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AnIntroduction

IncometaxandDeatharetheonlytwoinevitablethingsin
life
InIndia,taxeswereleviedeveninancienttimes referto
ManuSmriti&Arthashastra
WhytoPayTax?
Itwasonlyforthegoodofhissubjectsthathecollected
taxesfromthem,justastheSundrawsmoisturefromthe
Earthtogiveitbackathousandfold.
KalidasinRaghuvansheulogizingKINGDALIP.
IncometaxAct,1922
IncometaxAct,1961
IncometaxRules,1962
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Inthepastwehadveryhightaxrates.

Now,theratesarequitemoderateandcomparablewith
severalothercountries.

Wealsohadveryhighwealthtaxrates,estateduty,gifttax.
Nowthereisaseachange.

Countries
India
Brazil
China
Denmark
Japan
Netherland
Russia
UK
USA

TaxRates(%)
10 30
7.5 27.5
3 45
38 65
5 50
5.85 52
13
0 45
0 39.6
Source: http://www.worldwide-tax.com 4

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Cameintoforcew.e.f.1st April,1962

ExtendstowholeofIndia

Consistsof298sections,23Chaptersand14schedules.The
numberofsubsections,provisosandExplanationsrunsinto
severalhundreds

TheActdetermineswhichpersons areliabletopaytaxandin
respectofwhichincome.Thesectionslaydownthelawof
incometaxandthescheduleslaydowncertainprocedures
andgivecertainlists,whicharereferredtointhesections.

However,theActdoesnotprescribetheratesofIncomeTax

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TheratesofIncometaxareprescribedeveryyearbythe
FinanceAct(popularlyknownasTheBudget)

Atpresent,thetaxratesaresameforallcorporateassessees
andpartnershipfirms(30%)andtherearedifferentslabsfor
Individualtaxpayers

Wealsohavesurchargeforcorporateassesseesand
educationcessforallassessees

TheActempowerstheCBDTtoformulaterulesfor
implementingtheprovisionsoftheAct.Rulescanbe
amendedmoreeasilythantheAct bymerelypublishinga
notificationintheOfficialGazetteoftheGOI.

ToamendtheAct,anamendmentBillhastobepassedinthe
Parliament.

IncaseofaconflictbetweentheActandtheRules,the
provisionsoftheActshallprevail.
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CBDTissuescircularsoncertainmattersfortheguidanceof
theTaxOfficersandthegeneralpublic

CircularsarebindingonlyontheIncomeTaxOfficers

Circularscannotchangetheprovisionsoflaw;theycan
merelyclarifythelaworrelaxcertainprovisionsinfavourof
thetaxpayers

Ineventofadispute,theCourtsarenotboundbythe
circulars

CaseLawsarethedecisionsofthevariousIncometax
AppellateTribunals(ITAT)andtheHighCourts(HC)andthe
SupremeCourt(SC)

DecisionsoftheSCarebindingonalllowerCourtsandtax
authoritiesinIndia

HCdecisionsarebindingonlyinthestateswhicharewithinthe
jurisdictionofthatparticularHighCourt

DecisionsofoneHChaspersuasivepowersoverotherHCs
whendecidingsimilarissues

ITATcanbeasinglememberbench(SMC)oratwomember
benchoraSpecialBenchoraThirdMemberBench
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Section2givesdefinitionsofvarioustermsreferredtointhe
Act

Definitionscanbeinclusivedefinitionsorexclusivedefinitions

Definitionofonetermmayleadtothedefinitionofanother
term

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InclusiveDefinitions:
Inclusivedefinitionisoneinwhichthedefinitiongivessome
meaninginadditiontothedictionaryorthecommon
meaningortheterm.Aninclusivedefinitionextendsor
enlargesthecommonlyunderstoodmeaningoftheterm.
ExhaustiveDefinitions:
Exhaustivedefinitionisonewhichgivesavery clear&
precisemeaningofthegiventerm.The meaningoftheterm
doesnotgobeyondwhatisexpresslygiveninthedefinition.
Anexhaustivedefinitionlimitsorrestrictsthemeaningof
theterm.
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Someoftheimportantdefinitionscontainedinthe
Actareof:
Person
Assessee
AssessmentYear
PreviousYear
Income

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Thetermpersonincludes:
(i)anindividual, [e.g.Mr.AorMr.B.]
(ii)aHinduundividedfamily, [e.g.Mr.A(HUF)orMr.B

(HUF)]
(iii)acompany, [e.g.XYZPvt.Ltd.OrABCLtd.]
(iv)afirm, [e.g.M/sABCorM/sXYZandCo.]
(v)anassociationofpersonsorabodyofindividuals,
whetherincorporatedornot, [e.g.ABCSangh or XYZDal]
(vi)alocalauthority,and [e.g.BMCorPCMCMunicipal
Corporation]
(vii)everyartificialjuridicalperson,notfallingwithinany
oftheprecedingsubclauses. [ResidualCategory]

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Assesseemeansapersonbywhomanytaxorany
othersumofmoneyispayableunderthisAct,and
includes
everypersoninrespectofwhomanyproceedingunder

thisActhasbeentakenfortheassessmentofhisincome
[orassessmentoffringebenefits]oroftheincomeofany
otherpersoninrespectofwhichheisassessable,orofthe
losssustainedbyhimorbysuchotherperson,orofthe
amountofrefundduetohimortosuchotherperson;

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everypersonwhoisdeemedtobeanassessee

underanyprovisionofthisAct;
everypersonwhoisdeemedtobeanassesseein
defaultunderanyprovisionofthisAct.

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AssessmentYear(AY)isdefinedinsection2(9)of
IncomeTaxAct,1961asayearinwhichincomeof
anassesseeofthepreviousyear/lastyearneededto
beassessed.Itiscalledastaxyearinsomeofthe
countries.AssessmentYear(AY)isaperiodoftwelve
monthsstartingfromApril1standendingonMarch
31st.

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Aspersection3therewillbeonlyonepreviousyear
foralltheassesseesendingon31st Marchforall
sourcesofincomes.
Thefinancialyearimmediatelypreceedingthe
assessmentyearshallbethepreviousyear.
Theincomeofapreviousyearistaxedinthe
immediatelysucceedingassessmentyear.

P.S.:Fornewlysetupbusiness,P.Yshallcommence
fromthedateofcommencementofthebusiness.
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IncomeofpersonleavingIndiapermanentlyorforalongperiodoftime,
Incomeofpersontryingtoalienatehisassetswithanintentiontoavoidtax,
Incomeofadiscontinuedbusiness,
IncomeofnonresidentshippingcompanieshavingnorepresentativeinIndia.
Theseincomesaretaxedastheincomesoftheassessmentyearimmediately
precedingthenormalassessmentyearattheratesapplicabletotheformer.

Income u/s 2(24)

Incomeisdefinedtoincludeseveralitems
Itisnotanexhaustivedefinition
Anyincomewhichisnotspecificallyexemptistaxable

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The definition of income as per the Incometax Act begins

with the words Income includes. Therefore, it is an
inclusive definition and not an exhaustive one. Such a
definition does not confine the scope of income but leaves
room for more inclusions within the ambit of the term.
Certain important principles relating to income are
enumerated below

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Income, in general, means a periodic monetary return

which accrues or is expected to accrue regularly from
definite sources. However, under the Incometax Act, even
certain income which do not arise regularly are treated as
income for tax purposes e.g. Winnings from lotteries,
crossword puzzles.

Income normally refers to revenue receipts. Capital

receipts are generally not included within the scope of
income. However, the Incometax Act has specifically
included certain capital receipts within the definition of
income e.g. Capital gains gains on sale of a capital asset
like land.
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Income means net receipts and not gross receipts. Net

receipts are arrived at after deducting the expenditure
incurred in connection with earning such receipts. The
expenditure which can be deducted while computing
income under each head.

Income is taxable either on due basis or receipt basis. For

computing income under the heads Profits and gains of
business or profession and Income from other sources
the method of accounting regularly employed by the
assessee should be considered, which can be either cash
system or mercantile system.

Income earned in a previous year is chargeable to tax in

the assessment year.
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Previous year is the financial year, ending on 31st March, in

which income has accrued/ received.

Assessment year is the financial year (ending on 31st

March) following the previous year. The income of the
previous year is assessed during the assessment year
following the previous year. .

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ScopeofTotalIncomeu/s.5
ResidentialStatusinIndiau/s6.

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1.
2.
3.
4.

Individual
Hindu undivided family
Firm or association of person or a body of individuals
Every other person

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Tax is to be charged on the income of the previous year of

a person at the rates fixed for the assessment year .
The tax liability of a person is determined on the basis of
Residence in India in the previous year.
The residential status of an assessee may not necessarily
be the samein each year, he may be a resident in one year
and a nonresident in the next.

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As such, clear identification of residential status is

necessary.
The rules for determining the residential status for
different types of assessees viz., individual, Hindu
Undivided Family (HUF), firm and a company etc. are not
same.

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Section5oftheIncometaxActdealswiththescopeof
totalincome.Itstatesthatthescopeoftotalincomeofa
personisdeterminedbyreferencetohisresidenceinIndia
inthepreviousyear.

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1.ResidentofIndia
2.NonresidentofIndia
a.ResidentindividualandHUFcanbedividedintotwo
categories
i.Residentandordinarilyresidentor
ii.Residentbutnotordinarilyresident
b.Allotherassessee cansimplybeeitherresidentornon
resident

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Residential
statusof

Resident

Residentand
ordinarily
Resident

Non
Resident

Residentbut
notordinarily
resident
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Basic condition for resident

An individual is said to be resident in India in any previous
year, if he satisfies at least one of the following basic
condition
a) He is in India in the previous year for a period of 182 days
or more
b) He is in India for a period of 60 days or more during the
previous year and 365 days or more during 4 years
immediately preceding the previous year

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i) Being a citizen of India if he leaves India in any previous

year (as a member of a crew of an Indian ship or) for the
purpose of employment or outside India, the period of 60
days in clause (b) above will be extended to 182 days or
more.
ii) Being a citizen of India or a person of Indian origin, who
being outside India, comes on a visit to India in any
previous year the period of 60 days mentioned in clause
(b) will be 182 days or more
A person is deemed to be of Indian origin if he, or either of
his parents or any of his grand parents was born in
undivided India.

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Non Resident means a person who is not a resident.

An individual is nonresident in India if he does not satisfy
any of the two basic conditions as stated under section
6(1)

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Residentindividualistreatedasresidentbutnotordinarily
residentInIndiaifhesatisfiesanyoneofthefollowingtwo
additionalconditions
Hehasbeenanonresidentin9outof10yearsimmediately
precedingthefinancialyearor
HehasbeeninIndiaforaperiodof729daysorlessin7
previousyearsimmediatelyprecedingthefinancialyear
Ifany1oftheaboveconditionsissatisfied,thepersonissaid
toberesidentbutnotordinarilyresidentinIndia.Howeverif
noneoftheaboveconditionsissatisfied,thepersonissaid
tobeResidentandOrdinarilyResidentinIndia.
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Resident individual is treated as resident and ordinarily

resident In India if he satisfies the following two
additional conditions
a) He has been resident in India in at least 2 out of 10
previous years immediately the relevant previous year
b) He is been in India for a period of 730 days or more during
7 years immediately preceding the relevant previous year.

Individual becomes resident and ordinarily resident in

India if he satisfies at least one of the basic conditions and
the two additional conditions .
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Case1
BrettLee,anAustralianplayervisitsIndia
for100daysineveryfinancialyear.Thishas
beenhispracticeforthepast10financial
years.Findouthisresidentialstatusforthe
assessmentyear201516.

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Case2
Mr.Modi,anIndiancitizenleftIndiaon
22.09.14forthefirsttimetoworkasan
officerofacompanyinGermany.
DeterminetheresidentialstatusofMr.
ModiforA.Y.201516andexplainthe
conditionstobefulfilledforthesameunder
theIncomeTaxAct,1961.
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Case3
Mr.RahulG,anonresident,residinginItaly
since1961,camebacktoIndiaon
01.02.2014forpermanentsettlement.What
willbehisresidentialstatusforA.Y.201415
andA.Y.201516?

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Case4
Mr.Jaison,agermantouristcametoindia
forthefirsttimeon15th August2014.He
leftIndiaon26th January2015.Whatwillbe
hisresidentialstatusA.Y.201516?

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Case5
Mr.H,anIndiancitizenleftIndiaforthefirst
timeasamemberofthecrewofanIndian
shipon31st December2014.Thereafterhe
settlesdownabroadforemploymentand
comesbackonavisittoIndiaon1st June
2015andstaysfor189days.Whatwillbehis
residentialstatusA.Y.201516andA.Y.
201617?
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Case6
Mr.NitinDhopatwhoisanIndiancitizenandaprofessionalcricketer,
touchedSouthAfrica.Australia,U.K.WestIndiesandZimbabweon
variousdates.ThedetailsofdeparturefromandarrivalinIndiaareas
under:DeterminehisresidentialstatusfortheAssessmentyear201516.
Giveyourworkingandexplanation.
Country

DateofDeparture DateofArrival

SouthAfrica(for
thefirsttime)

01/03/2013

Australia

15/04/2014

01/05/2014

UK

05/05/2014

11/07/2014

WestIndies

31/08/2014

14/09/2014

Zimbabwe

01/01/2015

23/03/2015

25/03/2013

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The residential status of an HUF depends on two factors,

the location of control and management of its affairs and
the residential status of its Karta:
Ordinarily Resident (Section 6(2) )
HUF is said to be ordinarily resident in India in any
previous year :
If the control and management of its affairs is wholly or
partly situated in India during the previous year.

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If its manager (Karta) satisfies the following conditions of

Section 6(6) :
i)
ii)

its manager has been resident in India in 2 out of 10

previous years preceding that year; and
its manager has, during the 7 years preceding that year,
been in India for a period amounting in all to 730 days or
more.

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AHinduUndividedFamilyissaidtobe'notordinarily
residentinIndia,ifcontrolandmanagementofitsaffairs
issituatedwhollyorpartlyinIndiaduringtheprevious
yearbutitsmanagerdoesnotsatisfytheconditionsof
Section6(6).

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AHinduUndividedFamilyissaidbenonresidentinsuch
casesonlywhereitscontrolandmanagementissituated
whollyoutsideIndiaduringthepreviousyear.

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Firms and other association of persons can fall under two

categories only. They may either be residents or non
residents.

Resident
A firm or other association of persons is said to be resident
in India in any previous year where during that year the
control and management of its affairs is partially or wholly
situated in India.
The residential status of its partners in India is immaterial.

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Afirmoranassociationofpersonsissaidtobenon
residentinsuchcasesonlywherethecontroland
managementofitsaffairsissituatedwhollyoutsideIndia
duringthepreviousyear.

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A company may either be a resident or nonresident.

A company is said to be resident in India in any previous
year if:
I.
II.

it is an Indian company, or
during the year, the control and management of its
affairs is situated wholly in India.

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Ifacompanydoesnotsatisfyanyoftheaforesaid
conditionsofresidence,itissaidtobea'nonresident'
company.Inotherwordsifthecompanyisnotregistered
inIndiaanditscontrolandmanagementissituatedwholly
orpartiallyoutsideIndia,itisregardedasanonresident.

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Resident :
Every other person (local authority, artificial, juridical
person & Statutory Corporations) is said to be resident in
India in any previous year if the control and management
of its affairs is partly or wholly situated in India
NonResident :
Every other person is said to be nonresident if control and
management of its affairs is situated wholly outside India.

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Case7
HSBP.Ltd.IsanIndianCompanywhich
carriesonbusinessfromCaymanIslands.
Thecontrolandmanagementisdone
entirelyfromCaymanIslandsandentire
incomeisalsoearnedfromCaymanIslands.
Determineitsresidentialstatus.

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Case8
HSBP.Ltd.isaforeignCompanywhich
carriesonbusinessfromMumbai.Thecontrol
andmanagementisdoneentirelyfrom
Mumbaiandentireincomeisalsoearned
fromMumbai.Determineitsresidential
status.
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Case9
HSBP.Ltd.isaforeignCompanywhichcarrieson

businessfromDelhi.Thecontroland
managementisdonepredominantlyfromDelhi
andentireincomeisearnedfromDelhi.However
somelevelofcontrolandmanagementisdone
formUSAtotakecertaincriticaldecisions.
Determineitsresidentialstatus.

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Case10
RamthekartaofABC,anHUF,hasbeena

residentinIndiaforP.Y.201011toP.Y.201314.
Duringthatperiodhistotalstayamountedto710
days.HisstayinIndiafortheperiod200708to
200910was19days.HewashoweverinIndiafor
aperiodof170daysonlyinP.Y.201415.HUFwas
partiallycontrolledinIndiaduringP.Y.201415but
wasentirelycontrolledoutsideIndiaduringthe
P.Y.201314.Discusstheresidentialstatusofthe
HUFandofMr.RamforP.Y.201415.
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Case11
Jai&Co.,apartnershipfirmiscontrolledjointly

fromTripuraandCanberrabyitspartners.Allthe
partnersresideinCanberraandoccasionallyvisit
Tripurafornotmorethanonemonthinayear.
Discusstheresidentialstatusofthefirm.

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