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Basic concepts of Income Tax
INTRODUCTION
Taxation is the practice of collecting taxes (money) from
Type of Taxation
1. Direct taxes: a tax which is born and paid directly by the
person on whom it is imposed is a direct tax. Example: income
tax, wealth tax, gift tax etc.
It is directly paid by the taxpayer to the Govt. without any
intermediaries & it comes from own pocket.
2. Indirect tax: if a tax is passed on by the taxpayer to some
other person as it is, is an indirect tax. E.g. sales tax, VAT etc.
It is not directly paid by the person on whom it is levied, but is
paid indirectly through the medium of other persons.
CBDT
Judicial Decision
Contd
City Compensatory Allowance/ Dearness allowance
Benefit or Perquisite to a Director
Any Benefit or perquisite to a Representative Assessee
Capital Gain
Insurance Profit
Banking income of a Co-operative Society
Winnings from Lottery
Employees Contribution Towards Provident Fund
Amount Received under Keyman Insurance Policy
Gift received for an amount exceeding 50,000
Consideration received for issue of shares
Person
Income-tax is charged in respect of the total income of the previous year of
every person. Hence, it is important to know the definition of the word person.
As per section 2(31), Person includes:
an individual:
a Hindu undivided family:
a company
a firm
an association of persons or a body of individuals whether incorporated or not:
a local authority: every artificial, juridical person, not falling within any of the
above categories
Assessee
In common parlance every tax payer is an assessee.
However, the word assessee has been defined in Section 2(7) of the Act
according to which assessee means a person by whom any tax or any other sum
of money (i.e. interest, penalty etc.) is payable under the Act and includes:
(a) 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 of
the income of any other person in respect of which he is assessable or to
determine the loss sustained by him or by such other person or to determine 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
provision of this Act.
CONTD..
Accordingly, assessee is a person by whom tax or any other sum is payable
Deemed Assessee
A person who is deemed to be an assessee for some other
Income earned in a year is taxable in the next year. The year in which
purpose.
Income of persons from transfer of property to avoid tax
Income of discontinued business
the case of all assesses. This exemption has been granted on account of the
constitutional provisions relating to the powers of the Central and the State
Governments for levying tax on agricultural income.
Under the Constitution only the State Governments are empowered to levy tax
on agricultural income. Hence, the Central Government while imposing
income-tax on incomes of various types has specifically excluded agricultural
income from the purview of Central income-tax. This exemption would,
however, be available only in cases where the income in question constitutes
agricultural income within the meaning of Section 2(1A).
(a) Any rent or revenue derived from land which is situated in India and is used for
agricultural purposes;
(b) Any income derived from such land by (i) agriculture; or
(ii) the performance by a cultivator or receiver of rent-in-kind of any process
ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce
raised or received by him fit to be taken to market; or
(iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or
received by him, in respect of which no process has been performed other than a process
of the nature described in paragraph (ii) of this sub-clause ;
(c) Any income derived from any building owned and occupied by the receiver of the
rent or revenue of any such land, or occupied by the cultivator or the receiver of rent-inkind, of any land with respect to which, or the produce of which, any process mentioned
in paragraphs (ii) and (iii) of sub-clause (b) is carried on:
Section 10 of Income Tax Act has given a long list of incomes which are
totally exempt from tax and so these incomes are not included in the
gross total income of the assessee. In other words, such incomes are
totally Tax-Free.
While calculating Total Income in any previous year of any person, any
income coming under the following clauses shall be exempted.
companies.
Subsidy received from Tea Boards
Subsidy received by assessee engaged in the business of growing and
manufacturing rubber coffee cardamom
Income of 100% EOU (Export Oriented Units)
Allowances of members of Parliament
Pension to gallantry award winners
Agricultural income
Dividend received from any Indian company.
Capital gain on the transfer of units
Capital gain on compulsory acquisition of urban agricultural land
LTCG on transfer of equity shares/ units in cases covered by
Securities Transaction Tax
Residential Status
Contd..
Section 6 of the Income-tax Act prescribes the tests to be applied to
determine the residential status of all tax payers for purposes of income-tax.
There are three alternative tests to be applied for individuals, two for
companies and Hindu Undivided Families and firms, associations of persons,
bodies of individuals and artificial juridical persons.
An assessees residential status must be determined with reference to the
previous year in respect of which the income is sought to be taxed (and not
with reference to the assessment year).
Non-Resident
If an individual does not satisfy any of the above basic condition
Not Ordinarily
Resident (Satisfies any
condition from 1 & 2)
Condition 1: If individual is in India in the previous year for a total period of 182 days or more.
Condition 2: If he has been in India for at least 365 days during the 4 years preceding the previous
year and has been in India for at least 60 days during the previous year. However this clause will not
be applicable if he is a:
Citizen of India, who leaves India in any previous year as a member of the crew of an Indian ship,
or for the purpose of employment outside India or
Citizen of India or of Indian origin engaged outside India (whether for rendering service outside or
not) and who comes on a visit to India in the any previous year.
Condition 3: An individual who has been a non-resident in India in at least nine out of the ten
previous years preceding that year, and has during the seven previous years preceding that year been
in India for a period of, or periods amounting in all to 729 days or less.
If Karta of Resident HUF satisfies both the following additional conditions (as
applicable in case of Individual) then Resident HUF will be ROR, otherwise it will be
RNOR:
Additional Conditions :
(1) Karta of Resident HUF should be resident in atleast 2 previous years out of 10
previous year immediately
preceding relevant previous year.
(2) Stay of Karta during 7 previous year immediately preceding relevant previous year
should be 730 days or more.HUF can be not ordinarily resident
Firms, association of persons, local authorities and other artificial juridical
persons can be either resident (ordinarily resident) or non-resident in India but
they cannot be not ordinarily resident in India.
Resident
Non- Resident
resident in India regardless of the place of control and management of its affairs.
In the case of a foreign company the place of control and management of the affairs is
the basis on which the companys residential status is determinable.
a non-Indian company would be resident in India only if the whole of the control and
management of its affairs throughout the relevant previous year are exercised from
India. In other words, even if a negligible part of the control and management is
exercised from outside India the company would be a nonresident for income-tax
purposes. Thus, a foreign company with its registered office outside India could be
treated as resident in India if the control of its affairs is exercised wholly from India.
Like other tax payers, a company may also be resident in more places than one
although it can have only one registered office.
(SECTION 5)
Section 4 of the Act imposes a charge of tax on the total or taxable income of
the assessee. The meaning and scope of the expression of total income is
contained in Section 5.
The total income of an assessee cannot be determined unless we know the
residential status in India during the previous year. The scope of total income
and consequently the liability to income-tax also depends upon the following
facts:
(a) whether the income accrues or is received in India or outside,
(b) the exact place and point of time at which the accrual or receipt of income
takes place, and
(c) the residential status of the assessee.
(C) Non-Resident
Sub-section (2) of Section 5 provides that the total income of a non-resident
would comprise of:
(i) income received or deemed to be received in India in the accounting year by
or on behalf of such
person;
(ii) income which accrues or arises or is deemed to accrue or arise to him in India
during the previous year.
ROR
RNOR
NRI
YES
YES
YES
YES
YES
YES
YES
YES
NO
NO
NO
YES
NO
NO
NO
NO
NO
Practical Question
Mr. X earns the following income during the financial year 2014-15:
Amt (Rs.)
(a)
1,20,000
(b)
1,80,000
2,00,000
(d)
1,25,000
(e)
4,00,000
(f)
10,000
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