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INCOME TAX LAW AND PRACTICE (RCCCM12)

INTRODUCTION

Before one can embark on a study of the law of income-tax, it is absolutely vital

to understand some of the expressions found under the Income-tax Act, 1961. The

Purpose of this Chapter is to enable the students to comprehend basic expressions.

Therefore, all such basic terms are explained and suitable illustrations are

Provided to define their meaning and scope.

OBJECTIVES

• Concept of assessment year and previous year

• Meaning of person and assessee

• How to charge tax on income

• What is regarded as income under the Income-tax Act

• What is gross total income

• Income-tax rates

ASSESSMENT YEAR (2013-2014)

“Assessment year” means the period starting from April 1 and ending on March

31 of the next year. Example- Assessment year 2013-14 which will commence on April 1, 2013, will

End on March 31, 2014 Income of previous year of an assessee is taxed during the next following

Assessment year at the rates prescribed by the relevant Finance Act.

PREVIOUS YEAR (2012-2013)

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, previous year is the financial year immediately

preceding the assessment year.

PERSON

The term “person” includes:

a. an individual;

b. a Hindu undivided family;

c. a company;

d. a firm;

e. an association of persons or a body of individuals, whether incorporated or not;

f. a local authority; and

g. 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 exhaustive. Therefore, any person, not 4

falling in the above-mentioned seven categories, may still fall in the four corners

of the term “person” and accordingly may be liable to tax.

ASSESSEE

Assessee” means a person by whom income tax or any other sum of money is

payable under the Act. It includes every person in respect of whom any

proceeding under the Act has been taken for the assessment of his income or loss

or the amount of refund due to him. It also includes a person who is assessable in

respect of income or loss of another person or who is deemed to be an assessee, or

an assessee in default under any provision of the Act.

MEANING OF INCOME

The definition of the term “income” in section 2(24) is inclusive and not

exhaustive. Therefore, the term “income” not only includes those things that are

included in section 2(24) but also includes those things that the term signifies

according to its general and natural meaning.

GROSS TOTAL INCOME

As per section 14, the 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 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.

HOUSE PROPERTY

Formula to Calculate Income or Loss on House Property (negative value implies

loss)

Income or Loss on

House Property

= (Annual Rental Value of House property – Property

Tax) – 30% of (Annual Rental Value-property tax)-

Interest paid on Housing Loan

Annual Rental Value : The basis of calculating Income from House property is the “annual value”. It is

not necessary, as we have seen earlier, that the property should actually be let. Where the actual rent

received is more than the reasonable return, it has been specifically provided that the actual rent will be

the annual value. Where, however, the actual rent is less than the reasonable rent , the latter will be the

annual value. The municipal value of the property, the cost of construction, the standard rent, if any,

under the Rent Control Act, the rent of similar properties in the same locality are all pointers to the

determination of annual value. From the said annual value tax paid, From the annual value as determined

above, municipal taxes are to be deducted. Also, deduction equal to 30% of the annual value (Rental

value-Tax paid), irrespective of any expenditure incurred by the taxpayer (S.24(a)).

Some incomes from house property are exempt from tax. They are neither taxable

nor included in the total income of the assessee for the rate purposes. These are:

1. Income from a farm house [section 2(1A) (c) and section 10(1)].

2. Annual value of one palace in the occupation of an ex-ruler [section

10(19A)].

3. Property income of a local authority [section 10(20)].

4. Property income of an approved scientific research association [section

10(21)].

5. Property income of an educational institution and hospital [section

10(23C)].

6. Property income of a registered trade union [section 10(24)].

7. Income from property held for charitable purposes [section 11].

8. Property income of a political party [section 13A].

9. Income from property used for own business or profession [section 22].

10. Annual value of oneself occupied property [section 23(2)].

LET OUT HOUSE PROPERTY

Income from house property is determined as under:

Gross Annual Value xxxxxxx

Less: Municipal Taxes xxxxxxx

Net Annual Value xxxxxxx

Less: Deductions under Section 24

- Statutory Deduction (30% of NAV) xxxxxxx

- Interest on Borrowed Capital xxxxxxx

Income From House Property xxxxxxx

INCOME FROM SALARIES

Salary-definition:

Any amount or benefit received by an employee in consideration of his services from his

employer is called salary.

Employer-employee relationship between provider and receiver

It may be received from more than one employer in any previous year.

It should be a real one.

It is deemed to accrue at the place where the service is rendered

Specified Assessee Sec.17 (2)(III)

Perquisites Sec.17 (2)

Types of Perquisites:

Perquisites-Taxable for all assessee

Perquisites- Taxable for specified assessee

Perquisites-Exemption for all assesses

Fringe Benefits:

Following are the various benefits available to the employee which are covered under Fringe

Benefit Tax [FBT]:

Free meal

Boarding and lodging facilities

Entertainment

Gifts

Festival celebrations

Profits in lieu of salary (Sec.17(3))

Provident fund:

It can be classified into four types:

Statutory Provident Fund (SPF)

Recognized Provident Fund (RPF)

Unrecognized Provident Fund (URPF)

Public Provident Fund (PPF)

Rent Free Accommodation:

If the employee is provided rent free accommodation (R.F.A), it is a taxable in all cases except for

the judges of High Courts, or the supreme court , officials of parliament , union ministers & leader

of opposition .

Taxable value:

There are two categories:

Government employees

Non-government employees/ other employees

Salary for rent free

Basic

D.A

Bonus

Commission

Fees

Taxable Portion of all allowances

Gratuity:

Gratuity is a lump sum payment made by the employer to the employee in appreciation of

his/her past services. It is a retirement benefit scheme.

Pension:

Pension is the periodical payment made by the employer to his employee after the later‘s

retirement. If the employee desires, he can convert it into a lump sum.

Tax treatment:

Uncommitted pension /pension

Commuted pension

Leave salary:

An employee is entitled to various type of leave during his service. If an employee has not

availed his earn leave, he can encash it whenever he is in need of money.

Tax treatment:

Leave salary during service

Leave salary during termination of service

Deduction from Gross salary (sec. 16)

Entertainment allowance (sec. 16(ii))

Professional tax

Tax treatment:

Leave salary during service

Leave salary during termination of service

Deduction from Gross salary (sec. 16)

Entertainment allowance (sec. 16(ii))

Professional tax (sec. 16(iii))

Deductions (80C):

Savings are important for the economic development of any country

INCOME FROM BUSINESS OR PROFESSION

Business

The main motive of any business is to earn profit. It includes any trade, commerce,

manufacture or any adventure or concern in the nature of trade, commerce or manufacture.

Profession:

It is an occupation, which requires specialized knowledge & skill in a particular field of

activity.

Vocation:

It means natural ability of a person for a particular work.

Basis of charge: (sec.28)

Computation of profits & gains from business or profession

Admissible Deduction

Expenditure on Building

Expenditure on plant, Machinery and Furniture

Depreciation

Blocks of Assets

Expenditure on Scientific Research

Expenditure on acquisition of patent Right or Copyright

Expenditure on know –how

Expenditure on eligible projects or schemes

Payment to Rural Development Programmes

Amortization of preliminary

Expenditure on Amalgamation or Demerger

Amortization of expenditure Incurred under Voluntary Retirement scheme

Other Deductions

General Deductions

Inadmissible Expenses

Payment Exceeding RS. 20,000

Procedure for computing Professional Income

Format for Doctors or Medical Practioners

Professional Receipts /income

Consultation free xxx

Visiting free xxx

Sale of medicine xxx

Gifts and presents from clients xxx

Operation fees xxx

Nursing home receipts etc., xxx

xxxx

Less: professional payments / Expenses:

Dispensary expenses xxx

Cost of medicines xxx

Depreciation of surgical equipment xxx

Depreciation on x-ray machines xxx

Cost of professional books xxx

Motor car expenses xxx

Depreciation on motor car etc. Xxx

xxxx

_____

Professional Income xxxx

CAPITAL GAINS

Capital gain arising from transfer of capital assets shall be taxable in the previous year in

which the assets is transferred

Capital asset :( sec. 2(14))

Capital asset means any kind of property held by an assessee

Assets not considered as Capital assets Basis of charge: (sec. 45)

Types of Capital Assets

Long term Capital Asset: (sec .2(29))

Short term capital asset :( sec.2 (42 A))

Income from Other Sources

It is residuary head of Income which must satisfy the following conditions:-

There must be an income;

This income is NOT exempt under the IT Act 1961; and

This income is not chargeable to tax under the other heads of income viz. "Salary", "House

property", "Business or Profession" and "Capital Gains".

Example of Income from Other Sources

Some examples of certain incomes normally taxed under this head are given below:-

Interest on bank deposits, loans or company deposits,

Dividend;

Family pension (received by legal heirs of an employee),

Income from sub-letting of house property by a tenant,

Agricultural income from agricultural land situated outside India,

Interest received from IT Dept. on delayed refunds,

Remuneration received by Members of Parliament,

Casual receipts and receipts of non-recurring nature,

Insurance commission,

Examiner-ship fees received by a teacher (not from employer),

Income from royalty,

Director's commission for standing as guarantor to bankers,

Winnings from Lotteries, Crossword Puzzles, Horse Races and Card Games,

Interest on securities,

Income from letting out of machinery, plant or furniture, etc.

Any sum exceeding Rs. 50,000/- received without consideration shall be treated as income provided

that the sum of money is not received from any relative or on the occasion of marriage of the

individual or under a will or inheritance etc.

Computation of Income from Other Sources

Income from this source is computed after deducting the following:-

Expenditure incurred during the previous year;

Expenditure incurred wholly and exclusively for the purpose of earning the said income;

After deducting allowances and deduction provided in Section 57 of the IT Act 1961;

And after disallowing the following:-

Expenditure relating to personal expenses

Interest, salary payable outside India on which TDS not made,

Income / Wealth Tax paid, excessive-payments to relatives etc.

Expenditure in respect of royalty and technical fees received by a foreign company;

Expenditure in respect of winning from lottery.

Individual resident below 60 years of age (i.e. born on or after 1st April1953) or any NRI / HUF /

AOP / BOI / AJP *

Income-tax:Calculate Tax Liability for AY 2013-14

Income Slabs Income Tax Rate

i. Where the total income does not exceed Rs. 2,00,000/-. NIL

ii. Where the total income exceeds Rs. 2,00,000/- but does not exceed Rs.

5,00,000/-.

10% of amount by which the total income exceeds Rs. 2,00,000/-

iii. Where the total income exceeds Rs. 5,00,000/- but does not exceed Rs.

10,00,000/-.

Rs. 30,000/- + 20% of the amount by which the total income exceeds Rs.

5,00,000/-.

iv. Where the total income exceeds Rs. 10,00,000/-. Rs. 130,000/- + 30% of the amount by which the total income exceeds

Rs. 10,00,000/-.

Surcharge: Nil

Education Cess: 3% of the Income Tax.

* Abbreviations used:

NRI - Non Resident Individual; HUF - Hindu Undivided Family; AOP - Association of Persons; BOI -

Body of Individuals; AJP - Artificial Judicial Person

I. Individual resident who is of the age of 60 years or more but below the age of 80 years at any time during the previous year (i.e. born on or after 1st April 1933 but before 1st April 1953)





5,00,000/-

10% of the amount by which the total income exceeds Rs. 2,50,000/-.

iii. Where the total income exceeds Rs. 5,00,000/- but does not exceed Rs.

10,00,000/-

Rs. 25,000/- + 20% of the amount by which the total income exceeds Rs.

5,00,000/-.

iv. Where the total income exceeds Rs. 10,00,000/- Rs. 125,000/- + 30% of the amount by which the total income exceeds Rs.

10,00,000/-.

Surcharge: Nil


http://finotax.com/income-tax/calc


II. Individual resident who is of the age of 80 years or more at any time during the previous year (i.e. born before 1st April 1933)





10,00,000/-

20% of the amount by which the total income exceeds Rs. 5,00,000/-.

iii. Where the total income exceeds Rs. 10,00,000/- Rs. 100,000/- + 30% of the amount by which the total income exceeds Rs.

10,00,000/-.

Surcharge: Nil


III. Co-operative Society



i. Where the total income does not exceed Rs. 10,000/-. 10% of the income.

ii. Where the total income exceeds Rs. 10,000/- but does not exceed Rs.

20,000/-.

Rs. 1,000/- + 20% of income in excess of Rs. 10,000/-.

iii. Where the total income exceeds Rs. 20,000/- Rs. 3.000/- + 30% of the amount by which the total income exceeds Rs.

20,000/-.

Surcharge: Nil

Education Cess: 3% of the Income-tax.

IV. Firm

Income-tax: 30% of total income.Calculate Tax Liability for AY 2013-14

Surcharge: Nil


V. Local Authority


Surcharge: Nil


http://finotax.com/income-tax/nicalc




VI. Domestic Company


Surcharge: The amount of income tax as computed in accordance with above rates, and

after being reduced by the amount of tax rebate shall be increased by a surcharge at the

rate of 5% of such income tax, provided that the total income exceeds Rs. 1 crore.

Education Cess: 3% of the total of Income Tax and Surcharge.

VII. Company other than a Domestic Company


@ 50% of on so much of the total income as consist of (a) royalties received from

Government or an Indian concern in pursuance of an agreement made by it with the

Government or the Indian concern after the 31st day of March, 1961 but before the 1st

day of April, 1976; or (b) fees for rendering technical services received from Government

or an Indian concern in pursuance of an agreement made by it with the Government or

the Indian concern after the 29th day of February, 1964 but before the 1st day of April,

1976, and where such agreement has, in either case, been approved by the Central

Government.

@ 40% of the balance

Surcharge: The amount of income tax as computed in accordance with above rates, and

after being reduced by the amount of tax rebate shall be increased by a surcharge at the

rate of 2% of such income tax, provided that the total income exceeds Rs. 1 crore.

Education Cess: 3% of the total of Income Tax and Surcharge.



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