Chapter 1

Basic concepts
There are basically two types of taxes i.e. direct taxes and indirect taxes
Direct tax: - It is a tax where the person cannot shift the incidence of tax
where as
Incase of Indirect tax, the incidence can be shifted from one person to
another.

Income tax is direct tax i.e. a person earning income has to pay the tax
himself; he cannot shift his incidence to any other person (Exception in
middle – east countries)
In India, income tax is levied as per the provision of income tax
act 1961. The provision of this act is applicable through out India.
However the income tax slabs and rates are subject to change every year
based on the budget.
Income tax is a central based tax i.e. payable to the central government.

DEFINITIONS:-
• Previous Year: - Sec 3 of Income tax Act 1961, defines
Previous year as the year as the year in which a person has earned
income. The relevant previous year is 1 April 09 – 31 March 10
st st

Generally previous year will be for a period of 12 months, However

in certain cases, it may be for a period less than 12 months i.e. if a
person has joined service newly during the previous 2009-10*
started business newly during 08-09 or he is leaving India during
09-10.

EXCEPTION TO THE GENERAL RULE OF PREVIOUS YEAR

Normally Income earned by a person during the Previous Year is
assessable to tax during the next year; however there are certain
exceptions for this rule
1. Income of non-resident from shipping
2. Income of a person leaving India either permanently or for a
longer period of time
3. Income of bodies formed for short duration
4. Income of discontinued business
Previous Year is also called as “financial year or accounting year “

Assessment Year
Sec 2(a) of Income tax Act 1961, defines as assessment year as
“the period starting from 1 April and ending on 31 march of the
st st

next year. This is the year in which the income of a person is

assessed to tax.
The relevant assessment year 01-04-10 to 31-03-11” . It is also
called as “current Year “. Assessment year will be for a period of 12
months only.
 PERSON:-
Sec 2(31) of the Act, defines the term person to include:-
a. An Individual
b. A HUF
c. A Firm
d. A Company
e. An Association of person or Body of Individual whether
incorporated or not.
f. A Local Authority (BDA)
g. Every artificial jurisdiction person (University) not falling within
any of the preceding category.

ASSESSEE:-
Sec 2(7) defines assessee “as 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 the income or loss or any refund due to him.

Income:-
Sec 2(24) defines the term income “In general words, income is a
periodical monetary return with some sort of regularity. It may be broadly
defined as the true increase in the amount of the wealth which comes to a
person during a fixed period of time. However sec 2 (24) specifically
includes the following under the term income:-
a. Profits and gains
b. Dividend
c. Voluntary Contribution received by a trust
d. Perquisites in the hands of an employee (e.g. LTC in addition
to the salary )
e. Any special allowance or benefit
f. Gift received (exceeding Rs 50000)

Gross Total Income

As per Sec-14, income of a person is compound under the
following 5 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 all these five heads is considered as Gross
Total income .

Agricultural Income:-
Sec-10(1) exempts agricultural income tax
Agricultural Income means:-
a. Any rent or revenue derived from land.
 b. Any income derived from land by agricultural operations
including processing of agriculture , produced, raised or received as
rent in kind so as to render it fit for the market
c. Income attributable to a farm house
d.
Examples of non –agricultural income
1. Interest on arrears of rent in respect of agricultural land.
2. Income from sale of forest trees fruits and flowers grown on
land naturally spontaneously without human intervention
3. Income from sale of wild grass of spontaneous Growth
4. Interest received by a money lender in the form of agricultural
produced.
5. Income from fisheries
6. Commission earned by the land lord for selling agricultural
produce

Examples of agricultural income

1. Profit on sale of standing crop or the produce after harvest by
cultivating owner or tenant of land.
2. Income from growing flowers and creepers rent for
agricultural land received from sub tenants by (mortgage) in
possession.
3. Interest on capital received by the partner from the firm
engaged in agricultural operation

Capital income:-

Capital and revenue receipts

Revenue receipts are those received by a person at
some regular interval whereas capital receipts are those which are not
received at regular interval, however the distinction between capital and
revenue depends mainly on the type of activity a person is engaged is
normally only revenue receipts are taxed but under the head capital gains
we tax capital receipts also

Residential status and tax incidence:

Determination of residential status of a person is very essential in
order to determine the tax incidence. To find out on what income a person
has to be taxed, determining the residential status becomes vital

Residential status of an individual:

An individual & residential status:
a. Resident and ordinary resident
b. Resident and not ordinary resident
c. Non resident
To determine whether an individual is a resident or not, certain basic
condition are checked

Basic Condition:-
1. He should be in India for a period of 182 days or more during
the previous year.
2. He should be in India for a period of 60 days or more during
previous year and 365 days during 4 year preceding the relevant
previous year
If an individual satisfies any of the above condition. He is declared as a
resident in India.

Exception to the 2 basic condition

nd

The number of 60 days mentioned in the 2 basic condition will

nd

be extended to 182 days in the following cases:-

a. If an Indian citizen or a person of Indian origin comes on a visit
to India, during the previous year 2008-2009 the number of 60 days
is increased to 182 days
A person of Indian origin means either he or his parents or
grandparents (maternal or paternal) are from undivided India
b. An Indian citizen leaves India during the previous year 2008-09
for the purpose of employment or as a member of the crew of an
Indian ship; the no. of 60 days is extended to 182 days.

Additional condition:
To determine whether a resident individual is ordinarily resident or not we
check the additional conditions.
a. He is resident in India for 2 out of 10 previous Year preceding
the relevant previous year
b. He is in India for a period of 730 days or more during 7 Years
proceeding the relevant previous year.

If an Individual satisfies both the above conditions, he becomes an

ordinary resident

1 Basic + 2 Additional Condition = R + OR

1 Basic +0/1 Add. Condition = Resident but not ordinarily resident
0 Basic condition = Non Resident

Question 1
Mr. x left India for the first time 20.05.06 during the financial year 08-09.
He came to India once on 27 may for a period of 53 days. Determine his
th

residential status.
Question 2
Mr. x comes to India for the 1st time on 16 April 06. During his stay up to
th

5 Oct 08, he stays at Delhi up to 5 April 08 and thereafter remains in

th th

Chennai till his departure from India. Determine his residential status for
the assessment year 09-10?
Question 3
Mr. x is an Italian citizen who comes to India for the first time (after 20
years) on the 28 may 08 and stays up to 5 Dec 08. Determine the
th th

residential status for assessment year 09-10

Question 4
Mr. x a foreign citizen (not being a person of Indian origin) comes to India
for the 1 time in the last 30 years on 20.03.08. On 01.09.08, he leaves
st

India for Nepal on a business trip. He comes back to India on 26 Feb 09. th

Determine the residential status for assessment year 09-10

Question 5
Mr. x a German tourist comes to India for the first time on 17.05.08, and
he leaves India on 15 Sep 2008 Determine his residential status for the
th

assessment year 2009-10? Does it make any difference if he comes to

India on a business trip or if he is an Indian citizen?
Question 6
Mr. x a foreign citizen comes to India for the 1 time on June 20 08. On 6
st th th

Sept 08, he leaves for Burma. On a business trip. He comes back on 1 Jan st

09. He maintains a dwelling place in India from the date of his arrival in
india (June 20 08 – 15 Jan 09) when he leaves for Kuwait. Determine his
th th

residential status for assessment year 09-10. Does it make any difference
if x is a person of Indian Origin?

Question 7
Mr. x a foreign citizen (not a person of Indian origin) leaves India for the 1 st

time in the last 20 years on 20.11.06. During the calendar year 07, he
comes to India on 1 Sept for 30 days. During the calendar year 2008, he
st

doesn’t visit India at all but comes to India on 16.01.09. Determine his
residential status for assessment year 2009-10.
INCIDENCE OF TAX

I. In case of Resident & Ordinarily resident in India

a. Income which is received or deemed to be received in
India in the previous year whether accrued or arose anyway
b. Income which arises or accrues or which is deemed to
accrue or arise in India during the previous year whether
received anyway.
c. Income which accrues or arises to a person outside India
(any income which is earned and received outside India)
II . In Case of Resident but not ordinarily resident in India
a. Income which is received or deemed to be received in India in
the previous year whether accrued or arose anyway
b. Income which arises or accrues or which is deemed to accrue
in India during the previous year whether received anyway.
 c. Income accrues or arises to a person outside India from a
business control from India or a Profession set up in India
III Incase of Non resident in India:-
a. Income which is received or deemed to be received in India in
the previous year whether accrued or arose any way
b. Income which arise or accrue or which is deemed to accrue or
arise in India during the previous year whether received anyway

Meaning of some Important Concepts:-

1. Deemed to be received :-
It means that the income has not actually been received but it is
assumed or deemed to be received Under the Income Tax Act 1961
Eg. i. Dividend declared but not yet received.
ii. Annual accretion to the recognized provident fund in Excess of
9.5%
iii. Excess contribution of employer incase of RPF (Recognized
Provident Fund)
2. Accrue or Arise:-
An Income is said to be accrue or arise when a person gets a right
to receive.
E.g. An interest on deposit account has been credited in the bank in
a name of a person
3. Deemed to accrue or arise
Sec –9 provides that certain incomes which are deemed to accrue
or arise in India even though they actually arise and accrue outside India
It taxable in the hands of all assesses irrespective of residential status
nationality domicile or place of business
E.g.
a. Income from business connection derived outside India.
b. Salary payable abroad to a citizen of India, for services
rendered out of India.
c. Dividend paid by an Indian company outside India,
d. Income earned through transfer of Capital Assets by non-
resident (when Capital Asset is in India.)

Note:-
Any Gift received by a person being Individual or H.U.F. from a person
other than relative or other than by will or “Inheritance” will be exempt to
an aggregate amount of Rs 50000
If an aggregate amount of such gift exceeds Rs 50000 the entire amount
will be Taxable.

Problems on incidence of tax

Question 1
Following are the taxable income of shri ralan chand for
the previous year 2008-
09:-
Income from salary accrued and received from India – Rs. 20,000
Profit of a hotel Business in Germany – Rs. 30,000
Dividend declared in Iran but received in India – Rs. 4,000
Income from a transfer of long term capital asset in India – Rs. 20,000
Interest on debentures of a company accrued in Manchester – Rs. 6,000
received in India.
Interest received from Mr. Philip a non resident on loan provided to him
for a business carried on in India – Rs. 5000.
Royalty received in Germany in Germany from shri kailash a resident in
india for a business carried on in germany Rs. 20,000.
Fees from an Indian company carrying on business at London having been
directly deposited by the company in his bank account in india – Rs.
30,000.
Compute the total income of shri rata chand for the assessment
year 2007-08 if he is: - (1) resident and non resident (2) resident but not
ordinary resident (3) non resident.

Question 2
Mr. Prasad came to India for the 1 time after a period of 12 years on 1
st st

Feb’08. Determine his residential status and calculate his total income for
the assessment year 2009-10 from the following particulars.
Salary for three months received in India (cumulative RS. 9,000)
Dividends received in Germany from British companies out of which Rs.
3,000 was remitted in India – Rs. 22,000.
Income from business in Pakistan being controlled from India – Rs. 10,000.
Interest on savings bank deposit in SBI Rs. 1,000.
Amount brought in India out of past untaxed profit earned in Japan –
20,000.
Income from house property in India (computed Rs. 3,400).
Question 3
Following are the particulars of taxable income of Mr. Arora for the
previous year ended on 31.03.09.
Royalty received from govt. of India – Rs. 24,000.
Income from business earned in Afghanistan rs. 25,000 of which 15,000
was received in India, business controlled from India.
Interest received from Shri aditya kumar a non resident against a loan
provided to him to run a business in India - Rs. 5000.
Royalty received from shri Abdul a resident for technical services provided
to run a business outside India – Rs. 20000.
Income from business in jaipur Rs 40000. This business is controlled from
France. Rs. 20000 was further remitted to France.
Gift from a friend – Rs. 55000
Compute the GTI of Mr. Arora for assessment year 08-09 if he is (1)
resident and ordinary resident (2) resident but not ordinary resident (3)
non resident
Question4
For the assessment year 2009-10 Mr. x receives the following incomes.
Royalty earned in India but received on 3 may 08 in Nepal Rs. 46000.
rd

Dividend from a foreign company received in Nepal on 16.07.08 - Rs.

56000
Share of profit of a business situated in Nepal received in Burma on
14.06.08 but controlled from India – Rs. 42000.
Rent of 2008-09 of a house property situated in Nepal and received there
on 31 Dec 07 – Rs. 165000.
st

Speculation profit earned and received outside India on 15.04.09 – Rs.

60000.
Determine the gross total income of Mr. X for assessment year 09-10
if he is (1) resident and ordinary resident (2) resident but not ordinary
resident (3) Non resident.
Question 5
Mr. X furnishes the following particulars of his income earned during the
previous year relevant to the assessment year 09-10.
Interest on German development bond – Rs. 60000. (2/5 is received in
th

India).
Income from agriculture in Bangladesh received there but Rs. 50000 is
remitted to India. (Agricultural activity is controlled from Bangladesh) – Rs.
181000.
Income from property in Canada received outside india (Rs. 16000 is used
in Canada for meeting educational expenses of his daughter in USA and
Rs. 10000 is later on remitted to india) – Rs. 86000.
Income from earned from business in Kampala which is controlled from
Delhi (Rs. 15000 is received in India) – Rs. 65000.
Dividend paid by a foreign company but received in India on 10 April 08 –
th

Rs. 46500.
Post untaxed profit of 98-99 brought to India in 2008-09 – Rs. 1043000.
Profit from a business in madras and managed from outside India – Rs.
27000.
Profit on sale of a building in India but received in Sri Lanka is Rs.
1480000.
Pension from a former employee in India received in Rangoon Rs. 36000.
Gift in foreign currency from a friend received in India on 20.01.09 – Rs.
80000. Find out the gross total income of x if he is (1) resident and
ordinary resident (2) resident but not ordinary resident (3) non resident.

Question 6
Mr. Shri Ram a foreign national gives the following particulars of his
income for the previous year 2008-09.
Income from house property in New York received there – Rs. 120000.
Income from business in Kolkata managed from Singapore Rs. 240000.
Profit on sale of machinery in California (one half is Kolkata) – Rs. 90000.
Dividend received in Thailand from a company registered in India but
mainly operating in Thailand. – Rs. 15000.
Income from house property in Dhaka deposited by the tenant there in a
foreign bank of SBI. – Rs. 36000.
Gift in foreign currency Rs. 350000 from a relative (1/2 is received in india
and the balance used in New York).
Income from agriculture in Burma – Rs. 45000 received there. (1/3 was
used while visiting there and 2/3 remitted to Kolkata).
rd

Income from profession as a management consultant in Japan and

received there. The profession was setup in India. – Rs. 220000.
Compute his total income if he is (1) resident and ordinary resident
(2) resident but not ordinary resident (3) non resident.

Question 7
Mr. Prasad has the following incomes for the year ending 31.03.2009.
Income from salary in India from a company Rs. 50000.
Dividend from an Indian company received in England and deposited in a
bank there. – Rs. 1000.
Income from house property in India received in Pakistan. – Rs. 20000.
Dividend from a foreign company received in England and deposited in a
bank there. – Rs. 10000.
Income from a business in Kolkata managed from U.S.A – Rs. 20000.
Income from business in U.S.A. controlled from Kanpur head office. – Rs.
12000.
Income was earned in Australia and received there but brought to India. –
Rs. 25000.
His maternal uncle sent a draft from France as a gift to him on his
marriage. – Rs. 20000.
Compute the gross total income (1) resident and ordinary resident (2)
resident but not ordinary resident (3) non resident.
Mr. Anand furnishes the following particular of his income during the p. yr
07-08
Interest on American development bonds (1/3 is received in India) – Rs
rd

51000/-
Income from agriculture from Bangladesh and remitted to India – Rs
31,000/-
Income from property in Canada received in USA – Rs 1, 10,000/-
Income earned from business in Kuwait business being controlled from
India. – (Rs. 25000 received in India) – Rs. 65000.
Dividend from an Indian company Rs. 15000.
Royalty received in Singapore from Mr. David a resident of india for
technical services provided for a business carried on in Singapore. – Rs.
25000.
Profit from a business in Chennai this business. This business is controlled
from Singapore. –Rs. 125000.
Profit on a sale of building in India but received in Nepal. –Rs. 250000.
Income from agriculture in Punjab received in Mumbai. –Rs. 30000.
Profit from business in Indonesia. This business is controlled from Delhi.
60% of the profit deposited in a bank there and 40% is remitted to India.
Rs. 40000.
Interest received from Mr. dayal a non resident on the loan provided to
him for his business in India. –Rs. 28000.
Compute his gross total income if he is (1) resident and ordinary resident
(2) resident but not ordinary resident (3) non resident.

PROFFESIONAL INCOME
Meaning:-
As per Sec2 (36) Profession includes Vocation. The word profession
implies professed attainment in special knowledge as distinguished from
mere skill ; special knowledge which is to be acquired only after patient
study and application.

Methods of maintaining books of a/c

There are two main methods of accounting:-
a.) Mercantile System
b.) Cash system

Under mercantile system of accounting profit or loss is calculated

after taking into consideration all Income and expenditure of a particular
accounting year, irrespective of the fact whether income is received or
expenditure is paid during the accounting period.
Cash system of accounting:-
Under cash system of accounting Income is taxed during
accounting period if it is received during that period , irrespective of
whether it belongs to the previous year or not. Similarly expenditure is
allowed during a particular accounting period , if it is paid during that
period, irrespective of whether it belongs to the previous year or not.

Performa:- Income & Expenditure a/c

Particular Amount
 Excess of Income Over Expenses ******

Add: Non Professional Expenses ******

Less: Non Professional Income ******

Taxable Professional Income ******

Receipts & Payment a/c

Add: Professional income ***********

Less: Professional Expenses ***********

Taxable Professional Income ************

Question 1.
Mr. Ravi a reputed lawyer has prepared the following income and
expenditure a\c for year ended 31.03.09.
Particulars Rs. Particulars Rs.
House hold expenses 12000 Legal fees 126000
Office expenses 7000 Special commission 5000
Appointment fees
Charity 500 Cash gifts from clients 3000
Telephone expenses 2000 House rents 15000
Income tax 1000 Interest on govt. security 3000
Rent 4000
Electricity charges 1000
Donation to national 1000
defense fund
Books for profession 3000
(annual publication)
Salary 15000
Purchase of car 60000
Life insurance premium 5000
Car expenses 6000
Excess of income over 34500
expenditure
152000 152000
 He gives you the following additional
information:-
He lives ½ of the house and the other half is used for office. Rent and
electricity charges are in respect of this house.
½ of his car expenses are for his personal use.
Compute his taxable income for profession for assessment year 2009-10.
Question 2.
Dr. Dipti is a leading doctor who maintains her books of a/c on cash basis
Furnishes the following receipt and payment a/c for the financial year
2008/09.
Receipts Rs. Payments Rs.
To balance b/d 10000 Salaries 25000
Progressional fees 100000 Magazines subscription 3000
Dividend from an Indian 9000 Car expenses 20000
company
Share from h.u.f. 11000 Purchase of scanning 50000
machine
Share of profit from a 15000 Income tax 5000
partnership firm
Professional tax 2000
House property
expenses:
a)Taxes 6000
b)Repairs 3000
c)Interest on loan 18000
9000
balance C/d 22000
145000 145000
Compute her professional income after taking into a/c the following
info.
30% of car expenses are in respect of personal use
Scanning machine was purchased on 10.10.08
She stays in her house of which 1/3 is used as her clinic
rd

Question 3.
Dr. Arvind is a medical is a medical professional. Receipts and payments
for the financial year ending 31.03.09 is as under.
Particulars Rs. Particulars Rs.
To balance b/d 1,30,000 Clinic expenses 1.24,000
Visiting fee 75000 Medical books purchase 15000
and put to use on
01.07.08
Consultation fee 9,15,000 Surgical equipment 90000
Sale of medicine 28000 Car expenses 36000
Operation theatre rent 18000 Indian medical 7000
association membership
fee
Dividend from 22000 Payment to auditor for 4000
 domestic company filing income tax return
Bank loan for 2,00,000 Entertainment expenses24000
purchasing of flat
Life insurance policy 1,00,000 Purchase of medicine 33000
(maturity proceeds)
Rent from flat 60,500 Purchase of flat 2,80,000
Bank interest 30000
Balance c/d 9.05.500
15,48,500 15,48,500
Additional information:
A cash payment of Rs. 75000 was given to him by a patient in
appreciation of his medical services but was not recorded in the book.
1/3 of car expenses relate to his personal use, depreciation on car
rd

allowable under income tax act for professional use is Rs. 12000.
Surgical equipments were purchased on 01.01.08 and they were put to
use on the same day.

Question 4
The following is the receipts of payments a/c of Dr Laxmi year ending
31.03.09.

Balance b/d 20000 Rent of clinic 18000

Sale of medicine 40000 Staff salary 82000
Consultation fee 100000 Purchase of medical books10000
Visiting fees 120000 Purchase of surgical 25000
equipments
Rent from building let out 20000 Medicines purchased 30000
Dividends 20000 Car expenses 30000
Audit fees 20000
General expenses 25000
Medical association 4000
Balance c/d 76000
3,20,00 3,20,00
0 0
Additional information:
1/3 of car expenses relate to her personal use
rd

Depreciation allowed as per income tax act on car Rs.

9000
Wad of surgical equipment brought forward from earlier year Rs. 25000.
She sold.
Equipment for Rs. 10000 during the previous year computes her income
from profession.
Question 5
Mr. d is a leading tax consultant who maintains his books account on cash
basis furnishes the following receipts and payments a/c for the previous
year 08-09.
Compute his taxable income.
Receipts Rs. Payments Rs.
 Balance b/d 22000 Books purchased (other 12,000
books)
Fees from clients 09- 1,50,00 Computer purchased 30,000
10 0
Fees from client 08-09 33000 Car expense 18000
Gifts and presents 25000 Office expenses 40000
Interest from loan from a 2,40,00 Salary to staff 08-09 32000
client for purchase for a 0
car
Winning from lottery 46000 Salary to staff 09-10 8000
Share from H.U.F. 70,000 Car purchased (10 th
3,00,000
dec’08)
Bonus of comm. From a 14000 Income tax 5000
partnership firm In which
he is a partner
Professional tax 3000
Medical insurance 2000
premium
Balance c/d 1,50,000
600,000 6,00,000
Additional information:
Car is used partly for official use. (40%)
Gifts and presents include Rs. 5000 received from a client
Office expenses include Rs. 5000 paid as salary to his wife who casually
helps in office.
Question 6
Dr. Mahesh is a medical practitioner. Besides his own practice, he works
as a part time physician in a private hospital for which he receives a
monthly remuneration. He is also consultant physician of P co. ltd. on a
monthly retainer fee. The following is abstract of receipts and payments
a/c for year ended 31.03.09.
RECIEPTS
Consultation fee- Rs. 3, 20,000
Gross remuneration from hospital- Rs. 48000
Retainer fee from P Co. ltd. –Rs. 12000
Interest on bank deposit

PAYMENTS
Rent and electricity charges for the clinic. –Rs. 24000.
Telephone charges –Rs. 4800.
Printing and stationary. –Rs. 1500.
Car maintenance expense. – Rs. 24000
Wages of clinical assistance. _Rs. 7200.
Driver’s salary. –Rs. 7200
Life insurance premium. – Rs. 4800
The W.D.V. of car and furniture at the clinic as on 31.03.09 were Rs.
25,000 and Rs. 6000 respectively.
20% of car and telephone is attributable for personal use.
Compute the professional income for the assessment year 09-10.