1

Borivali Education Society

Matrushri Pushpaben Vinubhai Valia College of Commerce
M. K. School Complex, Factory Lane, Borivali (w), Mumbai 400092.

A PROJECT
ON

DIRECT TAX

IN THE SUBJECT OF DIRECT AND INDIRECT TAX

SUBMITTED TO
UNIVERSITY OF MUMBAI,
FOR SEMSTER III OF
MASTER OD COMMERCE (ACCOUNTANCY)
BY
BHAVYA P. SAVLA
ROLL NO: 317
UNDER THE GUIDANCE OF
DR. MEGHNA CHOTALIYA

YEAR 2016 - 17

DECLARETION BY STUDENT
MR. BHAVYA P. SAVLA The student of M.com Part-II (2016 - 17) Roll No: 317 hereby
declare that the project for the strategic management titled.

DIRECT TAX
Submitted by me for semester - III during the academic year 2016-17 is based on actual
work carried out by me under the guidance and supervision of Dr. Meghna Chotaliya
I further stated that this work is original and not submitted anywhere else for the
examination.

Signature of Student.

EVALUATION CERTIFICATE
This is to certify that the undersigned have assessed and evaluated the project

DIRECT TAX

Submitted by Bhavya P. Savla Student of M.Com part II. This project is original and best of
our knowledge and has been accepted for internal assessment.

Dr. Meghna Chotaliya

Internal Examiner

Prof. V. Manikandan
External Examiner

I/C PRINCIPAL

ACKNOWLEDGEMENT
It given me immense pleasure to present this project while I taking this opportunity to thank
all of them who helped me to prepare this project and timely guidance received which help
me greatly in the competition of the project.

I would acknowledge my deep sense of gratitude to Dr. Meghna Chotaliya. For her kind cooperation in this project at all stages. Her constant support, encouragement and guidance
without which the successful completion of this project would have been impossible.

I would like to thanks our respected principle, librarians and other teaching and non- teaching
staff for their corporation in this project.

Last but not least I would also like to thanks all our friends for their suggestions and valuable
help.

Once again I would like to thanks all those people who have helped me to complete this
project on time.

INDEX

SR.
NO.
1.

CHAPTER NAME
DIRECT TAX

PAGE
NO.
68

1.1 Introduction
1.2 Direct Tax

2.

1.3 Defination
OVERVIWE OF DIRECT TAX
Difference Between Direct Tax And Indirect

9 - 43

Tax

Merits Of Direct Tax

Demerits Of Direct Tax
Scope Of Total Income
Income From Salary
Income From Business And Profession
3.

CONCLUSION

44

4.

BIBLIOGRAPHY AND REFERENCES

45

CHAPTER 1:- DIRECT TAX

1.1 INTRODUCTION
The taxes are the basic source of revenue for the Government. Revenue raised from the
taxes are utilized for meeting the expense of Government like, provision of education,
infrastructure facilities such as roads, dams etc.
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.
Under direct taxes, person who pays the tax bears the burden of it example: Income tax,
Wealth Tax etc. while in Indirect Taxes the person who consumes the goods or services
example: Service Tax, Value Added Tax, Excise Duty etc.
The first Income Tax Act in India was introduced in 1860. The present law of income tax
is contained in Income Tax Act, 1961. This Act is the charging Statute of Income Tax in
India. It provides for levy, administration, collection and recovery of Income Tax. The
Income Tax Law comprises The Income Tax Act 1961, Income Tax Rules 1962,
Notifications and Circulars issued by Central Board of Direct Taxes (CBDT), Annual
Finance Acts and Judicial pronouncements by Supreme Court and High Courts.
Direct Taxes, as the name suggests, are taxes that are directly paid to the government by
the taxpayer. It is a tax applied on individuals and organizations directly by the
government e.g. income tax, corporation tax, wealth tax etc.

1.2 DIRECT TAXES

Income Tax
Income Tax is paid by an individual based on his/her taxable income in a given
financial year. Under the Income Tax Act, the term individual also includes Hindu
Undivided Families (HUFs), Co-operative Societies, Trusts and any artificial judicial

person. Taxable income refers to total income minus applicable deductions and
exemptions.
Tax is payable if the taxable income is above the minimum taxable limit and is paid as
per the differing rates announced for each tax slab for the financial year.

Corporation Tax
Corporation Tax is paid by Companies and Businesses operating in India on the income
earned worldwide in a given financial year. The rates of taxation vary based on whether
the company is incorporated in India or abroad.

Wealth Tax
Wealth tax is applicable on individuals, HUFs or companies on the value of their assets
in a given financial year on the date of valuation. It is taxed at the rate of 1% of the net
wealth of any assesse exceeding Rs 30,00,000.
Net wealth here includes, unproductive assets like cash in hand above Rs 50,000,
second residential property not rented out, cars, gold jewellery or bullion, boats, yachts,
aircrafts or urban land. It does not include productive assets like commercial property,
stocks, bonds, fixed deposits, mutual funds etc.

Capital Gains Tax

The profits made on sale of property are taxable under Capital Gains Tax. Property here
includes stocks, bonds, residential property, precious metals etc. It is taxed at two
different rates based on how long the property was owned by the taxpayer Short Term
Capital Gains Tax and Long Term Capital Gains Tax. This deciding period of ownership
varies greatly for different classes of property.

1.3 DEFINITION
DEFINITION of 'Direct Tax
A tax that is paid directly by an individual or organization to the imposing entity. A
taxpayer pays a direct tax to a government for different purposes, including real
property tax, personal property tax, income tax or taxes on assets. Direct taxes are
different from indirect taxes, where the tax is levied on one entity, such as a seller, and
paid by another, such a sales tax paid by the buyer in a retail setting.

BREAKING DOWN 'Direct Tax

A direct tax cannot be shifted to another individual or entity. The individual or
organization upon which the tax is levied is responsible for the fulfillment of the tax
payment. Indirect taxes, on the other hand, can be shifted from one taxpayer to another.

DEFINITION of 'Income Tax'

A tax that governments impose on financial income generated by all entities within their
jurisdiction. By law, businesses and individuals must file an income tax return every
year to determine whether they owe any taxes or are eligible for a tax refund. Income
tax is a key source of funds that the government uses to fund its activities and serve the
public

BREAKING DOWN 'Income Tax'

Most countries employ a progressive income tax system in which higher income earners
pay a higher tax rate compared to their lower earning counterparts.
The first income tax imposed in America was during the War of 1812. Its original
purpose was to fund the repayment of a $100 million debt that was incurred through

war-related expenses. After the war, the tax was repealed, but income tax became
permanent during the early 20th century.

CHAPTER 2:- OVERVIWE OF DIRECT TAX

DIFFERENCE BETWEEN DIRECT TAX AND INDIRECT TAX

Basis of
Compariso
n

Direct Tax

Indirect Tax

Meaning

Direct tax is referred to as the tax,

which is paid by the person to the
government to whom it is levied
and charged on the income and
wealth of persons.

Indirect Tax is referred to as the tax,

which is paid by the taxpayer to the
government indirectly, charged on
goods and services.

Burden

The person on whom it is levied

bears its burden.

The burden of tax can be shifted to

another person.

Types

Wealth Tax, Income Tax, Property

Tax, Corporate Tax, Import and
Export Duties.

Central Sales tax, VAT (Value Added

Tax), Service Tax, STT (Security
Transaction Tax), Excise Duty,
Custom Duty.

Evasion

Tax evasion is possible.

Tax evasion is hardly possible

because it is included in the price of
goods and services.

Inflation

Direct tax helps in reducing

inflation.

Indirect taxes promotes inflation.

Levied on

Persons, i.e. Individual, HUF

(Hindu Undivided Family),
Company, Firm etc.

Consumers of goods and services.

Nature

Progressive

Regressive

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MERITS OF DIRECT TAX

Following are the important advantages or merits of Direct Taxes:-

Equity
There is social justice in the allocation of tax burden in case of direct taxes as they are
based on the principle of ability to pay. Persons in a similar economic situation are taxed
at the same rate. Persons with different economic standing are taxed at a different rate.
Hence, there is both horizontal and vertical equity under direct taxation. Progressive
direct taxation can reduce income inequalities and bring about adequate social &
economic justice.
Certainty
As far as direct taxes are concerned, the tax payer is certain as to how much he is
expected to pay, as the tax rates are decided in advance. The Government can also
estimate the tax revenue from direct taxes with a fair accuracy. Accordingly, the
Government can make adjustments in its income and expenditure.

Relatively Elastic
The direct taxes are relatively elastic. With an increase in income and wealth of
individuals and companies, the yield from direct taxes will also increase. Elasticity also
implies that the government's revenue can be increased by raising the rates of taxation. An
increase in tax rates would increase the tax revenue.

Creates Public Consciousness

They have educative value. In the case of direct taxes, the taxpayers are made to feel
directly the burden of taxes and hence take keen interest in how public funds are spent.
The taxpayers are likely to be more aware about their rights and responsibilities as
citizens of the state.

11

Economical
Direct taxes are generally economical to collect. For instances, in the case of personal
income tax, the tax can be deducted at source from the income or salaries of the
individuals. Therefore, the government does not have to spend much in tax collection as
far as personal income tax is concerned. However, in the case of indirect taxes, the
government has to set up an elaborate machinery to collect taxes.

Anti-inflationary
The direct taxes can help to control inflation. During inflationary periods, the government
may increase the tax rate. With an increase in tax rate, the consumption demand may
decline, which in turn may reduce inflation.

12

DEMERITS OF DIRECT TAX

Though direct taxes possess above mentioned merits, the economist have criticised
them on the following grounds:-

Tax Evasion
In India, there is good amount of tax evasion. The tax evasion is due to High tax rates,
Documentation and formalities, Poor and corrupt tax administration. It is easier for the
businessmen to evade direct taxes. They invariable suppress correct information about
their incomes by manipulating their accounts and evade tax on it.
In less developed countries like India, due to high rate of progressive tax evasion &
avoidance are extensive and led to rise in black money.

Arbitrary Rates
The direct taxes tend to be arbitrary. Critics point out that there cannot be any objective
basis for determining tax rates of direct taxes. Also, the exemption limits in the case of
personal income tax, wealth tax, etc., are determined in an arbitrary manner. A precise
degree of progression in taxation is also difficult to achieve. Therefore direct taxes may
not always fulfill the canon of equity.

Inconvenient
Direct taxes are inconvenient in the sense that they involve several procedures and
formalities in filing of returns. For most people payment of direct tax is not only
inconvenient, it is psychological painful also. When people are required to pay a
sizeable part of their income as a tax to the state, they feel very much hurt and their
propensity to evade tax remains high. Further everyone who is required to pay a direct
tax has to furnish appropriate evidence in support of the statement of his income &
wealth & for this he has to maintain his accounts in proper form. Direct tax is
considered inconvenient by some people because they have to make few lump sum

13

payments to the governments, whereas their income receipts are distributed over the
whole year.

Narrow Coverage
In India, there is a narrow coverage of direct taxes. It is estimated that only three
percent of the population pay personal income tax. Due to low coverage, the
government does not get enough funds for public expenditure. Estate duty & wealth tax
are equally narrow based and thus revenue proceeds from these taxes are invariably
small.

Affects Capital Formation

The direct taxes can affect savings and investment. Due to taxes, the net income of the
people gets reduced. This in turn reduces savings. Reduction in savings results in low
investment. The low investment affects capital formation in the country.

Effect on Willingness and Ability to Work

Highly progressive direct taxes reduce people's ability and willingness to work and
save. This in turn may have a negative impact on investment and productive capacity in
the economy. If tax burden is high, people's consumption level gets adversely affected
and this has an impact on their ability to work and save. High taxes also discourage
people from working harder in order to earn and save more.

Sectoral Imbalance
In India, there is Sectoral imbalance as far as direct taxes are concerned. Certain sectors
like the corporate sector is heavily taxed, whereas, the agriculture sector is 100% tax
free. Even the large rich farmers are exempted from payment of personal income tax.

14

SCOPE OF TOTAL INCOME

The following points should be noted in regard to scope of income:
While S. 4 makes the total income of the previous year chargeable to tax, S. 5 defines
the scope of the total income so chargeable to tax. It determines the extent and scope of
income which is chargeable to tax. The term scope of income means which items of
income are included and which are excluded while computing tax liability.
The scope of income depends upon the residential status of the person. There are three
broad categories of persons:
a) Resident and ordinary resident
b) Non- resident and
c) Resident but not ordinarily resident.
Section 5 lays down what types of income would be taxable in the case of assessees
belonging to each of these categories.
It should be noted that section 5 specifically states that the income is to be computed
subject to the provisions of this act. Thus, if any item of income is exempt under the
provisions of the act, it is to be excluded from the scope of income.

RESIDENT AND ORDINARY RESIDENT

A resident and ordinary resident is taxable in respect of any income, from whatever
source derived, which:
(a) Is received, or deemed to be received in India, in the previous year, by or on behalf
of such person; or
(b) Accrues or arises, or is deemed to accrue or arise to him, in India, during the
previous year; or
(c) Accrues or arises to him outside India, during the previous year.

15

Thus, in the case of a resident and ordinary resident, his total income includes any
income received, or accruing or arising in India, and any income accruing or arising
outside India (or deemed to be so received, or accruing or arising, as the case may be).
In short, the entire World Income (Indian Income+ Foreign Income) of an ordinary
resident is to be included in his total income.

RESIDENT BUT NOT ORDINARY RESIDENT

A person not ordinary resident in India, is taxable in respect of any income, from
whatever source derived, which(a) Is received, or deemed to be received, in India, in the previous year, by or on behalf
of such person: or
(b) Accrues or arises, or is deemed to accrue or arise to him, in India, during the
previous year; or
(c) Accrues or arises to him, outside India, from a business controlled from or a
profession set up in India.
Thus, in the case of a not ordinary resident, while the Indian Income is to be included in
the total income, the foreign income is to be included only if it is derived from a
business controlled in or a profession set up in India. So, the liability of a Not-Ordinary
Resident in respect of the Foreign Income is much less as compared with that of the
Ordinary Resident.

NON-RESIDENT
A resident who is a non-resident, is taxable in respect of any income, from whatever
source derived, which(a) Is received in India, or is deemed to be received in India, in the previous year, by or
on behalf of such person; or
(b) Accrues or arises, or is deemed to accrue or arise to him, in India, during the
previous year.
Thus, in the case of a non-resident his taxable income includes only his Indian income
during that year. The Foreign Income of a non-resident is not taxable under The Indian

16

Income-Tax Act. So, the liability of a non-resident is the lowest among all the types of
residents under The Income Tax Act.

RESIDENTIAL STATUS AND TAXABILITY OF INCOME

NATURE OF
INCOME

Income received in
India

RESIDENT &

RESIDENT BUT

ORDINARY

NOT ORDINARY

RESIDENT

RESIDENT

Taxable

Taxable

Taxable

Taxable

Taxable

Taxable

Taxable

Taxable

Taxable

Taxable

Taxable

Taxable

Taxable

Taxable

Not Taxable

NON RESIDENT

Income which
accrues or arises in
India
Income deemed to
be received in India
Income deemed to
accrue in India

Income which
accrues and arises
outside India from a
business controlled
from India/
profession set up in
India.

17

Taxable

Not Taxable

Not Taxable

Any other income

which accrues or
arises outside India

NOTE:
1) Indian income is taxable in all cases, whether of an ordinary resident, or a not-ordinary
resident, or a non-resident. Indian income includes income received or accruing or
arising in India, or deemed to be received in India.
2) Foreign income of an ordinary resident is wholly taxable.
3) Foreign income of a not-ordinary resident is taxable only if derived from a business
controlled or profession set up in India.
4) Foreign income of a non-resident is not taxable at all.
[As per S.1, the Act extends to whole of India i.e. it applies to all residents of India and
to all income arising in India. hence all income earned by a resident (whether arising in
or outside India), while all income arising in India is taxable (whether earned by a
resident or a non-resident).]

18

Illustration
From the following income of Mr. Rohit for the previous year 2014-15, compute his
gross total income for the assessment year 2015-16 if he is(a) Resident and ordinary resident
(b) Resident but not ordinary resident
(c) Non-resident

Income
1. Dividend received from Mac-Donalds Ltd. a USA Company in USA

18000

2. Rent received from house in Kolkata

60000

3. Income from agriculture in Sri Lanka

50000

4. Income from business in Dhaka, controlled from Mumbai

60000

5. Rent from office property in UK credited to bank account in Switzerland

20000

6. Income from profession in Nairobi received in Nairobi which was set up

in India

30000

7. Past untaxed foreign income brought to India, during the previous year

10000

8. Royalties from Indian Companies

40000

19

Solution:
Name: Mr. Rohit
Previous Year: 2014-15

Assessment Year: 2015-16

Computation Of Total

R but

Income

Income

R&OR

NOR

NR

1.Dividend received from MacDonalds Ltd. USA Company in Foreign

18000

60000

60000

60000

50000

60000

60000

20000

30000

30000

USA
2.Rent received from house in Indian
Kolkata
3.Income from Agriculture in Sri Foreign
Lanka
4.Income from business in Dhaka Foreign
controlled from Mumbai
5.Rent from office property in
UK credited to bank account in Foreign
Switzerland
6.Income

from

profession

in

Nairobi received in Nairobi Foreign

which was set up in India
7.Past untaxed foreign income Remittance
brought to India during the (Not

20

previous year
8.Royalties

Income)
from

Indian

Companies

40000

40000

40000

278000

190000

100000

Indian
Gross Total Income

INCOME FROM SALARY

MEANING

21

The meaning of the term salary for purposes of income tax is much wider than what is
normally understood. Every payment made by an employer to his employee for service
rendered would be chargeable to tax as income from salaries. The term salary for the
purposes of Income-tax Act, 1961 will include both monetary payments (e.g. basic
salary, bonus, commission, allowances etc.) as well as non-monetary facilities (e.g.
housing accommodation, medical facility, interest free loans etc).

(1) Employer-employee relationship:

Before an income can become chargeable under the head salaries, it is vital that there
should exist between the payer and the payee, the relationship of an employer and an
employee. Consider the following examples:
(a) Sujatha, an actress, is employed in Chopra Films, where she is paid a monthly
remuneration of `2 lakh. She acts in various films produced by various producers. The
remuneration for acting in such films is directly paid to Chopra Films by the different
producers. In this case, `2 lakh will constitute salary in the hands of Sujatha, since the
relationship of employer and employee exists between Chopra Films and Sujatha.
(b) In the above example, if Sujatha acts in various films and gets fees from different
producers, the same income will be chargeable as income from profession since the
relationship of employer and employee does not exist between Sujatha and the film
producers.
(c) Commission received by a Director from a company is salary if the Director is an
employee of the company. If, however, the Director is not an employee of the company,
the said commission cannot be charged as salary but has to be charged either as income
from business or as income from other sources depending upon the facts.
(d) Salary paid to a partner by a firm is nothing but an appropriation of profits. Any salary,
bonus, commission or remuneration by whatever name called due to or received by
partner of a firm shall not be regarded as salary. The same is to be charged as income
from profits and gains of business or profession. This is primarily because the
relationship between the firm and its partners is not that of an employer and employee.

(2) Full-time or part-time employment:

22

It does not matter whether the employee is a full-time employee or a part-time one.
Once the relationship of employer and employee exists, the income is to be charged
under the head salaries. If, for example, an employee works with more than one
employer, salaries received from all the employers should be clubbed and brought to
charge for the relevant previous years.

(3) Foregoing of salary:

Once salary accrues, the subsequent waiver by the employee does not absolve him from
liability to income-tax. Such waiver is only an application and hence, chargeable to tax.
Example: Mr. A, an employee instructs his employer that he is not interested in
receiving the salary for April 2013 and the same might be donated to a charitable
institution. In this case, Mr. A cannot claim that he cannot be charged in respect of the
salary for April 2013. It is only due to his instruction that the donation was made to a
charitable institution by his employer. It is only an application of income. Hence, the
salary for the month of April 2013 will be taxable in the hands of Mr. A. He is however,
entitled to claim a deduction under section 80G for the amount donated to the
institution.

(4) Surrender of salary:

However, if an employee surrenders his salary to the Central Government under section
2 of the Voluntary Surrender of Salaries (Exemption from Taxation) Act, 1961, the
salary so surrendered would be exempt while computing his taxable income.

(5) Salary paid tax-free:

This, in other words, means that the employer bears the burden of the tax on the salary
of the employee. In such a case, the income from salaries in the hands of the employee
will consist of his salary income and also the tax on this salary paid by the employer.

DEFINITION OF SALARY
The term salary has been defined differently for different purposes in the Act. The
definition as to what constitutes salary is very wide. As already discussed earlier, it is an

23

inclusive definition and includes monetary as well as non-monetary items. There are
different definitions of salary say for calculating exemption in respect of gratuity,
house rent allowance etc.
Salary under section 17(1), includes the following:
(i)

Wages,

(ii) Any annuity or pension,

(iii) Any gratuity,
(iv) Any fees, commission, perquisite or profits in lieu of or in addition to any salary or
wages,
(v) Any advance of salary,
(vi) Any payment received in respect of any period of leave not availed by him i.e.
leave salary or leave encashment,
(vii) The portion of the annual accretion in any previous year to the balance at the credit
of an employee participating in a recognised provident fund to the extent it is taxable
and
(viii) Transferred balance in recognized provident fund to the extent it is taxable,
(ix) The contribution made by the Central Government or any other employer in the
previous year to the account of an employee under a pension scheme referred to in
section 80CCD.

BASIS OF CHARGE
1. Section 15 deals with the basis of charge. Salary is chargeable to tax either on due
basis or on receipt basis, whichever is earlier.
2. However, where any salary, paid in advance, is assessed in the year of payment, it
cannot be subsequently brought to tax in the year in which it becomes due.
3. If the salary paid in arrears has already been assessed on due basis, the same cannot be
taxed again when it is paid.

24

Examples:
i. If A draws his salary in advance for the month of April 2014 in the month of March 2014
itself, the same becomes chargeable on receipt basis and is to be assessed as income of
the P.Y.2013-14 i.e., A.Y.2014-15. However, the salary for the A.Y.2015-16 will not
include that of April 2014.
ii. If the salary due for March 2014 is received by A later in the month of April 2014, it is
still chargeable as income of the P.Y.2013-14 i.e. A.Y.2014-15 on due basis. Obviously,
salary for the A.Y.2015-16 will not include that of March 2014.

ADVANCE SALARY
Advance salary is taxable when it is received by the employee irrespective of the fact
whether it is due or not. It may so happen that when advance salary is included and
charged in a particular previous year, the rate of tax at which the employee is assessed
may be higher than the normal rate of tax to which he would have been assessed.
Section 89(1) provides for relief in these types of cases.

LOAN OR ADVANCE AGAINST SALARY

Loan is different from salary. When an employee takes a loan from his employer, which
is repayable in certain specified installments, the loan amount cannot be brought to tax
as salary of the employee.
Similarly, advance against salary is different from advance salary. It is an advance taken
by the employee from his employer. This advance is generally adjusted with his salary
over a specified time period. It cannot be taxed as salary.

ARREARS OF SALARY
Normally speaking, salary arrears must be charged on due basis. However, there are
circumstances when it may not be possible to bring the same to charge on due basis. For
example if the Pay Commission is appointed by the Central Government and it
recommends revision of salaries of employees, the arrears received in that connection
will be charged on receipt basis. Here, also relief under section 89(1) is available.

PROVIDENT FUND

25

Provident fund scheme is a scheme intended to give substantial benefits to an employee

at the time of his retirement. Under this scheme, a specified sum is deducted from the
salary of the employee as his contribution towards the fund. The employer also
generally contributes the same amount out of his pocket, to the fund. The contribution
of the employer and the employee are invested in approved securities. Interest earned
thereon is also credited to the account of the employee. Thus, the credit balance in a
provident fund account of an employee consists of the following:
(i) Employees contribution
(ii) Interest on employees contribution
(iii) Employers contribution
(iv) Interest on employers contribution.
The accumulated balance is paid to the employee at the time of his retirement or
resignation. In the case of death of the employee, the same is paid to his legal heirs. The
provident fund represents an important source of small savings available to the
Government. Hence, the Income-tax Act, 1961 gives certain deductions on savings in a
provident fund account. The following are the types of provident funds:
(i) Statutory Provident Fund (SPF)
(ii) Recognised Provident Fund (RPF)
(iii) Unrecognised Provident Fund (URPF)

The tax treatment is given below:

26

PARTICLUARS

EMPLOYEES
CONTRIBUTION

STATUTORY

RECOGNOSED

UNRECOGNISED

PF

PF

PF

Ignore

Ignore

Ignore

Exempt Upto
12% [Basic
EMPLOYERS
CONTRIBUTION

Fully Exempt

Salary+ DA (In
Terms)+

Fully Exempt

Turnover
Commission]

INTEREST
CREDITED

Fully Exempt

Exempt Upto
9.5%

Fully Exempt

LUMPSUM

Exempt u/s

Exempt u/s

Taxable

RECEIVED

10(11)

10(12)

(Divided In 4 Parts)

LUMPSUM RECEIVED FROM UNRECOGNISED PF

27

CONTRIBUTION

INTEREST

Employees

Employers

Contribution

Contribution

IGNORE

On

On

Employers

Employees

Contribution

Contribution

TAXABLE AS IFS

TAXABLE
AS IFOS

LUMPSUM RECEIVED FROM RECOGNISED PROVIDENT

FUND

AFTER 5 YEARS

WITHIN 5 YEARS

EXEMPT

DUE TO:

Ill health of employee

Discontinuation of business
by employer

Any other reason beyond

control of employee

GRATUITY

OTHERWISE

TAXABLE

28

Gratuity is a voluntary payment made by an employer in appreciation of services

rendered by the employee. Now-a-days gratuity has become a normal payment
applicable to all employees. In fact, Payment of Gratuity Act, 1972 is a statutory
recognition of the concept of gratuity. Almost all employers enter into an agreement
with employees to pay gratuity
GRATUITY

Government

POGA

Other

Employees

Employees

Employees

Fully Exempt

15
26

1
2

X Last Salary X Completed

Average X

completed
pm.

years of
service

Actual Received

salary

years of
service

Actual received

Maximum Rs. 1000000

Maximum Rs. 1000000

(WHICHEVER IS LESS)

(WHICHEVER IS LESS)

Last Salary pm.

= Basic salary

Average Salary
= Average basic salary

+
DA (all)

+
Average DA (in terms)
+
Average Turnover
Commission
Average of last 10 months
preceding the month
of retirement

29

DEDUCTIONS FROM SALARY

The income chargeable under the head Salaries is computed after making the
following deductions:
1) Entertainment allowance [Section 16(ii)]
2) Professional tax [Section 16(iii)]

(1) Entertainment allowance

Entertainment allowance received is fully taxable and is first to be included in the salary
and thereafter the following deduction is to be made: However deduction in respect of
entertainment allowance is available in case of Government employees. The amount of
deduction will be lower of:
i.
ii.
iii.

One-fifth of his basic salary or

5,000 or
Entertainment allowance received.
Deduction is permissible even if the amount received as entertainment allowance is not
proved to have been spent.

(2) Professional tax on employment

Professional tax or taxes on employment levied by a State under Article 276 of the
Constitution is allowed as deduction only when it is actually paid by the employee
during the previous year. If professional tax is reimbursed or directly paid by the
employer on behalf of the employee, the amount so paid is first included as salary
income and then allowed as a deduction under section 16.

INCOME FROM BUSINESS AND PROFESSION

30

MEANING OF BUSINESS, PROFESSION AND PROFITS

(i) The tax payable by an assessee on his income under this head is in respect of the
profits and gains of any business or profession, carried on by him or on his behalf
during the previous year. The term business has been defined in section 2(13) to
include any trade, commerce or manufacture or any adventure or concern in the nature
of trade, commerce or manufacture. But the term profession has not been defined in
the Act. It means an occupation requiring some degree of learning. Thus, a painter, a
sculptor, an author, an auditor, a lawyer, a doctor, an architect and, even an astrologer
are persons who can be said to be carrying on a profession but not business. The term
profession includes vocation as well [Section 2(36)]. However, it is not material
whether a person is carrying on a business or profession or vocation since for
purposes of assessment, profits from all these sources are treated and taxed alike.
(ii) Business necessarily means a continuous exercise of an activity; nevertheless, profit
from a single venture in the nature of trade would also be assessable under this head if
the venture had come to an end or after the entire cost had been recouped. For example,
where a person had purchased a piece of land, got it surveyed, laid down a scheme of
development, divided it into a number of building plots and sold some of the plots from
time to time, though he would not be charged tax on a notional profit made on the
individual sale of plots, he would be liable to pay tax on the surplus after all the plots
have been sold and the venture has come to an end or after he has recovered the cost of
all the plots and expenditure incidental thereto and has a surplus left.
(iii) Profits may be realised in money or in moneys worth, i.e., in cash or in kind.
Where profit is realised in any form other than cash, the cash equivalent of the receipt
on the date of receipt must be taken as the value of the income received in kind. Capital
receipts are not generally to be taken into account while computing profits under this
head. Payment voluntarily made by persons who were under no obligation to pay
anything at all would be income in the hands of the recipient, if they were received in
the course of a business or by the exercise of a profession or vocation. Thus, any
amount paid to a lawyer by a person who was not a client, but who has been benefited
by the lawyers professional service to another would be assessable as the lawyers
income.

31

(iv) Application of the gains of trade is immaterial. Gains made even for the benefit of
the community by a public body would be liable to tax. To attract the provisions of
section 28, it is necessary that the business, profession or vocation should be carried on
at least for some time during the accounting year but not necessarily throughout that
year and not necessarily by the assessee-owner personally, but it should be under his
direction and control.
(v) The charge is not on the gross receipts but on the profits and gains in their natural
and proper sense. Profits are ascertained on ordinary principles of commercial trading
and commercial accounting. According to section 145, income has to be computed in
accordance with the method of accounting regularly and consistently employed by the
assessee. The assessee may account for his receipts on the cash basis or mercantile
basis.
(vi) The Act, however, contains certain provisions for determining how the income is to
be assessed. These must be followed in every case of business or profession. The
illegality of a business, profession or vocation does not exempt its profits from tax: the
revenue is not concerned with the taint of illegality in the income or its source. Income
is taxable even if the assessee is carrying on the business, profession or vocation
without any profit motive. The liability to tax arises once income arises to the assessee;
the motive or purpose of earning the income is immaterial. Thus, profit motive is not
essential for describing the income from that activity as income from business or
profession.
(vii) The profits of each distinct business must be computed separately but the tax
chargeable under this section is not on the separate income of every distinct business
but on the aggregate profits of all the business carried on by the assessee. Profits should
be computed after deducting the losses and expenses incurred for earning the income in
the regular course of the business, profession, or vocation unless the loss or expenses is
expressly or by necessary implication, disallowed by the Act.
(viii) Income arising from business assets which are temporarily let out e.g., an oil mill,
cinema theatre, hotel, ginning or textile factory, rice mill or jute press would be
assessable as business income. But if the commercial asset is permanently let the
income is taxable as income from house property or income from other sources,
depending on the facts and circumstances of the case.

32

INCOME CHARGEABLE UNDER THIS HEAD [SECTION 28]

The various items of income chargeable to tax as income under the head profits and
gains of business or profession are as under:
(i) Income arising to any person by way of profits and gains from the business,
profession or vocation carried on by him at any time during the previous year.
(ii) Any compensation or other payment due to or received by:
(a) Any person, by whatever name called, managing the whole or substantially the
whole of
(i) The affairs of an Indian company or
(ii) The affairs in India of any other company at or in connection with the termination of
his management or office or the modification of any of the terms and conditions relating
thereto;
(b) any person, by whatever name called, holding an agency in India for any part of the
activities relating to the business of any other person at or in connection with the
termination of the agency or the modification of any of the terms and conditions
relating thereto ;
(c) any person, for or in connection with the vesting in the Government or any
corporation owned or controlled by the Government under any law for the time being in
force, of the management of any property or business; By taxing compensation received
on termination of agency or on the takeover of management (which is a capital receipt)
as income from business, section 28(ii) provides exception to the general rule that
capital receipts are not income taxable in the hands of the recipient.
(iii) Income derived by any trade, professional or similar associations from specific
services rendered by them to their members. It may be noted that this forms an
exception to the general principle governing the assessment of income of mutual
associations such as chambers of commerce, stock brokers associations etc. As a result
a trade, professional or similar association performing specific services for its members
is to be deemed as carrying on business in respect of these services and on that

33

assumption the income arising there from is to be subjected to tax. For this purpose, it is
not necessary that the income received by the association should be definitely or
directly related to these services.
(iv) Profits on sale of a licence granted under the Imports (Control) Order, 1955 made
under the Imports and Exports (Control) Act, 1947.
(v) Cash assistance (by whatever name called) received or receivable by any person
against exports under any scheme of the Government of India.
(vi) Any Customs duty or Excise duty drawback repaid or repayable to any person
against export under the Customs and Central Excise Duties Drawback Rules, 1971.
(vii) Any profit on the transfer of the Duty Entitlement Pass Book Scheme, being Duty
Remission Scheme, under the export and import policy formulated and announced
under section 5 of the Foreign Trade (Development and Regulation) Act, 1992.
(viii) Any profit on the transfer of Duty Free Replenishment Certificate, being Duty
Remission Scheme, under the export and import policy formulated and announced
under section 5 of the Foreign Trade (Development and Regulation) Act, 1992.
(ix) The value of any benefit or perquisite whether convertible into money or not,
arising from business or the exercise of any profession.
(x) Any interest, salary, bonus, commission or remuneration, by whatever name called,
due to or received by a partner of a firm from such firm will be deemed to be income
from business. However, where any interest, salary, bonus, commission or remuneration
by whatever name called, or any part thereof has not been allowed to be deducted under
section 40(b), in the computation of the income of the firm the income to be taxed shall
be adjusted to the extent of the amount disallowed. In other words, suppose a firm pays
interest to a partner at 20% simple interest p.a. The allowable rate of interest is 12% p.a.
Hence the excess 8% paid will be disallowed in the hands of the firm. Since the excess
interest has suffered tax in the hands of the firm, the same will not be taxed in the hands
of the partner.
(xi) Any sum received under a Keyman insurance policy including the sum allocated by
way of bonus on such policy will be taxable as income from business. Keyman
insurance policy means a life insurance policy taken by a person on the life of another

34

person who is or was the employee of the first mentioned person or is or was connected
in any manner whatsoever with the business of the first mentioned person.
(xii) Any sum received or receivable, in cash or kind, on account of any capital asset (in
respect of which deduction has been allowed under section 35AD) being demolished
destroyed, discarded or transferred.

ADMISSIBLE DEDUCTIONS
RENT, RATES, REPAIRS AND INSURANCE FOR BUILDINGS [SECTION 30]

RENT, RATES,
REPAIRS AND
INSURANCE
FOR BUILDINGS

USED FOR
BUSINESS

NOT USED
FOR
BUSINESS

ALLOWED

NOT ALLOWED

REPAIRS AND INSURANCE OF MACHINERY, PLANT AND FURNITURE

[SECTION 31]

35

REPAIRS AND
INSURANCE OF
MACHINERY,
PLANT AND
FURNITURE

USED FOR
BUSINESS

NOT USED
FOR
BUSINESS

ALLOWED

NOT
ALLOWED

DEPRECIATION [SECTION 32]

ASSET
ELLIGIBLE

INTANGIBLE

TANGIBLE

BUILDING

FURNITURE
& FIXTURES

PLANT & MACHINERY

PLANT &
MACHINER
Y

KNOWHOW
PATENTS
COPYRIGHTS
TRADEMARKS
LICENSE
FRANCHISE

36

Plant & Machinery includes Motor Vehicle, Ship, Aircraft, Surgical Equipment,
Scientific Apparatus but does not include Livestock, Tea Bushes, Building, Furniture &
Fixtures
RATE OF DEPRICIATION
A.

BUILDING

TEMPORARY
STRUCTURE

RESIDENTIA
L BUILDING

NORMAL

100%

5%

10%

B. FURNITURE& FIXTURES = 10%

C. PLANT & MACHINERY
i.

MOTOR
CAR

ii.

HIRING
BUSINESS

NORMAL

30%

15%

SHIP = 20%

37

iii.

AIRCRAFT = 40%

iv.

GLASS CONTAINER = 50%

v.

COMPUTER & SOFTWARE = 60%

vi.

BOOKS

ANNUAL
PUBLICATION

LIBRARY
BUSINESS

NORMALLY

100%

100%

60%

vii.

ENERGY SAVING DEVICES = 80%

viii.

POLLUTION CONTROL EQUIPMENT = 100%

ix.

GENERAL RATE = 15%

D. INTANGIBLE ASSET = 25%

38

METHOD OF
DEPRECIATI
ON

FIM

WDV

INDIVIDUA
L ASSET

BLOCK OF
ASSET
SYSTEM

POWER
UNITS

MANDATORY
FOR ALL
ASSESSEE

OTHER
METHODS

NOT
ALLOWED

OPTIONA
L

ASSET
PURCHASED &
PUT TO USE

FOR 180 DAYS

OR MORE

LESS THAN
180 DAYS

FULL
DEPRECIATIO
N

HALF
DEPRECIATIO
N

(VIII) EXPENDITURE ON SCIENTIFIC RESEARCH [SECTION 35]

39

DONATION/
CONTIBUTION
FOR SCIENTIFIC
RESEARCH

TO A
COMPANY
APPROVED
FOR
SCIENTIFIC
RESEARCH

TO NATIONAL
LABORATORY
FOR
SCIENTIFIC
RESEARCH

TO
SCIENTIFIC
RESEARCH
UNIVERSITY
SCIENTIFIC
REASEARCH
COLLEGE

125%

200%

175%

FOR SOCIAL AND

STATISTICAL
REASEARCH

125%

ILLUTRATION

Mr. More gives following P & L A/c for the year ending 31-3-2015:

Particulars

Rs.

Particulars
By Gross Profit

To Rent:
Godown

45,000 By Dividend On Shares

18,000 By Sale Of Import License

Showroom

25,000

Proprietor House

For Export
36,000 By Custom Duty Drawback
By Gifts & Presents From

Factory

Rs.
4,38,000
6,000
30,000

By Cash Compensatory Subsidy

To Insurance:
Factory
Godown

15,000
8,000
7,000

Business Associates
5,000 By Gifts From Father- In- Law
By Interest From Customers For
8,000
Late Payment

2,000
15,000

40

By Amount Received Under

Endowment
Showroom

Life

Insurance

1,00,000

1,00,000
Policy (Including Bonus Rs.
60,000)
By Salary From Partnership Firm

To Municipal Tax:

2,00,000

By Interest On Capital From

Godown

41,000

85,000

Partnership Firm
6,000 By Salary From ABC Ltd.
By Gift From ABC Ltd.

Proprietor House
To Repairs:

50,000
40,000

8,000 By Rent From Subletting

30,000 By Income From Lottery Prize

Factory
Proprietor House
To Insurance Of P&M

7,000

To Insurance Of Furniture

1,000

To Repairs Of P&M

3,000

To Depreciation

35,000

To Scientific Research Expense

20,000

To Sundry Expenses

20,000

To Salary

1,30,000

To Net Profit

5,22,000

4,000
20,000
40,000

Total 10,60,000

Total

10,60,000

Additional information:
1. Depreciation allowed according to income tax amounted to Rs. 40000
2. Salary to son reasonable Rs. 100000
You are required to prepare statement of income from business for the AY 2015-16
SOLUTION:
Name of Assessee: Mr. More
Previous Year: 2014-15
Assessment year 2015-16
Statement of income from business

PARTICULARS
Net Profit As Per P& L

Rs.

Rs.
5,22,000

41

Add: Non- Business Expenses

1. Rent: Proprietors House
2. Municipal Tax: Proprietor House
3. Repairs: Proprietor House
4. Depreciation
5. Salary To Son
Less: Non- Business Income
1. Dividend On Shares
2. Gift From Father In Law
3. Endowment Life Insurance Policy
4. Share In Net Profit From Partnership Firm
5. Salary From ABC Ltd.
6. Gift From ABC Ltd.
7. Rent From Sub-Letting
8. Income From Lottery Prize
Less: Unrecorded Business Expenses
1. Depreciation As Per IT
Taxable Income From Business

36000
6000
30000
35000
30000
6000
2000
100000
50000
40000
4000
20000
40000

137000
657000

(262000)
395000
(40000)
355000

42

CHAPTER 4:-CONCLUSION
CONCLUSION
The taxes are the basic source of revenue for the Government. Revenue raised from the
taxes are utilized for meeting the expense of Government like, provision of education,
infrastructure facilities such as roads, dams etc.
Direct Taxes are taxes that are directly paid to the government by the taxpayer. It is a
tax applied on individuals and organizations directly by the government e.g. income tax,
corporation tax, wealth tax etc.
The term scope of income means which items of income are included and which are
excluded while computing tax liability.
Every payment made by an employer to his employee for service rendered would be
chargeable to tax as income from salaries. The term salary for the purposes of tax will
include both monetary payments (e.g. basic salary, bonus, commission, allowances etc.)
as well as non-monetary facilities (e.g. housing accommodation, medical facility,
interest free loans etc). The tax payable by an assessee on his income under the head of
income from business and profession is in respect of the profits and gains of any
business or profession, carried on by him or on his behalf during the previous year.

43

CHAPTER 4:- BIBLIOGRAPHY & REFERENCES

BIBLIOGRAPHY
Direct Tax-Manan Prakashan
https://in.finance.yahoo.com/news/basics-explained--what-are-direct-and-indirect-taxes

064840748.html
http://www.investopedia.com/terms/d/directtax.asp#ixzz3lXLBu3hV
http://www.investopedia.com/terms/i/incometax.asp#ixzz3lXNaWKEk
http://keydifferences.com/difference-between-direct-tax-and-indirect-tax.html
http://kalyan-city.blogspot.in/2010/12/direct-taxes-meaning-merits-and.html
http://www.dvsca.net/admin/pdffiles/13597250832-Scope%20of%20Total%20Income
%20and%20Residential%20status.pdf

http://www.icaiknowledgegateway.org/littledms/folder1/chapter-4-income-fromsalaries.pdf
http://www.icaiknowledgegateway.org/littledms/folder1/chapter-6-profits-and-gains-ofbusiness-or-profession.pdf

REFERENCES

The weblography from which we have collected information are:-

o
o
o
o
o
o

www.google.com
www.askme.com
www.wikipedia.com
www.wikiaskme.com
www.shareslied.com
www.scribd.com

44