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INCOME TAX ACT 1961

BASIC CONCEPTS AND DEFINITIONS

ASSESSMENT YEAR :- Sec.2(9)

Assessment year means the period starting from April 1 and Ending on March 31 of

the next year

For example Assessment year 2012-2013 will commence on 1 st April 2012 and will

end on 31 st March 2013.

Income of the Previous Year is taxed during the next following Assessment Year

PREVIOUS YEAR :- sec. 3

previous year is a period of 12 months , which will start from 1st April and will end on

31 st March of the next year

It is a priod of 12 months immediately preceding the Assessment year.It is a Financial immediately preceding the Assessment year

When previous year ends Assessment year starts

For example If Assessment year is 2012-2013 the Previous year is 2011-2012

(1-4-2011 To 31-03-2012)

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Previous Year In case of newly setup Business or Profession-

In case of newly started Business or Profession the period of Previous year will start fromthe date on which the new Business or Profession started and will end on immediatelyfollowing 31 March.

For Example Mr X started new business on 13 th September 2011 then for his first year

of new business the Previous year is a period start from 13 th September 2011 and willend on 31 st March 2012

If Mr Y started new business on 25 th February 2011 the for his new business the firstprevious year is 25 th February 2011 To 31 st March 2012

However from the subsequent year the period will be always 1st April to 31 March.

PERSON :- Sec. 2(31)The Term Person Includes

a. An Individual

b. A Hindu Undivided Family

c. A Company

d. A Firme. An Association of persons or a body of individuals ,whether incorporated or not

f. A Local Authority

g. Every artificial juridical person not falling within any of the preceding catagories

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Explanation :-

An IndividualThe word individual means only a natural person i.e., humanbeing andincludes minor and a person of unsound mind.

A Hindu Undivided Family :-Consists of all persons lineally descended from commonancestor and includes their wives and unmarried doughters.

A Company- As per section 2(17) company is defined to mean the following

a . Any Indian company

b. any Body corporate incorporated under the laws of a foreign country

c. any institution , association or a body which is assessed or was assessable/assessed asa company for any assessment year

d. any institution , association or a body ,whether incorporated or not and whetherIndian or non-Indian, which is declared by general or special order of the Central Boardof Direct Taxes to be a company.

Firm- As defined under sec.4 of The Indian Partnership Act 1932

An Association of persons or a body of individuals Means an association in which two ormore persons join in a common purpose or common action.

Local Authority It means a municipal committee , district board or other authority legally

entitled to or entrusted by the Government with the control and management of amunicipal or local fund

Every Artificial juridical person Any entity having a separate legal existence,not coveredunder any of the above categories , fall under this category

For example: Deity , an idol , A corporation established under a special Act., LIC, University

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Determine the status of the following

Mumbai University

DCM LTD

Thane Municipal Corporation

ABC ENGINEERING PVT.LTDDhanlaxmi commercial Bank

Sahakar Co op housing Soct.ltd

XY AND CO.(PARTNER MR.X AND MR.Y)

JOINT FAMILY MR.X HIS WIFE AND TWO SONS

Income Tax Consultants AssociationShree Siddhivinayak mandir

Artificial Juridical person

A company

A local authority

A COMPANY A COMPANY

An Association Of Persons

A FIRM

A HUF

An Association Of Persons Artificial Juridical person

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ASSESSEE :- Sec.2(7)

Assessee means a person by whom Income Tax or any other sum of money is payableunder the Act . It includes-

a. Every Person in a respect of whom any proceeding under the Act has been taken

for the assessment of his income or loss or the amount of refund due to himb. A person who is assessable in respect of income or loss of another person

c. A person is deemed to be an assessee , or an assessee in default under anyprovision of the Act.

Explanation :--

Assessee means every person i.e.- person means as defined under sec 2(31)

a. By whom any tax or any other amount is payable under this act. i.e. penolty ,

interest etc.is recoverable from person

Proceedings can be taken for assessment of income of person for his own income orany refund due to him

b. A person can be assessed for the income of another person e.g.-Trustees of thetrust, Directors of the company or Representative Assessee

c. Every person who is deemed to be an assessee e.g.- A representative assessee isdeemed to be an assessee by virtue of section 160(2) Deemed to be meansAssumed to be

Assessee in default means a person who failed to pay advance tax ,or a personwho failed to deduct a tax at source(TDS)

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WHAT IS GROSS TOTAL INCOME

As per sec.14 , income of a person is computed under the following FIVE

heads

1 . Salaries

2. Income from House Property

3. Profits and Gains from Business or Profession

4. Capital Gains

5. Income from Other sources

The aggregate income under the heads is termed as Gross Total Income.i.e.Total of all the above heads of income is Gross Total Income

It is a income before deducting any deductions under sec.80 of the Act.

WHAT IS NET TAXABLE INCOME

GROSS TOTAL INCOME XXX

LESS : DEDUCTIONS UNDER SEC.80 XXX

NET TAXABLE INCOME XXX

* Income Tax is calculated on Net Taxable Income

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RESIDENTIAL STATUS AND ITS EFFECT OF TAX

INCIDENCE

Tax incidence on a assessee depends on his residential statusThere are two types of tax payers: --

Resident in India

Non resident in India

There are further TWO catagories for Resident in IndiaResident and Ordinarily resident in India

Resident but not Ordinarily resident in India

RESIDENTIAL STATUS

Resident in India Non Resident

Resident and Ordinarily Resident Resident but not Ordinarily Resident

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HOW TO FINDOUT RESIDENTIAL STATUS OF AN INDIVIDUAL

SEC.6

Step 1 - Findout whether he is Resident or Non Resident(By applying BasicConditions as per sec 6(1)

Step 2 If he is Resident in India then further findout whether he is OrdinarilyResident or not Ordinarily Resident

Note :---Residential status is to be findout every year. A person can be Resident inone year and can be Non resident in another year.

BASIC CONDITIONS :-(To findout whether he is Resident or Non Resident)An Individual is said to be RESIDENT in India if he satisfies at least ONE of the

following Basic Condition

1 He is in India in the previous year for a period of 182 days or more

OR

2 - He is in India for a period of 60 days or more during the previous year and 365days or more during 4 years immediately preceding the previous year

It means if any individual satisfy any one of the above conditions he will beconsidered as RESIDENT , but however if he does not satisfy any of the aboveconditions he will be considered as NON RESIDENT

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SUMMARY

1 ST CONDITION SATISFY RESIDENT

OR

2 ND CONDITION SATISFY RESIDENT

BOTH CONDITIONS SATISFY RESIDENT

CONDITIONS 1 AND 2 BOTH

NOT SATISFY NON RESIDENT

Note : -

For findingout days it is not necessary he should stay continuously at one

place during the previous

Residential status is to be findout for each previous yeare.g. for assessment year 2012-2013 residential status is to be findout for the

previous year 2011-2012 by applying the abovementioned conditions

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TWO SPECIAL CASES IN RELATION TO DAYS

The period of 60 days in 2 nd basic condition is extended to 182 days in

following TWO SPECIAL CASES

1 - An Indian Citizen who leaves India during the previous year for the

purpose of employment outside India or an Indian citizen who leaves

India during the previous year as a member of the crew of an Indian ship.

2 - An indian Citizen or a person of Indian origin who come on a visit to

India during the previous year

In above TWO SPECIAL CASES the period of 60 days in 2 nd basic condition is

extended to 182 days.

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ONCE IT IS DECIDED THAT AN INDIVIDUAL IS RESIDENT

FINDOUT WHETHER HE IS

ORDINARILY RESIDENT (R and OR)

OR

NOT ORDINARILY RESIDENT (R But NOT OR)

For this there are TWO ADDITIONAL CONDITIONS

If a Resident satisfy BOTH of the ADDITIONAL CONDITIONS he will be

considered as ORDINARILY RESIDENT .

But if he does not satisfy BOTH the ADDITIONAL Or satisfy Only One

condition he will be considered as

NOT ORDINARILY RESIDENT

It means He must satisfy BOTH ADDITIONAL CONDITIONS to become

ORDINARILY RESIDENT

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ADDITIONAL CONDITIONS Sec. 6(6)

(a) He has been resident in India in at least 2 out of 10 previous

years immediately preceding the relevant previous year

AND

(b) He has been in India for a period of 730 days or more during

7 years immediately preceding the relevant previous year

SUMMARY

R AND OR Any one of Basic conditions plus Both

the Additional Conditions

R BUT NOT OR Any One Basic condition but None ofAdditional conditions or only One additional conditions

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Residential Status of HUF :- sec 6(2)

A HUF like an Individual is either Resident in India or non Resident in India. A

Resident HUF is ordinarily Resident or Not ordinarily resident.

A HUF is said to be resident in India if control and management of its affairs is wholly

or partly situated in India. A HUF is Non Resident in India if control and

management of its affairs is wholly situated outside India.

Residential Status of Firm and Association of persons :- sec.6(2)

A Firm and AOP can either Resident or Non Resident

R and OR and R But NOT OR are not applicable to A Firm or AOP

A FIRM or AOP are said to be resident in India if control and management of their

affairs are wholly or partly situated in India. A FIRM or AOP is Non Resident in

India if control and management of their affairs are wholly situated outside India.

Residential Status of A COMPANY :- sec.6(3)

An Indian Company is always resident in India.A Foreign company is resident in India only if , during the previous year control and

management of its affairs is situated wholly in India

Residential Status of Every other Person :- sec.6(4)

Every other Person is non resident in India if control and management of its affairs is

wholly situated outside India

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Residential Status and Incidence of Tax

(Scope of Income) : Sec 5

Incidence of Tax on a taxpayer depends on his

residential status.

Income which is Received , Accrued and Deemed to

be received in India is TAXABLE in the hands all

i.e. R AND OR , R BUT NOT OR , NR

Income which is Received , Accrued and Deemed to

be received Outside India is TAXABLE only in thehands of R AND OR , R BUT NOT OR

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SUMMARY OF SEC . 5

R AND OR R BUT NOT OR NR

INCOME RECEIVED IN INDIA TAXABLE TAXABLE TAXABLE

INCOME ACCRUED IN INDIA TAXABLE TAXABLE TAXABLE

INCOME DEEMED TO BE RECEIVED IN

INDIA TAXABLE TAXABLE TAXABLE

INCOME RECEIVED , ACCRUED AND

DEEMED TO BE RECEIVED OUTSIDE

INDIA TAXABLE TAXABLE NOT TAXABLE

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Questions on Scope of Income

Mr. X earns following income during the FY 2011-12

Findout his Total Income if he is R AND OR , R BUT NOT OR AND NR

1 Interest on Fixed Deposits in India Rs 25000

2 Rent of house at Delhi Rs 120000 pa

3 Rent of house at Dubai Rs 200000 pa

4 Lottery prize win at Hongkong but amout received at Mumbai Rs 300000

5 Interest on Fixed Deposits in bank at USA Rs 100000

6 Agriculture income at Japan Rs 200000

7 Business conducted out side India but control and management in India

8 Income which is Taxed Outside India not brought to India Rs.30000/-

9 Lottery prize win at Mumbai but received in France Rs.1,00,000

10 Commission Income at USA received at USA Rs 50,000

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HEADS OF INCOME

In Income Tax Act. There are only FIVE heads of income

Income of a person is to be charged to tax under a particularhead of income after considering the nature of Income

For Example Mr. X is a employee of ABC Ltd. Earning salary

His income will be taxed under the head Income From Salaries

Mr. Y has given his shop on rent basis this rent received will becharged to tax under the head Income from house Property

Income from Business will be taxed under the head Profits and

Gains from Business and profession

Profit from sale of any Capital Asset will be charged to tax underthe head Capital Gains

If any person earns any income which we cannot fit in any of the

above four heads of income will be charged to tax under the

head income From Other Sources

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Interest on fixed Deposits with bank,

Winning from lottery , Cross word puzzle , TV Game shows , KBC,

Awards , winning from Horse Race are examples of Income

From Other Sources

For each head of income there are specific provisions ,Sections,

Rules

Income from a particular head is to be calculated and taxed by

applying these specific provisions of the Act.

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INCOME FROM SALARIES

Following are Important norms for charging income under the

head Income From Salaries

Relationship between payer and payee

Employer and employee relationship

Master and Servent

Employer may be

Individual,firm,Company,Government,Trust,corporation etc.

Employee working part time or full time is not important

Payment received by an individual from a person other than

his employer cannot be termed as Salary

Salary and Wages Conceptually not different

Perquisites,allowances,overtime,awards etc. received from

employer are taxable under the head Salaries

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From the following which income are taxable under the head

Salaries

Bonus form Employer

Mr. X working with ABC LTD on a salary Rs.30000 pm , receivedan award from Thane municipal Corporation Rs 5000

Mr. Y Lecturer of Mumbai University , received some amount

from Pune University for assessing MBA exam papers

Mr Y Lecturer of Mumbai University , received some amountfrom Mumbai University for assessing TY Bcom exam papers

Mr Z working part time with PQR LTD and also working part

time with AB Enterprises

Car Perquisite provided to Mr C by his employer

Remuneration to partner by a partnership firm ?????

Remuneration to Directors of Company

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Important points

1. Gratuity , Perquisites , amount in lieu of salary , Bonus ,allowances are

also taxable as salary

2. Amounts received from two employers are also taxable under a singlehead salaries .Only employer employee relationship is important

3. Value of Perquisites provided to employee by employer are taxable under

the head salaries. The value of the perquisite is to be findout as per the

rules of Income Tax Act.

4. What is Perquisite ?

Any casual emolument or benefit attached to an office or position in

addition to salary or wages

Perquisite may be provided in cash or in kind

Even a casual and non recurring receipt can be perquisitePerquisites are included in salary income only if they are received by

an employee from his employer

It must be from legal origin. An unauthorised advantage taken by an

employee without employers authority would not amount to perquisite

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Examples of Perquisites

Furnished / unfurnished house without rent or at concessional rent

Supply of gas , Electricity , Water for household purpose

Service of a sweeper , watchman , gardener or personal attendent Education facility to employees family members

Interest free / concessional loan

Car or any other automotive conveyance

Transport facility by a transport undertaking other than for the purpose

of official work

Free food and beverage - other than working hours/ other than official

work

Credit card

Club Gift or gift voucher more than Rs 5000

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Allowances

Allowance is generally defined as a

fixed quantity of money or other substance given regularly or in addition

to salary for the purpose of meeting some particular requirementconnected with the service or as compensation for unusual conditions of

that service

It is fixed , pre- determined and given irrespective of actual expenditure

It is taxable on due or receipt basis , whichever comes earlier

Examples : -

House Rent allowance

Children Education Allowance

Medical Allowance Tiffin allowance

Transport allowance

Entertainment allowance

City compensatory allowance

D d ti f S l i

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Deductions from Salaries

Sec.16

After Calculating Gross Salary Deductions under sec.16 are allowed

There are Two Deductions under sec 16If Net Salary is given in question then find out Gross Salary after adding back

All the amounts which are deducted earlier

Eg- if Net Salary is given in question after deducting profession Tax,Income Tax etc.then

add back all the amounts in net salary and find out gross Salary

Net Salary = Rs.24600 pmAmounted already deducted = Profession Tax Rs.200 pm and Income Tax Rs1000 p.m

Gross Salary is =

24600

Add back Profession Tax Deducted 200

Add back Income Tax 1000

Gross Salary = 25800

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Deductions under sec. 16

Sec 16(ii) Entertainment Allowance

(Only for Govt. Employees)

Amount to be deducted is lowest of the following

a) Rs 5000/-

b) 20 % of basic Salary

c) Actual Amount of Entertainment allowance

Note : Amount actually spent on entertainment is not

to be considered for allowing deduction

Sec 16 (ii) Profession Tax (Tax on employment)

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Calculation of Income under the head Salaries

Gross Salary

It is a total of all amounts received from employer during the course of employmentPlus all allowances and value of perquisites to the extent taxable

Total of the above is a Gross Salary

Allow Deductions under Sec.16

The Balance amount is Income Taxable under the head Salaries

Basic Salary xxx

Add : Taxable Allowances xxx

Add: Value of Perquisites xxxGross Salary xxx

Less : Deductions under Sec 16 xxx

Taxable income under the head Salaries xxx

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INCOME FROM HOUSE PROPERTY

BASIS OF CHARGE

Annual value is chargeable to tax

WHAT IS ANNUAL VALUE ?

IT MEANS :- THE SUM FOR WHICH THE PROPERTY MIGHT REASONABLY BE

EXPECTED TO BE LET FROM YEAR TO YEAR ( ie . REASONABLE LETTING

VALUE)OR

ANNUAL RENT (WHETHER RECEIVED OR RECEIVEABLE)

WHICH EVER IS MORE IS KNOWN AS GROSS ANNUAL VALUE

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IMPORTANT POINTS

PROPERTY MUST CONSIST OF BUILDING OR LANDATTACHED TO OR CONNECTED WITH THE BUILDING

ASSESSEE MUST BE THE OWNER OF THE PROPERTY

IT SHOULD NOT BE OCCUPIED BY THE OWNER FOR HIS

BUSINESS/PROFESSION PROPERTY CAN BE RESIDENTIAL OR COMMERCIAL

ONLY FOUR WALLS AND ONE ROOF IS SUFFICIENT TO CALL IT

AS A PROPERTY

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WHAT IS NET ANNUAL VALUE ?

GROSS ANNUAL VALUE XXX

LESS : MUNICIPAL TAXES XXXNET ANNUAL VALUE XXX

IMPORTANT POINTS :--

MUNICIPAL TAX IS TO BE DEDUCTED

IT MUST BE PAID BY THE OWNER & NOT BY THE TANENT

IT IS DEDUCTED ONLY IN CASE OF RENTED PROPERTY ANDNOT IN CASE OF SELF OCCUPIED PROPERTY (SOPMUNICIPALTAX WHICH IS DUE BUT NOT PAID IS NOT TO BE DEDUCTED

MUNICIPAL TAX OF LAST YEAR IF PAID IN CURRENT YEAR CANBE DEDUCTED

IF PROPERTY IS PARTLY LET OUT THE PROPERNATE MUNICIPALTAX IS RELATED TO LET OUT PART ONLY )

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WHAT IS SELF OCCUPIED PROPERTY(SOP)

IF OWNER HIMSELF IS STAYING IN HIS OWN

RESIDENTIAL HOUSE ,IT IS A SELF OCCUPIED

PROPERTY(SOP)

ANNUAL VALUE OF SOP IS NIL

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CALCULATION OF INCOME FROM HOUSE

PROPERTY IN CASE OF SOP

GROSS ANNUAL VALUE NIL

LESS : DEDUCTION U/S 24

* INTEREST ON BORROWED FUNDS XXX

(MAXIMUM RS.1,50,000)

TAXABLE INCOME FROM SOP XXX

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IN CASE OF TWO SOP AT A SAME TIME

ONLY ONE HOUSE AS PER THE CHOICE OF THEOWNER WILL BE CONSIDERED AS SOP

OTHER HOUSE IS CONSIDERED AS DEEMED

TO BE LET OUT (ASSUMED TO BE LET OUT) INCOME OF THE DEEMED TO BE LET OUT

PROPERTY IS CALCULATED AS IF IT IS LET OUT