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 1^st 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 1^st April and ends on 31^st 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 31^st 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 31^st 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.

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.

(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.

 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	He must satisfy at least one of the basic conditions and also the both additional conditions
Resident but not ordinarily resident in India	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.

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
2	Income deemed to be received in India whether accrued or arise in India or outside India.	Yes	Yes	Yes
3	Income accruing or arising in India whether received in India or outside India.	Yes	Yes	Yes
4	Income deemed to accrue or arise in India whether received in India or outside India.	Yes	Yes	Yes
5	Income received and accrued or arisen in India from a business controlled in or a profession set up in India.	Yes	Yes	No
6	Income received and accrued or arisen outside India from a business controlled from outside India or a profession set up outside India.	Yes	No	No
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

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 1^st 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 1^st April and ends on 31^st 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 31^st 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 31^st 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.

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.

(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.

 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	He must satisfy at least one of the basic conditions and also the both additional conditions
Resident but not ordinarily resident in India	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.

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
2	Income deemed to be received in India whether accrued or arise in India or outside India.	Yes	Yes	Yes
3	Income accruing or arising in India whether received in India or outside India.	Yes	Yes	Yes
4	Income deemed to accrue or arise in India whether received in India or outside India.	Yes	Yes	Yes
5	Income received and accrued or arisen in India from a business controlled in or a profession set up in India.	Yes	Yes	No
6	Income received and accrued or arisen outside India from a business controlled from outside India or a profession set up outside India.	Yes	No	No
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

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