Income tax BBA Notes, Schemes and Mind Maps of Business Taxation and Tax Management

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ELEMENTS OF INCOME TAX

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Subject: ELEMENTS OF INCOME TAX Credits: 4

SYLLABUS

Study of the Income-Tax A comprehensive study of the Income-tax act 1961, Wealth-tax act, Case laws governing capital and revenue expenditure, Special Problems Centering on the concept of assesses, Registered Firm, Hindu Undivided family, Companies, Association of persons and trust, Minors, Cooperatives, non-resident Indias and avoidance of double taxation

Heads of Income Problems covering heads of income salaries, Perquisites, gratuity and retirement benefits, Income from house property, Capital gains, income from other sources, Income from business and profession, Problems arising from aggregation of income and set off and carry forward of losses, Computation of income and Return of Income Tax, Filing procedure

Tax audit Tax administration appeals, Revisions, review and rectification, Application to central Board of Direct Taxes, Acquisition Proceedings, Principles of valuation of movable and immovable property, Tax incentives and export promotion, Deductions under chapter VI, Other benefits and tax exemptions

Indirect Tax Indirect Tax Laws, Administration and relevant procedures, The central excise including Central Value Added Tax (CENVAT), The Central Sales Tax Act, 1956 (74 of 1956), The Customs Act, 1962 (52 of 1962), Excise audit

Assessment of Tax Payable Assessment of Tax Payable by the Assess under Indirect Taxes, Power of Different Authorities, Impact of Tax on Gatt 94 WTO, Anti Dumping Processing, Tariff Commission and other tariff authorities

Suggested Readings:

1. Charities An Exhaustive Treatise for Tax and Other....by S Rajaratnam , M. Natarajan , C.P. Thangaraj
2. Laws of Trade Tax Central Sales Tax and Tax on Ent....by O S Vatsa
3. Trade Tax, Central Sales Tax & Tax on Entry of Goo.... by Arvind Agarwal , Adarsh K Gupta

year(Accounting/Financial Year). So, any student of income tax necessity know the meaning of the conditions income, previous year, assessment year,

total income and who are the persons liable to income tax in India. In this chapter we have traced the history of income tax in India and we have also defined all these conditions as per the provisions of the Income Tax Act as amended up to date.

BROAD MECHANISM OF INCOME TAX IN INDIA

The First War of Independence in 1857 was a major financial burden to the English Government which brought it into great financial difficulties. Therefore compelled through financial necessities the British Government enacted the Income Tax Act, 1886. The financial crunch resulting from the First World War brought to focus the inadequacies of the said Act. After extensive investigation, the Act of 1922 was enacted and was effective for in relation to the four decades.

These intervening years saw India gain independence and the new Indian Government felt that the Income Tax Act needed a thorough overhaul. The Law Commission submitted a draft bill in 1958. A committee appointed under the Chairmanship of Mahabir Tagi in 1958, also recognized as the Direct Taxes Administration Committee, to look into the direct tax structure submitted a draft, finally, the old Indian Income Tax Act, 1922 was totally recast in 1961 and a new Income Tax Act came into force with effect from 1.4.1962.

The administration of the Income Tax Act, 1962 is done through the Central Board of Direct Taxes (CBDT), which works under the supervision of the Ministry of Finance. The CBDT is charged with the duty of framing rules for the administration of the Income Tax Act. These rules, recognized as the Income Fax Rules, 1962, contain several shapes and miscellaneous details. The procedure of framing/rules is a very elaborate one, it involves notifying the rule first for public deliberation, and then for adoption. They are also placed on the tables of the House for information. These Rules are changed as

and when the situation warrants.

The CBDT also issues from time to time, several circulars for the direction of the officials of the Income Tax Department and for Information of tax payers. It is so, necessary for a student of income tax to stay himself up-to- date with the latest provision. The best method to do this is to regularly read several tax journals and other tax publications.

The Finance Act

You may be aware that the Finance Minister of the Government of India presents an estimate of income and expenditure for the coming financial year to the Parliament usually on the last day of February every year. The document is popularly recognized as 'budget'. It is a significant event of the country as it provides the public a thought of the direction the Government is going to follow in the ensuing year. In order to provide legal form to several tax proposals, a bill is also moved which is recognized as Finance Bill. It contains several provisions as regards direct and indirect taxes. Once the Finance Act is passed, it becomes a law according to which several taxes are charged.

It is the Finance Act that contains the rate structure of income tax which would be applicable in that year. It is so, necessary that any student of income tax should not only revise the Income Tax Act but also the Income Tax Rules and the latest Finance Act. All these have to be studied simultaneously.

Scheme of Income Tax—an Overview

Every entity whose income (computed in accordance with the Income Tax Act and the Income Tax Rules etc.) is more than the tax free limit as prescribed through the relevant Finance Act, is required to pay tax. The Finance Act of 1990 raised the exemption limit from Rs. 18,000 to Rs. 22,000.

identifies what is incorporated in the term "Income". Section 2(24) of the Act defines "Income" to contain the following items: Profits and Gains — this is one of the major sources of income. Dividends — the definition of dividend has been given in Sec, 2(22) which expands the meaning of the term. Voluntary Contributions received through a trust created wholly or partly for charitable or religious purposes or through an institution recognized wholly or partly for such purposes, or through a scientific research association or sports association. If the contribution is made with the specific instruction that it shall form a part of corpus of the trust or the institution, it shall not be treated as income. The value of perquisite or profit in lieu of salary. These have been defined, in Sec. 17 and will be dealt with while discussing income from 'salaries'. Any special allowance or benefit, other than perquisite incorporated in (4) above specifically granted to the assessee to meet expenses wholly, necessarily and exclusively for the performance of the duties of an office or employment of profit. Any allowances granted to the assessee either to meet his personal expenses at the lay where the duties of his office or employment of profit are ordinarily performed through him or at a lay where lie ordinarily resides to compensate him for the increased cost of livelihood. The value of any benefit or perquisite obtained from a company either through a director or through a person who has substantial interest in the company or through a relative of such director or person. The value of any benefit or perquisite, whether convertible into money or not which is obtained through a beneficiary or a trustee from a trust will be treated as taxable income in the hands of the beneficiary or the trustee, as the case may be. Any compensation or other payment made to the person managing the affairs of a company in connection with the termination of his office and income derived through a trade, professional or similar association

for specific services rendered or done to its members and chargeable profit under Section 59. The value of any benefit or perquisite whether convertible into money or not, arising from business or the exercise of a profession under Section 28 (IV). Capital gains arisen, from the transfer of a capital asset. The profits and gains of any business of insurance accepted on through a mutual insurance company or through a cooperative society computed in accordance with Section 44, Any sum chargeable to income tax as profits and gains of business or profession or as recovery of losses, expenses, or trading liability in respect of which the assessee had been granted a deduction in a previous year or deemed profits. Profit on sale of a license granted under the Imports (Control) Orders,

Any cash assistance received or receivable through any person against exports under any scheme of the Central Government. Any duty of customs or excise repaid or repayable to any person against exports. Against exports. Any winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort and betting of any form or nature whatsoever. Any sum received through the assessee from his employees as contributions to any Provident finance or superannuation finance set up under the Employees' State insurance Act or any other finance for the welfare of such employees.

It is significant to note that the items described under (13) above are supposed to be casual in nature and so an amount of Rs. 5,000 thereof is not taxed at all.

The word „Income‟ connotes a periodical monetary receipt coming in from some definite source with some sort of regularity. The source need not be a continuously productive one, but necessity is one whose substance is the manufacture of income. Income is a periodical yield measurable in conditions of money or money's worth and arises out of use of real or personal property i.e. the income may be received in cash or type. Therefore the receipts in type, which can be measured in conditions of money, shall be taxable. Periodicity or regularity or at least expected regularity is significant elements of income. Regularity does not imply that a single receipt is not income. Income comprises monies that have become due though not received. A receipt which is income‟ will continue to be so even if it is exempted from tax. Income means real income. Fictional or technological income cannot be termed income for the purposes of the Income Tax Act, 1961. Income necessity come from outside. Pocket money received through a student from his father cannot be termed income. Legality or otherwise of income or source of dictate whether a receipt can be termed income. You are required to pay tax on illegally earned income as well. This though, does not grant immunity from prosecution.

DEFINITION OF PERSON

The term "Person" is defined in Section 2(31) of the Act. It is an inclusive definition implying list of entities which can be treated as a "person.‟‟ The term person comprises the following: An individual, A Hindu undivided family, A company A firm,

An association of persons or a body of individuals whether incorporated or not, A local authority, and Every artificial juridical person not falling within any of the categories mentioned above.

It will therefore be seen that the word person in defined in very wide conditions. A minor would also be incorporated in the definition of persons in some circumstances. All the persons are liable to pay income tax under the Income Tax Act, 1961.

DEFINITION OF ASSESSEE

The term "assessee" has been defined in Section2 (7) of the Income Tax Act, 1961: “Assessee” means a person through whom any tax or any other sum is payable under this Act. The term is defined to contain the following: Every person in respect of whom proceedings have been started for the assessment of his income Every person who is assessable in respect of income of any other person. Every person to whom a refund of tax is due. Every-person who is deemed to be an assessee under this Act. Every person who is deemed to be an assessee in default under any provision this Act.

An assessee in default is a person Who is liable to deduct tax at source but does not do so, Who deducts the tax but does not pay it to the government, Who fails to pay installments of advance income tax in time?

The Act has given a very wide definition of this term. Anyone who is even remotely linked with the payment or refund of tax can be termed an assessee.

required to pay tax in the AY on the income that was earned through him in the previous year according to the rates of tax prescribed through Annual Finance Act. To illustrate, the current assessment year is 1990-91 and an assessee is required to pay tax in this AY on the income that was earned through him in the previous year 1989-90,

As a precaution, it should be pointed out here that there are a few exceptions to the common rule that income earned in the previous year only is taxed in the assessment year.

PREVIOUS YEAR

Income is earned in one year but is taxed in the after that. The year in which Income is earned is recognized as Previous Year (PY) and the year in which it is taxed is termed as Assessment Year.

It is also significant to learn that all Government business is transacted on the foundation of the financial year which commences on April 1, of the year and ends on March 31, of the following year. This era is also recognized as the fiscal year. We are also aware of the term „Calendar Year' which commences on January 1, and ends on December 31 of the similar year. Prior to the AY 1989-90 an assessee was free to opt for any era of 12 months as his previous year. He could either adopt the calendar year or Diwali to Diwali or Dussehra to Dussehra or some other year. But a drastic change has been introduced w.e.f. 1.4.89; the concept of uniform accounting year has been introduced. All assesses will hence forth be required to adopt only the financial year (i.e. April 1, to March 31) as previous year. This will greatly facilitate the assessment procedure. Accordingly the provisions of Section 3 have also been amended. The provisions relating to the previous year enforced from the A. Y. 90 are as follows: Previous year means the financial year immediately preceding the assessment year.

Previous year in relation to the assessment year commencing on 1.4.89, means the era of 12 months which ends on, any day throughout the financial year immediately preceding the AY.

Where the assessee has adopted more than one era as the previous year in relation to the assessment year commencing on 1.4.88 for dissimilar sources of his income, the previous year in relation to the assessment year 1989-90 shall be reckoned separately for each source of income and the longer or the longest of the periods shall be the previous year for the AY 1989-90. This era is also referred to as the "Middle Previous year." This switch in excess of to uniform accounting year would result in hardships to some assesses as their previous year would exceed twelve months. To take care of this the tenth schedule which gives for sure modifications in monetary limits, depreciation allowance or rate of tax in cases where the previous year exceeds twelve months. In case of a business or profession newly set up, or a source of income newly coming into subsistence on or after 1.4.87 but before 1.4.88 and when the accounts of such business or profession or source of income have not been made up to March 31, 1988 the previous year in relation to the assessment year 1989-90 shall be the era beginning with the date of setting up of the business or profession and ending on 31.3.1989. Let us explain with the help of an instance. X has been adopting the calendar year i.e. January 1, to December 31, as his Previous Year for his business income. His previous year for the assessment year 1990-91 under the changed provisions will be the era January 1, 1988 to March 31, 1989. An era of 15 months. The previous year for the Assessment Year will though be the 12 month era from April 1, 1989 to March 31, 1990. Y sets up a new business on November 1, 1987 and does not secure his book on March 31, 1988. For the Assessment Year 1989-90 his previous year will be the era from November 1, 1987 to March 31, 1989 an era of 17 months.

In both the examples, the previous year exceeded 12 months. This

leave India without the intention of coming back, he may determine the total income of the person from the date of expiry of the immediately preceding previous year to the date of planned departure. The Assessing Officer will also compute the tax payable and will inquire the individual to pay the tax so computed before leaving the country.

Income of Persons Trying to Alienate their Assets

Section 175 gives for the taxation of income of any person who, it appears to the Assessing Officer, is likely to sell, transfer or dispose of any of his assets with a view to avoiding payment of tax on his income, in the similar year in which it is earned. The Assessing Officer will determine the income from the date of expiry of the immediately preceding previous year to the day when such proceedings commence and will serve a demand notice on the assessee.

Income of Discounting Business

Where any business or profession is discontinued in any year, the income of the era from the date of expiry of the immediately preceding previous year to the date of discontinuance of such business shall be determined and tax on that income computed. It has been provided that any person discontinuing any business or profession shall inform the Assessing Officer of such discontinuance within 15 days thereof.

CONCEPT OF TOTAL INCOME

The term 'total income' is quite significant as it is the total income that is put to tax. The term is defined in Section 2(45) which says that "total income" means the total amount of income, profits, and gains as referred to in Section 5 and computed in the manner laid down in the Act. Compute taxable income under several heads of income i.e. salaries, house property, profits and gains of business and profession, capital

gains and other incomes, through allowing deductions in respect of expenses incurred through the assessee in earning those incomes up to the extent permissible under the provisions. Net result of adding taxable incomes from several heads of income is Gross Total Income. Out of the gross total so computed create the deductions allowed under Section 80 A to 80 U etc. in respect of several expenses such as LIC premium, contribution to Provident Finance, Medical Expenses etc, and several incomes such as dividends, interests etc.

The net income so remaining after allowing all such deductions is termed as total income which will be relevant for computation of tax liability. It is also described Taxable Income.

ACCOUNTING METHOD

There are three kinds of accounting methods which are accepted in the accounting world. Sometimes the assessee maintains the accounts on the foundation of cash system, a system wherein, income is supposed to be received only when it is received in cash. Till the amount is received, no cognizance is taken of income even if it has been earned. On the other hand there is a system which is based on accruals and not on cash receipts: Third system is a mix of the first two systems wherein, usually, income is accounted on the foundation of cash system and expenditure is recorded on the foundation of mercantile system or accrual system.

Since the assessee is at liberty to use any method of accounting, there is a need to ensure that the assessee does not change his method of accounting in a manner that is prejudicial to the interests of the Revenue. The Income Tax Act, 1961, so, gives in Section 145 that the income chargeable under the head 'Profits and Gains of the Business or Profession' or 'Income from other sources' shall be computed in accordance with the method of accounting employed through the assessee. If, though, the Assessing Officer is of the opinion that notwithstanding the correctness of the Accounts the method

CHAPTER 2

Basic Concepts-II

STRUCTURE

Learning objectives Agricultural income Concept of casual income Capital and revenue receipts importance of distinction Review questions

LEARNING OBJECTIVES

After learning this chapter, you should be able to: Explain agricultural income, and taxation thereof, Explain casual income and tax treatment thereof, Differentiate flanked by capital and revenue.

AGRICULTURAL INCOME

Agricultural income is not taxed under the Income Tax Act, 1961, because agriculture being a State subject, it is the State Government alone which is competent to tax income there from. The exemption to this income is provided under Section 10(1) of the Act. Since it is not taxed, the definition thereof has assumed significance. The assessee would naturally be interested in classifying his income as agricultural incomes howsoever distantly it might have been related to agriculture. On the other hand, the tax authorities would like to interpret the term conservatively and therefore there is a possibility of some dispute flanked by the parties as regards the meaning of the term. The Income Tax Act, 1961, has defined the term 'agricultural income' under Section 2(1A) exhaustively.

Definition of Agricultural Income

Agricultural income as defined under Section 2(1) means any rent or revenue derived from land which is situated in India and is used for agricultural purposes (2(1)(a)).

The definition creates it very clear that any rent or revenue (in cash or type) will be agricultural in nature only if the following circumstances are fully satisfied: Rent or revenue is derived from land, The land is situated in India, and The land is used for agricultural purposes.

Since the term 'agriculture' will determine the nature of income, it is necessary for us to be able to understand what is agriculture. Income is said to have been derived from land, from agriculture when that land is subjected to the labour and ability of man whether in the form of cultivation or otherwise. Though tilling is not a necessary part of agriculture, human labour and ability are supposed to be expended on the land itself and not merely on the growth from land.

The Supreme Court has in CIT v. Raja Benoy Kumar Sahas Roy expounded on the conditions 'Agriculture' and Agricultural Purposes'. The relevant portion of the judgment is given below: Agriculture in its mainly primary sense denotes the cultivation of the field and is restricted to the cultivation of the land in the strict sense of the term, meaning thereby tilling of land, sowing of seeds, planting arid similar operations on the land. It also comprises in its scope all the operations which foster the growth and preservation of the produce beside with the operations required to create the produce marketable. The term comprises within its scope all kinds of produce regardless of its nature.