CS EXECUTIVE INCOME TAX SUMMARY NOTES FOR UPCOMING EXAMS
Basic Concept of Income Tax
- Tax is the financial charge imposed by the Government on income, commodity or activity. Government imposes two types of taxes namely Direct taxes and Indirect taxes. Direct tax is one where burden of tax is directly on the payer. While Indirect tax is paid by the person other than the person who utilizes the product or service.
- The Income tax Act contains the provisions for determination of taxable income, determination of tax liability, procedure for assessment, appeal, penalties and prosecutions.
- Every year a Budget is presented before the parliament by the Finance Minister. One of the important components of the Budget is the Finance Bill. The Bill contains various amendments such as the rates of income tax and other taxes. When the Finance Bill is approved by both the houses of parliament and receives the assent of President,it becomes the Finance Act.
- To levy income tax, one must have the understanding of the various concepts related to the charge of tax like previous year, assessment year, Income, total income, person etc.
- Income : No precise definition of the word ‘Income’ is available under the Income-tax Act, 1961. The definition of Income as given in Section 2(24) of the Act starts with the word includes therefore the list is inclusive not exhaustive.
- Assessee : In common parlance every tax payer is an assessee. However, the word assessee has been defined in Section 2(7) of the Act according to which assessee means a person by whom any tax or any other sum of money (i.e. interest, penalty etc.) is payable under the Act.
- Person : Income-tax is charged in respect of the total income of the previous year of every person. Hence, it is important to know the definition of the word person.
- Assessment year means the period of twelve months commencing on 1st April every year.
- Previous year : Income earned in a year is taxable in the next year. The year in which income is earned is known as previous year.
- Computation of income : Income tax is a charge on the assessee’s income. Income Tax law lays down the provisions for computing the taxable income on which tax is to be charged.
- Total income of an assessee cannot be computed unless the person’s residential status in India during the previous year is known. According to the residential status, the assessee can either be;
- Resident in India or
- Non-resident in India
- Section 6 of the Income-tax Act prescribes the tests to be applied to determine the residential status of all tax payers for purposes of income-tax. There are three alternative tests to be applied for individuals, two for companies and Hindu Undivided Families and firms, associations of persons, bodies of individuals and artificial juridical persons.
- Residential status of Individual : The residential status of individual is determined on the basis of the following conditions :
- Condition 1 : If individual is in India in the previous year for a total period of 182 days or more.
- Condition 2 : If he has been in India for at least 365 days during the 4 years preceding the previous year and has been in India for at least 60 days during the previous year. However, the clause of 60 days is not applicable if a person is :
- Citizen of India, who leaves India in any previous year as a member of the crew of an Indian ship, or for the purpose of employment outside India. OR
- Citizen of India or of Indian origin engaged outside India (whether for rendering service outside or not) and who comes on a visit to India in any previous year.
- Condition 3 : An individual who has been a non-resident in India in at least nine out of the ten previous years preceding that year, and has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to 729 days or less.
Resident and Ordinarily Resident – Satisfies either condition 1 or 2; But does not satisfies
Not ordinarily resident – Satisfies any one condition from 1 & 2 and condition 3
Non-resident – Does not satisfy any condition from 1 and 2
- Residential status of HUF : The test to be applied to determine the residential status of a HUF, Firm or other Association of Persons is based upon the control and management of the affairs of the assessee concerned. A HUF, firm or other association of persons is said to be resident in India within the meaning of Section 6(2) in any previous year, if during that year the control and management of its affairs is situated wholly or partly in India during the relevant previous year. If the control and management of its affairs is situated wholly outside India during the relevant previous year, it is considered non resident.
- A HUF can be “not ordinarily resident”
- If manager/karta has been a not ordinarily resident in India in the previous year in accordance with the tests applicable to individuals.
- Firms, association of persons, local authorities and other artificial juridical persons can be either resident (ordinarily resident) or non-resident in India but they cannot be not ordinarily resident in India.
- Residential status of Companies : All Indian companies within the meaning of Section 2(26) of the Act are always resident in India regardless of the place of effective management.
In the case of a foreign company the place of effective management (POEM) of the affairs is the basis on which the company’s residential status is determinable.
- Basis of charge : Section 4 of the Act is the charging section which imposes a charge and provides rules for working out the charge so imposed.
Section 4 of the Act imposes a charge of tax on the total or taxable income of the assessee. The meaning and scope of the expression of total income is contained in Section 5. The total income of an assessee cannot determined unless we know the residential status in India during the previous year. The scope of total income and consequently the liability to income-tax also depends upon the following facts :
- whether the income accrues or is received in India or outside,
- the exact place and point of time at which the accrual or receipt of income takes place, and
- the residential status of the assessee.
Incomes which do not form Part of Total Income
- This Lesson discusses the general exempted incomes enumerated under section 10 and other specific exempted income dealt under section 10A, 10AA.
- The scheme applies only to those assessees (being an individual, association of persons or body of individuals) who have simultaneously net agricultural income exceeding Rs. 5,000 and non agricultural income exceeds the basis exemption limit of Rs. 2,50,000 or Rs.3,00,000 or Rs. 5,00,000 the case may be.
- Leave salary means the salary for the period of leave not availed by the employee. The encashment of accumulated leave can be at the time of retirement or during the continuation of service.
- In case of a Government employee, any death-cum-retirement gratuity received is wholly exempt
under section 10(10)(i). Employees of statutory corporation will not fall under this category.
- Any payment received from an account, opened in accordance with the Sukanya Samriddhi Account Rules, 2014 made under the Government Savings Bank Act, 1873 is exempt income.
Income Under the Head “Salaries”
- Basis of Charge: As per section 15, salary is taxable on due or receipt basis whichever is earlier. Under Section 15 the income chargeable to income tax under the head salaries would include any salary due to an employee from an employer or a former employer during the previous year irrespective of the fact whether it is paid or not.
- Different forms of salary:
- Basic Salary: Basic salary is taxable in the hands of an employee.
- Allowance: An allowance is defined as a fixed amount of money given periodically in addition to the salary for the purpose of meeting some specific requirements connected with the service rendered by the employee or by way of compensation for some unusual conditions of employment. It is taxable on due/accrued basis whether it is paid in addition to the salary or in lieu thereon.
- Perquisites: The term “perquisites” includes all benefits and amenities provided by the employer to the employee in addition to salary and wages either in cash or in kind which are convertible into money. These benefits or amenities may be provided either voluntarily or under service contract. For income-tax purposes, the perquisites are of three types:
- Tax-free perquisites
- Taxable perquisites
- Perquisites taxable under specified cases.
- Valuation of perquisites: The basic principles governing valuation of perquisites are as follows:
- The valuation is done on the basis of their value to the employee and not the employer’s cost for providing the same – Wilkins v. Rogerson (1963) 49 ITR 395 (CA).
- The value of perquisite is included in the salary income only if the perquisite is actually provided to the employee.
- Perquisite which is not actually enjoyed by the employee (though the terms of employment provide for the same) cannot be valued and taxed in the employee’s hands. Therefore, where the employee waives his right of perquisite, he cannot be taxed thereon.
- Allowable deductions under the head Salaries: The following amounts shall be deducted in order to arrive at the chargeable income under the head “Salaries”.
- Standard deduction: Omitted
- Entertainment allowance
- Tax on employment or Professional Tax
- Meaning of Salary under various circumstances:
|Gratuity (Non-Government Employees covered by Payment of Gratuity Act, 1972)||Basic + DA|
|Gratuity (Non-Government Employees NOT covered by Payment of Gratuity Act, 1972)||Basic + DA (if terms of employment so provide) + Commission as a % of Turnover|
|Leave Salary||Basic + DA (if terms of employment so provide) + Commission as a % of Turnover|
|HRA||Basic + DA (if terms of employment so provide) + Commission as a % of Turnover|
|Rent Free Accommodation||Basic + DA (forming part of retirement benefits) + Bonus + all Taxable Allowances|
Income under the head House Property
- Charging Section: Section 22 of the Act provides that the annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him, the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head Income from House Property”.
- Deemed Owner: As per section 27, the following persons though not the legal owners of a property are deemed to be the owners for the purposes of sections 22 to 26:
- Transfer to a spouse or minor child
- Holder of an impartible estate
- Member of a co-operative society
- Person in possession of a property
- Person having right in a property for a period not less than 12 years
- The measure of charging income-tax under this head is the annual value of the property, i.e., the inherent capacity of a building to yield income. The expression ‘annual value’ has been defined in Section 23(1) of the Income-tax Act as, the annual value of any property shall be deemed to be:
- the sum for which the property might reasonably be expected to let from year to year; or
- where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable; or
- where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause (a), the amount so received or receivable.
- Gross annual value shall be higher of
(a) Expected Rent
(b) Actual rent received or receivable.
The higher of Municipal value and fair rental value shall be Expected rent. However, expected rent shall not exceed the Standard rent.
- Net annual value shall be computed in the following manner:
- Determine the Gross Annual Value
- Deduct municipal tax actually paid by the owner during the previous year from the Gross Annual Value.
- Deduction from Annual Value (Section 24): W.e.f. Assessment Year 2002-03, income chargeable under the head “Income from house property” shall be computed after making the following deductions, namely:
- Standard deduction: a sum equal to 30% of the annual value;
- Interest on borrowed capital: where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital. The interest on borrowed money pertaining to pre-construction period is available in 5 equal installments commencing from the previous year in which house is acquired or constructed. For this purpose the pre-construction period means the period commencing on the date of borrowing and ending on 31st March immediately prior to the date of completion of construction/date of acquisition or date of repayment of loan, whichever is earlier. Interest for current year is deductible upto Rs. 30,000/ Rs. 2,00,000 as the case may be.
Profit and Gains from Business / Profession
- Sections 28 to 44D contain the provisions for computation of Income from Business and Profession.
- Section 28 defines the scope of income which can be taxed under this head.
- Sections 29 to 44D specify the method of computation of income under the business or profession.
- Expenses/allowances expressly allowed by the Act are listed under sections 29 to 37, whereas sections 40, 40A and 43B enumerate those expenses which are expressly disallowed while computing taxable income under this head.
- Section 44AA provides for maintenance of accounts by the assessee carrying on business or
- Mandatory tax audit of accounts of the persons carrying on business or profession is prescribed in section 44AB.
- Computation of profit from business and profession on presumptive basis are covered under sections 44AD and 44AD.
- Section 44B laid down special provisions for computing profits and gains of shipping business in case of non-residents.
Income from Capital Gains
- Sections 45 to 55A of the Income-tax Act, 1961 deal with capital gains. Section 45 of the Act, provides that any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in Sections 54, 54B, 54D, 54EC, 54ED, 54F, 54G, 54GA and 54H be chargeable to income-tax under the head “Capital Gains” and shall be deemed to be the income of the previous year in which the transfer took place.
- Section 2(14) of the Income-tax Act defines the term “capital asset” to means Property of any kind held by an assessee whether or not connected with his business or profession but does not include any stock-in-trade, personal effects , agricultural land in India, 6^ per cent Gold Bonds, Special Bearer Bonds , Gold Deposit Bonds.
- The essential requirement for the incidence of tax on capital gains is the transfer of a ‘capital asset’.- Any capital gain arising as a result of transfer of a short-term capital asset is known as short-term capital gain. “Short term” capital asset means a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer. In the case of capital assets (being equity or preference share in a company) held by an assessee for not more than 12 months immediately prior to its transfer.
- Assets other than short-term capital assets are known as ‘long-term capital assets’ and the gains arising therefrom are known as ‘long-term capital gains’. Section 48 of the Act provides that the income chargeable under the head ‘capital gains’ shall be computed by deducting from the full value of consideration received or accruing as a result of the transfer of the capital asset the f amount of expenditure incurred wholly and exclusively in connection with such transfer and the cost of acquisition of the capital asset and the cost of any improvement thereto.
- ‘Cost of acquisition’ of goodwill of a business or a right to manufacture, produce or process any article or thing, tenancy rights, stage carriage permits or loom hours is in the case of acquisition of such asset by the assessee by purchase from a previous owner, cost of acquisition means the amount of the purchase price; and in any other case cost of acquisition shall be Nil.
- Cost of improvement means all capital expenditure in making any additions or alterations by the
assessee after it became his property and where the capital asset became the property of then assessee by any of the modes specified in Section 49(1) by the previous owner as the case may be.
- Under Sections 54, 54B, 54D, 54EC, 54F, 54G and 54H of the Act, capital gains arising from the transfer of certain capital assets are exempt from tax under certain circumstances.
Income from Other Sources
- Income chargeable under Income-tax Act, which does not specifically fall for assessment under any of the heads discussed earlier, must be charged to tax as “income from other sources”.
- Section 56(2) specifically provides for the certain items of incomes as being chargeable to tax under the head such as Dividend, Keyman Insurance policy, Winnings from lotteries, Contribution to Provident fund, Income by way of interest on securities, Income from hiring machinery etc,Hiring out of building with machinery, Money Gifts, Share premiums in excess of the fair market value to be treated as income, income by way of interest received on compensation.
- The entire income of winnings, without any expenditure or allowance or deductions under Sections 80C to 80U, will be taxable. However, expenses relating to the activity of owning and maintaining race horses are allowable. Further, such income is taxable at a special rate of income-tax i.e., 30% + surcharge + cess @ 3%.
- Admissible Deductions : The income chargeable under the head “Income from other sources” is the income after making the deductions such as
- sum paid by way of commission or remuneration to a banker or any other person for the purpose of realising such interest;
- deduction shall be allowable in accordance with the provisions of Section 36(1)(va), i.e., if the employer has credited the employee’s accounts in the respective funds;
- a sum equal to 33-1/3% of the income or’ 15,000, whichever is less, is allowable as a deduction from family pension;
- a deduction of a sum equal to 50% of from Interest on compensation or enhanced compensation, and
- any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income.
- Inadmissible deductions: The following amounts shall not be deducted in computing income chargeable under the head ‘Income from other sources’:
- Any personal expenses of the assessee.
- Any interest chargeable under the Income-tax Act which is payable outside India and from which income-tax has not been paid or deducted at source.
- Any payment which is chargeable under the head “Salaries” if it is payable outside India unless tax has been paid thereon or deducted therefrom at source.
- Any expenditure referred to in Section 40A of Income-tax Act.
Clubbing provisions and Set Off and / or Carry Forward of Losses
- Sections 60 to 65 of the Income-tax Act provide that in computing the total income of an individual for purposes of assessment, there shall be included all the items of income specified in these sections.
- Transfer of Income (section 60) : Where a person transfers to any other person income (whether revocable or not) from an asset without transferring that asset, the income shall be included in the total income of the transferor. “Transfer” includes any settlement, trust, covenant, agreement or arrangement.
- Revocable transfer: Where a person transfers any asset to any other person with a right to revoke the transfer, all income accruing to the transferee from the asset shall be included in the total income of the transferor.
- The income under revocable transfer of asset shall be included in the income of transferor even when only a part of income from transferred asset has been applied for the transferor.
- Irrevocable Transfer: In case of an irrevocable transfer of assets for a specified period, the income from such assets shall not be included in the income of transferor.
- Income to spouse from a concern in which such individual has substantial interest [Section 64(1 )(ii)]: All such income as arises directly or indirectly, to the spouse of an individual by way of salary, commission, fees or any other remuneration, whether in cash or kind from a concern in which such individual has a substantial interest, shall be included in the income of the individual.
- Income to spouse from the assets transferred [Section 64(1)(iv)]: Where any individual transfers directly or indirectly any asset (other than a house property) to the spouse, the income from such asset shall be included in the income of the transferor.
- Income To Son’s Wife [Section 64(1)(vi)]: Where any individual transfers, directly or indirectly, any asset to his/her son’s wife without adequate consideration, after 1.6.1973, the income from such asset shall be included in the income of the transferor.
- Transfer for Immediate or Deferred Benefit of Son’s Wife [Section 64(1 )(viii)]: Any income
arising, directly or indirectly, to any person or association of persons from assets transferred directly or indirectly after June 1, 1973, otherwise than for adequate consideration to the person or association of persons by such individual shall, to the extent to which the income from such assets is for the immediate or deferred benefit of his son’s wife be included in computing the total income of such individual.
- Income to spouse through a third person [Section 64(1)(Vii)]: Where a person transfers some assets directly or indirectly to a person or association of persons (trustee or body of trustees or juristic person) without adequate consideration for the immediate or deferred benefit of his or her spouse, all such income as arises directly or indirectly from assets transferred shall be included in the income of the transferor.
- Clubbing of Income Of Minor Child [Section 64(1a)]: All income which arises or accrues to the minor child (not being a minor child suffering from any disability of the nature specified in Section 80U) shall be clubbed in the income of his parent. However, any income which is derived by the minor from manual work or from any activity involving application of his skill, talent or specialised knowledge and experience will not be included in the income of his parent. In case the income of an individual includes any income of his minor child in terms of this section [i.e. Section 64(1A)], such individual shall be entitled to exemption of the amount of such income or Rs. 1,500 whichever is less.
- Income From The Converted Property [Section 64(2)]: Where an individual, being a member of Hindu Undivided Family, transfers his self-acquired property after 31st December, 1969 to the family for the common benefit of the family, or throwing it into the common stock of the family, or transfers it directly or indirectly to the family otherwise than for adequate consideration, such property is known as converted property.
- Dual Liability for Tax: The tax on the income of the other person which has been included in the income of the assessee can either be recovered from the assessee or from the other person. The liability of other person is limited to the portion of the tax levied on the assessee which is attributable to the income so included.
- Set Off – carry Forward of losses: Sometimes the assessee incurs a loss from a source of income and unless such loss is set-off against any income, the net result of the assessee’s activities during the particular accounting year cannot be ascertained and consequently the tax payable would also be incapable of determination. For this purpose, the Income-tax Act contains specific provisions (Sections 70 to 80) for the set-off and carry-forward of losses.
- Set-Off of Losses from one source against Income from another source under the same Head of Income [Section 70]: If the net result for any assessment year in respect of any source falling under any head of income is a loss, the assessee is entitled to set off the amount of such loss against his income from any other source under the same head. However, Loss from Speculation Business, Loss from the activity of owning and maintaining race horses, long-term capital loss can be set-off from any other source of income.
- Where any individual transfers directly or indirectly any asset (other than a house property) to the spouse, the income from such asset shall be included in the income of the transferor.
- Carry-Forward and Set-Off of Losses If it is not possible to set-off the losses during the same assessment year in which these occurred, so much of the loss as has not been so set-off out of the following losses, can be carried forward to the following assessment year and so on to be set-off against the income of those years provided the losses have been determined in pursuance of a return filed by the asessee and it is the same assessee who sustained the loss.
However, losses suffered under the following heads are not allowed to be carried forward and set off:
(1) Losses under the head ‘salaries’.
(2) Losses under the head ‘Income from other sources’
(excepting loss suffered from the activity of owning and maintaining race horses).
- W.e.f. assessment year 2000-2001, Section 72A has been substituted by new section to provide for carry forward and set off of accumulated loss and unabsorbed depreciation allowance in case of:
(i) amalgamation [Section 72A(1), (2) and (3)], or
(ii) demerger [Section 72A(4) and (5], or
(iii) reorganisation of business [Section 72A(6)].
- Submission of Return for Loss (Section 80): An assessee is not entitled to carry-forward a loss unless he has filed a return of loss to the Department in time and in the prescribed form. It is obligatory on the part of the assessee to file such return; otherwise he will be deprived of the benefit of carryforward of losses. In fact, only that amount of loss is allowed to be carried-forward which has been computed by the Assessing Officer and not by the assessee.
Deductions from Gross Total Income, Rebate and Relief
- Section 80C: Deduction on life insurance premia, contribution to provident fund, etc – Available to individual/HUF for a maximum amount of Rs.1,50,000.
- Section 80CCC: Deduction for contribution to pension fund – Available to individual for maximum amount of Rs.150,000.
- Section 80CCD: Deduction in respect of contribution to pension scheme of Central Government available to individual.
- Section 80CCE: Limit on deductions under Sections 80C, 80CCC and 80CCD – can not exceed Rs.1,50,000.
- Section 80CCG: Deduction in respect of investment made under any equity saving scheme : Available to resident individual subject to maximum of Rs. 25,000.
- Section 80D: Deduction in respect of medical insurance premia – Available to individual/HUF.
- Section 80DD: Deduction in respect of maintenance including medical treatment of a dependant who is a person with disability or severe disability.
- Section 80DDB read with Rule 11DD: Deduction in respect of medical treatment, etc.: Available to Resident individual/resident HUF.
- Section 80E: Deduction in respect of repayment of loan taken for higher education: Available to
- Section 80G: Deduction in respect of donations to certain funds, charitable institutions, etc. Available to all assessees subject to maximum of 50% of qualifying amount, 100% as the case may be.
- Section 80GG: Deduction in respect of rent paid Available to individual for a maximum of Rs. 60,000.
- Section 80GGA: Deduction in respect of certain donations for scientific research or rural development
- Section 80GGB: Deduction in respect of contributions given by companies to political parties
- Section 80GGC: Deduction in respect of contributions given by any person to political parties
- Section 80-IA: Deduction in respect of profits and gains from industrial undertakings or enterprise engaged in infrastructure development
- Section 80-IAB: Deduction in respect of profit and gains by an undertaking a enterprise engaged in development of Special Economic Zone
- Section 80IAC: Deduction in respect of Eligible start-up
- Section 80-IB: Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings
- Section 80IBA: Deductions in respect of profits and gains from housing projects
- Section 80-IC: Special provisions in respect of certain undertakings or enterprises in certain special category States
- Section 80-JJA: Deduction in respect of profits and gains from the business of collecting and processing bio-degradable waste – Available to all assessees carrying on the business of collecting and processing bio-degradable waste.
- Section 80-JJAA: Deduction in respect of employment of new workmen – Available to Indian company of 30% of additional wages paid to new regular workmen.
- Section 80LA: Deduction in respect of certain incomes of Offshore Banking Units – 100% of certain income for 5 years, 50% of such income for 5 years.
- Section 80P: Deduction in respect of income of co-operative societies – Specified incomes subject to amount specified in sub section (2).
- Section 80QQB: Deduction in respect of royalty income, etc., of authors of certain books other than text books – Available to resident individual, for a maximum deduction of Rs. 3,00,000.
- Section 80RRB: Deduction in respect of royalty on patents – Available to Resident Individual, maximum of Rs. 3,00,000.
- Section 80TTA: Deduction in respect of interest on deposits in savings account – Available to Individual/HUF upto Rs. 10,000.
- Section 80U: Deduction in case of a person with disability – Available to Resident individual subject to maximum of Rs. 125,000.
Computation of Total Income and Tax Liability of various entities
- The term ‘Hindu undivided family’ has not been defined in the Income-tax Act. However, in general parlance it means an undivided family of Hindus. Creation of a HUF is a God-gifted phenomenon. As soon as a married Hindu gets a child, a new HUF comes into existence. It is not at all necessary that every HUF must have joint property or family income.
- A Hindu Joint Family consists of Coparceners & members.
- The gross total income of the family for the relevant previous year shall be computed under the relevant heads (as per the provisions of the Income-tax Act) as it is computed for other assessees.
- ‘Partition’ signifies division of property. In the cases of property capable of physical division, share of each member is determined by making physical division thereof. It must be noted that a division of income without physical division of property does not amount to partition.
- Partnership Firm: Under Section 2(23) of the Income-tax Act, the terms “firm”, “partner”, and “partnership” have the meanings respectively assigned to them in the Indian Partnership Act, 1932 and Limited Liability Partnership Act, 2008.
- As per the scheme, a partnership firm shall be assessed as a firm if the following conditions are satisfied:
• The partnership is evidenced by an instrument i.e. partnership deed.
• The individual shares of the partners are specified in that instrument.
• A copy of the partnership deed certified by all the partners in writing (other than the minors) is submitted along with the return of income in respect of which assessment as a firm is first sought.
- As per Section 10(2A) of the Act, any person who is a partner of a firm which is assessed as such, his share in the total income of the firm will not be included in computing his total income. Partner includes a minor admitted to the benefits of partnership as per Section 2(23) of the Act.
- When all the partners in the predecessor firm are replaced by new partners in the successor firm, it is known as succession of one firm by another firm. If a firm is dissolved and some of the partners take over the firm’s business or carry on a similar business with or without new partners, it would be a case of succession by a new firm .
- Where a change has occurred in the constitution of a firm on account of death or retirement, the firm is not entitled to carry forward and set off so much of the loss proportionate to the share of a retired or deceased partner as exceeds his share of profits, if any, in the firm in respect of the previous year.
- Alternate Minimum Tax: From the assessment year 2012-13 onwards, where the regular income tax payable for a previous year by a person other than a company is less than the alternate minimum tax payable for such previous year then the adjusted total income shall deemed to be the total income such person for such previous year and it shall be liable to pay income tax on such adjusted total income @ 18.5% + SC plus education & SHEC @ 3%.
- Association of persons: “Association of persons” means an association in which two or more persons join in a common purpose or common action to produce income, profits or gains.
- For the formation of an AOP the association need not necessarily be on the basis of a contract, consent and understanding may be presumed.
- Section 167B makes the following provisions as regards the incidence of charge of tax on the association of persons.
• Where shares of members are determinate In this case, tax is chargeable on the income of the association of persons at the same rate as applicable to an individual. However, where the total income of any member of the association of persons for the previous year (excluding his share of income from the association of persons) exceeds the maximum amount not chargeable to tax in the case of an individual, tax will be charged on the total income of the AOP at the maximum marginal rate of 30%, i.e. the highest slab applicable to an individual.
• Where the shares of the members are indeterminate In these cases, tax will be charged on the total income of the AOP at the maximum marginal rate, that is, the rate of tax as well as surcharge, if any, applicable to the highest slab of income in the case of an individual as specified in the Finance Act of the relevant year
- Section 67A seeks to provide for the method of computing a member’s share in the income of an association of persons or a body of individuals, wherein the shares of the members are determinate, in the same manner as provided for in Sub-sections (1) to (3) of Section 67 for computing a partner’s share in a firm.
- Co-operative Society means a co-operative society registered under the Co-operative Societies Act, 1912, or under any other law for the time being in force in any State for the registration of co-operative societies.
- The income of a co-operative society is computed in the same manner as provided for other assessees.
- Section 80P provides for certain deductions from the gross total income of a Co-operative Society.
Classification and Tax Incidence on Companies
- Article 366(6) of the Constitution defines corporate tax.
- As per section 2(17) of the Income Tax Act, Company means any Indian Company, or any body corporate incorporated by or under the laws of a country outside India, or any institution, association or body which is or was assessable or was assessed as a company for any assessment year under the Indian Income Tax Act, 1922 (11 of 1922) or was assessed under this Act, as a company for any assessment year commencing on or before April 1, 1970; or any institution, association or body, whether incorporated or not and whether Indian or non-Indian, which is declared by general or special order of the CBDT to be a company.
- Companies under the Income Tax Act are companies in which the public are substantially interested also referred to as widely-held companies and companies in which public are not substantially interested and also referred to as closely held company.
- Minimum Alternate Tax (“MAT”) on the book profit of a Company would not apply to a Foreign Company not having any physical presence in India.
- A domestic company is liable to pay tax on the amounts distributed, declared or paid as dividend (whether interim or otherwise), it shall be payable @ 15% plus surcharge @ 12% and education cess and SHEC @3% in addition to the income tax payable.
- Section 115BBD provides for taxing foreign dividends received from a foreign company at the rate of 15% plus surcharge @7% and education cess and SHEC @ 3%.
- The Income-tax Act provides for collection and recovery of income-tax in the following ways, namely,
(i) deduction of tax at source in respect of income by way of salaries, interest on securities, interest other than interest on securities, winnings from lotteries and crossword puzzles, winnings from horse-race, insurance commission, dividends, payment to contractors or subcontractors and payments to non- residents;
(ii) advance payment of income-tax before the assessment by the assessee himself;
(iii) direct payment of income-tax by the assessee on self-assessment; and
(iv) after the assessment is made by the Assessing Officer.
- Sections 192 to 206 of the Income-tax Act lay down the provisions relating to deduction of tax at
- Section 197A provides that no deduction of tax at source is to be made from (i) interest on securities, (ii) dividends, and (iii) payments in respect of deposits under NSS, etc. if the following conditions are satisfied:
a) The recipient of such income is an individual and resident in India.
b) Such person furnishes a declaration in writing in duplicate, in the prescribed form and verified in the prescribed manner, to the payer of such income to the effect that the tax on his estimated total income of the previous year in which such income is to be included for computing his total income will be nil.
- Section 207-219 of the Income Tax Act deals with the provisions relating to advance payment of tax. In advance payment of tax, the assessee has to pay tax in a financial year under estimated income which is to be taxed in the subsequent assessment year. It follows the doctrine known as pay as you earn scheme. It is obligatory for an assessee to pay advance tax where the advance tax payable is Rs. 10,000 or more (Section 208).
- Filing of Return: The procedure under the Income-tax Act for making an assessment of income begins with the filing of a return of income. Section 139 of the Act contains the relevant provisions relating to the furnishing of a return of income.
- E-Filing of Return: The Income Tax Department has introduced on line facility in addition to conventional method to file return of income. The process of electronically filing of Income Tax return through the mode of internet access is called e-filing of return.
- Permanent Account Number: Every person, who has not been allotted any permanent account number, is obliged to obtain permanent account number, if;
a) if his total income assessable during the previous year exceeds the maximum amount which is not chargeable to tax or
b) any person carrying on business or profession whose total sales turnover or gross receipts are or is likely to exceed Rs. 5,00,000 in any previous year or
c) is required to furnish a return of income under Section 139.
- Refund means “to repay” or restore what was taken under the income-tax law. Refunds arise in those cases where the amount of tax paid by a person or on his behalf is greater than the amount with which he is properly chargeable for that year.
Assessment, Appeals & Revision
- Types of Assessment
- Self assessment (Section 140A)
- Regular assessment (Section 143)
- Best judgment assessment (Section 144)
- Income escaping assessment or re-assessment (Section 147)
- Precautionary assessment.
- Self assessment is the first step in the process of assessments. Self Assessment is simply a process where a person himself assesses his tax liability on the income earned during the particular previous year and submits Income Tax Return to the department.
- Under summary assessment, Assessing Officer completes the assessment without passing a regular assessment order. The Assessing Officer issue an acknowledgement/intimation under section 143(1) of tax payable or refundable as the case may be on the basis of Return of Income filed by the assessee under section 139 or in response to a notice issued under section 142(1).
- Where a return has been made under Section 139, or in response to a notice under sub–section (1) of Section 142, the Assessing Officer shall, if he considers necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not underpaid the tax in any manner, serve on the assessee a notice requiring him, on a date to be specified therein, either to attend his office or to produce, or cause to be produced there, any evidence on which the assessee may rely in support of the return.
- Best Judgment Assessment : The Assessing Officer, after taking into account all relevant material which he has gathered, and after giving the assessee an opportunity of being heard, makes the assessment of the total income or loss to the best of his judgment and determine the sum payable by the assessee on the basis of such assessment.
- Income Escaping Assessment : If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153.
- The right to appeal must be given by express enactment in the Act. Therefore, in case there is no provision in the Act for filing an appeal regarding a particular matter, no appeal shall lie. The right to appeal arises where the taxpayer is aggrieved by the order passed by the income-tax authority.
- The assessee may prefer an appeal against the orders of the Assessing Officer to the Commissioner (Appeals), in accordance with the relevant provisions under Section 246 and appeal against the order of the Commissioner (Appeals) can be preferred by the Assessee or the Commissioner of Income Tax and such appeal lies with the Appellate Tribunal.
- The Central Government shall constitute an Appellate Tribunal consisting of as many judicial and accountant members as it thinks fit to exercise the powers and discharge the functions conferred on the Appellate Tribunal by this Act.
- Section 260A provides that an appeal shall lie to the High Court from every order passed in appeal by the Appellate Tribunal if the High Court is satisfied that the case involves a substantial question of law.
- The aggrieved party is entitled to appeal to the Supreme Court against the judgment delivered by the High Court.
- Chapters XVII and XXI of Income-tax Act, 1961, contain various provisions empowering an Income- tax Authority to levy penalty in case of certain defaults.