Income Tax Act 1961

Income-tax is the most significant direct tax. Entry 82 of the Union List i.e., List I in the Seventh Schedule to
Article 24
6 of the Constitution of India has given the power to the Parliament to make laws on taxes on income other than
agricultural income.

It came into force on 1st April, 1962.

It contains 298 sections and XIV schedules.
Income-tax Rules, 1962
The administration of direct taxes is looked after by the Central Board of Direct Taxes (CBDT).
• The CBDT is empowered to make rules for carrying out the purposes of the Act.
• For the proper administration of the Income-tax Act, 1961, the CBDT frames rules from time to time. These
rules are collectively called Income-tax Rules, 1962.
• It is important to keep in mind that along with the Income-tax Act, 1961, these rules should also be studied.

Circulars
• Circulars are issued by the CBDT from time to time to deal with certain specific problems and to clarify
doubts regarding the scope and meaning of certain provisions of the Act.
• Circulars are issued for the guidance of the officers and/or assessees.
• The department is bound by the circulars. While such circulars are not assessees, they can take advantage
of beneficial circulars.
Notifications
• Notifications are issued by the Central Government to give effect to the provisions of the Act.

Case Laws

Imp Definitions

Person
• an individual
The term ‘individual’ means only a natural person, i.e., a human being.
 It includes both males and females.
 It also includes a minor or a person of unsound mind. But the assessment in such a case may be
made on the guardian or manager of the minor or lunatic who is entitled to receive his income.
 In the case of deceased person, assessment would be made on the legal representative.
• a Hindu undivided family
Members of the HUF are called co-parceners. Head of the family is known as “Karta”.
• a company
• a firm
• an association of persons or a body of individuals whether incorporated or not:
• a local authority:
• every artificial, juridical person, not falling within any of the above categories

Assessment year
This means a period of 12 months commencing on 1st April every year. The year in which income is earned is the
previous year and such income is taxable in the immediately following year which is the assessment year. Income
earned in the previous year 2018-19 is taxable in the assessment year 2019-20.
Previous year
It means the financial year immediately preceding the assessment year.

Certain cases when income of a previous year will be assessed in the previous year itself

Rate of Taxes

1. Individual/ Hindu Undivided Family (HUF)/ Association of Persons (AOP)/ Body of Individuals
(BOI)/ Artificial Juridical Person

Rate Resident below 60 Senior Citizen Super Senior HUF / AOP / BOI /
years / Non Resident (Resident above 60 Citizen (Resident above AJP/ Private trusts,
years of age) 80 years of age) political parties

Nil Up to 2,50,000 Up to 3,00,000 Up to 5,00,000 Up to 2,50,000

2,50,001 to 3,00,001 to 5,00,000 2,50,001 to

5% -
5,00,000 5,00,000
5,00,001 to 5,00,001 to 5,00,001 to 5,00,001 to
20%
10,00,000 10,00,000 10,00,000 10,00,000
30% Above 10,00,000 Above 10,00,000 Above 10,00,000 Above 10,00,000

2. Firm/ LLP- 30%

3. Local Authority- 30%
4. Co-operative society-
Upto 10000 10%
10001-20000 20%
Exceed 20000 30%

5. Company
In case of Domestic Company
If the total turnover or gross receipt in the P.Y.2016-17 ≤ 250 crore 25%
In other case 30%
Section 115BA provides that, notwithstanding anything contained in the Act, the income-tax payable in
respect of the total income of a domestic company for any previous year relevant to A.Y.2017-18 and
thereafter, shall be computed @25%, subject to the other provisions of Chapter XII, at the option of the
 company, if,
i. the company has been setup and registered on or after 1st March, 2016;
ii. the company is not engaged in any business other than the business of manufacture or production
of any article or thing and research in relation to, or distribution of, such article or thing
manufactured or produced by it; and
iii. the company while computing its total income has not claimed any benefit.

In Case of Foreign Company – 40%

Surcharge

Rebate U/S 87A

Rebate of Rs 2500 if the Total Income is up to Rs 350000.
Note: Rebate under section 87A is, however, not available in respect of tax payable @10% on long-term capital
gains taxable under section 112.

“Health and Education cess” on Income-tax

“Health and Education cess on income-tax”, calculated at the rate of 4% of such income-tax and surcharge, if
applicable. Education cess is leviable in the case of all assessees i.e. individuals, HUF, AOPs/ BOIs, firms, local
authorities, cooperative societies and companies.
Residential status and tax incidence
The incidence of tax on any assessee depends upon his residential status under the Act. For all purposes of income-
tax, taxpayers are classified into three broad categories on the basis of their residential status viz.
(1) Resident and ordinarily resident
(2) Resident but not ordinarily resident
(3) Non-resident

Residential status of Individuals

An individual is said to be resident in India in any previous year, if he satisfies any one of the following
conditions:
(i) He has been in India during the previous year for a total period of 182 days or more,
or
(ii) He has been in India during the 4 years immediately preceding the previous year for a total period of
365 days or more and has been in India for at least 60 days in the previous year.
If the individual satisfies any one of the conditions mentioned above, he is a resident. If both the above conditions
are not satisfied, the individual is a non-resident.
Case (i) (ii) Status
1 Yes No Resident
2 NO Yes Resident
3 Yes Yes Resident
4 NO No Non Resident

Exceptions:
The following categories of individuals will be treated as resident in India only if the period of their stay during the
relevant previous year amounts to 182 days. In other words, even if such persons were in India for 60 days or
more (but less than 182 days) in the relevant previous year, they will not be treated as resident due to the reason
that their stay in India was for 365 days or more during the 4 immediately preceding years.
i. Indian citizens, who leave India during the relevant previous year as a member of the crew of an Indian
ship or for purposes of employment outside India, or
ii. Indian citizen or person of Indian origin engaged outside India in an employment or a business or
profession or in any other vocation, who comes on a visit to India in any previous year
An individual is said to be a resident and ordinarily resident if he satisfies both the following conditions:
(i) He is a resident in any 2 out of the last 10 years preceding the relevant previous year, and
(ii) His total stay in India in the last 7 years preceding the relevant previous year is 730 days or more.

If the individual satisfies both the conditions mentioned above, he is a resident and ordinarily resident but if only
one or none of the conditions are satisfied, the individual is a resident but not ordinarily resident.

Residential status of HUF

Resident: A HUF would be resident in India if the control and management of its affairs is situated wholly or partly
in India.
Non-resident: If the control and management of the affairs is situated wholly outside India it would become a non-
resident.

Resident and ordinarily resident/ Resident but not ordinarily resident in case of HUF
If Karta of resident HUF satisfies both the following additional conditions (as applicable in case of individual) then,
resident HUF will be Resident and ordinarily resident, otherwise it will be Resident but not ordinarily resident.
Additional conditions:
1. Karta of resident HUF should be resident in at least 2 previous years out of 10 previous years immediately
preceding relevant previous year.
2. Stay of Karta during 7 previous years immediately preceding relevant previous year should be 730 days or more.
Residential status of companies
A company would be resident in India in any previous year, if
(i) it is an Indian company; or
(ii) its place of effective management, in that year, is in India.
“Place of effective management”(POEM) to mean a place where key management and commercial decisions that are
necessary for the conduct of the business of an entity as a whole are, in substance made.

Scope of Total Income

Section 5 provides the scope of total income in terms of the residential status of the assessee because the incidence
of tax on any person depends upon his residential status.

Scope of Total Income Resident and Resident but not Ordinarily Resident Non-
Ordinarily (R & NOR) Resident
Resident (ROR)

Income received or deemed to Yes Yes Yes

be received in India during the
previous year

Income accruing or arising or Yes Yes Yes

deeming to accrue or arise in
India during the previous year

Income accruing or arising Yes Yes, but only if such income is derived No
outside India during the previous from a business controlled in or
year profession setup in India, Otherwise NO
Exempted Incomes
10(1) Agricultural Income

Section 10(1) provides that agricultural income is not to be included in the total income of the assessee. The reason
for totally exempting agricultural income from the scope of central income tax is that under the Constitution, the
Central Government has no power to levy a tax on agricultural income.

Agricultural income may arise in any one of the following three ways:

(i) It may be rent or revenue derived from land situated in India and used for agricultural purposes.

(ii) It may be income derived from such land by

a) agriculture or
b) the performance of a process ordinarily employed by a cultivator or receiver of rent in kind to
render the produce fit to be taken to the market or
c) the sale of such agricultural produce in the market.

(iii) Lastly, agricultural income may be derived from any farm building required for agricultural operations.

Note: The term ‘agriculture’ cannot be extended to all activities which have some distant relation to land like dairy
farming, breeding and rearing of livestock, butter and cheese making and poultry farming.

Whether income from nursery constitutes agricultural income? Yes

Apportionment of income in business income and agricultural income

Rule Apportionment of income in certain cases Agricultural Business

Income Income
7A Income from growing and manufacturing of rubber 65% 35%
7B Income from growing and manufacturing of coffee

Income derived from the sale of coffee grown and cured 75% 25%

Income derived from the sale of coffee grown, cured, roasted and 60% 40%
grounded

8 Income from growing and manufacturing of tea 60% 40%

Certain income which is treated as Agriculture Income:

a) Income from sale of replanted trees.
b) Rent received for agricultural land.
c) Income from growing flowers and creepers.
d) Share of profit of a partner from a firm engaged in agricultural operations.
 e) Interest on capital received by a partner from a firm engaged in agricultural operations.
f) Income derived from sale of seeds.

Certain income which is not treated as Agricultural Income:

a) Income from poultry farming.
b) Income from bee hiving.
c) Income from sale of spontaneously grown trees.
d) Income from dairy farming.
e) Purchase of standing crop.
f) Dividend paid by a company out of its agriculture income.
g) Income of salt produced by flooding the land with sea water.
h) Royalty income from mines.
i) Income from butter and cheese making.
j) Receipts from TV serial shooting in farm house is not agriculture income.

Partial integration of agricultural income with non-agricultural income

It is applicable to individuals, HUF, AOPs, BOIs and artificial juridical persons. Two conditions which need to be
satisfied for partial integration are:

1. The net agricultural income should exceed Rs 5,000 p.a., and

2. Non-agricultural income should exceed the maximum amount not chargeable to tax. (i.e., Rs 5,00,000 for
resident very senior citizens, Rs 3,00,000 for resident senior citizens, Rs 2,50,000 for all others).

Tax calculation in such cases is as follows:

 Step 1: Add non-agricultural income with net agricultural income. Compute tax on the aggregate amount.
 Step 2: Add net agricultural income and the maximum exemption limit available to the assessee (i.e., Rs
2,50,000 / Rs 3,00,000/ Rs 5,00,000). Compute tax on the aggregate amount.
 Step 3: Deduct the amount of income tax calculated in step 2 from the income tax calculated in step 1 i.e., Step
1 – Step 2.
 Step 4: The sum so arrived at shall be increased by surcharge, if applicable. It would be reduced by the rebate
if any available u/s 87A.
 Step 5: Thereafter, it would be increase by health and education cess @4%.

(2) Amounts received by a member from the income of the HUF [Section 10(2)]
(3) Share income of a partner [Section 10(2A)]
(4) Payments to Bhopal Gas Victims [Section 10(10BB)]
(5) Compensation received on account of disaster [Section 10(10BC)]
(6) Payment from Sukanya Samriddhi Account [Section 10(11A)]
(7) Educational scholarships [Section 10(16)]
(8) Payments to MPs & MLAs [Section 10(17)]
(9) Awards for literary, scientific and artistic works and other awards by the Government [Section 10(17A)]
(10) Pension received by recipient of gallantry awards [Section 10(18)] Eg Param Vir Chakar
(11) Annual value of palaces of former rulers [Section 10(19A)]
(12) Income of local authorities [Section 10(20)]
(13) Income of research associations approved under section 35(1)(ii)/(iii) [Section 10(21)]
(14) Income of news agency [Section 10(22B)]
(15) Income of professional associations [Section 10(23A)]
(16) Income of institutions established by armed forces [Section 10(23AA)]
(17) Income of Funds established for welfare of employees of which such employees are members [Section
10(23AAA)]
(18) Income of Fund set up by Life Insurance Corporation or other insurer under pension scheme [Section
10(23AAB)]
(19) Income of institution established for development of Khadi and Village industries [Section 10(23B)]
(20) Income of authorities set up under State or Provincial Act for promotion of Khadi and Village Industries
[Section 10(23BB)]
(21) Income of authorities set up to administer religious or charitable trusts [Section 10(23BBA)
(22) Income of the IRDA [Section 10(23BBE)]
(23) Income of Central Electricity Regulatory Commission [Section 10(23BBG)]
(24) Income of Prasar Bharati (Broadcasting Corporation of India) [Section 10(23BBH)]
(25) Income of certain funds or institutions [Section 10(23C)] Eg hospitals, charitable and religious trust.
(26) Income of Mutual Fund [Section 10(23D)]
(27) Income of Investor Protection Funds set up by recognised stock exchanges in India [Section 10(23EA)]
(28) Specified income of Investor Protection Fund set up by commodity exchanges [Section 10(23EC)
(29) Income of Investor Protection Fund set up by depositories [Section 10(23ED)]
(30) Specified income of Core Settlement Guarantee Fund (SGF) set up by a recognized Clearing Corporation
[Section 10(23EE)]
(31) Income of trade unions [Section 10(24)]
(32) Income of provident funds, superannuation funds, gratuity funds [Section 10(25)
(33) Income of Employees’ State Insurance (ESI) Fund [Section 10(25A)]
(34) Income of member of a scheduled tribe [Section 10(26)]
(35) Specified income of a Sikkimese Individual [Section 10(26AAA)]
(36) Income of an Agricultural Produce Market Committee or Board [Section 10(26AAB)]
(37) Income of a corporation etc. for the promotion of interests of members of Scheduled Casts or Tribes or
backward classes or any two or all of them [Section 10(26B)]
(38) Income of corporations established to protect interests of minority community [Section 10(26BB)]
(39) Income of corporation established for welfare and economic upliftment of exservicemen [Section 10(26BBB)]
(40) Income of a co-operative society for promoting interest of members of Scheduled castes or Tribes or both
[Section 10(27)]
(41) Incomes of certain bodies like Coffee Board, etc. [Section 10(29A)]
(42) Tea board subsidy [Section 10(30)]

10AA TAX HOLIDAY FOR UNITS ESTABLISHED SPECIAL ECONOMIC ZONES

The unit of an entrepreneur, which begins to manufacture or produce any article or thing or provide any service in
a SEZ, shall be allowed a deduction of:
i. 100% of the profits and gains derived from the export, of such articles or things or from services for a
period of 5 consecutive assessment years beginning with the assessment year relevant to the previous year
in which the Unit begins to manufacture or produce such articles or things or provide services, and
ii. 50% of such profits and gains for further 5 assessment years.
iii. so much of the amount not exceeding 50% of the profit as is debited to the profit and loss account of the
previous year in respect of which the deduction is to be allowed and credited to a reserve account (to be
called the "Special Economic Zone Re-investment Reserve Account") to be created and utilised in the
manner laid down under section 10AA(2) for next 5 consecutive years.

For Agricultural income, salary, TDS,TCS refer Handwritten notes.

Double taxation and its avoidance mechanism
Where a taxpayer is resident in one country but has a source of income situated in another country it gives rise to
possible double taxation. This arises from the two basic rules that enables the country of residence as well as the
country where the source of income exists to impose tax namely, (i) the source rule and (ii) the residence rule. The
source rule holds that income is to be taxed in the country in which it originates irrespective of whether the income
accrues to a resident or a non-resident whereas the residence rule stipulates that the power to tax should rest with
the country in which the taxpayer resides. If both rules apply simultaneously to a business entity and it were to
suffer tax at both ends, the cost of operating on an international scale would become prohibitive and would deter
the process of globalisation. It is from this point of view that Double Taxation Avoidance Agreements (DTAA)
become very significant.

DTAAs lay down the rules for taxation of the income by the source country and the residence country. Such rules
are laid for various categories of income, for example, interest, dividend, royalties, capital gains, business income
etc. Each such category is dealt with by separate article in the DTAA.

Types of Relief

Relief from double taxation can be provided in mainly two ways:

1. Bilateral Relief: In this we have DTAA, Applicable Section are 90 and 90A.
2. Unilateral Relief: In this we don’t have DTAA, section 91 is applicable.

Bilateral Relief:

Under this method, the Governments of two countries can enter into an agreement (known as DTAA) to
provide relief against double taxation by mutually working out the basis on which the relief is to be granted. India
has entered into agreements for relief against or avoidance of double taxation with more than 80 countries which
include Sri Lanka, Switzerland, Sweden, Denmark, Japan, Federal Republic of Germany, Greece, etc.

Tax will be levied by that country in which:

 Permanent establishment is available
 If permanent establishment in both country then that country, where, place of effective management is
situated.
Permanent establishment means fixed place of business or profession, like office, branch, etc.

Bilateral Relief may be granted in either one of the following methods:

1. Exemption Method: A particular income is taxed in only one country & exempt in other country.
2. Tax Credit Method:
 Income is taxable in both countries in accordance with their respective tax laws read with double
taxation avoidance agreement.
 The country of resident of the tax payer, however, allows him credit for the tax charged thereon in
the country of source.

Unilateral Relief: This method provides for relief of some kind by the home country even where no mutual
agreement has been entered into by the two countries.
Sec 90: Agreement with Foreign Country (DTAA)

Central government may enter into agreement with government of foreign country or specified territory outside
India, for

1. For granting relief for double taxed income, or

2. Exchange of information with each other for prevention of tax evasion, investigating of such cases & co-
operation with each other for recovery of taxes.

Note:
1. DTAA or income tax act whichever is more beneficial to the assessee shall apply.
2. Non resident to whom DTAA applies, shall not be entitled to claim relief under DTAA unless TRC (Tax
residency certificate) of his being resident in any foreign country is obtained by him from foreign govt.
3. If there is conflict between Income tax Act and DTAA, Then DTAA will prevail as DTAA have specific
provision.
4. As per Sec 90A “Specified Association” of India can enter into an agreement with “Specific Association” of
foreign country. CG may adopt or implement such agreement.
“Specified Association” means functioning under any law e.g. RBI.

Sec 91: Double taxation relief if there is NO DTAA

a) Assessee should be resident of India
b) Income derived from Foreign Country.
c) Tax should have been deducted or paid in foreign country.
d) There should be NO DTAA.

How to Calculate Amount of relief

Step 1: Compute NTI (Indian + Foreign Income)
Step 2: Find out Gross Tax (after adding surcharge & education cess)
Step 3: Find Out “ Average rate of Tax”
Step 4: Find out rate at which tax paid / deducted in foreign country.
Step 5: Find out lower rate from step 3 & step 4.
Step 6: Relief U/S 91= Foreign Income X Rate in Step 5.

E-filing of income-tax returns

Forms
ITR 1 For individuals being a resident other than not ordinarily resident having Income from Salaries,
one house property, other sources (Interest etc.) and having total income upto Rs.50 lakh
ITR 2 For Individuals and HUFs not having income from profits and gains of business or profession
ITR 3 For individuals and HUFs having income from profits and gains of business or profession
ITR 4 For presumptive income from Business & Profession
ITR 5 For persons other than:-
(i) Individual,
(ii) HUF,
(iii) Company and
(iv) Person filing Form ITR-7
ITR 6 For Companies other than companies claiming exemption under section 11
ITR 7 For persons including companies required to furnish return under sections 139(4A) or 139(4B)
or 139(4C) or 139(4D) or 139(4E) or 139(4F)
Transfer Pricing
Any income, expenditure, interest & allocation of cost in relation of international transaction shall be computed
with regard to Arm Length Price (ALP).
If due to ALP there is reduction in the income or increasing the losses then transfer pricing provision shall not
apply.
Sec 92B: International transaction, It means
a. Transaction between two or more Associate Enterprises (AE)
b. At least one of them must be non resident.
Associate Enterprise (Sec 92A)
Two enterprises shall be deemed to be associated enterprises if, at any time during the previous year –
Sno Circumstances
1 one enterprise holds, directly or indirectly, shares
carrying
2 any person or enterprise holds, directly or
indirectly, shares carrying
3 a loan advanced by one enterprise to the other
enterprise constitutes
4 one enterprise guarantees
5 more than half of the board of directors or members
of the governing board, or one or more executive
directors or executive members of the governing
board of one enterprise
6 more than half of the directors or members of the
governing board, or one or more of the executive
directors or members of the governing board, of
each of the two enterprises
7 the manufacture or processing of goods or articles
or business carried out by one enterprise is wholly
dependent
8 90%, or more of the raw materials and consumables
required for the manufacture or processing of goods
or articles carried out by one enterprise
9 the goods or articles manufactured or processed by
one enterprise
10 where one enterprise is controlled by an individual
11 where one enterprise is controlled by a HUF
Condition
not less than 26% of the voting power in the other
enterprise
not less than 26% of the voting power in each of such
enterprises
not less than 51% of the book value of the total assets
of the other enterprise
not less than 10% of the total borrowing of the other
enterprise
are appointed by the other enterprise
are appointed by the same person or persons
on the use of know-how, patent, copyrights,
trademarks, licences, franchises or any other business
or commercial rights of similar nature, or
any data, documentation
are supplied by the other enterprise, or by persons
specified by the other enterprise, and the prices and
other conditions relating to the supply are influenced
by such other enterprise
are sold to the other enterprise or to persons specified
by the other enterprise, and the prices and other
conditions relating thereto are influenced by such
other enterprise
the other enterprise is also controlled by such
individual or his relative or jointly by such individual
and relative of such individual
the other enterprise is controlled by a member of such
HUF, or by a relative of a member of such HUF, or
jointly by such member and his relative
12 where one enterprise is a firm, AOPs or BOIs the other enterprise holds not less than 10% interest
in such firm, AOPs or BOIs

Sec 92C: Computation of ARM Length price

ALP shall be computed as per most appropriate method out of the following methods.

1. Comparable uncontrolled price method (CUP)

2. Resale Price method (RPM)
3. Cost Plus method (CPM)
4. Profit split method (PSM)
5. Transactional Net margin method (TNMM)

Comparable uncontrolled price method (CUP)

Price charged/ paid in comparable un-controlled transaction XXX
+/- Adjustment for difference between international transaction & comparable uncontrolled XX
transaction.
ALP XXX

Resale Price method (RPM)

Price charged for goods sold to unrelated enterprise (Resale Price) XXX
(-) Normal GP Margin in similar transaction (XX)
XXX
(-) Purchase related expenses (XX)
ALP XXX

Cost Plus method

Direct Cost + Indirect cost of production XXX
(+) Normal GP Margin in similar transaction XX
XXX
(+)/(-) Adjustment for difference between international transaction & comparable uncontrolled XX
transaction.
ALP XXX

Profit split method

Normally PSM is applicable where assesse executes an order in joint venture with its associate enterprise. First
find out Total profit earned in Joint venture & after that divide that profit between Associate Enterprise in the ratio
of manpower employed, functional performed, risk taken etc.
Cost incurred by Assessee XXX
+ Share of profit of such enterprise XX
ALP XXX

Transactional Net margin method

Under this method, Profit earned by other player in the same industry under same or similar consideration taken
into account for computing ALP.
Sec 92D: Maintenance of Information & Documentations
Assessee entered into international transaction required to maintained documents as specified by CBDT, if value of
international transaction is more than Rs 1 crore.

Sec 92E: Report of CA

Assessee required to file report of CA in form 3CEB upto 30th Nov of AY.
Tax considerations in specific business situations
Make or buy decision: In making ‘make or buy’ decisions, the variable cost of making the product or
part/component of product is compared with its purchase price in the market. The article is brought if the
former is greater than the latter. Alternatively, if the decision to make involves establishment of a separate
industrial unit for this purpose, a decision may be taken on the basis of total cost rather than variable cost.
In such an event, the assessee would also be in a position to get the tax benefits arising from allowances such
as depreciation, tax holiday benefit and deduction in respect of profits from new industrial undertakings,
wherever they are applicable. There are many other costing and non-costing considerations which are kept in
mind at the time of taking the decision, like capacity utilisation, supply position of the article to be bought, terms of
purchase, etc. The basis of taking make or buy decision should be ‘saving after tax’. The net saving can be
ascertained after deducting from gross savings, income-tax payable on the amount of saving. The long-term
advantages arising out of a decision to make should also be given due weightage in arriving at a decision. At the
time of ascertaining variable cost of the product (for taking make or buy decision) all taxes such as GST, customs
duty etc., payable in the process of manufacture should be taken into account and in determining purchase price of
the product. All taxes to be borne by the purchaser should be added for the purpose of comparison and cost of
purchasing.

Own or lease:

Another important area of decision making is whether to own or lease (or sale and lease back). There are
advantages as well as disadvantages in leasing. Leasing avoids ownership and with it, the accompanying risks of
obsolescence and terminal value losses. In leasing, immediate payment of capital costs is avoided but fixed
rental obligation arises. There are many factors which are required to be considered before making ‘own or
lease’ decision such as cost of asset to be owned, rent of the asset to be taken on lease, source of financing
the asset, risk involved in the alternatives, impact of tax concessions such as depreciation, tax holiday
benefit, etc.

Leasing can also provide important tax advantages. If the asset is taken on lease, the firm can deduct for income-tax
purposes, the entire rental payment. If the rate of tax is 30%, then, the effective rent obligation is reduced to that
extent. Another tax advantage of the lease is that the life of the lease can be shortened compared to the depreciable
life otherwise allowed if the assessee purchased the asset. Thus, there is a delay in paying taxes and in effect an
interest free loan by the Government to the extent of the delay in taxes. There is one more tax advantage arising
out of lease which arises from the opportunity to depreciate otherwise non depreciable assets. The principal asset
of this type is land. The lease rental covers the cost of the land which thus becomes deductible. This arrangement
may prove particularly attractive where the land value constitutes a high percentage of the total value of the real
estate or where the building is already fully depreciated.

Retain or Replace Decision:

One of the important decisions which involves alternative choice is whether or not to buy new capital
equipment. Both have their own merits and demerits. Generally, replacement offers cost saving which results
in increase in profit. However, replacement requires investment of large funds resulting in extra cost. The
decision is based on the relative profitability and other financial and non-financial considerations. Tax
considerations should also be taken into account in this context. Some of the important considerations from the tax
angle to which attention will have to be paid relate to the allowance of depreciation, as also the allowance on
account of expenditure on scientific research. The applicability of the provisions for allowances should be
considered and their impact ascertained before any decision is taken.

Tax planning may be defined as an arrangement of one’s financial affairs in such a way that, without violating in
any way the legal provisions, full advantage is taken of all tax exemptions, deductions, concessions, rebates,
allowances and other reliefs or benefits permitted under the Act so that the burden of taxation on the assessee is
reduced to the minimum. It involves arranging one’s financial affairs by intelligently anticipating the effects which
the tax laws will have on the arrangements now being adopted. As such it is a very stimulating intellectual exercise.

Tax Avoidance is within four corner of Act, but might not be the objective of government

Tax evasion refers to any attempt to avoid payment of taxes by using illegal means. Some of the common forms of
tax evasion are:

 misrepresentation or suppression of facts;

 failure to record investments in books of account;
 claim of expenditure not substantiated by any evidence;
 recording of any false entry in books of account;
 failure to record any receipt in books of account having a bearing on total income