INCOME TAX ACT - 1961

INTRODUCTION

CHAPTER 1: INTRODUCTION

• Meaning of Income, Agricutural Income,

Previous year, assessment year, Gross

total income

• Tax Free Income – Sec 10

• Problems on residential status of Individual

• Problems on Tax liability

Chapter 2: INCOME FROM SALARY

• Salary – Definition

• Allowances

• Perquisites and Retirement Benefits

• Deductions

• Computation of Salary Income

• Problems

Chapter 3: Income from house

property

• Annual value

• Let out property

• Self occupied property

• Deductions

Module 4: Indirect Taxes

• Central Excise:

• (a) Chargeability

• (b) Valuation of goods in Central Excise

• (c) Registration in Central Excise Law

• (d) Procedure for clearance of excisable goods

• Central Sales Tax:

• (a) Definitions

• (b) Chargeability

• (c) Interstate sale, sale in the course of Import/Export

• (d) Registration under CST Act.

• Service Tax

• (a) Definitions

• (b) Chargeability

• (c) Levy and Collection

Reference Books

1. Direct Tax Law & Practice – V.K.

Singhania

2. Direct Tax Laws – T.N. Manoharan

Direct Vs Indirect Taxes

• Levy and Incidence

on the same person

• Eg: Income Tax,

Wealth Tax.

• Levy on one person

but burden of

incidence entirely

on different person

• Eg: Sales tax,

Excise Duty, Service

Tax, VAT.

Introduction to ITA - 1961

• Levy of income tax governed by ITA-1961

• Came into force on 1st April 1962

• Contains 298 sections and XII schedules

• Additions and deletions brought about by

Finance Act every year

• Administration of Direct taxes looked by

CBDT.

• Sec 295 empowers the CBDT to make

rules

Sources for the Study

• The Income Tax Act 1961

• The Finance Act

• Income Tax Rules

• Circulars and Notifications

• Legal decisions of courts.

PREAMBLE – ITA 1961

• Revenue Mobilisation

• Balanced Economic Development

• Savings or Resources Channelisation

FINANCE ACT – 2010

PART A : Of the budget speech contains the Proposed policies.

PART B : Of the budget speech contains the detailed tax proposals.

• The first schedule has 3 parts

Part I : Consists of rates of tax applicable to

income of various types of assesses for the

assessment year 2013-14.

Part II : Rates of deduction of tax at source in

certain Cases

PART III : Rates for calculating income tax for the

purpose of deduction of tax from salary and also

for computing advance tax. ( These are applicable

for A.Y 13-14).

NOTE: When FA 2013 is passed by the parliament Part III of

1st Schedule becomes Part I of FA 2012.

DEFINITIONS :

Sec 2(7) Assesse:

Assesse means any person by whom any tax

or any other sum of money is payable

under this act and also includes

1. Deemed assesse

2. Assesse in default

3. Person on whom any proceedings under the

act are being conducted for the assessment

of his income.

Sec 2(8) Assessment :

Assessment means computation of amount of

tax and imposition of tax liability.

• Self Assessment

• Regular Assessment

• Best Judgment Assessment

• Protective Assessment

• Re-Assessment.

Sec 144 Best Judgment Assessment

• It is mandatory

• AO bound to make assessment if any one

of the following default occurs.

1. Failure to make Return

2. Failure to comply with terms of notice

issue

( File return, procedure accounts, Audit,

Audit Report, Produce evidence supporting

the return, Ensure his attendance).

Sec 2(31) Person

Person means and includes

• An Individual

• HUF

• Company

• Partnership Firm

• Association of persons (AOP)

• Body of individuals (BOI)

• Local Authority

• Artificial Juridical person (AJP)

Company

• Any Indian company.

• Any body corporate – under the laws of a

country outside India

• Any Institution, Association or body which is

assessable or was assessed as a company

before 1st April 1970.

• Any Institution, Association or body which is

declared by a general or Special order of the

CBDT to be a company for such AY.

Classes of Companies

• Indian Company

• Domestic Company

• Foreign company

• Indian company: Formed and Registered under the

Act

• Domestic company: Indian companies and other

companies which have made arrangement for

declaration and payment of dividend

– The share register of the company for all the share holders

should be regularly maintained at its principal place of

business

– Dividends declared should be paid only within India.

– General meeting for passing of accounts – In India.

Foreign company: It is a company which is not a domestic

company

Sec 2 (9) Assessment Year AY means the period of 12 months

starting from April 1 of every year and

ending on March 31 of the next year.

Sec 3 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.

NOTE :

1. PY not necessarily be 12 months but AY has to be 12

months.

2. Uniform PY ( 1st April – 31st March )

3. Books of accounts not necessarily be maintained

from the same dates.

Exceptions to the rule that income

of P.Y is taxable in the A.Y

• Sec 172: Shipping business of Non

Resident.

• Sec 174 : Persons leaving India

permanently or for a long period of time.

• Sec 174(A) : Bodies formed for short

duration.

• Sec 175 : Persons likely to transfer

property to avoid tax.

• Sec 176 : Discontinued Business

RATES OF TAX: In case of Individual, AOP, BOI, and AJP.

INCOME RATES OF TAX Upto Rs. 180000 (Basic exemption) Nil

Above Rs. 180000 – Upto 500000 10%

Above Rs 500000 to 1000000 20%

Above 1000000 30%

Basic exemption limit of Rs. 180000 will get enhanced to

Rs 190000 in case of resident women and to Rs. 240000 in case of

resident senior citizens who are 65 years or more at any time during the

P.Y . Very senior citizen above – 85 yrs. Limit - 500000

SURCHARGE: ABOLISHED SURCHARGE

10 % of Income tax provided the total income exceeds

Rs. 10 Lakhs

And Education cess @ 2% + higher education cess

of 1 % on income tax.

Eg: Mr. A – Taxable income Rs. 400000

Mrs. A – Taxable income Rs. 700000

Mr. X – Taxable Income Rs. 800000 ( Senior citizen)

Co-operative society

• On the first Rs. 10000 10%

• On the next Rs. 10000 20%

• On the balance 30%

• Co operative societies are not liable to

surcharge but education cess at 2% on

tax.

Rates of tax to companies:

• In case of domestic companies 30%

• Other companies

– Income from royalties received from govt. 50%

– On the remaining balance 40%

SURCHARGE

– 10 % for domestic companies

– 2.5% for other companies

– Education cess at 2% on total tax.

Surcharge

• Surcharge means the extra or additional

tax payable by certain assesses calculated

at the specified rates on the net tax

payable by them.

• Education cess: it is the additional

surcharge on IT and Surcharge.

• Object of levying the education cess is to

provide and finance universalised quality

basic education.

Sec 2 (24) Income: Income includes the following

• Profits and Gains

• Dividend from shares

• Voluntary contribution received by trust.

• Perquisite or Profit in lieu of salary

• Special allowance or benefits to assesse.

• Allowance granted to assesse to meet personal expenses

• Value of any benefit or perquisite received from a company.

• Int., salary, commission, etc.. Received by a partner from his firm

• Value of benefits received by a representative of NR, minor or a lunatic.

• Profit on sale of license granted under the import control Act 1955.

• Any sum chargeable to income tax as P&G of

business or recovery of losses in respect of which

the assesse has been granted deduction in the past

• Capital gains

• Any duty of Customs or Excise repaid or repayable.

• Winnings from lotteries, crossword puzzles, races,

card games or any sort of gambling or betting of any

nature.

• Any sum received by an employer as contribution

from employee towards any fund.

• Profits and gains of business or profession

• Cash assistance received or receivable by any

person against exports under any scheme of central

government.

Concepts of Income:

• Income is a wide term that covers anything and

everything provided it satisfies the attributes of an

income.

• Income must have regularity and definite source.

• Income is taxable at the earliest of receipt or accrual

• Income may be in cash or in kind.

• No distinction is made between legal and illegal

income except that for illegal expenses are not

deductible.[CIT vs. Piara Singh (1980) 3]

• Tax free income is always grossed up.

• Income includes loss.

• A title dispute will not cause postponement of

assessment.

• Double taxation is always avoided.

• The assesse cannot claim that the source of income

does not exist in the A.Y.

• Birthday gifts or marriage gifts does not constitute

income for Income Tax Act.

• Dharmada received meant for charitable purpose

is not income

• Stridhan is not income even if such payments are

made by husband to his wife for household or

other personal expenses.

• Sports awards received by non-professional sports

person are not taxable.

Sec 14: Gross total Income: Income of

a person is aggregated under 5 heads viz:

1. Income from Salary

2. Income from House property

3. Income from profits and gains of Business & Profession

4. Income from capital gains

5. Income from other sources

The aggregate of such income is called gross total income.

Sec 2 (45) : Total Taxable Income:

Gross total income as reduced by the deduction

available under sec 80 ccc to 80 u is called total or taxable

income.

Receipts • CAPITAL

• In lieu of source of Income

• Fund

• Several P.Y

• Non recurring

• Improvement

• They are exempt from tax

unless they are expressly

taxable [ E.g. U/S 45]

• REVENUE

• In lieu of income itself

• Flow

• One P.Y.

• Recurring

• Maintenance

• They are taxable unless they are expressly exempt from tax [ U/S 10]

Expenditure Any expenditure on acquisition of

a capital asset or for a benefit of permanent nature is

a capital expenditure all other expenditure is revenue

expenditure

Capital Receipts

• Fixed Capital Receipts

• Receipt as compensation for surrender

of legal rights

• Receipt in substitution of a source of

income

• Sale proceeds of assets not for resale.

• Grants received from government for

development activities.

Revenue Receipts

• Working Capital Receipt

• Receipt as compensation for loss

• Sale proceeds of assets held for resale

• Grant or subsidy received from govt.

for meeting day to day expenses.

Capital Expenditure

• Cost of acquisition of fixed assets

• Expenses incurred to free a capital

liability

• Expenditure for the acquisition of a

source of income

• Expenditure for increasing the earning

capacity

• Expenditure incurred for raising

capital

Revenue Expenditure

• Purchase price of assets & goods for resale

• Expenditure to free a revenue liability (Eg Creditors, B/P, O/S expenses etc..)

• Expenditure for earning incomes such as rent, salaries

• Expenditure for maintaining a fixed asset

• Expenses for raising loans

Capital Losses

• Loss on sale of capital asset

• Loss of money due to misappropriation

after office hours

• Loss of security deposit

• Loss of gold, silver, smuggling

business is a capital loss as it is not

incidental to business

Revenue losses

• Loss on sale of current asset

• Loss incidental to business such as

theft of money and loss during office

hours.

• Loss of security deposits due to its

forfeiture of non fulfillment of

contract or agreement.

Tax Free Incomes Sec 10

• Gratuity Sec 10(10)

• Leave salary Sec 10(10AA)

• Pension Sec 10(10A)

• Retrenchment compensation Sec 10(10B)

• Compensation on voluntary retirement Sec 10(10C)

• House rent allowance 10(13A)

• Special allowance 10(14)

• Provident Fund Sec 10(11/12)