of Persons [ AoP ] or Body of Individuals [BoI]

whether incorporated or not.

d. Company,

e. Firm

f. Local Authority

g. Every Artificial Juridical Person [ AJP ] not falling in any of the preceding categories.

Definitions Contd..

2. Assessee [ Sec 2(7) ] :Income Tax Act,1961 defines “assessee” as a person by whom any tax or any other sum of money is payable under this Act, and includes,

* Every person in respect of whom any proceeding under this Act has been taken for the assessment of his income or income of any other person in respect of which he is assessable, or of the loss sustained by him or such other person, or the amount of refund due to him or to such other person.

* Any Person who is deemed to be an assessee under any provisions of this Act.

* Any Person who is deemed to be an assessee in default under any provisions of the Act.

Definitions Contd..

3. Previous Year [Sec 3] :

“The year in which income is earned is known as Previous Year. Previous Year is the Financial Year immediately preceding the Assessment Year.”

Notes : * All assessees are required to follow financial year

( i.e. Apr To Mar ) as previous year.

* This uniform previous year has to be followed for all

sources of income.

Definitions Contd..

4. Assessment Year [Sec 2 (9)] :

“ `Assessment Year’ means the period starting from April 1 and ending on March 31, next year.”

Income of Previous Year of the Assessee is taxed during the next following assessment year at the rates prescribed by relevant Finance Act.

Definitions Contd..5. Income [Sec 2 (24)] :

Under Sec.2(24), the term “income” specifically include the following :

1. Profit & Gains

2. Dividend

3. Voluntary Contributions received by Trust

4. Perquisites in the hands of employees.

5. Any Special Allowance or benefit

6. City Compensatory Allowance/Dearness Allowance

7. Any benefit or perquisites to a director

8. Any benefit or perquisites to a representative assessee.

9. Any sum chargeable under section 28, 41 & 59.

10. Capital Gains

11. Insurance Profit

12.Banking income of a Co-operative Society

13.Winning from Lottery.

14. Employees Contributions towards provident fund

15. Amount received under Keyman Insurance Policy.

16.Amount exceeding Rs.50000/- by way of Gift received by an individual or HUF.

Definitions Contd..

Income [Sec 2 (24)] : contd..

The definition of the term “income” u/s 2(24) is inclusive and not exhaustive. Therefore, the term “income” not only includes those things which are included in section 2(24) but also includes such things which the term signifies according to its general & natural meaning.

Therefore, following points must be kept in mind while assessing income :

1. Income can be in any form i.e. in Cash or in kind.

2. Income will also include illegal income, if any.

3. Disputed title to income does not make any difference.

4. Income must come from Outside. One cannot earn profit from oneself.

5. Income should be real & not fictional. (E.g. : H.O. & Branch transactions)

6. Receipt in lump sum or in instalment does not make any difference.

7. There is difference between Capital Receipts & Revenue Receipts.

All Revenue receipts are taxable unless specifically exempt, while all capital receipts are exempt unless specifically taxed.

8. Income includes loss.

9. Same income cannot be taxed twice.

Definitions Contd..

7. Gross Total Income [Sec 14] :

As per Section 14 income of a person is computed under the following heads,

1. Salaries

2. Income from House Properties

3. Profits & Gains of Business or Profession

4. Capital Gains

5. Income from other Sources.

The aggregate income under these heads is termed as

“ Gross Total Income”.

Definitions Contd..

8. Total Income [ Sec 2 (45) ] :

“` Total Income ’ means the total amount of income referred to in Section 5, computed in the manner laid down in the Act.”

In other words, it is the income after allowing the deductions u/s 80 C to 80 U.

Definitions Contd..

Computation of Total Income

Particulars Amount

1 Income from Salaries xxx

2 Income from House Properties xxx

3 Profits & Gains of Business & Prof. xxx

4 Capital Gains xxx

5 Income from other Sources xxx

Less : Set off & carry forward of Losses xxx

Gross total Income XXX

Less : Deductions u/s 80 C to 80 U xxx

Total Income XXX

Rates of Tax for A.Y. 2014-15:(As per Part III of the First Schedule to

the Finance Act, 2013)

Tax RatesIn case of Very Senior Citizen

( Age >= 80 + )1. Where the total income does not

exceed Rs. 5,00,000

2. Where the total income exceeds Rs. 5,00,000 but does not exceed Rs. 10,00,000

3. Where the total income exceeds Rs. 10,00,000

1. NIL

2. 20% of the amount by which the total income exceeds Rs. 5,00,000

3. Rs. 1,00,000 plus 30% of the amount by which total income exceeds Rs. 10,00,000

Tax Ratesin the case of Resident Senior Citizen

( Age 60 – 79 Years )

1. Where the total income does not exceed Rs. 2,50,000




1. NIL


3. Rs. 25,000 plus 20% of the amount by which the total income exceeds Rs. 5,00,000


Tax RatesFor any other Individual ( including resident women), every

HUF/AOP/BOI/AJP

1. Where the total income does not exceed Rs. 2,00,000




1. NIL


3. Rs. 30,000 plus 20% of the amount by which the total income exceeds Rs. 5,00,000


Tax Rates In the case of every co-operative society-

1. Where the total income does not exceed Rs. 10,000

2. Where the total income exceeds Rs. 10,000 but does not exceed Rs. 20,000

3. Where the total income exceeds Rs. 20,000

1. 10% of the total income

2. Rs. 1,000 plus 20% of the amount by which the total income exceeds Rs. 10,000

3. Rs. 3,000 plus 30% of the amount by which total income exceeds Rs. 20,000

Tax Rates In case of every Firm & Local Authority-

On the whole of the total income

30 %

Tax RatesIn case of a Company

I. In case of a domestic company

II. In the case of a company other than a domestic company

i) on certain specified incomes

ii) on the balance, if any, of the total income

30 % of the total income

50 %

40 %

Surcharge on Income Tax

In addition to the amount of income tax computed as per the above mentioned rates or as per section 111A or section 112, every company shall be liable to pay surcharge only if its total income exceeds Rs. 1 crore. The rates of surcharge are:

Domestic Company : 5%

Company other than domestic company : 2%

Marginal Relief is provided to all companies having a total income exceeding Rs. 1 crore.

( Refer example given below )

Surcharge on Income Tax

Example of Marginal Relief :

In this case XYZ Ltd has to Pay ₹ 1,53,150/- as a additional tax on additional income of Rs.10000/-.

Which is more than the additional income. Hence, Marginal Relief of ₹ 1,43,150/-shall granted to XYZ Ltd.

(In other words, additional tax liability shall not exceed additional income over Rs.1 Cr.)

ABC LTD XYZ LTD

TOTAL INCOME : 1,00,00,000 TOTAL INCOME : 1,00,10,000

Tax on Income : 30,00,000 Tax on Income : 30,03,000

Surcharge : Nil Surcharge @5% : 1,50,150

Total Tax : 30,00,000 Total Tax : 31,53,150

Diff : -- Diff : 1,53,150

Cess

Education Cess @ 2% Secondary & Higher Education Cess @ 1% shall be levied on total tax payable including surcharge, if any. Unlike surcharge, Education Cess is applicable to all assessees.

RESIDENTIAL STATUS AND SCOPE OF TOTAL INCOME

Tax Liability = Total Income * Rate of Tax

Residential Status ≠ Citizenship

Residential Status

Resident Non - Resident

Ordinarily Resident

Not Ordinarily Resident

Section 6(1)

Section 6(6)

Section 6(1) – [Satisfy any one]

Basic Condition (a):

182 days or more during the previous year.

OR

Basic Condition (b):

60 days or more during previous year&

365 days or more during 4 years immediately preceding the relevant previous years.

e.g. : F.Y. 2013-14, relevant previous years are:I 2012-13 II 2011-12 II 2010-11 II 2009-10 I

Exception to Basic Condition (b)

As per this Exception, In the following cases, an individual will be resident in India only if he is in India during relevant previous year for at least 182 days; and Basic Condition (b) will not be applicable.

1. Indian Citizen, who being in India, leaving India, for employment (includes self employed)

2. Indian Citizen, who being in India, leaving India, Indian ship as a crew member.

3. Indian Citizen, who stays outside India, comes to India during relevant previous year, for visit.

4. Person of Indian origin, who being outside India, comes to India during relevant previous year, for visit.

(Note : A person is deemed to be an Indian Origin if he or either of his parents or any of his grand parents, was born in Undivided India.)

Section 6(6) – [Satisfy both]

i. He has been resident in India in at least 2 years out of the 10 years immediately preceding the relevant previous year.

AND

ii. He has been in India for a period of 730 days or more during 7 years immediately preceding the relevant previous year.

Residential Status

Individual

Stay in India

Section 6 (1): [Any One]a) 182 days or more during P.Y. 2013-14

ORb) 60 days or more during P.Y. 2013-14

AND365 days or more during PY. 2009-10 to 2012-13

[Remember 4 exceptions]

Section 6 (6): [Both]1) Resident for 2 out of 10 years (From 2003-04 to 2012-13)

AND2) 730 days or more during 7 years (From 2007-08 to 2013-14)

Hindu Undivided Family

Control and Management

Wholly in IndiaPartly in India &

Partly outside IndiaWholly outside

India

Resident

Section 6(6)

If Karta satisfy Section 6(1)If Karta does not satisfy

Section 6(6)

HUF = “R & OR” HUF = “R & NOR”

Non - Resident

Company

Registration

In India Outside India

Indian Company

Always Resident

Foreign Company

Wholly in IndiaPartly in India &

Partly Outside IndiaWholly Outside

India

Resident Non-Resident Non-Resident

Control & Management

Firm / Association of Persons & Body of Individuals / Local Authority / Artificial Juridical Person

Control and Management

Wholly in IndiaPartly in India & Partly

outside India Wholly outside India

Resident Resident Non-Resident

Important NOTE : There is no further classification into Resident & Ordinarily Resident, Resident & Not Ordinarily Resident, in case of Company, Firm,

Association of Persons & Body of Individuals, Local Authority, Artificial Juridical Person

Scope of Total Income [ Sec 5 ]

Particulars Resident Not OrdinaryResident

Non-Resident

Taxability Taxability Taxability

INDIAN INCOME

1. Income received or deemed to be received in India, whether earned in India or elsewhere.

2. Income which accrues or arises or is deemed to accrue or arises in India during the previous year, whether received in India or elsewhere.

Yes

Yes

Yes

Yes

Yes

Yes

Scope of Total Income [ Sec 5 ] contd..

Particulars Resident Not OrdinaryResident

Non-Resident

Taxability Taxability Taxability

FOREIGN INCOME

1. Income which accrues or arises outside India and received outside India from a business controlled from India or Profession set up in India.

2. Income which accrues or arises outside India and received outside India in the previous year from any other source.

Yes

Yes

Yes

No

No

No.

Income Tax Fundamental Concepts

Law

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