Introduction to Tax

Meaning :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). If tax is levied directly on the income or wealth of a person, then it is a direct tax e.g. income-tax. If tax is levied on the price of a good or service, then it is called an indirect tax e.g. excise duty. In the case of indirect taxes, the person paying the tax passes on the incidence to another person.

Types :-

The following diagram will describe the various types of taxes: -

TYPES OF TAX

DIRECT TAXES

INDIRECT TAXES

INCOME TAXES

WEALTH TAXES

EXCISE DUTY

CUSTOM DUTY

SERVICE TAX

SALES TAX/VAT

Reason For Levy :-

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.
1

Overview Of Income-Tax Law In India

Income-tax is the most significant direct tax.

Components of Income

Tax:The income-tax law in India consists of the following components The various instruments of law containing the law relating to income-tax are explained below:

COMPONENTS OF INCOME TAX LAWS

INCOME TAX ACT 1961

ANNUAL FINANCE ACTS

INCOME TAX RULES

CIRCULARS/ NOTIFICATIO NS

LEGAL DECISIONS OF COURT

I. Income-tax Act
The levy of income-tax in India is governed by the Income-tax Act, 1961. This Act came into force on 1st April, 1962. The Act contains 298 sections and XIV sched ules. These undergo change every year with additions and deletions brought about by the Finance Act passed by Parliament. In pursuance of the power given by the Incometax Act, rules have been framed to facilitate proper administration of the Income-tax Act.
2

II. The Finance Act

Every year, the Finance Minister of the Government of India presents the Budget to the Parliament. Part A of the budget speech contains the proposed policies of the Government in fiscal areas. Part B of the budget speech contains the detailed tax proposals. In order to implement the above proposals, the Finance Bill is introduced in the Parliament. Once the Finance Bill is approved by the Parliament and gets the assent of the President, it becomes the Finance Act.

III. Income-tax Rules

The administration of direct taxes is looked after by the Central Board of Direct Taxes (CBDT). The CBDT is empowered to make rules for carrying out the purposes of the Act. For the proper administration of the Income-tax Act, the CBDT frames rules from time to time. These rules are collectively called Income-tax Rules, 1962. It is important to keep in mind that along with the Income-tax Act, these rules should also be studied.

IV. Circulars and Notifications

Circulars are issued by the CBDT from time to time to deal with certain specific problems and to clarify doubts regarding the scope and meaning of the provisions. These circulars are issued for the guidance of the officers and/or assessees. The department is bound by the circulars. While such circulars are not binding the assessees they can take advantage of beneficial circulars.

V. Case Laws
The study of case laws is an important and unavoidable part of the study of income-tax law. It is not possible for Parliament to conceive and provide for all possible

issues that may arise in the implementation of any Act. Hence the judiciary will hear the disputes between the assessees and the department and give decisions on various issues. The Supreme Court is the Apex Court of the country and the law laid down by the Supreme Court is the law of the land. The decisions given by various High Courts will apply in the respective states in which such High Courts have jurisdiction. Tax Section 4 of the Income-tax Act is the charging section which provides that: (i) Tax shall be charged at the rates prescribed for the year by the annual Finance Act. The charge is on every person specified under section 2(31); Tax is chargeable on the total income earned during the previous year and not the Assessment year. (There are certain exceptions provided by sections 172, 174, 174A, 175 and 176); Tax shall be levied in accordance with and subject to the various provisions contained in the Act. This section is the back bone of the law of income-tax in so far as it serves as the most operative provision of the Act. The tax liability of a person springs from this section. Charge Of Income-

Definitions
Income-tax is a tax levied on the total income of the previous year of every Assessee. The main definitions are :

Previous year [Section

3] It means the financial year immediately preceding the assessment year. The income earned during the previous year is taxed in the assessment year. Business or profession newly set up during the financial year - In such a case, the previous year 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. 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 the assessment year 2007-08. Ans. The previous year will be 1.4.2006 to 31.3.2007. 2. A chartered accountant sets up his profession on 1st July, 2006. Dete rmine the previous year for the assessment year 2007-08. Ans. The previous year will be from 1.7.2006 to 31.3.2007.

Assessment year

The term has been defined u/s 2(9). This means a period of 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 2009-10 (1.4.2009 to 31.3.2010) the relevant previous year is 2008-09 (1.4.2008 to 31.3.2009).

Assessee [Section 2(7)]

Assessee means a person by whom any tax or any other sum of money is payable under this Act. It includes every person in respect of who many proceeding has been taken for the assessment of his income or assessment of fringe benefits. Sometimes, a person becomes assessable in respect of the income of some other persons. In such a case also, he may be considered as an assessee. This term also includes every person who is deemed to be an assessee or an assessee in default under any provision of this Act.

Person [Section 2(31)]

The definition of assessee leads us to the definition of person as the former is closely connected with the latter. The term person is important from another point of view also viz., the charge of income-tax is on every person.The definition is inclusive i.e. a 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.

Concept Of Income
The definition of income as per the Income-tax Act begins with the words Income includes. Therefore, it is an inclusive definition and not an exhaustive one. Such a definition does not confine the scope of income but leaves room for more inclusions within the ambit of the term. Certain important principles relating to income are enumerated below - Income, in general, means a periodic monetary return which accrues or is expected to accrue regularly from definite sources. However, under the Income-tax Act, even certain income which do not arise regularly are treated as income for tax purposes e.g. Winnings from lotteries, crossword puzzles. Income normally refers to revenue receipts. Capital receipts are generally not included within the scope of income. However, the Income-tax Act has specifically included certain capital receipts within the definition of income e.g. Capital gains i.e. gains on sale of a capital asset like land. Income means net receipts and not gross receipts. Net receipts are arrived at after deducting the expenditure incurred in connection with earning such receipts. The expenditure which can be deducted while computing income under each head is prescribed under the Income-tax Act. Income is taxable either on due basis or receipt basis. For computing income under the heads Profits and gains of business or profession and Income from other sources, the method of accounting regularly employed by the assessee should be considered, which can be either cash system or mercantile system. Income earned in a previous year is chargeable to tax in the assessment year. Previous year is the financial year, ending on 31 st March, in which income has accrued/ received. Assessment year is the financial year (ending on 31 st March) following the previous year. The income of the previous year is assessed during the assessment year following the previous year. For instance income of previous year 2006-07 is assessed during 2007-08. Therefore, 2007-08 is the assessment year for

assessment of income of the previous year 2006-07.

Computation of Total Income And Tax Payable

Income-tax is levied on an assessees total income. Such total income has to be computed as per the provisions contained in the Income-tax Act, 1961. Let us go step by step to understand the procedure of computation of total income for the purpose of levy of income-tax STEP 1 DETERMINATION OF RESIDENTIAL STATUS The residential status of a person has to be determined to ascertain which income is to be included in computing the total income. Income which is to be included /not included is to be determined by seeing the status of assessee. Residential status is different from Citizenship. A person can be a resident of more than two countries but cannot a citizen of more than two countries. The residential statuses as per the Income-tax Act are shown below
Resident Status Under Income Tax Act,1961

Resident

Nonresident

Resident And Ordinary Resident

Resident And not ordinary resident

In the case of an individual, the duration for which he is present in India determines his residential status. Based on the time spent by him, he may be (a) resident and ordinarily resident, (b) resident but not ordinarily resident, or (c) non-resident. The residential

status of a person determines the taxability of the income. For e.g., income earned
Taxability of income on Basis of residential status

Resident

Non-Resident

Resident and ordinary resident

Resident but not emocni naidnI ylnO ordinary resident

Indian income+foreign income

Indian income + foreign income (source )controlled from india

outside India will not be taxable in the hands of a non-resident but will be taxable in case of a resident and ordinarily resident. SCOPE OF TOTAL INCOME Section 5 provides the scope of total income in terms of the residential status of the assessee because the incidence of tax on any person depends upon his residential status. The scope of total income of an assessee depends upon the following three important considerations: (i) the residential status of the assessee (as discussed earlier); (ii) the place of accrual or receipt of income, whether actual or deemed; and (iii) the point of time at which the income had accrued to or was received by or on behalf of the assessee.
9

The ambit of total income of the three classes of assessee would be as follows: (1) Resident and ordinarily resident - The total income of a resident assessee would, Under section 5(1), consists of: (i) Income received or deemed to be received in India during the previous year; (ii) Income which accrues or arises or is deemed to accrue or arise in India during The previous year; and (iii) Income which accrues or arises outside India even if it is not received or brought into India during the previous year. In simpler terms, a resident and ordinarily resident has to pay tax on the total income Accrued or deemed to accrue, received or deemed to be received in or outside India. (2) Resident but not ordinarily resident Under section 5(1), the computation of total Income of resident but not ordinarily resident is the same as in the case of resident and Ordinarily resident stated above except for the fact that the income accruing or arising to He outside India is not to be included in his total income. However, where such income is derived from a business controlled from or profession set up in India, then it must be included in his total income even though it accrues or arises outside India. (3) Non-resident - A non-residents total income under section 5(2) includes: (i) income received or deemed to be received in India in the previous year; and (ii) income which accrues or arises or is deemed to accrue or arise in India during The previous year. Note: All assessee, whether resident or not, are chargeable to tax in respect of their income accrued, arisen, received or deemed to accrue, arise or to be received in India whereas residents alone are chargeable to tax in respect of income which accrues or arises
10

outside India STEP 2 CLASSIFICATION OF INCOME UNDER DIFFERENT HEADS The Act prescribes five heads of income. These are shown below Heads of Income

Salary Income

Income From House Property

Profits and Gains of Business / Profession

Capital Gains

Income From Other Sources

These heads of income exhaust all possible types of income that can accrue to or be received by the tax payer. Salary, pension earned is taxable under the head Salaries. Rental income is taxable under the head Income from house property. Income derived from carrying on any business or profession is taxable under the head Profits and gains from business or profession. Profit from sale of a capital asset (like land) is taxable under the head Capital Gains. The fifth head of income is the residuary head under which income taxable under the Act, but not falling under the first four heads, will be taxed. The tax payer has to classify the income earned under the relevant head of income. Discussion in detail a) SALARY

The meaning of the term salary for purposes of income tax is much wider than what is normally understood. Every payment made by an employer to his employee for service rendered would be chargeable to tax as income from salaries. The term salary
11

for the purposes of Income-tax Act will include both monetary payments (e.g. basic salary, bonus, commission, allowances etc.) as well as non-monetary facilities (e.g. housing accommodation, medical facility, interest free loans etc). Main Condition for entry of any income under this head:Employer-employee relationship: Before an income can become chargeable under the head salaries, it is vital that there should exist between the payer and the payee, the relationship of an employer and an employee. Consider the following examples: a. Sujatha, an actress, is employed in Chopra Films, where she is paid a monthly remuneration of Rs. 2 lacs. She acts in various films produced by various producers. The remuneration for acting in such films is directly paid to Chopra Films by the different producers. In this case, Rs. 2 lacs will constitute salary in the hands of Sujatha, since the relationship of employer and employee exists between Chopra Films and Sujatha. b. In the above example, if Sujatha acts in various films and gets fees from different producers, the same income will be chargeable as income from profession since the relationship of employer and employee does not exist between Sujatha and the film producers. c. Commission received by a Director from a company is salary if the Director is an employee of the company. If, however, the Director is not an employee of the company, the said commission cannot be charged as salary but has to be charged either as income from business or as income from other sources depending upon the facts. d. Salary paid to a partner by a firm is nothing but an appropriation of profits. Any salary, bonus, commission or remuneration by whatever name called due to or received by partner of a firm shall not be regarded as salary. The same is to be charged as income from profits and gains of business or profession. This is primarily because the relationship between the firm and its partners is not that of an employer and employee.

12

DEFINITION OF SALARY The term salary has been defined differently for different purposes in the Act. The definition as to what constitutes salary is very wide. As already discussed earlier, it is an inclusive definition and includes monetary as well as non-monetary items. There are different definitions of salary say for calculating exemption in respect of gratuity, house rent allowance etc. Salary u/s 17(1), includes the following: (i) wages, (ii) any annuity or pension, (iii) any gratuity, (iv) any fees, commission, perquisite or profits in lieu of or in addition to any salary or wages, (v) any advance of salary, (vi) any payment received in respect of any period of leave not availed by him i.e. leave salary or leave encashment, (vii) the portion of the annual accretion in any previous year to the balance at the credit of an employee participating in a recognised provident fund to the extent it is taxable and (viii) transferred balance in recognized provident fund to the extent it is taxable, (ix) the contribution made by the Central Government in the previous year to the account of an employee under a pension scheme referred to in section 80CCD. BASIS OF CHARGE 1. Section 15 of the Act deals with the basis of charge. Salary is chargeable to tax either on due basis or on receipt basis whichever is earlier. 2. However, where any salary, paid in advance, is assessed in the year of payment, it
13

cannot be subsequently brought to tax in the year in which it becomes due. 3. If the salary paid in arrears has already been assessed on due basis, the same cannot be taxed again when it is paid. b) HOUSE PROPERTY :CHARGEABILITY [SECTION 22] (i) The process of computation of income under the head Income from house property starts with the determination of annual value of the property. The concept of annual value and the method of determination is laid down in section 23. (ii) The annual value of any property comprising of building or land appurtenant thereto, of which the assessee is the owner, is chargeable to tax under the head Income from house property. CONDITIONS FOR CHARGEABILITY (i) Property should consist of any building or land appurtenant thereto. (a) Buildings include not only residential buildings, but also factory buildings, offices, shops, godowns and other commercial premises. (b) Land appurtenant means land connected with the building like garden, garage etc. (c) Income from letting out of vacant land is, however, taxable under the head Income from other sources. (ii) Assessee must be the owner of the property (a) Owner is the person who is entitled to receive income from the property in his own right. (b) The requirement of registration of the sale deed is not warranted. (c) Ownership includes both free-hold and lease-hold rights. (d) Ownership includes deemed ownership (discussed later in para 2.12) (e) The person who owns the building need not also be the owner of the land upon
14

INCOME

FROM

which it stands. (f) The assessee must be the owner of the house property during the previous year. It is not material whether he is the owner in the assessment year. (g) If the title of the ownership of the property is under dispute in a court of law, the decision as to who will be the owner chargeable to income-tax under section 22 will be of the Income-tax Department till the court gives its decision to the suit filed in respect of such property. (iii) The property may be used for any purpose, but it should not be used by the owner for the purpose of any business or profession carried on by him, the profit of which is chargeable to tax. (iv) Property held as stock-in-trade etc. Annual value of house property will be charged under the head Income from house property in the following cases also (a) Where it is held by the assessee as stock-in-trade of a business; (b) Where the assessee is engaged in the business of letting out of property on rent; EXCEPTIONS (a) Letting out is supplementary to the main business (i) Where the property is let out with the object of carrying on the business of the assessee in an efficient manner, then the rental income is taxable as business income, provided letting is not the main business but it is supplementary to the main business. (ii) In such a case, the letting out of the property is supplementary to the main business of the assessee and deductions/allowances have to be calculated as relating to profits/gains of business and not relating to house property. (b) Letting out of building along with other facilities (i) Where income is derived from letting out of building along with other facilities like furniture, the income cannot be said to be derived from mere ownership of house property but also because of facilities and services rendered and hence assessable as
15

income from business. (ii) Where a commercial property is let out along with machinery e.g. a cotton mill including the building and the two lettings are inseparable, the income will either be assessed as business income or as income from other sources, as the case may be.
c)

INCOME

FROM

PROFITS AND GAINS FROM BUSINESS & PROFESSION MEANING OF BUSINESS, PROFESSION AND PROFITS (i) The tax payable by an assessee on his income under this head is in respect of the profits and gains of any business or profession, carried on by him or on his behalf during the previous year. The term business has been defined in section 2(13) to include any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. But the term profession has not been defined in the Act. It means an occupation requiring some degree of learning. Thus, a painter, a sculptor, an author, an auditor, a lawyer, a doctor, an architect and, even an astrologer are persons who can be said to be carrying on a profession but not business. The term profession includes vocation as well [Section 2(36)]. However, it is not material whether a person is carrying on a business or profession or vocation since for purposes of assessment, profits from all these sources are treated and taxed alike. (ii) Business necessarily means a continuous exercise of an activity; nevertheless, profit from a single venture in the nature of trade would also be assessable under this head if the venture had come to an end or after the entire cost had been recouped. For example, where a person had purchased a piece of land, got it surveyed, laid down a scheme of development, divided it into a number of building plots and sold some of the plots from time to time, though he would not be charged tax on a notional profit made on the
16

individual sale of plots, he would be liable to pay tax on the surplus after all the plots have been sold and the venture has come to an end or after he has recovered the cost of all the plots and expenditure incidental thereto and has a surplus left. (iii) Profits may be realised in money or in moneys worth, i.e., in cash or in kind. Where profit is realised in any form other than cash, the cash equivalent of the receipt on the date of receipt must be taken as the value of the income received in kind. Capital receipts are not generally to be taken into account while computing profits under this head. Payment voluntarily made by persons who were under no obligation to pay anything at all would be income in the hands of the recipient, if they were received in the course of a business or by the exercise of a profession or vocation. Thus, any amount paid to a lawyer by a person who was not a client, but who has been benefited by the lawyers professional service to another would be assessable as the lawyers income. (iv) Application of the gains of trade is immaterial. Gains made even for the benefit of the community by a public body would be liable to tax. To attract the provisions of section 28, it is necessary that the business, profession or vocation should be carried on at least for some time during the accounting year but not necessarily throughout that year and not necessarily by the assessee-owner personally, but it should be under his direction and control. (v) The charge is not on the gross receipts but on the profits and gains in their natural and proper sense. Profits are ascertained on ordinary principles of commercial trading and commercial accounting. According to section 145, income has to be computed in accordance with the method of accounting regularly and consistently employed by the assessee. The assessee may account for his receipts on the cash basis or mercantile basis. (vi) The Act, however, contains certain provisions for determining how the income is to be assessed. These must be followed in every case of business or profession. The
17

illegality of a business, profession or vocation does not exempt its profits from tax: the revenue is not concerned with the taint of illegality in the income or its source. Income is taxable even if the assessee is carrying on the business, profession or vocation without any profit motive. The liability to tax arises once income arises to the assessee; the motive or purpose of earning the income is immaterial. Thus, profit motive is not essential for describing the income from that activity as income from business or profession. (vii) The profits of each distinct business must be computed separately but the tax chargeable under this section is not on the separate income of every distinct business but on the aggregate profits of all the business carried on by the assessee. Profits should be computed after deducting the losses and expenses incurred for earning the income in the regular course of the business, profession, or vocation unless the loss or expenses is expressly or by necessary implication, disallowed by the Act. (viii) Income arising from business assets which are temporarily let out e.g., an oil mill, cinema theatre, hotel, ginning or textile factory, rice mill or jute press would be assessable as business income. But if the commercial asset is permanently let the income is taxable as income from house property or income from other sources, depending on the facts and circumstances of the case.

d) CAPITAL GAINS:-

INCOME

FROM

Section 45 provides that any profits or gains arising from the transfer of a capital asset effected in the previous year will be chargeable to income-tax under the head Capital Gains. Such capital gains will be deemed to be the income of the previous year in

18

which the transfer took place. In this charging section, two terms are important. One is capital asset and the other is transfer.

BASIS OF CHARGE :A) B) C) Capital Asset Transfer of Capital Asset Computation of Capital Gains

Capital Gains

Long term Capital Gain if Capital AssetsniaG latipaC mreT trohS is held for more than 36 months mretmonthston si hcihW) /12 gnoL (in ) )case of certain securities

e) OTHER SOURCES:-

INCOME

FROM

Any income, profits or gains includible in the total income of an assessee, which cannot be included under any of the preceding heads of income, is chargeable under the head Income from other sources. Thus, this head is the residuary head of income and brings within its scope all the taxable income, profits or gains of an assessee which fall outside the scope of any other head. Therefore, when any income, profit or gain does

19

not fall precisely under any of the other specific heads but is chargeable under the provisions of the Act, it would be charged under this head.

STEP 3 - EXCLUSION OF INCOME NOT CHARGEABLE TO TAX There is certain income which are wholly exempt from income-tax e.g. agricultural income. These incomes have to be excluded and will not form part of Gross Total Income. Also, some incomes are partially exempt from income-tax e.g. House Rent Allowance, Education Allowance. These incomes are excluded only to the extent of the limits specified in the Act. The balance income over and above the prescribed exemption limits would enter computation of total income and have to be classified under the relevant head of income. STEP 4 - COMPUTATION OF INCOME UNDER EACH HEAD Income is to be computed in accordance with the provisions governing a particular head of income. Under each head of income, there is a charging section which defines the scope of income chargeable under that head. There are deductions and allowances prescribed under each head of income. For example, while calculating income from house property, municipal taxes and interest on loan are allowed as deduction. Similarly, deductions and allowances are prescribed under other heads of income. These deductions etc. have to be considered before arriving at the net income chargeable under each head

20

STEP 5 CLUBBING OF INCOME OF SPOUSE, MINOR CHILD ETC. In case of individuals, income-tax is levied on a slab system on the total income. The tax system is progressive i.e. as the income increases, the applicable rate of tax increases. Some taxpayers in the higher income bracket have a tendency to divert some portion of their income to their spouse, minor child etc. to minimize their tax burden. In order to prevent such tax avoidance, clubbing provisions have been incorporated in the Act, under which income arising to certain persons (like spouse, minor child etc.) have to be included in the income of the person who has diverted his income for the purpose of computing tax liability.(Sec. 60 to Sec. 65) STEP 6 SET-OFF OR CARRY FORWARD AND SET-OFF OF LOSSES An assessee may have different sources of income under the same head of income. He might have profit from one source and loss from the other. For instance, an assessee may have profit from his textile business and loss from his printing business. This loss can be set-off against the profits of textile business to arrive at the net income chargeable under the head Profits and gains of business or profession. Similarly, an assessee can have loss under one head of income, say, Income from house property and profits under another head of income, say, Profits and gains of business or profession. There are provisions in the Income-tax Act for allowing inter-head adjustment in certain cases. Further, losses which cannot be set-off in the current year due to inadequacy of eligible profits can be carried forward for set-off in the subsequent years as per the provisions contained in the Act. STEP 7 COMPUTATION ION OF GROSS TOTAL INCOME. The final figures of income or loss under each head of income, after allowing the
21

deductions, allowances and other adjustments, are then aggregated, after giving effect to the provisions for clubbing of income and set-off and carry forward of losses, to arrive at the gross total income.

STEP 8 DEDUCTIONS FROM GROSS TOTAL INCOME There are deductions prescribed from Gross Total Income (Sec. 80C to 80U). These deductions are of three types
A. B. C.

Deductions in respect of certain payments, Deductions in respect of certain incomes and Deductions in respect of other deductions.

STEP 9 TOTAL INCOME The income arrived at, after claiming the above deductions from the Gross Total Income is known as the Total Income. It is also called the Taxable Income. It should be rounded off to the nearest Rs.10.(Sec.288B) STEP 10 APPLICATION OF RATES OF TAX ON THE TOTAL INCOME The rates of tax for the different classes of assesses are prescribed by the Annual Finance Act. For individuals, HUFs etc., there is a slab rate and basic exemption limit. At present, the basic exemption limit is Rs.1,50,000 for individuals. This means that no tax is payable by individuals with total income of up to Rs.1,50,000. Those individuals whose total income is more than Rs.1,50,000 but less than Rs.2,00,000 have to pay tax on their total income in excess of Rs.1,50,000 @ 10% and so on. The highest rate is

22

30%, which is attracted in respect of income in excess of Rs.3, 00,000. For firms and companies, a flat rate of tax is prescribed. At present, the rate is 30% on the whole of their total income. The tax rates have to be applied on the total income to arrive at the income-tax liability.

Rates of Tax
Income-tax is to be charged at the rates fixed for the year by the annual Finance Act. Section 2 read with Part I of the First Schedule to the Finance Act, 2006 specifies the rates at which income-tax is to be levied on income chargeable to tax for the AY 2006-07. Part II lays down the rate at which tax is to be deducted at source during the financial year 2006-07 i.e. A.Y. 2007-08 from income subject to such deduction under the Act; Part III lays down the rates for charging income-tax in certain cases, rates for deducting income-tax from income chargeable under the head "salaries" and the rates for computing advance tax for the financial year 2006-07 i.e. A.Y.2007-08. Part III of the First Schedule to the Finance Act, 2006 will become Part I of the First Schedule to the Finance Act, 2007 and so on.

(1) Individual / Hindu Undivided Family (HUF) / Association of Persons (AOP) / Body of Individuals (BOI) / Artificial juridical Person.
For resident men below the age of 65 years First Rs.1,50,000 Next Rs.1,50,000 Rs.3,00,000 Next Rs.3,00,000 Rs.5,00,000 Above Rs.5,00,000 Nil 10% 20% 30%
23

Illustration: Mr. Ram has a total income of Rs.6,00,000. Compute his gross tax liability. Tax liability before rebate and surcharge = Rs.55,000 + 30 % of Rs.1,00,000 = Rs.85,000

Alternatively: Tax liability before rebate and surcharge : First Rs.1,50,000 - Nil Next Rs.1,50,000 Rs.3,00,000 - @ 10% of Rs.1,50,000 = Rs. 15,000 Next Rs.3,00,000 Rs.5,00,000 - @ 20% of Rs.2,00,000 = Rs. 40,000 Balance i.e. Rs.1,00,000 - @ 30% of Rs.1,00,000 Total tax = Rs.30,000 = Rs.85,000 Tax

For Resident Women Below The Age Of 65 Years First Rs.1, 80,000 Next Rs.1,80,000 Rs.3,00,000 Next Rs.3,00,000 Rs.5,00,000 Above Rs.5,00,000 Nil 10% 20% 30%

Illustration: Mrs. Ram X has a total income of Rs.6,00,000. Compute his gross tax liability. Tax liability before rebate and surcharge = Rs.52,000 + 30 % of Rs.1,00,000 = Rs.82, 000 Alternatively: Tax liability before rebate and surcharge : First Rs.1, 80,000 - Nil
24

Tax

Next Rs.1, 80,000 Rs.3, 00,000 - @ 10% of Rs.1,20,000 = Rs. 12,000 Next Rs.3, 00,000 Rs.5,00,000 - @ 20% of Rs.2,00,000 = Rs. 40,000 Balance i.e. Rs.1,00,000 - @ 30% of Rs.1,00,000 Total tax more) First Rs.2,25,000 Next Rs.2,25,000 Rs.3,00,000 Next Rs.3,00,000 Rs.5,00,000 Above Rs.5,00,000 Nil 10% 20% 30% = Rs.30,000 = Rs.82,000

For senior citizens (being resident individuals of the age of 65 y ears or

Illustration: Mr. Ram has a total income of Rs.6,00,000. His age is 65 years. Compute his gross tax liability. Tax liability before rebate and surcharge = Rs.47,500 + 30 % of Rs.1,00,000 = Rs.77,500 Alternatively: Tax liability before rebate and surcharge : First Rs.2,25,000 - Nil Next Rs.2,25,000 Rs.3,00,000 - @ 10% of Rs.75,000 Balance i.e. Rs.1,00,000 - @ 30% of Rs.1,00,000 Total tax = Rs. 7,500 = Rs.30,000 = Rs.77,500 Next Rs.3,00,000 Rs.5,00,000 - @ 20% of Rs.2,00,000 = Rs. 40,000 Tax

(2) Firm
On the whole of the total income Surcharge if income exceeds One Crore Rupees 30% 10%

25

Illustration: M/s. Ram & Sham, A firm, has a total income of Rs.6, 00,000. Compute his gross tax liability. Tax liability before rebate and surcharge = 30 % of Rs.6, 00,000 = Rs.1, 80,000

(3) Local authority

On the whole of the total income Surcharge 30% Nil

Illustration: Punjab Municipal Corporation, has a total income of Rs.6,00,000. Compute his gross tax liability. Tax liability before rebate and surcharge = 30 % of Rs.6,00,000 = Rs.1,80,000

(4) Co-operative Society

Upto the total income of Rs. 10,000 Next 10,000-20,000 Next 20000 & above 10% 20% 30%

Illustration: Ram & Bharat Co-operative Society reg. Under Societies Act,1881 has a total income of Rs.60,000. Compute his gross tax liability. Tax liability before rebate and surcharge = Rs.3,000 + 30 % of Rs.40,000 = Rs.15,000 Alternatively:
26

Tax liability before rebate and surcharge : First Rs.10,000 Next Rs.10,000 Rs.20,000 Balance i.e. Rs.40,000 Total tax

Tax

@ 10% of Rs.10,000 = Rs. 1,000 @ 20% of Rs.10,000 = Rs. 2,000 @ 30% of Rs.40,000 = Rs.12,000 = Rs.15,000

(5) Company
(a) In the case of a domestic company 30% of the total income Illustration: Ram & Bharat Co. has a total income of Rs.6, 00,000. Compute his gross tax liability. Tax liability before rebate and surcharge = 30 % of Rs.6, 00,000 = Rs.1, 80,000 (b) In the case of a company other than Domestic Company 50% of specified royalties & fees for a domestic company rendering technical services and 40% on the balance. The above rates are prescribed by the annual Finance Acts. However, in respect of certain types of income, as mentioned below, the Income-tax Act has prescribed SPECIFIC RATES (1) Section 112 has prescribed the rate of tax @20% in respect of long term capital gains (2) Section 111A provides for a concessional rate of tax (i.e. 10%) on the short-term capital gains on transfer of (i) An equity share in a company or
27

(ii) A unit of an equity oriented fund. The conditions for availing the benefit of this concessional rate are (i) The transaction of sale of such equity share or unit should be entered into on or after 1.10.2004 and (ii) Such transaction should be chargeable to securities transaction tax. (3) Section 115BB prescribes the rate of tax @30% for winnings from(i) Any lottery; or (ii) Crossword puzzle; or (iii) Race including horse race; or (iv) Card game and other game of any sort; or (v) Gambling or betting of any form. STEP 11 - ADVANCE TAX AND TAX DEDUCTED AT SOURCE Although the tax liability of an assessee is determined only at the end of the year, tax is required to be paid in advance in certain installments on the basis of estimated income. In certain cases, tax is required to be deducted at source from the income by the payer at the rates prescribed in the Act. Such deduction should be made either at the time of accrual or at the time of payment, as prescribed by the Act. For example, in the case of salary income, the obligation of the employer to deduct tax at source arises only at the time of payment of salary to the employees. Such tax deducted at source has to be remitted to the credit of the Central Government through any branch of the RBI, SBI or any authorized bank. If any tax is still due on the basis of return of income, after adjusting advance tax and tax deducted at source, the assessee has to pay such tax (called self-assessment tax) at the time of filing of the return.

28

Surcharge
Surcharge is an additional tax payable over and above the income-tax. Surcharge is levied as a percentage of income-tax. At present, the rate of surcharge for firms and domestic companies is 10% and for foreign companies is 2.5% . For individuals, surcharge would be levied @10% only if their total income exceeds Rs.10 lakhs. (1) In the case of every person being an individual, HUF, AOP or BOI whose income exceeds Rs.10,00,000, the amount of income-tax after allowing rebate u/s 88E, is to be increased by a surcharge calculated @ 10% of such income-tax. (2) In the case of artificial juridical person, surcharge @ 10% will be applicable on the total income. (3) In the case of firms, a surcharge @ 10% on total tax will be payable. (4) In the case of domestic companies, the rate of surcharge is 10% . (5) In the case of foreign companies, the rate of surcharge is 2.5% (6) No surcharge is payable in the case of cooperative society and local authority. If Surcharge provisions applies , the tax paid by assessee exceeds the extra income over and above the limits of surcharge then it leads of applicability of concept of marginal relief.

29

Education cess
The income-tax, as increased by the surcharge, is to be further increased by an additional surcharge called education cess@2%. The Education cess on income-tax is for the purpose of providing universalised quality basic education. This is payable by all assesses who are liable to pay income-tax irrespective of their level of total income. The amount of income-tax as increased by the union surcharge should be further increased by an additional surcharge 2% called the Education cess on income-tax, and 1 % further Secondary and higher education cess calculated at the rate of 3% (2% +1%) of such income-tax and surcharge. Education cess is leviable in the case of all assessees i.e. individuals, HUF, AOP / BOI, firms, local authorities, co-operative societies and companies.

30

Concept of Marginal Relief

In case of such individuals / HUFs / AOPs / BOIs having a total income exceeding Rs.10,00,000, the additional amount of income-tax payable (together with surcharge) on the excess of income over Rs.10,00,000 should not be more than the amount of income exceeding Rs.10,00,000. This is called marginal relief. Simple Calculation of Marginal Relief: a) H.U.F.,AOP,BOI, Computation of Tax Tax on total income of Rs. 10 Lakhs Add:- Least of Two:1) 100 % of Income excess over 10Lakh Or 2) 0.33 of income excess over 10 lakh + 10 % of tax on Rs. 10 Lakh (Surcharge) xxx Total tax b) Domestic Company Computation of Tax Tax on total income of Rs. 1crore Rs. xxxxx = Rs.xxxxx In Case of Firm And xxxx Rs. xxxxx xxx In Case of Individual,

31

Add:- Least of Two:1) 100 % of Income excess over 1crore

xxx xxxx Or

2) 0.33 of income excess over 1crore

+ 10 % of tax on Rs.1 crore Total tax

(Surcharge) xxx = Rs.xxxxx

If 1) of a) or b) least condition applies it is called Marginal Relief

Return Of Income
The Income-tax Act contains provisions for filing of return of income. Return of income is the format in which the assessee furnishes information as to his total income and tax payable. The format for filing of returns by different assessees is notified by the CBDT. The particulars of income earned under different heads, gross total income, deductions from gross total income, total income and tax payable by the assessee are required to be furnished in a return of income. In short, a return of income is the declaration of income by the assessee in the prescribed format. The Act has prescribed due dates for filing return of income in case of different assessees. All companies and firms have to mandatorily file their return of income before the due date. Other persons have to file a return of income if their total income exceeds the basic exemption limit.(Sec.139) Due Dates of filling Returns Due date means (a) 31st October of the assessment year, where the assessee is (i) a company; or (ii) a person (other than a company) whose accounts are required to be audited

32

under the Income-tax Act, 1961 or any other law in force; or (iii) a working partner of a firm whose accounts are required to be audited under the Income-tax Act, 1961 or any other law for the time being in force. (b) 31st July of the assessment year, in the case of any other assessee. Revised Return [Section 139(5)] (1) If any person having furnished a return under section 139(1) or in pursuance of a notice issued under section 142(1), discovers any omission or any wrong statement therein, he may furnish a revised return at any time before the expiry of one year from the end of the relevant assessment year or before completion of assessment, whichever is earlier. (2) It may be noted that a belated return cannot be revised. It has been held in Kumar Jagdish Chandra Sinha v. CIT [1996] 86 Taxman 122 (SC) that only a return furnished under section 139(1) or in pursuance of a notice under section 142(1) can be revised. A belated return furnished under section 139(4), therefore, cannot be revised.

33

Case Study of M/s.

Ashoka Glass Syndicates for leving of Income Tax as per INCOME TAX ACT,1961 M/s. Ashoka Glass Syndicate is a sole proprietorship concern owned and managed by Sh. Ashok Kumar. The business of concern is Trading of Glasses. The Main Source of income of Sh. Ashok Kumar is his business. Since it is a sole proprietorships concern, tax is not on concern but on Sh. Ashok Kumar as owner has no separate entity.

Computation of tax on

the income of Sh. Ashok Kumar Such Computation is Done by following the steps discussed as follows : 1)

Determination of Status of M/s. Ashoka Glass Syndicate :- Since the concern

is sole proprietorship , the residential status of Sh. Ashok has to be checked. Application of Provisions of Sec.6 Of Income tax act, 1961:(1)

Residential status of Individuals

34

Resident: - Under section 6(1), an individual is said to be resident in India in any previous year, if he satisfies any one of the following conditions: Basic Conditions:(i) He has been in India during the previous year for a total period of 182 days or more, or (ii) He has been in India during the 4 years immediately preceding the previous year for a total period of 365 days or more and has been in India for at least 60 days in the previous year. Non-Resident :- If the individual satisfies any one of the conditions mentioned above, he is a resident. If both the above Basic conditions are not satisfied, the individual is a non-resident. An individual is said to be:Resident and ordinarily resident

if he satisfies Basic Conditions and both the following conditions: (i) He is a resident in any 2 out of the last 10 years preceding the relevant previous year, and (ii) His total stay in India in the last 7 years preceding the relevant previous year is 730 days or more. Resident But not ordinarily resident :- If the individual satisfies both the conditions mentioned above, he is a resident and ordinarily resident but if Basic conditions are satisfied but only one or none of the conditions are satisfied, the individual is a resident but not ordinarily resident. Sh. Ashok Kumar, an Indian citizen, leaves India on 30.9.2008 for the first time for the expansion of Business offers in Afghanistan and from their they went to Nepal for
35

meeting his brother living there and returned in Month of April 2009 . During the previous year 2008-09, Sh. Ashok Kumar, an Indian citizen, was in India for 183 days (i.e. 30+ 31+ 30+31+ 31+30 days). He satisfies the minimum criteria of 182 days., And he never leave India Before So no need to find out the satisfaction of Additional Conditions. Sh. Ashok Kumar is a resident and ordinary resident for the A.Y.2009-10
2) Classification of Income under different heads:- Since the main source of

income of Sh. Ashok Kumar is Business and he has no other source of Income. So His income is taxable under head Profits & Gains of Business And Profession as Business income is covered under this head.

3) Exclusion of income not chargeable to tax :- No Such kind of income covered

by Sec. 10 is earned by Sh. Ashok Kumar.

4) Computation of Business Income :- The Business income of Sh. Ashok Kumar

is computed by following provisions contained Sections 28 to 44D of Income tax act ,1961 for computation of income under head Profits & Gains of Business And Profession.

Computation of Business Income :-

Rs.

36

Taxable Incomes Under This Head (As per Return U/s. 139(1)) Sales (Net of Returns) Closing Stock Income From Repair Works as concerned with Business 4414360.00 1673635.00 248680.00 ----------------Total Taxable Income Less: - Expenses allowed as deductions from Taxable income Sec. 30 to 37 Total Expenses (covered By Sec. 30 to 37) Income under head PGBP 6137666.00 -----------------199009.00 63366675.00

5) Clubbing Provisions :- As Sh. Ashok Kumar s wife is A house wife and son is

a major and no other person whose income is to be clubbed as per Sec. 60 to 65 of Income tax Act,1961 , is associated with Sh. Ashok So no Clubbing Provisions Applies.
6) Set off or carried forward provisions :- As source of income is Business And

business is well managed by Sh. Ashok And No Losses are carried forward for set off from previous years and in 2008-09 P.Y. business earns Profits So Sec. 70-80 Not applies.
7) Computation of G.T.I. :-As Business income is only Source Gross Total Income

is calculated as above:37

Heads
a. b.

Amount Nil Nil Nil 60000.00 259009.00

Salary Less Deductions u/s 16 Income From House Property Less Deductions u/s 24 Capital Gain Less Deductions u/s 54 Gross Total Income

c. Business Income Less Deductions u/s 30-37(See 4) Above) 199009.00 d.

e. Income From Other Sources Less Deductions u/s 56/57

8) Deduction From G.T.I.:- Sh. Ashok has paid his and his wife s life insurance

premium amounting Rs. 33403.00 in P.Y.08-09.And a medical premia for his health of Rs.5796.00 Calculations of deductions :- Applicability of Sections between 80C to 80 U:Section. Whom Applies Applicable Applies Applies Maximum Limit Rs.1,00,000.00 Rs. 15,000.00 Rs. 33403.00 5796.00 Total
9) Computation of Total Income :-

Sec. 80C For Individual And HUF. Sec.80 D- For Individual And HUF. Deductions to Sh. Ashok Kumar Sec 80 C Sec 80 D

39199.00 Sh. Ashok Kumars Total Income Is 259009.00 - 39099.00 219810.00

Calculated as follws:G.T.I. Less:- Deduction U/s.80C to 80 U Total Income 10) Rates of taxation

38

As Sh. Ashok Kumar has born on 8-07-1965. As on 1-04-09 he is of age 43 Years, So. Rates applicable As follows:For resident men below the age of 65 years First Rs.1,50,000 Next Rs.1,50,000 Rs.3,00,000 Next Rs.3,00,000 Rs.5,00,000 Above Rs.5,00,000 Nil 10% 20% 30%

Sh. Ashok has a total income of Rs.2, 19,810.

Tax on Total Income Rs. 219810

Tax on Normal Income at Slap rates Rs.159810

Tax at Special Rates Rs.60000 Lottery Income Rate 30%

Tax liability before rebate and surcharge First Rs.1,50,000 - Nil Next Rs.1,50,000 Rs.1,59,810 - @ 10% of Rs9,810 a) Tax at normal rates b) Tax at Special rate Lottery Income 60000 @30%

Tax = Rs. 981 = Rs.981 =Rs. 18000

39

c) Total Tax [a+b]

= Rs.18981

11) Surcharge:- As total Income of Sh. Ashok does not exceeds Rs. 10 Lakh No

Surcharge applies
12) Education Cess And Secondary & Higher Education Cess:- Rate 3% of Tax

on Total income. Amount =18981*3/100=569 Now Total tax = 18981+569=19550.00Rs.

13) Advance payment of tax:- As Net tax payable exceeds Rs. 5000 (limit)

Net tax payable by Sh. Ashok Kumar :-19550 *18540=1010 Rs. *TDS on lottery income = 60000*30.9%=18540 Rs. so Sh. Ashok is Not liable to pay advance tax. Provisions of Sec.207-211 and Sec.218,219,234B,234C not Applies. 14) Filling of Return ;- As Sec. 139 Defines filling of return , Annexure are given at the end of term paper.

40