Unit I
INTRODUCTION & BASIC CONCEPTS
Tax
is a fee charged by a government on a product, income or activity. There are
two types of taxes – direct taxes and indirect taxes (See Chart below this
paragraph).
Income
tax is one of the forms of Direct Taxes. Tax is the financial charge imposed by
the Government on income, commodity or activity. Government imposes two types
of taxes namely Direct taxes and Indirect taxes.
·
Direct tax is one where burden of
tax is directly on the payer e.g income tax, wealth tax etc.
·
Indirect tax is paid by the
person other than the person who utilizes the product or service e.g Excise
duty, Custom duty, Service tax, Sales Tax, Value Added Tax.
Income-tax
is one of the major sources of revenue for the Government. The responsibility
for collection of income-tax vests with the Central Government.
Why are Taxes Levied (charged)?
The reason for levy of
taxes is that they constitute the basic source of revenue to the government.
Revenue so raised is utilized for meeting the expenses of government like
defence, provision of education, health-care, infrastructure facilities like
roads, dams etc.
Basic Concepts to Income Tax
“Income Tax is levied on the total income of the previous year of every person.”
To levy income tax, one must have the understanding of the various
concepts related to the charge of tax like previous year, assessment year,
Income, total income, person etc.
1)
Income
This is a very
important term as income tax is charged on the income of a person. The
definition of Income is given in Section 2(24) of the Act. As per section
2(24), the term income includes:
1. Profits
and gains;
2. Dividend;
3. Voluntary
contributions: Voluntary contributions received by :
– a trust
created wholly or partly for charitable or religious purposes
– a scientific
research association; or
– a fund or
trust or institution established for charitable
– any university
or other educational
– An electoral
trust.
4. The value
of any perquisite or profit in lieu of salary taxable.
5. Any
special allowance or benefit specifically granted to the assesse to meet
expenses wholly, necessarily and exclusively for the performance of the duties
6. City
Compensatory Allowance/ Dearness allowance: 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 compensate him for the increased cost
of living.
7. Benefit or
Perquisite to a Director: The value of any benefit or perquisite, whether
convertible into money or not, obtained from a company by: (a) a director, or
(b) a person having substantial interest in the company, or (c) a relative of
the director or of the person having substantial interest
8. Any Benefit or perquisite to a
Representative Assessee
9. Any sum
chargeable to tax as business income
10. Capital Gain
11. The profits
and gains of any business of insurance carried on by a mutual insurance
company or by a
co-operative society
12.The profits
and gains of any business
13. Any winnings
from lotteries, crossword puzzles, races, including horse-races,
card-games and
games of any sort or from gambling or betting of any form.
(i)
"lottery"
includes winnings, from prizes awarded to any person by draw of lots or by
chance or in any other manner whatsoever,
(ii)
"card game and other game of any
sort" includes any game show, an entertainment programme on television or
electronic mode, in which people compete to win prizes or any other similar
game;
14. 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 (34 of 1948) or any other fund for the welfare of
such employees.
15 Any sum
received under a Keyman Insurance Policy. Keyman Insurance Policy means a life
insurance policy taken by a person on the life of another person who is or was
the employee of the first mentioned person or is or was connected with the
business.
16. Gift
received for an amount exceeding ` 50,000: Any sum of money or value of
property referred to in clause (vii) or clause (viia) of sub-section (2) of
sec. 56
Meaning of Income as generally Understood
In
general terms, Income is a periodical monetary return with some sort of
regularity. A study of some of the broad principles given below will help to
understand the concept of income:
1.
Cash or kind
Income
may be received in cash or kind. When the income is received in kind, its
valuation will be made
in
accordance with the rules prescribed in the Income-tax Rules, 1962.
2.
Receipt basis/ Accrual basis
Income
arises either on receipt basis or on accrual basis. The income in some cases is
deemed to accrue or arise to a person without its actual accrual or receipt.
Income accrues where the right to receive arises.
3.
Legal or illegal source
The
income-tax law does not make any distinction between income accrued or arisen
from a legal source and income tainted with illegality
4.
Temporary/Permanent
There
is no difference between temporary and permanent income under the Act. Even
temporary income is taxable same as permanent income.
5.
Lump sum / installments
Income
whether received in lump sum or in installments is liable to tax. For example:
arrears of salary or bonus received in lump sum is income and charged to tax as
salary.
6.
Gifts
Gifts
of personal nature do not constitute income subject to maximum of Rs. 50,000
received in cash.
7. Revenue
or Capital receipt: Income-tax, as the name implies, is a tax on income
and not a tax on every item of money received. Therefore, unless the receipt in
question constitutes income as distinguished from capital, it cannot be charged
to tax. For this purpose, income should be distinguished from capital which
gives rise to income.
The concept of income
is very important as it is the income that is taxed under the income tax act.
The definition of income under this act is a very wide and includes profits and
gains, dividends, voluntary contributions, perquisites, allowances, discharge
of an obligation, compensation receipts, profits on sale, cash assistance
received against exports, recovery of loss or expenditure, recovery of bad
debts, any wins from lottery, cross word puzzles, races, card games, gambling,
betting etc.
2) Gross total income
[Sec.80B (5)]
The aggregate of net taxable income
under various heads of income is termed as Gross total income.
(i)
Income from Salaries
(ii)
Income from House Property
(iii)
Profit and Gains of Business and Professions
(iv)
Capital Gains
(v)
Income from Other Sources
It is computed after allowing for the
deductions specific to various heads of income, set off of losses and
allowances or set off of carry forward losses and allowances and clubbing of
income of any other person that may be liable to be included in assesses total
income.
3)Total Income [Sec.2 (45)]
Total income is
arrived at after allowing deductions under Sec.80C to 80U from the gross total
income. The amount so arrived is rounded off to the nearest multiple of ten
rupees. The income tax is charged on total income of an assesse.
4)Agricultural Income:
Agricultural income in India is not chargeable to
tax [sec. 2 (1A)]
5)Rates
of Income tax:
The rates of income tax are prescribed every year by
the finance act which follows a combination of flat and slab rates for charging
tax on total income. Rebate [sec.87]
Rebate is a reduction allowed in the amount of
income tax computed in case of certain types of assessee.
6)Assessee [Sec.-2(7)]:
An assessee is a
person who is liable to pay any sum under the Income tax act. It is not
necessary that the income in respect of which a person is considered an
assessee should be his own, that is a person can be a deemed assessee on some
other person’s income as well.
The assesse means a person:
(i)Who is liable
to pay tax [sec.2 (7)]
(ii)A person who
is liable to pay any other sum (interest, penalty etc.)
(iii)For whom any proceedings under this act has been taken
for the assessment of his income of fringe benefits; or
(iv)For whom any proceedings under this act has been taken for
the assessment of the income of any other person in respect of which he is
assessable; or
(v) For whom any proceedings under this act has been taken for
the assessment of the loss sustained by him or by such other person; or
(vi)For whom any proceedings under this act has been taken for
the amount of refund due to him or by such other person
(vii)Who is deemed to be an assessee under any provision of
this act;
(viii) Who is deemed to be an assessee in default under any
provision of this act
Deemed Assessee [sec.2
(7b)]
The Deemed assessee is a person who has
been treated as an assessee for some other person. The deemed assessee is assessed on the income
or loss of any other person. For example, the legal representative of the deceased
the guardian of a minor, the agent of a non-resident and the trustee of a trust
etc, are termed as deemed assessee.
Deemed
to be an assessee in default [sec.2 (7c)]
A person is deemed to be an assessee in
default if he does not fulfil his statutory duty under the income tax act. For
example, if any person who is required to deduct tax at source does not deduct
it, or after having deducted, fails to pay it to the Central government, he is
deemed to be an assessee by default in respect of the tax.
7)Person [Section
2(31)]
The term person
includes:
(i)
an
individual,
(ii)
a
Hindu Undivided Family (HUF),
(iii) a
company,
(iv) a
firm,
(v) an
AOP or a BOI, whether incorporated or not,
(vi) a
local authority, and
(vii) every
artificial juridical person e.g., an idol or deity.
(i)
Individual - Individual means a natural person, or a human being. Itincludes
both males and females, a minor or a person of unsound mind.
(ii)
HUF - Hindu undivided family (HUF) is treated as aseparate entity for
the purpose of assessment. It consists of all males lineally descended from a
common ancestor and includes their wives and unmarried daughters.
(iii)Company
[Section 2(17)] -A
‘Company’may be defines as an artificial person joining created by the law for
a common purpose, a common seal and shares carrying limited liability.
(iv)
A partnership firmunder the partnership act
(v) Association of Persons (AOP) - In order to constitute an association, persons must join in a
common purpose, common action and their object must be to produce income.
(vi)Body of Individuals
(BOI) – It 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 same extent as the beneficiaries
individually. Thus co-executors or co-trustees are assessable as a BOI as their
title and interest are indivisible.
(vi) Local Authority - The term means a municipal committee, district board, etc.
(vii) Artificial Persons - This category could cover
every artificial juridical person which is established under special act of
legislature, an idol, or deity etc.
8)Assessment year 2(9)-
This means a periodof 12 months commencing on 1st 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 the assessment year 2016-17, the relevant previous year is 2015-16
(1.4.2015 to 31.3.2016).
9)Previous year
[Section 3] –The year in which income is earned is
termed as the previous year. Income tax is charged on the total income of the
previous year, and the income earned during the previous year is assessed to
tax at the rates and as per the provisions applicable for the assessment year.
In other words, the income chargeable to tax in the assessment year is the one
actually earned in the previous year.
·
Generally, previous year means the
financial year immediately preceding the A.Y. Financial Year begins on 1st
April and ends on 31st march.
·
Business or profession newly set up
during the financial year - In such a case, the previousyear
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. In this case,
the first previous year may be of less than 12 months
·
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.
Illustration:
1.
A is running a business from 1992 onwards. Determine the previous year for
theassessment year 2013-14.
Ans. The previous
year will be1.4.2012 to 31.3.2013.
2. A
chartered accountant sets up his profession on 1st July, 2012. Determine the
previousyear for the assessment year 2013-14.
Ans. The previous
year will be from1.7.2012 to 31.3.20
Tax Evasion
When a person
reduces his total income by making false claims or by concealing the
information regarding his real income, so that his tax liability is reduced, is
known as tax evasion. It is not only illegal but it is also immoral, anti-
social, and anti- national practice.
Tax Avoidance
It is an art of
dodging tax without actually breaking the law. It is a method of reducing tax
incidence by availing of certain loopholes in the law.
Tax Planning
It may be defined as an arrangement of one’s financial affairs in such a way that without violating in any way the legal provision of an Act, full advantage is taken of all exemptions, deductions, rebates and reliefs permitted under the Act, so that the burden of the taxation on an assessee, as far as possible, the least.
It may be defined as an arrangement of one’s financial affairs in such a way that without violating in any way the legal provision of an Act, full advantage is taken of all exemptions, deductions, rebates and reliefs permitted under the Act, so that the burden of the taxation on an assessee, as far as possible, the least.
Agricultural Income [Sec. 10 (1)]
Agriculture income is exempt under the Indian Income Tax
Act. However, while computing tax on non-agricultural income agricultural
income is also taken into consideration.
Conditions: Under IT
Act, to be classified as Agricultural Income, the following two conditions
should be satisfied –
(a) The Income should be derived from land
situated in India, and
(b) The Land should be
used for agricultural purposes.
Agricultural Income means:
As per Income Tax Act income earned
from any of the under given three sources meant Agricultural Income;
(i) Any
rent received from land which is situated in India and used for agricultural
purpose.
(ii) 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.
(iii) Income
from a farm house subject to certain conditions.
Now income earned from carrying nursery operations is also
considered as agricultural income and hence exempt from income tax.
1. Any income received as rent or
revenue from agricultural land
When the owner of land is not performing
agricultural operations himself but gives his land on contract basis, any
amount received from the actual cultivator by the owner of the land shall be
agricultural income.
Income from sale of agricultural
land. The Finance Act, 1989 has added an explanation to section 2(IA) that any
income from transfer of urban agricultural land will not form part of
agricultural income. It will he taxable income under the head “capital Gains. “.
2. Income derived from
Agricultural operations
Income derived from land situated in India by
applying agricultural operations shall be agricultural income. If all the basic
operations like preparation of land for sowing, planting, watering, harvesting
etc. are applied, any income resulting from such operations shall be
agricultural income. On the other hand, if grass, trees etc. have grown
spontaneously or without the aid of human skill, effort, labour etc., any
income resulting from the sale of such grass, trees or lease rent of such land
shall not he agricultural income.
Income
which is in the nature of by-products of agricultural land such as selling of
milk, the pasturing of cattle etc. can safely be included in agricultural
income.
3. Any income by the performance
of any process to render the produce marketable
If, a process is to be employed by the
cultivator himself or the landlord who receivesthese produce as rent-in-kind,
any income derived from such a process shall be agricultural income. Such a
process must be employed to render the produce fit for marketing. The process
may he manual or mechanical. It should be noted that the produce should not
change its original character in spite of the processing unless the produce
cannot be sold in that form or condition.
This can further be elaborated with following examples
(i)
Unginned cotton can be sold in its original form and if any profit is
attributable to the ginning operation.
(ii) Tobacco
leaves need to be dried to make them suitable for the market and thus profit
earned by selling dried tobacco shall be agricultural income.
(iii) Drying and
curing of coffee after picking beans, husking of paddy, conversion of latex into sole crepe or smoked
sheets
4. Any income received by the
sale of produce
Any income derived by any
person by the sale of agricultural produce raised by him or received as
rent-in-kind shall also be agricultural income even if he keeps a shop for the
sale of such produce.
5. Income from buildings used for
agriculture
Any income derived from a building used for agricultural
operations shall be agricultural income if the following conditions are
satisfied:
a) The building from where the income is
received is occupied by the owner, or by the cultivator or by the receiver of
rent-in-kind.
b) It is situated on or in the immediate
vicinity (area) of the agricultural land.
(b)
Building is used as a dwelling house or a store house or other out-building by
the cultivator or the receiver of the rent-in-kind, by reason of his connection with the land.
the cultivator or the receiver of the rent-in-kind, by reason of his connection with the land.
(c) The
land if assessed to land revenue in India or is subject to a local rate
assessed and collected by officers of the Government and in case the land is
not assessed to land revenue or to local rate, it should not be situated within
the urban areas.
6.
Income from saplings or seedlings
The income derived from saplings and
seedlings grown in a nursery shall be deemed to be agricultural income.
Agricultural Income (Important Points)
In order to consider an income as
agricultural income certain points have to be kept in
mind:
(i) There must be a land in India.
(ii) The land is being used for agricultural
operations.
(iii) Agricultural operation means that
efforts have been induced for the crop to sprout out of the land.
(iv) If any rent is being received from the land
then in order to assess that rental income as agricultural income there must
be agricultural activities on the land.
(v) In order to assess income of farm house as
agricultural income the farm house building must be situated on the land
itself only and is used as a store house/dwelling house.
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Certain income which is treated as Agriculture Income;
(a) Income from
sale of replanted trees.
(b) Rent received for
agricultural land.
(c) Income from
growing flowers and creepers.
(d) Share of profit of a
partner from a firm engaged in agricultural operations.
(e) Interest on
capital received by a partner from a firm engaged in agricultural operations.
(f) Income derived
from sale of seeds.
Certain income which is not treated as Agricultural Income;
(a) Income from
poultry farming.
(b) Income from bee
hiving.
(c) Income from sale of
spontaneously grown trees.
(d) Income from dairy
farming.
(e) Purchase of standing
crop.
(f) Dividend paid
by a company out of its agriculture income.
(g) Income of salt
produced by flooding the land with sea water.
(h) Royalty income from
mines.
(i) Income from butter
and cheese making.
(j) Receipts from TV
serial shooting in farm house is not agriculture income.
Certain points to be remembered;
(a) Agricultural
income is considered for rate purpose while computing tax of
Individual/HUF/AOP/BOI/Artificial Judicial Person.
(b) Losses from
agricultural operations could be carried forward and set off with agricultural
income of next eight assessment years.
(c) Agriculture
income is computed same as business income.
Partly Agricultural
Income
Sometimes
there is composite income, which is partially agricultural and partially non -
agricultural. For determining the non - agricultural income chargeable to tax,
the market value of any agricultural produce which has been raised by assesse
and which has been utilized as a raw material in such business, shall be
deducted. No further deduction shall be made in respect of cost of cultivation.
For
this purpose, market value shall be deemed to be:
(a) Where
the agricultural produce is ordinarily sold in the market, the value calculated
according to the average price at which it has been sold; during the previous
year; or,
(b) Where
the agricultural produce is not ordinarily sold in the market the aggregate of
the following shall be its market value:
(i)
The expenses of cultivation
(ii)
The land revenue or rent paid for the
land for which it was grown;
(iii)
The profit which in the opinion of the
Assessing Officer is reasonable.
Examples:(1)
Profit of such sugar factories where sugarcane grown on their own farms, are
treated as partly agricultural income. (Sugarcane is generally sold in the
market. Hence in order to separate the agricultural income from the business
income, the average market price of sugarcane shall be charged as an
expenditure.)
(2)
Income from growing and manufacturing tea: 60% of the income derived from the
sale of tea grown and manufactured by the seller in India is deemed to be
agricultural income.
(3)
Income from growing and manufacturing of centrifuged (separator) latex (milk):
65% of the income derived from the sale of such product a manufactured or
processed in India is deemed to be agricultural income.
(4)
Income from growing and manufacturing of coffee: (a) 75% of the income derived
from the sale of coffee grown and cured by the seller in India is deemed to be
agricultural income.
(b)
60% of the income derived from the sale of coffee grown, cured, roasted and
grounded by the seller in India, with or without mixing of other flavoring
ingredients is deemed to be agricultural income.
UNIT
II
RESIDENTAIL STATUS AND TAX LIABILITY
The scope of total income of an assessee
is determined with reference to his residence in India in the previous year.
Residence and citizenship are two different things. (sec.5)
An Indian may be non – resident and a
foreigner may be resident for income tax purposes. The residence of a person
may change from year to year but citizenship cannot be changed every year. A
person may be resident in more than one country for the same previous year.
(sec.6)
Different
Typesof Residents
On the basis of residence, the assesses
are divided into three categories:
(1) Person who are resident in India,
known as ordinarily resident;
(2) Person who are not ordinarily
resident in India
(3) Person who are non - resident in
India
There are separate rules for determining
the residence of different kinds of assesses. The different kinds of assesses
are individuals, Hindu Undivided Families, Firms, An association of persons,
Companies, local authorities, and artificial judicial persons.
I. Residential Status of an Individual Sec 6
previous year and for 365 days or more during 4
years immediately preceding the previous year I. Resident and
Ordinarily Resident:An individual is said to be residentin
India if he satisfies any one of the following Basic conditions:
Basic Conditions
(i)
He is in India for 182 days or more in the relevant previous
year or
(ii)He
is in India for 60 days or more during the relevant.
If
he does not satisfy any one of the conditions above, he shall be non-resident.
Exceptions:
Basic condition (ii) is not
applicable in following cases;
a.
If Indian Citizen leaves India during the previous year for employment outside
India or as a member of crew of an Indian Ship, he must have stayed in India
182 days instead of 60 days.
b.
If Indian citizen or person of Indian origin who is living outside India,
visits India during previous year, he must have stayed in India 182 days
instead of 60 days.
In other words, only condition (i)
is to be satisfied to become a resident in India by these individuals.
Additional conditions:
An
individual who is resident in India shall be resident and ordinarily resident
(ROR) in India if he satisfies both the following conditions:
i.
He has been resident in India for at least 2 out of 10 previous years
immediately preceding the relevant previous year,
ii.
He has been in India for 730 days or more during 7 previous years immediately
preceding the relevant previous year.
In
brief, an individual becomes resident and ordinarily resident in India if he
satisfies at least one of the basic conditions and both the additional
conditions.
II. Resident but not Ordinarily
Resident:An individual who satisfies at least
one of the basic conditions but does not satisfy the two additional conditions,
is treated as a resident but not ordinarily resident in India.
III. Non Resident:
If
he does not satisfy any or both of the above conditions, he shall be resident
but not ordinarily resident (RNOR) in India.
Rule of residence of an individual
in brief
Resident and ordinarily resident in India
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He must satisfy at least one of the basic conditions and
also the both additional conditions
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Resident but not ordinarily resident in India
|
He must satisfy at least one basic condition and one or
none of the both additional conditions
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Non - Resident in India
|
He satisfiesnone of the basic conditions. Additional conditions are not relevant in
the case of non-resident.
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II. Residential Status of Hindu
Undivided Family, Firm or Association of Persons [Sec. 6 (2)]
A HUF, firm or association of persons are resident in India
when during that year control and management of their affairs is situated
wholly or partly in India. In other words, they will be non-resident in India
if control and management of affairs is wholly situated outside India.
(Control and management lies at the place where decision
regarding the affairs of the HUF are taken.)
Additional
Condition:
A resident HUF is said to be resident and ordinarily
resident in India if the karta of the HUF satisfies both the following
conditions:
i.
He
has been resident in India for at least 2 out of 10 previous years immediately
preceding the relevant previous year
ii.
Karta
has been present in India for a period of 730 days or more during 7 years
immediately preceding the relevant previous year.
If the karta of HUF does not satisfy any or both of the
above conditions, then HUF shall be resident but not ordinarily resident in
India.
Residential Status of Companies [ Sec. 6(3)]
An Indian Company is always resident in
India.
A Foreign Company is resident in India if control and
management of its affairs is situated wholly in India during the previous year
i.e. if all the board meetings of the foreign company are held in India, then
it shall be resident, otherwise non-resident.
A company can never be “ordinarily” or “not ordinarily
resident” in India.
Residential Status of Every Other Person [Sec. 6
(4)]
Every other person (local authority,
artificial judicial person) is resident, if control and management of its
affairs is, wholly or partly, situated in India in the previous year. On the
other hand, every other person is non-resident in India if control and
management of its affairs is wholly situated outside India.
Residential
Status and Incidence of Tax
Incidence of tax on a
taxpayer depends on his residential status, place and time of accrual or
receipt of income.
Indian Income
a.
If
income is received (or deemed to be received) in India during the previous year
and it accrues (or arises) in India during the previous year
b.
If
income is received (or deemed to be received) in India during the previous year
but it accrues (or arises) outside India during the previous year
c.
If
income is received outside India during the previous year but it accrues or
arises (or deemed to accrue or arise) in India during the previous year
Foreign Income
a.
Income
is not received (or not deemed to be received) in India;
b.
Income
does not accrue or arise (or does not deemed to accrue or arise) in India.
Tax Incidence in Brief
S.N.
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Incomes
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Whether Taxable or Not
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Resident
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Not Ordinarily Resident
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Non Resident
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1
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Income
received in India whether accrued or arise in India or outside India.
|
Yes
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Yes
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Yes
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2
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Income
deemed to be received in India whether accrued or arise in India or outside
India.
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Yes
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Yes
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Yes
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3
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Income
accruing or arising in India whether received in India or outside India.
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Yes
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Yes
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Yes
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4
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Income
deemed to accrue or arise in India whether received in India or outside
India.
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Yes
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Yes
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Yes
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5
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Income
received and accrued or arisen in India from a business controlled in or a
profession set up in India.
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Yes
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Yes
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No
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6
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Income
received and accrued or arisen outside India from a business controlled from
outside India or a profession set up outside India.
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Yes
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No
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No
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7
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Income
received and accrued or arisen outside India from any other source.
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Yes
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No
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No
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8
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Income
accrued or arisen and received outside India in earlier years but later on
remitted to India during the previous year.
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No
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No
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No
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Income
Exempt from Tax
All
receipts, which give rise to income, are taxable under the income-tax Act
unless it is specifically provided that it does not form part of total income. Such
incomes which do not form part of total income may also be called incomes
exempt from tax. As per section 10 to 13A, certain incomes are either totally
exempt from tax or exempt up to a certain amount. Therefore, these incomes, to
the extent these are exempt, are not included in the total income of an
assessee for computation of his total income.
Sections
|
Particulars
|
|
10(1)
|
Agricultural Income
|
|
10(2)
|
Sum received by a member from HUF
|
|
10(2A)
|
Share of profit if a partner from a firm
|
|
10(4)
|
Interest in Non-resident (External) Account
|
|
10(5)
|
Leave travel concession or assistance received by
an individual from his employer subject to certain conditions being
satisfied.
|
|
10(6)
|
Remuneration to certain persons who are not
citizens of India In case of an individual who is not a citizen of India, the
following income shall be exempt: i. Remuneration received by diplomat ii.
Remuneration received by a foreign national as employee of a foreign
enterprise.iii. Non-resident employed on a foreign ship iv. Remuneration of
employee of foreign Government during his training in India
|
|
10(7)
|
Allowances or perquisites outside India to an
Indian citizen who is a Government employee posted outside India
|
|
10(10)
|
Death-cum-retirement gratuity received by an
employee subject to certain limits specified
|
|
10(10A)
|
Payment in commutation of pension received by the
employees subject to certain limits specified
|
|
10(10AA)
|
Leave encashment subject to certain limits
specified
|
|
10(10B)
|
Compensation on retrenchment subject to maximum of
` 5,00,000
|
|
10(10BB)
|
Payments under Bhopal Gas Leak Disaster
(Processing of Claims) Act, 1985
|
|
10(10BC)
|
Compensation received or receivable on account of
any disaster
|
|
10(10C)
|
Amount received on voluntary retirement subject to
maximum of ` 5,00,000
|
|
10(10CC)
|
Tax on non-monetary requisites paid by employer
|
|
10(10D)
|
Amount received under a Life Insurance Policy Any
sum received under a life insurance policy, including the sum allocated by
way of bonus on such policy, is wholly exempt from tax. However, the following
sum received are not changed under this section: 1. Any sum received
from a policy under section 80 DD (3) or section 80 DDA (3); or2. Any sum
received under a Keyman Insurance Policy; or3. Premium payable for any
previous year exceeded 10% of sum assured.
|
|
10(11)
|
Provident Fund
|
|
10(12)
|
Payments from Recognized Provident Fund
|
|
10(13)
|
Any payment from an approved Superannuation Fund Any
payment from an approved superannuation fund shall be exempt provided it is
made: i. On death of a beneficiary; ii. To any employee in lieu of or in
communication of an annuity on his retirement iii. By way of refund of
contribution to on the death of a beneficiary iv. By way of refund of
contribution to an employee on his leaving the service in connection with
which the funds is established otherwise than by retirement at or after a
specified age or on his becoming incapacitated to such retirement
|
|
10(13A)
|
House Rent Allowance subject to certain limits
specified
|
|
10(14)
|
Notified Special Allowance subject to certain limits
specified
|
|
10(15)
|
Interest, premium or bonus on specified
investments Any income by way of interest, premium on redemption or other
payment on such securities, bonds, annuity certificates, savings
certificates, other certificates issued by the Central Government and
deposits as the Central Government may, by notification in the Official
Gazette, specify in his behalf, subject to such conditions and limits as may
be specified in the said notification e.g. interest on Post Office Saving
Bank account is exempt up to Rs.3,500 in case of an individual account, and `
7,000 In case of a joint account.
|
|
10(16)
|
Scholarships granted to meet the cost of education
|
|
10(17)
|
Daily and consultancy allowance, etc. received by
MPs and MLAs
|
|
10(17A)
|
Award or Reward given by the Government
|
|
10(18)
|
Pension received by certain awardees/any member of
their families
|
|
10(19)
|
Family pension received by the family members of
armed forces personnel killed in action
|
|
10(19A)
|
Annual value of one palace of the ex-ruler The ‘annual
value’ in respect of any one palace which is in the occupation of an ex-ruler
is exempt from tax.
|
|
10(20)
|
Income of a local authority The following income
of a local authority shall be exempt: i. Income which is chargeable under the
head, ‘Income from house property’, ii. Income from ‘Capital gains’, or iii.
Income from ‘Other sources’, or iv. Income from a trade or business carried
on by it which accrues or arises from the supply of:
a) Water or electricity within or
outside its own jurisdictional area, or
b) Any other commodity or service
within its own jurisdictional area.
|
|
10(21)
|
Income of an approved scientific research
association
|
|
10(22B)
|
Income of specified news agency
|
|
10(23A)
|
Income of professional association/institution
|
|
10(23BBH)
|
Income of the Prasar Bharti (Broadcasting
Corporation of India)
|
|
10(23C)
|
Income of certain funds of national importance Any
income received by any person on behalf of the following is exempt from tax: i.
The Prime Minister’s National Relief Fund; or ii. The Prime Minister’s Fund
(Promotion of Folk Art); or iii. The Prime Minister’s Aid to Students Fund;
or iv. The National Foundation for Communal Harmony; or
v. Any university or other
educational institution existing solely by for educational purposes and not
for purpose of profit; or
vi. Any hospital or other
institution for the reception and treatment of persons
(i) suffering from illness or (ii) mental defectiveness or
(iii) during convalescence or (iv) requiring medical attention or
rehabilitation, existing solely for philanthropic purpose and not for payment
of profit. The exemption under clause (v) and (vi) shall be available only to
following type of universities/ hospitals/institutions (hereinafter called
institutions).
A. Institutions which are wholly
or substantially financed by the Government, or
B. Institutions whose aggregate
annual receipts do not exceed ` 1crore, or
C. Institutions, other than
covered under (A) and (B) above, which may be approved by the
prescribed authority i.e. Chief Commissioner or Director General of
Income-tax
Where approval is granted it
shall be a permanent approval unless it is cancelled or withdrawn.
vii. The provision also empowers
the prescribed authority, on an application, to grant exemption from income
tax by giving approval in respect of:
a.
Any other fund or institution established for charitable purposes, having
regard to its objects and importance throughout India or throughout any one
or more States [Section 10(23C)(iv)]; and
b Any trust or
institution, which is either or wholly for public religious purposes
or wholly for public religious
and charitable purposes, and which is administered and supervised in a
manner so as to ensure that its income
is
Properly applied for its
purposes. [Section 10(23C)(v)]
|
|
10(23D)
|
Income of notified mutual funds
|
|
10(24)
|
Income on Trade Union
|
|
10(26)
|
Income of a member of Scheduled Tribe residing in
certain specified areas
|
|
10(26AAA)
|
Income of a Sikkimese
|
|
10(32)
|
Income of minor clubbed in the hands of a parent
after maximum exemption of ` 1,500
|
|
10(34)
|
Dividend to be exempt in the hands of the
shareholders
|
|
10(35)
|
Income from units to be exempt in the hands of the
unit-holders
|
|
10(37)
|
Capital gains on compensation received on
compulsory acquisition of agricultural land situated within specified urban
limits
|
|
10(38)
|
Long term capital gain arising from sale of shares
through recognized stock exchange and units sold through RSE or sold to
mutual funds
|
|
10(39)
|
Exemption of specified income from international
sporting event held in India Any specified income arising, from any
international sporting event held in India, to the person or persons notified
by the Central Government in the Official Gazette, shall be exempt if such
international sporting event –a) Is approved by the international body
regulating the international sport relating to such event; b) Has
participation by more than two countries; c) Is notified by the Central
Government in the Official Gazette for the purpose of this clause.
|
|
10(43)
|
Amount received by an individual as loan
under the reverse mortgage
|
|
10(44)
|
Income received by any person or on behalf of New
Pension System Trust
|
|
10(45)
|
Notified allowance or perquisite paid to
Chairman/member or retired Chairman/member of U.P.S.C.
|
|
10(46)
|
Specified income arising to a notified
body/authority/board/trust commission Any specified income arising to a body
or authority or Board or Trust or Commission (by whatever name called) which
–a) Has been established or constituted by or under a Central, State or
Provisional Act, or constituted by the Central Government or a State
Government, with the object of regulating or administering any activity for
the benefit of the general public; b) Is not chargeable in any commercial
activity; and c) Is notified by the Central Government in the Official
Gazette for the purposes of this clause shall be exempt from income-tax.
|
|
10(47)
|
Income of an infrastructure debt fund
|
|
10(48)
|
Exemption in respect of income received by certain
foreign companies Any income of a foreign company received in India in Indian
currency on account of sale of crude oil to any person in India shall be
exempt subject to the following conditions being satisfied: i. The receipt of
money is under an agreement or an arrangement which is either entered into by
the Central Government or approved by it. ii. The foreign company, and the
arrangement or agreement has been notified by the Central Government having
regard to the national interest in this behalf.iii. The receipt of the money
is the only activity carried out by the foreign company in India.
|
|
10AA
|
Special provisions in respect of newly established
Units in Special Economic Zones Eligibility: It is allowed to all categories
of assesses established in Special Economic ZoneConditions:1. It should not
be farmed by the splitting up an reconstruction of a business already in
existence2. It should not be formed by the transfer of machinery or plant,
previously used for any purpose. Following are the exceptions to this
conditions:
a) Imported machinery never used
in India will not be treated as second hand machinery
b) Machinery up to 20% of total
value can be second hand
c) Audit report of CA compulsory
|
|
Period for which deduction is available1. First 5
consecutive years – 100% of profits2. Next 5 consecutive years – 50% of
profits3. Next 5 consecutive years – not exceeding 50% of profits debited to
profit and loss of a/c and credited to Special Economic Zone Reinvested
Reserve Account Computation of deduction allow
Profit of business * ET (Expert
Turnover/It (Turnover)
|
||
11
|
Income from property held for charitable or
religious purposes For claiming exemption under section 11, the following
conditions must be satisfied: a) Trust must have been created for any lawful
purpose b) Such trust/institution must be for charitable or religious
purposes c) The property from which income is derived should be held under
trust d) The accounts of the trust/institution should be audited
e) Trust must get itself
registered with the Commissioner of Income-tax
f ) The charitable trust created
on or after 1.4.1962 should satisfy the following further conditions:
i. It should not be created for
the benefit of any particular community or caste;
ii. No part of the income of such
charitable trust or institutions should endure
directly or indirectly for the benefit of the settler
or other specified persons; and
iii. The property should be held
wholly for charitable purposes.
The following incomes of a
religious or charitable trust or institution are not included in its total
income, provided the above conditions are satisfied:
g) Income from property held
under trust wholly for charitable or religious purposes
h) Income from property held
under trust which is applied in part only for charitable or religious
purposes
i) Income from property held
under trust which is applied for charitable purposes outside India
j) Voluntary contribution forming
part of corpus, corpus means income in the form of voluntary contribution
with a specific directions
Exemption
Exemption allowed to the extent
of income applied for charitable purpose in India plus 15% of the income so
accumulated. Assessee can accumulate more than 15% by fi ling form 10 and
depositing the money in a mode given under section 11(5). Period of
accumulated maximum 5 years Corpus donations are fully exempt
|
|
12
|
Income of trusts or institutions from voluntary
contributions also exempt as given above
|
|
12A
|
Registration of trust before the end of the
previous year from which exemption is required is compulsory to claim
exemption
|
|
12AA
|
Procedure for registration, “Assessee to apply for
registration in Form 10A”
|
|
13A
|
Income of political parties. It should be a
registered political party. In this case the following incomes are exempt: i.
Income under from house property ii. Income from other sources iii. Income
from capital gains. iv. Income from
voluntary contribution provided the name and address of the donor who gives
donation of Rs. 2,00,000 or more is given
|
|
13B
|
Income of Electoral Trust exempt
|
|
Unit I
INTRODUCTION & BASIC CONCEPTS
Tax
is a fee charged by a government on a product, income or activity. There are
two types of taxes – direct taxes and indirect taxes (See Chart below this
paragraph).
Income
tax is one of the forms of Direct Taxes. Tax is the financial charge imposed by
the Government on income, commodity or activity. Government imposes two types
of taxes namely Direct taxes and Indirect taxes.
·
Direct tax is one where burden of
tax is directly on the payer e.g income tax, wealth tax etc.
·
Indirect tax is paid by the
person other than the person who utilizes the product or service e.g Excise
duty, Custom duty, Service tax, Sales Tax, Value Added Tax.
Income-tax
is one of the major sources of revenue for the Government. The responsibility
for collection of income-tax vests with the Central Government.
Why are Taxes Levied (charged)?
The reason for levy of
taxes is that they constitute the basic source of revenue to the government.
Revenue so raised is utilized for meeting the expenses of government like
defence, provision of education, health-care, infrastructure facilities like
roads, dams etc.
Basic Concepts to Income Tax
“Income Tax is levied on the total income of the previous year of every person.”
To levy income tax, one must have the understanding of the various
concepts related to the charge of tax like previous year, assessment year,
Income, total income, person etc.
1)
Income
This is a very
important term as income tax is charged on the income of a person. The
definition of Income is given in Section 2(24) of the Act. As per section
2(24), the term income includes:
1. Profits
and gains;
2. Dividend;
3. Voluntary
contributions: Voluntary contributions received by :
– a trust
created wholly or partly for charitable or religious purposes
– a scientific
research association; or
– a fund or
trust or institution established for charitable
– any university
or other educational
– An electoral
trust.
4. The value
of any perquisite or profit in lieu of salary taxable.
5. Any
special allowance or benefit specifically granted to the assesse to meet
expenses wholly, necessarily and exclusively for the performance of the duties
6. City
Compensatory Allowance/ Dearness allowance: 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 compensate him for the increased cost
of living.
7. Benefit or
Perquisite to a Director: The value of any benefit or perquisite, whether
convertible into money or not, obtained from a company by: (a) a director, or
(b) a person having substantial interest in the company, or (c) a relative of
the director or of the person having substantial interest
8. Any Benefit or perquisite to a
Representative Assessee
9. Any sum
chargeable to tax as business income
10. Capital Gain
11. The profits
and gains of any business of insurance carried on by a mutual insurance
company or by a
co-operative society
12.The profits
and gains of any business
13. Any winnings
from lotteries, crossword puzzles, races, including horse-races,
card-games and
games of any sort or from gambling or betting of any form.
(i)
"lottery"
includes winnings, from prizes awarded to any person by draw of lots or by
chance or in any other manner whatsoever,
(ii)
"card game and other game of any
sort" includes any game show, an entertainment programme on television or
electronic mode, in which people compete to win prizes or any other similar
game;
14. 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 (34 of 1948) or any other fund for the welfare of
such employees.
15 Any sum
received under a Keyman Insurance Policy. Keyman Insurance Policy means a life
insurance policy taken by a person on the life of another person who is or was
the employee of the first mentioned person or is or was connected with the
business.
16. Gift
received for an amount exceeding ` 50,000: Any sum of money or value of
property referred to in clause (vii) or clause (viia) of sub-section (2) of
sec. 56
Meaning of Income as generally Understood
In
general terms, Income is a periodical monetary return with some sort of
regularity. A study of some of the broad principles given below will help to
understand the concept of income:
1.
Cash or kind
Income
may be received in cash or kind. When the income is received in kind, its
valuation will be made
in
accordance with the rules prescribed in the Income-tax Rules, 1962.
2.
Receipt basis/ Accrual basis
Income
arises either on receipt basis or on accrual basis. The income in some cases is
deemed to accrue or arise to a person without its actual accrual or receipt.
Income accrues where the right to receive arises.
3.
Legal or illegal source
The
income-tax law does not make any distinction between income accrued or arisen
from a legal source and income tainted with illegality
4.
Temporary/Permanent
There
is no difference between temporary and permanent income under the Act. Even
temporary income is taxable same as permanent income.
5.
Lump sum / installments
Income
whether received in lump sum or in installments is liable to tax. For example:
arrears of salary or bonus received in lump sum is income and charged to tax as
salary.
6.
Gifts
Gifts
of personal nature do not constitute income subject to maximum of Rs. 50,000
received in cash.
7. Revenue
or Capital receipt: Income-tax, as the name implies, is a tax on income
and not a tax on every item of money received. Therefore, unless the receipt in
question constitutes income as distinguished from capital, it cannot be charged
to tax. For this purpose, income should be distinguished from capital which
gives rise to income.
The concept of income
is very important as it is the income that is taxed under the income tax act.
The definition of income under this act is a very wide and includes profits and
gains, dividends, voluntary contributions, perquisites, allowances, discharge
of an obligation, compensation receipts, profits on sale, cash assistance
received against exports, recovery of loss or expenditure, recovery of bad
debts, any wins from lottery, cross word puzzles, races, card games, gambling,
betting etc.
2) Gross total income
[Sec.80B (5)]
The aggregate of net taxable income
under various heads of income is termed as Gross total income.
(i)
Income from Salaries
(ii)
Income from House Property
(iii)
Profit and Gains of Business and Professions
(iv)
Capital Gains
(v)
Income from Other Sources
It is computed after allowing for the
deductions specific to various heads of income, set off of losses and
allowances or set off of carry forward losses and allowances and clubbing of
income of any other person that may be liable to be included in assesses total
income.
3)Total Income [Sec.2 (45)]
Total income is
arrived at after allowing deductions under Sec.80C to 80U from the gross total
income. The amount so arrived is rounded off to the nearest multiple of ten
rupees. The income tax is charged on total income of an assesse.
4)Agricultural Income:
Agricultural income in India is not chargeable to
tax [sec. 2 (1A)]
5)Rates
of Income tax:
The rates of income tax are prescribed every year by
the finance act which follows a combination of flat and slab rates for charging
tax on total income. Rebate [sec.87]
Rebate is a reduction allowed in the amount of
income tax computed in case of certain types of assessee.
6)Assessee [Sec.-2(7)]:
An assessee is a
person who is liable to pay any sum under the Income tax act. It is not
necessary that the income in respect of which a person is considered an
assessee should be his own, that is a person can be a deemed assessee on some
other person’s income as well.
The assesse means a person:
(i)Who is liable
to pay tax [sec.2 (7)]
(ii)A person who
is liable to pay any other sum (interest, penalty etc.)
(iii)For whom any proceedings under this act has been taken
for the assessment of his income of fringe benefits; or
(iv)For whom any proceedings under this act has been taken for
the assessment of the income of any other person in respect of which he is
assessable; or
(v) For whom any proceedings under this act has been taken for
the assessment of the loss sustained by him or by such other person; or
(vi)For whom any proceedings under this act has been taken for
the amount of refund due to him or by such other person
(vii)Who is deemed to be an assessee under any provision of
this act;
(viii) Who is deemed to be an assessee in default under any
provision of this act
Deemed Assessee [sec.2
(7b)]
The Deemed assessee is a person who has
been treated as an assessee for some other person. The deemed assessee is assessed on the income
or loss of any other person. For example, the legal representative of the deceased
the guardian of a minor, the agent of a non-resident and the trustee of a trust
etc, are termed as deemed assessee.
Deemed
to be an assessee in default [sec.2 (7c)]
A person is deemed to be an assessee in
default if he does not fulfil his statutory duty under the income tax act. For
example, if any person who is required to deduct tax at source does not deduct
it, or after having deducted, fails to pay it to the Central government, he is
deemed to be an assessee by default in respect of the tax.
7)Person [Section
2(31)]
The term person
includes:
(i)
an
individual,
(ii)
a
Hindu Undivided Family (HUF),
(iii) a
company,
(iv) a
firm,
(v) an
AOP or a BOI, whether incorporated or not,
(vi) a
local authority, and
(vii) every
artificial juridical person e.g., an idol or deity.
(i)
Individual - Individual means a natural person, or a human being. Itincludes
both males and females, a minor or a person of unsound mind.
(ii)
HUF - Hindu undivided family (HUF) is treated as aseparate entity for
the purpose of assessment. It consists of all males lineally descended from a
common ancestor and includes their wives and unmarried daughters.
(iii)Company
[Section 2(17)] -A
‘Company’may be defines as an artificial person joining created by the law for
a common purpose, a common seal and shares carrying limited liability.
(iv)
A partnership firmunder the partnership act
(v) Association of Persons (AOP) - In order to constitute an association, persons must join in a
common purpose, common action and their object must be to produce income.
(vi)Body of Individuals
(BOI) – It 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 same extent as the beneficiaries
individually. Thus co-executors or co-trustees are assessable as a BOI as their
title and interest are indivisible.
(vi) Local Authority - The term means a municipal committee, district board, etc.
(vii) Artificial Persons - This category could cover
every artificial juridical person which is established under special act of
legislature, an idol, or deity etc.
8)Assessment year 2(9)-
This means a periodof 12 months commencing on 1st 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 the assessment year 2016-17, the relevant previous year is 2015-16
(1.4.2015 to 31.3.2016).
9)Previous year
[Section 3] –The year in which income is earned is
termed as the previous year. Income tax is charged on the total income of the
previous year, and the income earned during the previous year is assessed to
tax at the rates and as per the provisions applicable for the assessment year.
In other words, the income chargeable to tax in the assessment year is the one
actually earned in the previous year.
·
Generally, previous year means the
financial year immediately preceding the A.Y. Financial Year begins on 1st
April and ends on 31st march.
·
Business or profession newly set up
during the financial year - In such a case, the previousyear
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. In this case,
the first previous year may be of less than 12 months
·
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.
Illustration:
1.
A is running a business from 1992 onwards. Determine the previous year for
theassessment year 2013-14.
Ans. The previous
year will be1.4.2012 to 31.3.2013.
2. A
chartered accountant sets up his profession on 1st July, 2012. Determine the
previousyear for the assessment year 2013-14.
Ans. The previous
year will be from1.7.2012 to 31.3.20
Tax Evasion
When a person
reduces his total income by making false claims or by concealing the
information regarding his real income, so that his tax liability is reduced, is
known as tax evasion. It is not only illegal but it is also immoral, anti-
social, and anti- national practice.
Tax Avoidance
It is an art of
dodging tax without actually breaking the law. It is a method of reducing tax
incidence by availing of certain loopholes in the law.
Tax Planning
It may be defined as an arrangement of one’s financial affairs in such a way that without violating in any way the legal provision of an Act, full advantage is taken of all exemptions, deductions, rebates and reliefs permitted under the Act, so that the burden of the taxation on an assessee, as far as possible, the least.
It may be defined as an arrangement of one’s financial affairs in such a way that without violating in any way the legal provision of an Act, full advantage is taken of all exemptions, deductions, rebates and reliefs permitted under the Act, so that the burden of the taxation on an assessee, as far as possible, the least.
Agricultural Income [Sec. 10 (1)]
Agriculture income is exempt under the Indian Income Tax
Act. However, while computing tax on non-agricultural income agricultural
income is also taken into consideration.
Conditions: Under IT
Act, to be classified as Agricultural Income, the following two conditions
should be satisfied –
(a) The Income should be derived from land
situated in India, and
(b) The Land should be
used for agricultural purposes.
Agricultural Income means:
As per Income Tax Act income earned
from any of the under given three sources meant Agricultural Income;
(i) Any
rent received from land which is situated in India and used for agricultural
purpose.
(ii) 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.
(iii) Income
from a farm house subject to certain conditions.
Now income earned from carrying nursery operations is also
considered as agricultural income and hence exempt from income tax.
1. Any income received as rent or
revenue from agricultural land
When the owner of land is not performing
agricultural operations himself but gives his land on contract basis, any
amount received from the actual cultivator by the owner of the land shall be
agricultural income.
Income from sale of agricultural
land. The Finance Act, 1989 has added an explanation to section 2(IA) that any
income from transfer of urban agricultural land will not form part of
agricultural income. It will he taxable income under the head “capital Gains. “.
2. Income derived from
Agricultural operations
Income derived from land situated in India by
applying agricultural operations shall be agricultural income. If all the basic
operations like preparation of land for sowing, planting, watering, harvesting
etc. are applied, any income resulting from such operations shall be
agricultural income. On the other hand, if grass, trees etc. have grown
spontaneously or without the aid of human skill, effort, labour etc., any
income resulting from the sale of such grass, trees or lease rent of such land
shall not he agricultural income.
Income
which is in the nature of by-products of agricultural land such as selling of
milk, the pasturing of cattle etc. can safely be included in agricultural
income.
3. Any income by the performance
of any process to render the produce marketable
If, a process is to be employed by the
cultivator himself or the landlord who receivesthese produce as rent-in-kind,
any income derived from such a process shall be agricultural income. Such a
process must be employed to render the produce fit for marketing. The process
may he manual or mechanical. It should be noted that the produce should not
change its original character in spite of the processing unless the produce
cannot be sold in that form or condition.
This can further be elaborated with following examples
(i)
Unginned cotton can be sold in its original form and if any profit is
attributable to the ginning operation.
(ii) Tobacco
leaves need to be dried to make them suitable for the market and thus profit
earned by selling dried tobacco shall be agricultural income.
(iii) Drying and
curing of coffee after picking beans, husking of paddy, conversion of latex into sole crepe or smoked
sheets
4. Any income received by the
sale of produce
Any income derived by any
person by the sale of agricultural produce raised by him or received as
rent-in-kind shall also be agricultural income even if he keeps a shop for the
sale of such produce.
5. Income from buildings used for
agriculture
Any income derived from a building used for agricultural
operations shall be agricultural income if the following conditions are
satisfied:
a) The building from where the income is
received is occupied by the owner, or by the cultivator or by the receiver of
rent-in-kind.
b) It is situated on or in the immediate
vicinity (area) of the agricultural land.
(b)
Building is used as a dwelling house or a store house or other out-building by
the cultivator or the receiver of the rent-in-kind, by reason of his connection with the land.
the cultivator or the receiver of the rent-in-kind, by reason of his connection with the land.
(c) The
land if assessed to land revenue in India or is subject to a local rate
assessed and collected by officers of the Government and in case the land is
not assessed to land revenue or to local rate, it should not be situated within
the urban areas.
6.
Income from saplings or seedlings
The income derived from saplings and
seedlings grown in a nursery shall be deemed to be agricultural income.
Agricultural Income (Important Points)
In order to consider an income as
agricultural income certain points have to be kept in
mind:
(i) There must be a land in India.
(ii) The land is being used for agricultural
operations.
(iii) Agricultural operation means that
efforts have been induced for the crop to sprout out of the land.
(iv) If any rent is being received from the land
then in order to assess that rental income as agricultural income there must
be agricultural activities on the land.
(v) In order to assess income of farm house as
agricultural income the farm house building must be situated on the land
itself only and is used as a store house/dwelling house.
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Certain income which is treated as Agriculture Income;
(a) Income from
sale of replanted trees.
(b) Rent received for
agricultural land.
(c) Income from
growing flowers and creepers.
(d) Share of profit of a
partner from a firm engaged in agricultural operations.
(e) Interest on
capital received by a partner from a firm engaged in agricultural operations.
(f) Income derived
from sale of seeds.
Certain income which is not treated as Agricultural Income;
(a) Income from
poultry farming.
(b) Income from bee
hiving.
(c) Income from sale of
spontaneously grown trees.
(d) Income from dairy
farming.
(e) Purchase of standing
crop.
(f) Dividend paid
by a company out of its agriculture income.
(g) Income of salt
produced by flooding the land with sea water.
(h) Royalty income from
mines.
(i) Income from butter
and cheese making.
(j) Receipts from TV
serial shooting in farm house is not agriculture income.
Certain points to be remembered;
(a) Agricultural
income is considered for rate purpose while computing tax of
Individual/HUF/AOP/BOI/Artificial Judicial Person.
(b) Losses from
agricultural operations could be carried forward and set off with agricultural
income of next eight assessment years.
(c) Agriculture
income is computed same as business income.
Partly Agricultural
Income
Sometimes
there is composite income, which is partially agricultural and partially non -
agricultural. For determining the non - agricultural income chargeable to tax,
the market value of any agricultural produce which has been raised by assesse
and which has been utilized as a raw material in such business, shall be
deducted. No further deduction shall be made in respect of cost of cultivation.
For
this purpose, market value shall be deemed to be:
(a) Where
the agricultural produce is ordinarily sold in the market, the value calculated
according to the average price at which it has been sold; during the previous
year; or,
(b) Where
the agricultural produce is not ordinarily sold in the market the aggregate of
the following shall be its market value:
(i)
The expenses of cultivation
(ii)
The land revenue or rent paid for the
land for which it was grown;
(iii)
The profit which in the opinion of the
Assessing Officer is reasonable.
Examples:(1)
Profit of such sugar factories where sugarcane grown on their own farms, are
treated as partly agricultural income. (Sugarcane is generally sold in the
market. Hence in order to separate the agricultural income from the business
income, the average market price of sugarcane shall be charged as an
expenditure.)
(2)
Income from growing and manufacturing tea: 60% of the income derived from the
sale of tea grown and manufactured by the seller in India is deemed to be
agricultural income.
(3)
Income from growing and manufacturing of centrifuged (separator) latex (milk):
65% of the income derived from the sale of such product a manufactured or
processed in India is deemed to be agricultural income.
(4)
Income from growing and manufacturing of coffee: (a) 75% of the income derived
from the sale of coffee grown and cured by the seller in India is deemed to be
agricultural income.
(b)
60% of the income derived from the sale of coffee grown, cured, roasted and
grounded by the seller in India, with or without mixing of other flavoring
ingredients is deemed to be agricultural income.
UNIT
II
RESIDENTAIL STATUS AND TAX LIABILITY
The scope of total income of an assessee
is determined with reference to his residence in India in the previous year.
Residence and citizenship are two different things. (sec.5)
An Indian may be non – resident and a
foreigner may be resident for income tax purposes. The residence of a person
may change from year to year but citizenship cannot be changed every year. A
person may be resident in more than one country for the same previous year.
(sec.6)
Different
Typesof Residents
On the basis of residence, the assesses
are divided into three categories:
(1) Person who are resident in India,
known as ordinarily resident;
(2) Person who are not ordinarily
resident in India
(3) Person who are non - resident in
India
There are separate rules for determining
the residence of different kinds of assesses. The different kinds of assesses
are individuals, Hindu Undivided Families, Firms, An association of persons,
Companies, local authorities, and artificial judicial persons.
I. Residential Status of an Individual Sec 6
previous year and for 365 days or more during 4
years immediately preceding the previous year I. Resident and
Ordinarily Resident:An individual is said to be residentin
India if he satisfies any one of the following Basic conditions:
Basic Conditions
(i)
He is in India for 182 days or more in the relevant previous
year or
(ii)He
is in India for 60 days or more during the relevant.
If
he does not satisfy any one of the conditions above, he shall be non-resident.
Exceptions:
Basic condition (ii) is not
applicable in following cases;
a.
If Indian Citizen leaves India during the previous year for employment outside
India or as a member of crew of an Indian Ship, he must have stayed in India
182 days instead of 60 days.
b.
If Indian citizen or person of Indian origin who is living outside India,
visits India during previous year, he must have stayed in India 182 days
instead of 60 days.
In other words, only condition (i)
is to be satisfied to become a resident in India by these individuals.
Additional conditions:
An
individual who is resident in India shall be resident and ordinarily resident
(ROR) in India if he satisfies both the following conditions:
i.
He has been resident in India for at least 2 out of 10 previous years
immediately preceding the relevant previous year,
ii.
He has been in India for 730 days or more during 7 previous years immediately
preceding the relevant previous year.
In
brief, an individual becomes resident and ordinarily resident in India if he
satisfies at least one of the basic conditions and both the additional
conditions.
II. Resident but not Ordinarily
Resident:An individual who satisfies at least
one of the basic conditions but does not satisfy the two additional conditions,
is treated as a resident but not ordinarily resident in India.
III. Non Resident:
If
he does not satisfy any or both of the above conditions, he shall be resident
but not ordinarily resident (RNOR) in India.
Rule of residence of an individual
in brief
Resident and ordinarily resident in India
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He must satisfy at least one of the basic conditions and
also the both additional conditions
|
Resident but not ordinarily resident in India
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He must satisfy at least one basic condition and one or
none of the both additional conditions
|
Non - Resident in India
|
He satisfiesnone of the basic conditions. Additional conditions are not relevant in
the case of non-resident.
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II. Residential Status of Hindu
Undivided Family, Firm or Association of Persons [Sec. 6 (2)]
A HUF, firm or association of persons are resident in India
when during that year control and management of their affairs is situated
wholly or partly in India. In other words, they will be non-resident in India
if control and management of affairs is wholly situated outside India.
(Control and management lies at the place where decision
regarding the affairs of the HUF are taken.)
Additional
Condition:
A resident HUF is said to be resident and ordinarily
resident in India if the karta of the HUF satisfies both the following
conditions:
i.
He
has been resident in India for at least 2 out of 10 previous years immediately
preceding the relevant previous year
ii.
Karta
has been present in India for a period of 730 days or more during 7 years
immediately preceding the relevant previous year.
If the karta of HUF does not satisfy any or both of the
above conditions, then HUF shall be resident but not ordinarily resident in
India.
Residential Status of Companies [ Sec. 6(3)]
An Indian Company is always resident in
India.
A Foreign Company is resident in India if control and
management of its affairs is situated wholly in India during the previous year
i.e. if all the board meetings of the foreign company are held in India, then
it shall be resident, otherwise non-resident.
A company can never be “ordinarily” or “not ordinarily
resident” in India.
Residential Status of Every Other Person [Sec. 6
(4)]
Every other person (local authority,
artificial judicial person) is resident, if control and management of its
affairs is, wholly or partly, situated in India in the previous year. On the
other hand, every other person is non-resident in India if control and
management of its affairs is wholly situated outside India.
Residential
Status and Incidence of Tax
Incidence of tax on a
taxpayer depends on his residential status, place and time of accrual or
receipt of income.
Indian Income
a.
If
income is received (or deemed to be received) in India during the previous year
and it accrues (or arises) in India during the previous year
b.
If
income is received (or deemed to be received) in India during the previous year
but it accrues (or arises) outside India during the previous year
c.
If
income is received outside India during the previous year but it accrues or
arises (or deemed to accrue or arise) in India during the previous year
Foreign Income
a.
Income
is not received (or not deemed to be received) in India;
b.
Income
does not accrue or arise (or does not deemed to accrue or arise) in India.
Tax Incidence in Brief
S.N.
|
Incomes
|
Whether Taxable or Not
|
||
Resident
|
Not Ordinarily Resident
|
Non Resident
|
||
1
|
Income
received in India whether accrued or arise in India or outside India.
|
Yes
|
Yes
|
Yes
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2
|
Income
deemed to be received in India whether accrued or arise in India or outside
India.
|
Yes
|
Yes
|
Yes
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3
|
Income
accruing or arising in India whether received in India or outside India.
|
Yes
|
Yes
|
Yes
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4
|
Income
deemed to accrue or arise in India whether received in India or outside
India.
|
Yes
|
Yes
|
Yes
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5
|
Income
received and accrued or arisen in India from a business controlled in or a
profession set up in India.
|
Yes
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Yes
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No
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6
|
Income
received and accrued or arisen outside India from a business controlled from
outside India or a profession set up outside India.
|
Yes
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No
|
No
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7
|
Income
received and accrued or arisen outside India from any other source.
|
Yes
|
No
|
No
|
8
|
Income
accrued or arisen and received outside India in earlier years but later on
remitted to India during the previous year.
|
No
|
No
|
No
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Income
Exempt from Tax
All
receipts, which give rise to income, are taxable under the income-tax Act
unless it is specifically provided that it does not form part of total income. Such
incomes which do not form part of total income may also be called incomes
exempt from tax. As per section 10 to 13A, certain incomes are either totally
exempt from tax or exempt up to a certain amount. Therefore, these incomes, to
the extent these are exempt, are not included in the total income of an
assessee for computation of his total income.
Sections
|
Particulars
|
|
10(1)
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Agricultural Income
|
|
10(2)
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Sum received by a member from HUF
|
|
10(2A)
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Share of profit if a partner from a firm
|
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10(4)
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Interest in Non-resident (External) Account
|
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10(5)
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Leave travel concession or assistance received by
an individual from his employer subject to certain conditions being
satisfied.
|
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10(6)
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Remuneration to certain persons who are not
citizens of India In case of an individual who is not a citizen of India, the
following income shall be exempt: i. Remuneration received by diplomat ii.
Remuneration received by a foreign national as employee of a foreign
enterprise.iii. Non-resident employed on a foreign ship iv. Remuneration of
employee of foreign Government during his training in India
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10(7)
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Allowances or perquisites outside India to an
Indian citizen who is a Government employee posted outside India
|
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10(10)
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Death-cum-retirement gratuity received by an
employee subject to certain limits specified
|
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10(10A)
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Payment in commutation of pension received by the
employees subject to certain limits specified
|
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10(10AA)
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Leave encashment subject to certain limits
specified
|
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10(10B)
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Compensation on retrenchment subject to maximum of
` 5,00,000
|
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10(10BB)
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Payments under Bhopal Gas Leak Disaster
(Processing of Claims) Act, 1985
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10(10BC)
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Compensation received or receivable on account of
any disaster
|
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10(10C)
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Amount received on voluntary retirement subject to
maximum of ` 5,00,000
|
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10(10CC)
|
Tax on non-monetary requisites paid by employer
|
|
10(10D)
|
Amount received under a Life Insurance Policy Any
sum received under a life insurance policy, including the sum allocated by
way of bonus on such policy, is wholly exempt from tax. However, the following
sum received are not changed under this section: 1. Any sum received
from a policy under section 80 DD (3) or section 80 DDA (3); or2. Any sum
received under a Keyman Insurance Policy; or3. Premium payable for any
previous year exceeded 10% of sum assured.
|
|
10(11)
|
Provident Fund
|
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10(12)
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Payments from Recognized Provident Fund
|
|
10(13)
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Any payment from an approved Superannuation Fund Any
payment from an approved superannuation fund shall be exempt provided it is
made: i. On death of a beneficiary; ii. To any employee in lieu of or in
communication of an annuity on his retirement iii. By way of refund of
contribution to on the death of a beneficiary iv. By way of refund of
contribution to an employee on his leaving the service in connection with
which the funds is established otherwise than by retirement at or after a
specified age or on his becoming incapacitated to such retirement
|
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10(13A)
|
House Rent Allowance subject to certain limits
specified
|
|
10(14)
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Notified Special Allowance subject to certain limits
specified
|
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10(15)
|
Interest, premium or bonus on specified
investments Any income by way of interest, premium on redemption or other
payment on such securities, bonds, annuity certificates, savings
certificates, other certificates issued by the Central Government and
deposits as the Central Government may, by notification in the Official
Gazette, specify in his behalf, subject to such conditions and limits as may
be specified in the said notification e.g. interest on Post Office Saving
Bank account is exempt up to Rs.3,500 in case of an individual account, and `
7,000 In case of a joint account.
|
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10(16)
|
Scholarships granted to meet the cost of education
|
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10(17)
|
Daily and consultancy allowance, etc. received by
MPs and MLAs
|
|
10(17A)
|
Award or Reward given by the Government
|
|
10(18)
|
Pension received by certain awardees/any member of
their families
|
|
10(19)
|
Family pension received by the family members of
armed forces personnel killed in action
|
|
10(19A)
|
Annual value of one palace of the ex-ruler The ‘annual
value’ in respect of any one palace which is in the occupation of an ex-ruler
is exempt from tax.
|
|
10(20)
|
Income of a local authority The following income
of a local authority shall be exempt: i. Income which is chargeable under the
head, ‘Income from house property’, ii. Income from ‘Capital gains’, or iii.
Income from ‘Other sources’, or iv. Income from a trade or business carried
on by it which accrues or arises from the supply of:
a) Water or electricity within or
outside its own jurisdictional area, or
b) Any other commodity or service
within its own jurisdictional area.
|
|
10(21)
|
Income of an approved scientific research
association
|
|
10(22B)
|
Income of specified news agency
|
|
10(23A)
|
Income of professional association/institution
|
|
10(23BBH)
|
Income of the Prasar Bharti (Broadcasting
Corporation of India)
|
|
10(23C)
|
Income of certain funds of national importance Any
income received by any person on behalf of the following is exempt from tax: i.
The Prime Minister’s National Relief Fund; or ii. The Prime Minister’s Fund
(Promotion of Folk Art); or iii. The Prime Minister’s Aid to Students Fund;
or iv. The National Foundation for Communal Harmony; or
v. Any university or other
educational institution existing solely by for educational purposes and not
for purpose of profit; or
vi. Any hospital or other
institution for the reception and treatment of persons
(i) suffering from illness or (ii) mental defectiveness or
(iii) during convalescence or (iv) requiring medical attention or
rehabilitation, existing solely for philanthropic purpose and not for payment
of profit. The exemption under clause (v) and (vi) shall be available only to
following type of universities/ hospitals/institutions (hereinafter called
institutions).
A. Institutions which are wholly
or substantially financed by the Government, or
B. Institutions whose aggregate
annual receipts do not exceed ` 1crore, or
C. Institutions, other than
covered under (A) and (B) above, which may be approved by the
prescribed authority i.e. Chief Commissioner or Director General of
Income-tax
Where approval is granted it
shall be a permanent approval unless it is cancelled or withdrawn.
vii. The provision also empowers
the prescribed authority, on an application, to grant exemption from income
tax by giving approval in respect of:
a.
Any other fund or institution established for charitable purposes, having
regard to its objects and importance throughout India or throughout any one
or more States [Section 10(23C)(iv)]; and
b Any trust or
institution, which is either or wholly for public religious purposes
or wholly for public religious
and charitable purposes, and which is administered and supervised in a
manner so as to ensure that its income
is
Properly applied for its
purposes. [Section 10(23C)(v)]
|
|
10(23D)
|
Income of notified mutual funds
|
|
10(24)
|
Income on Trade Union
|
|
10(26)
|
Income of a member of Scheduled Tribe residing in
certain specified areas
|
|
10(26AAA)
|
Income of a Sikkimese
|
|
10(32)
|
Income of minor clubbed in the hands of a parent
after maximum exemption of ` 1,500
|
|
10(34)
|
Dividend to be exempt in the hands of the
shareholders
|
|
10(35)
|
Income from units to be exempt in the hands of the
unit-holders
|
|
10(37)
|
Capital gains on compensation received on
compulsory acquisition of agricultural land situated within specified urban
limits
|
|
10(38)
|
Long term capital gain arising from sale of shares
through recognized stock exchange and units sold through RSE or sold to
mutual funds
|
|
10(39)
|
Exemption of specified income from international
sporting event held in India Any specified income arising, from any
international sporting event held in India, to the person or persons notified
by the Central Government in the Official Gazette, shall be exempt if such
international sporting event –a) Is approved by the international body
regulating the international sport relating to such event; b) Has
participation by more than two countries; c) Is notified by the Central
Government in the Official Gazette for the purpose of this clause.
|
|
10(43)
|
Amount received by an individual as loan
under the reverse mortgage
|
|
10(44)
|
Income received by any person or on behalf of New
Pension System Trust
|
|
10(45)
|
Notified allowance or perquisite paid to
Chairman/member or retired Chairman/member of U.P.S.C.
|
|
10(46)
|
Specified income arising to a notified
body/authority/board/trust commission Any specified income arising to a body
or authority or Board or Trust or Commission (by whatever name called) which
–a) Has been established or constituted by or under a Central, State or
Provisional Act, or constituted by the Central Government or a State
Government, with the object of regulating or administering any activity for
the benefit of the general public; b) Is not chargeable in any commercial
activity; and c) Is notified by the Central Government in the Official
Gazette for the purposes of this clause shall be exempt from income-tax.
|
|
10(47)
|
Income of an infrastructure debt fund
|
|
10(48)
|
Exemption in respect of income received by certain
foreign companies Any income of a foreign company received in India in Indian
currency on account of sale of crude oil to any person in India shall be
exempt subject to the following conditions being satisfied: i. The receipt of
money is under an agreement or an arrangement which is either entered into by
the Central Government or approved by it. ii. The foreign company, and the
arrangement or agreement has been notified by the Central Government having
regard to the national interest in this behalf.iii. The receipt of the money
is the only activity carried out by the foreign company in India.
|
|
10AA
|
Special provisions in respect of newly established
Units in Special Economic Zones Eligibility: It is allowed to all categories
of assesses established in Special Economic ZoneConditions:1. It should not
be farmed by the splitting up an reconstruction of a business already in
existence2. It should not be formed by the transfer of machinery or plant,
previously used for any purpose. Following are the exceptions to this
conditions:
a) Imported machinery never used
in India will not be treated as second hand machinery
b) Machinery up to 20% of total
value can be second hand
c) Audit report of CA compulsory
|
|
Period for which deduction is available1. First 5
consecutive years – 100% of profits2. Next 5 consecutive years – 50% of
profits3. Next 5 consecutive years – not exceeding 50% of profits debited to
profit and loss of a/c and credited to Special Economic Zone Reinvested
Reserve Account Computation of deduction allow
Profit of business * ET (Expert
Turnover/It (Turnover)
|
||
11
|
Income from property held for charitable or
religious purposes For claiming exemption under section 11, the following
conditions must be satisfied: a) Trust must have been created for any lawful
purpose b) Such trust/institution must be for charitable or religious
purposes c) The property from which income is derived should be held under
trust d) The accounts of the trust/institution should be audited
e) Trust must get itself
registered with the Commissioner of Income-tax
f ) The charitable trust created
on or after 1.4.1962 should satisfy the following further conditions:
i. It should not be created for
the benefit of any particular community or caste;
ii. No part of the income of such
charitable trust or institutions should endure
directly or indirectly for the benefit of the settler
or other specified persons; and
iii. The property should be held
wholly for charitable purposes.
The following incomes of a
religious or charitable trust or institution are not included in its total
income, provided the above conditions are satisfied:
g) Income from property held
under trust wholly for charitable or religious purposes
h) Income from property held
under trust which is applied in part only for charitable or religious
purposes
i) Income from property held
under trust which is applied for charitable purposes outside India
j) Voluntary contribution forming
part of corpus, corpus means income in the form of voluntary contribution
with a specific directions
Exemption
Exemption allowed to the extent
of income applied for charitable purpose in India plus 15% of the income so
accumulated. Assessee can accumulate more than 15% by fi ling form 10 and
depositing the money in a mode given under section 11(5). Period of
accumulated maximum 5 years Corpus donations are fully exempt
|
|
12
|
Income of trusts or institutions from voluntary
contributions also exempt as given above
|
|
12A
|
Registration of trust before the end of the
previous year from which exemption is required is compulsory to claim
exemption
|
|
12AA
|
Procedure for registration, “Assessee to apply for
registration in Form 10A”
|
|
13A
|
Income of political parties. It should be a
registered political party. In this case the following incomes are exempt: i.
Income under from house property ii. Income from other sources iii. Income
from capital gains. iv. Income from
voluntary contribution provided the name and address of the donor who gives
donation of Rs. 2,00,000 or more is given
|
|
13B
|
Income of Electoral Trust exempt
|
|
