Basic concepts

INCOME(Defn)
• Sec. 2(24)
-profits or gains
-dividend
-voluntry contributions
-perquisites of employee
-Special allowance or benefit
-benefits to directors
-benefits to representative assessee
-Capital gains
-Insurance Profit
-Income of banking firm or Coop society
-winning from lottery
-Employees contribution to PF
-Keyman Insurance and Gifrs
 Income
• Income connotes a monetary return coming in
with some sort of regularity from a definite
source. The broad principles which clarify the
concept of income are discussed below :
• increase of wealth for a person during stated
period of time.
• It is not the gross receipts but only the net
receipt arrived at after deducting the related
expenses
 Income
• It can be casual or non recurring as in the case
of windfall in the nature of winnings from
lotteries.
• The income can arise in both forms as cash
and kind.
• Income can arise either on receipt basis or
accrual basis. The income may accrue
without its actual receipt. The Income tax does
not make any distinction between income
arising from legal source or tainted & ill-
gotten income.
 Income
• Application, diversion
• gifts
• Similarly testimonial payments
• reward
• Income should be real and not fictional
 Income
• Includes
-revenue receipt
-wasting assets
-conversion or exchange into another
currency
INCOME TAX
DEFINITIONS
 Definitions
• ASSESSMENT YEAR [ SEC. 2(9)]

-Assessment year means the period of twelve

months starting from April 1 of every year and
ending on March 31 of the next year. For
instance, the assessment year 2008-09 which
will commence on April 1, 2008, will end on
March 31, 2009. The period of assessment year
is fixed by statute. Income of previous year of an
assessee is taxed during the following
assessment year at the rates prescribed for such
assessment year by the relevant Finance Act.
 Definitions
• PREVIOUS YEAR [SEC. 3]

-Income earned in a year is taxable in

the next year. The year in which income is
earned is known as previous year and the
next year in which income is taxable is
known as assessment year. In other
words, it can be said that income earned
during the previous year 2007-08 is
taxable in the immediately following
assessment year (i.e.,2008-09)
 PERSON [SEC. 2(31)]
• The term “person” includes:
• 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 preceding
categories.
• These are seven categories of persons chargeable to tax under the
Act. The aforesaid definition is inclusive, and not exclusive.
Therefore, any person, not falling in the abovementioned categories,
may still fall in the four corners of the term “person” and accordingly
may be liable to tax under section 4.
 ASSESSEE [SEC.2(7)]
• Assessee means a person by whom any tax or any other
sum of money (i.e., penalty or interest) is payable under
the Act. The term includes the following persons:

• A person (i.e., an individual; a Hindu undivided family; a

company; a firm; an association of persons or body of
individuals, whether incorporated or not; a local
authority; and every artificial juridical person) by whom
any tax or any other sum of money (including interest
and penalty) is payable under the Act (irrespective of the
fact whether any proceeding under the Act has been
taken against him or not.)
 Assessee
• A person in respect of whom any proceeding under the
Act has been taken (whether or not he is liable for any
tax, interest or penalty). Proceeding may be taken:
• either for the assessment of the amount of his income or
of the loss sustained by him; or
• of the income(or loss) of any other person in respect of
whom he is assessable; or
• of the amount of refund due to him or to such other
person.
• Every person who is deemed to be an assessee. For
instance, a representative assessee is deemed to be an
assessee by virtue of section 160(2).
 GROSS TOTAL INCOME
• As per section 14, income of a person is computed under the
following five heads:
1. Salaries
2. Income from house property
3. Profits and gains of business or profession
4. Capital gains
5. Income from other sources.
• The following propositions should also be kept in view:
• The aggregate income under these heads is termed as “gross total
income”. In other words, gross total income means total income
computed in accordance with the provisions of the Act before
making any deduction under sections 80c to 80U.
• According to the Shorter Oxford English
Dictionary, while the word “capital” means
“accumulated wealth employed
reproductively”, the word “revenue” means
“the return, yield, or profit of any lands,
property or other important source of
income; that which comes in to one as a
return from property of possessions;
income from any source
• Expenditure incurred by an assessee may be of two
types- capital expenditure or revenue expenditure. The
distinction between the two is vital because capital
expenditure, even if incurred for the purpose of earning
income, is not deductible while computing taxable
income, unless the law expressly so provides. Revenue
expenditure, on the other hand, is deductible while
computing taxable income unless the law provides
specific rules to disallow such expenditures wholly or
partly. As the Act does not define the terms “capital
expenditure” and “revenue Expenditure”, one has to
depend upon their natural meaning as well as decided
cases.
 OVERVIEW OF I.T.ACT

THE IMPORTANT AND RELEVANT

PROVISIONS OF I.T. ACT HAVE
BEEN COVERED IN FOLLOWING
SLIDES.HOWEVER IT DOES NOT
COVER ALL THE PROVISIONS OF
THE ACT.
1) DEFINITIONS: CH.I SEC. 2

2) INCOMES WHICH DO NOT FORM

PART OF TOTAL INCOME
(EXEMPT INCOME) CH.III SEC. 10-13A

3) COMPUTATION OF TOTAL INCOME: CH.IV SEC.14-59

HEADS OF INCOME

a) SALARIES SEC. 15-17

b) INCOME FROM
HOUSE PROPERTY SEC. 22-27
c) PROFITS AND GAINS OF
BUSINESS OR PROFESSION SEC. 28-44DB
d) CAPITAL GAIN SEC. 45-55A
e) INCOME FROM OTHER SOURCES SEC. 56-59

3a) CLUBBING OF INCOME SEC. 64-65

4)SET-OFF OR CARRY
FORWARD OF LOSS: CH.VI SEC.72-80

5)DEDUCTIONS TO BE
MADE IN COMPUTING
TOTAL INCOME: CH.VIA SEC.80A-80U

a) GENERAL: SEC.80A-80B
b) DEDUCTIONS IN RESPECT
OF CERTAIN PAYMENTS: SEC.80C-80GGC
c) DEDUCTIONS IN RESPECT
OF CERTAIN INCOMES: SEC.80H-80TT
d) OTHER DEDUCTIONS: SEC.80U
6) INCOME-TAX ON
FRINGE BENEFITS: CH.XIIH SEC.115W-
115WL
7) INCOME-TAX
AUTHORITIES: CH.XIII SEC.116-138

8) PROCEDURE FOR
ASSESSMENT: CH.XIV SEC.139-158
9)COLLECTION AND
RECOVERY OF TAX: CHXVII SEC 190-234D
a) GENERAL: SEC190-191
b) DEDUCTION AT SOURCE: SEC.192-206B
c) COLLECTION AT SOURCE: SEC.206C-
SEC.206CA
d) ADVANCE PAYMENT OF TAX: SEC.207-219
e) COLLECTION AND RECOVERY: SEC. 220-232
f) INTEREST CHARGEABLE IN
CERTAIN CASES: SEC.234A- 234D
10) REFUNDS: CH.XIX SEC.237-245

11) APPEALS AND

REVISIONS: CH.XX SEC.246-264

12) PENALTIES
IMPOSABLE: CH.XXI SEC.270-275

13) OFFENCES AND

PROSECUTIONS: CH.XXII SEC.275A-280
Basis of Charge - An overview
– Income tax is collected by the ‘State’ & is paid by
its ‘Subject’. [Here ‘State’ means India]
– But, the State cannot do so without lawful
authority. It must be legally empowered to charge
tax on income.
– What gives such authority to the State?
• Section 4 of the I. T. Act confers the authority
to the State to charge tax on the income of the
Subject.
• In other words, this section casts legal
obligation on the Subject to pay tax to the State
on his income.
• So, this section is said as a ‘Charging Section’.
Basis of Charge - An overview
– Section 5 of the I. T. Act gives the scope of chargeable
income.
• Who has to pay income tax,
• On what income.
– Sec. 7 to 9 specifies some such income.
• For the liability to pay tax under the I. T. Act
– either the person should be related to India
– or his income should be related to India.
– Sec. 6 defines the residential status of a person
• This is the basis on which the scope of chargeable
income is determined.
 What to Tax?

Whom to Tax? Income,

Total Income
Person When to Tax?
Why Tax?
Annual
Kosh Moolo Dandah Previous Year
Cost of Civilisation Asstt. Year
Tax Model
How to protect rights of 2? At what rate?
Appeals, revisions,
settlement, advance
ruling How to
ensure
Central Act
compliance? Finance Act
TDS, Advance Tax, How to tax?
Self asstt.tax, Tax on Assessment, Scrutiny,
regular asstt. Survey, Searches, 1/6,
Presumptive taxation S. 4, 5 &
6,
S. 139, 143
 Finance Act vs I. T. Act
Finance Act Income tax Act

i] Yearly legislation Standing legislation

ii] Obligation to pay ii] Contains entire machinery

income tax for a year as per for determination & collection
rates prescribed of income & tax
 Stages of imposition of tax
• Machinery provision:
– Assessment of liability
• Computation of T.I. & tax thereon.
– Collection of liability
• Charging provision [ Sec. 4]:
– Declaration of liability
• Who is liable to pay tax on income & at what rate.
• TDS, Advance tax, Self assessment tax, Post assessment tax.
– Comparison: Liability to pay tax arises by virtue of
Sec. 4, assessment only quantifies it.
 Charging vs other provisions
• Charging provision as given u/s 4 is not
absolute. It works in accordance with &
subject to other provisions of the Act.

• Sec. 4 is a general provision. Other

specific provisions of the Act take
precedence over it.
 Income
• Income
– Sec. 2(24) of the I. T. Act defines income. This is an
inclusive provision.
– A receipt in the nature of return from labour, skill, knowledge,
investment of capital etc.
– Accretion to wealth otherwise than gift, will, inheritance etc.
• Interest from F.D.,
• Rent from House Property,
• Salary from employer,
• Sale of goods in trade on profit
 Income
• The income has to arise out of receipts only.
• Do all receipts give rise to chargeable income?
– No
• Receipts are of two types
– Capital
– Revenue
• Revenue receipts give rise to chargeable income.
• However, gains arising out of some capital receipts are
also chargeable under the I. T .Act.
Capital vs Revenue receipts
1] Sale proceeds of the 1] Sale proceeds of the
source of income products of the source

2] Sale proceeds of a 2] Sale proceeds of

factory or a machinery the items produced in
installed therein that factory

3] Sale of tree or its 3] Sale of fruits

branches
Capital vs Revenue receipts
• Please examine the nature of following
receipts:
– 1] Mr. A has a F.D. of Rs. 5 lakhs with UTI
• He encashes the F.D. & gets back Rs. 5 lakhs,
• He also gets interest of Rs. 30,000/- on the said F.D.
– 2] Mrs. B has a flat at Sadar, Nagpur
• She gets rent of Rs. 60,000/- during 2002-03,
• She sells the flat on 4th April, 2003 for Rs. 14 lakhs.
• What if the lady is doing the business of buying & selling
flats?
Independence of previous Year
– Mr. Kumar owns 4 buildings. During the previous
year 2012-13 he earned rent of Rs. 50,000/- from
each building. But in the return of income of the
relevant period he showed rental income of Rs.
1,50,000/- only.
– He detected the mistake in the subsequent year &
added this income of Rs. 50,000/- to the income of
the said subsequent year.
• Will you accept it?
• What if the assessee does not show the income even in
the subsequent year & you as an A.O. find the
concealment?
Independence of previous Year
• Income tax is an annual levy. So, each
previous year is a distinct period of time.
• Every previous year is a self contained
separate unit.
• Income of a previous year has to be taxed
in that previous year only,
• Income of one previous year cannot be
taxed in earlier or subsequent previous
year.
 Res judicata [Estoppel]
• The law of res judicata is defined in Sec.
11 of the Code of Civil Procedure.
• The decision of a court in earlier
proceeding between two parties on the
same issue will be binding in subsequent
proceeding.
• The law of res judicata [doctrine of
estoppel] is not applicable to the
proceedings under the I. T. Act.
 Res judicata [Estoppel]
• Mr. Assessee is claiming expenditure on
account of payment of commission to Mr. Agent
@ 2% of sales for last 3 years. The A.O. has
allowed the expenditure.
• In the fourth year the A.O. investigates the
transaction thoroughly & finds that Mr. Agent
has not rendered any service to the assesseee.
– Can the A. O. disallow the claim?
– Though the law of res judicata is not applicable to
I.T. proceedings, but for taking decision different
from past there should be proper reason; earlier
decision was arbitrary, no proper inquiry was made
earlier, fresh facts have come etc.
– It should not be a mere change of opinion.
 Approbate & reprobate
• The doctrine of approbate & reprobate:
– It means that no party can accept & reject the
same instrument.
– A person says that a transaction is valid &
takes some advantage. He cannot claim that
the same transaction is invalid to take some
other advantage.
• An assessee claims an income as business
income & takes some deduction. He cannot say
that it is income from house property to claim other
benefit.
 Residential Status [Sec. 6]
• The taxation of a person under Indian
Income tax is based on his residential
status.
• What do you mean by the “Residential
status” of a person?
• Can a person have different residential
status in differential A.Ys?
– Yes, a person may have different residential
status in differential A.Ys. which may affect
the taxability of his income.
 Residential Status

Not
Resident Ordinarily Non Resident
Resident
 Residence of Individual
– An individual will be resident in India in a P.Y.
if
• i] his minimum stay in India in that P.Y. is 182
days, or
• ii] his minimum stay in India in that P.Y. is 60 days
& in preceding 4 P.Ys. it was 365 days.
– For following individuals condition (ii) does not apply:
» Indian citizen who leaves India in a particular Pr.
Year as a member of crew of an Indian ship or for
employment outside India.
» Indian citizen or person of Indian origins who comes
on a visit to India in a Pr. Year.
 Residence of Individual

– An individual will be not ordinarily

resident in India in a P.Y. if
• he was not resident in India in 9 out of 10
preceding Pr. Years or
• he was not in India for minimum 730 days in
last 7 Pr. Years.
– Only after an individual is found resident in a
particular Pr. Year, it should be examined whether he
is ‘Ordinarily Resident’ or ‘Not Ordinarily Resident’.
– An individual will be non-resident in India
in a P.Y. if he was not a resident. [S.2(30)].
 Residence of HUF
– A HUF will be resident in India in a P.Y.
unless
• the control & management of its affairs during that
year was situated wholly outside India.
– An HUF will be not ordinarily resident in
India in a P.Y. if its manager
• was not resident in India in 9 out of 10 preceding
Pr. Years or
• was not in India for minimum 730 days in last 7 Pr.
Years.
 Residence of company

• A company will be resident in India in a

P.Y. if
– it is an Indian Co. [Sec. 2(26)] or
– the control & management of its affairs during that year was
situated wholly in India.
• Affairs - business affairs.
• In other cases the company will be NR.
– A British company controls & manages all its business
affairs from Delhi. What will be its residential status for the
purpose of I. T. Act?
 Residence of firm etc.
• A firm, AOP, BOI or other persons will be
resident in India in a P.Y. unless
– the control & management of their affairs
during that year was situated wholly outside
India.
• How is the basis for the residence of a firm
different from that of a foreign company?
– The former will be resident if its control &
management is situated even partly in India,
while for latter it should be wholly in India.
 Deemed residence
• If a person is resident in India in a
previous year for any source of income, he
shall be deemed as resident for that P.Y.
for all his sources of income.
– A firm has two separate businesses. One is
controlled in India while the other is wholly
controlled from Germany.
• What will be the residential status of the firm w.r.t.
its German business?
 Control & management
• Control & management of a business
remains in the hands of a person or
persons. So, the deciding factor is :
‘Wherefrom’ such person or persons
controls or directs business.
• It is not the place of business but the
place of its control.
• The place where the ‘head & brain’ of
the concern is situated, normally the
place of head office.
 Control & management
– Examine the residential status:
• a) An Indian company is doing business in
USA.
• b) Board of Directors of a foreign company sits
in Mumbai. It does business in India.
• c) The H.O. of a French Co. is at Paris. Its
branch office is at Delhi. It does business in
India only.
• d) Control & management of a foreign company
is fully situated in Kolkata. It does business in
Korea & Japan.
• The affairs of a HUF is controlled partly from
Chennai & partly from London.
Scope of Total Income [Sec. 5]
• The total income of a Pr. Yr. of a person under the I. T. Act is as
under:
– Resident : His global income from all sources.
– NOR : His global income less the income which arises to him
outside India.
• However if such outside income is derived from a
business controlled in India or a profession set up in
India, it will be chargeable.
– NR : His Indian income.
• Total income: Chargeable income as computed under
the I. T. Act [Sec. 2(45)]
Scope of Total Income
• Resident

i] Income received by him in India

ii] Income arising to him in India
iii] Income arising to him abroad.
Scope of Total Income
• NOR

i] Income received by him in India

ii] Income arising to him in India
iii] Income arising to him abroad
from a business controlled in India
or a profession set up in India.
Scope of Total Income
• NR

i] Income received by him in India

ii] Income arising to him in India

What if the income arises to him outside India but is

received in India?
Chargeable under I. T. Act.
 Scope of Total Income
– Deemed income:
• Receipt of income includes deemed receipt &
the accrual of income includes deemed accrual.
– Constructive receipt:
• Not only the actual receipt of income by an
assessee but even the constructive receipt on
his behalf is taxable in his hands:
– Receipt by agent on behalf of principal,
– Payment to 3rd party on direction of the assessee,
– Interest credited in bank a/c against deposits etc.
– Receipt in kind:
• Receipt of income may be in cash or in kind.
 System of accounting
• System of accounting :
– The manner in which a transaction gives rise
to income or expenditure.
• There are two systems of accounting:
– 1] Cash system
• Accounting on receipt basis,
• Under this system the money must come to the
pocket of the assessee in case of income & it must
leave his pocket in case of expenditure.
 System of accounting
– 2] Mercantile system:
• Accounting on accrual basis.
• Under this system the actual transaction of
money is not relevant.
• The income accrues to assessee when he
acquires the right to receive it.
• Similarly an expenditure arises as & when the
assessee becomes liable to pay it.
– Difference between receipt & accrual:
• Income is said to be received when it reaches
the assessee; when the right to receive it
becomes vested in the assessee, it is said to
accrue or arise.
 System of accounting
– Normally following is the system of
accounting allowed under different heads
of income:
• Salary - Either or Both
• House property - Mercantile
• Business or Prof. - Either [No hybrid]
• Capital gains - Mercantile
• Other sources - Either
– In case an income is included in Total
Income on the basis of accrual, can it
again be included on receipt basis?
 Some deemed receipt [Sec. 7]
• Following incomes are deemed to be
received in a Previous Year
– Annual accretion to the credit balance of an
employee in a Recognised Provident Fund in
excess of certain limit. [Rule 6 of Part A of IV
Schedule]
• Employer’s contribution beyond 12%,
• Interest beyond notified rate [Presently 9.5%]
– Transferred balance in RPF to certain extent.
[Rule 11(4) of Part A of IV Schedule]
 Dividend [Sec. 8]
– Dividend [Sec. 2(22)(a) to (e)]
• Deemed income of the previous year in which it
is declared, distributed or paid.
– Interim dividend
• Deemed income of the previous year in which
the sum is made available to the assessee.
– Dividend vs interim dividend
• Dividend: Shareholders get right to receive it as
it is declared & approved by AGM.
• Interim dividend: Shareholders do not get right
to receive it unless it is approved in AGM.
 Income deemed to arise in India
[Sec. 9]
• Following incomes are deemed to arise in
India
– Income arising from ‘business connection’
in India,
– Income arising from any property in India,
– Income arising from a source of income in
India,
– Income arising from transfer of capital asset
situated in India.
Income deemed to arise in India
• Continues…..

– Salary earned in India

• Salary for service rendered in India,
• Salary for rest or leave period annexed therewith
as per service contract.
– Salary payable by Govt. to an Indian citizen
for service outside India
– Dividend paid by Indian company outside
India
Income deemed to arise in India
• Continues…..

– Interest payable by
• Government
• Resident
– except when the debt is incurred & used for business or
profession carried on outside India or for earning any
income from any source outside India
• Non resident
– if the debt is incurred & used for business or profession
carried on in India
Income deemed to arise in India

• Continues…..

– Royalty payable by
• Government
• Resident
– except when the right, property or information is
utilised for business or profession carried on outside
India or for earning any income from any source
outside India
• Non resident
– if the right, property or information is utilised for
business or profession carried on in India or for
earning any income from any source in India
Income deemed to arise in India

• Continues…..

– Fees for technical services payable by

• Government
• Resident
– except when services are utilised for business or
profession carried on outside India or for earning any
income from any source outside India
• Non resident
– if services are utilised for business or profession
carried on in India or for earning any income from
any source in India
 Business connection

– Not defined under the I. T. Act

– However, it is broadly understood as
under:
• There is a business in India,
• There is a connection between the assessee &
that business &
• The assessee is earning income through that
connection.
– ‘Business connection’ means something
more than ‘business’.
– It is relevant mainly for NR.
 Business connection
– Permanent establishment:
• If a non resident is doing business in India
through a permanent establishment, it has a
business connection in India.
– Branch office in India,
– Factory in India,
– Agent in India
– Business through subsidiary company etc.
• A German company manufactures CNC
machines. It sold 5 machines to buyers in India
& earned profit of 2 crores. It does not have any
PE in India. Can you tax the profit under the I.
T. Act?
– No, there is no business connection in India.
 Business connection
– What if the German company sold the said
machines in India through its commission
agent stationed at Delhi?
• This is the case where the NR is having business
connection in India & so the profit of 2 crores will
be taxable under the I. T. Act.
– In case a NR is having business connection in
India but business operations are partly
carried out in India, how much income will be
taxable under I. T. act?
• Only proportionate income.
 Exceptions

– If the activity of the NR is only buying of

goods in India for the purpose of export,
can any income be deemed to arise to him
in India?
• No.
– In following cases also no income will be
deemed to arise in India:
• If NR doing business of news agency or
publishing newspapers etc collects news &
views in India for transmission out of India.
• If some NR is doing shooting of cinematograph
 Some Examples

– Examine the taxability under I. T. Act

• a] M/s ABC Ltd is an Indian Co. It manufactures
& sells scooters in Korea.
• b] M/s ABC Ltd is an Japanese Co. It
manufactures & sells scooters in Korea.
• c] M/s Scotch Ltd has its main office in London.
It has a manufacturing plant near Chennai. It
sells liquor in India.
• d] M/s Maruti India Ltd. sells cars at Dubai
through an agent. It pays commission @ 2%.
The agent is NR & payment is made from
Delhi.
 Some Examples
– Continued …...
• e] M/s Tata India Ltd of Jamshedpur exports
steel to various parties in Sweden. There is a
dispute between it & a swedish buyer. It
engages a leading advocate of Sweden to
plead its case before a court over there. The
assessee pays Rs. 10 lakhs to him through a
draft sent from Jamshedpur. The transactions
in this regard are entered in the Books of A/cs
at Jamshedpur.
• f] What if the assessee has a branch at
Sweden & payment is made therefrom?
– a, c, d & e : Income taxable under Indian I. T. Act.
•