Module 1 Assessee Income Tax Act 1961 (Act no.

43) defines 'assessee' as a person by whom any tax or any other sum of money is payable under this Act, and includes y

y y

Every person in respect of whom any proceeding under this Act has been taken for the assessment of his income or of the income of any other person in respect of which he is assessable, or of the loss sustained by him or by such other person, or the amount of refund due to him or to such other person; Every person who is deemed to be an assessee under any provision of this Act; Every person who is deemed to be an assessee in default under any provision of this Act;

Assessment year Assessment year means the period of twelve months commencing on 1st April every year and ending on 31st March of the next year. Income of previous year of an assessee is taxed during the following assessment year at the rates prescribed by the relevant Finance Act. Gross Total Incom Under the scheme of computation of total income under the Income Tax Act, the income falling under each head is to be computed as per the relevant provisions of the Act relating to computation of income under that head. The aggregate of income under each head is known as 'Gross Total Income'

Income There is no specific definition of income but for statutory purposes there are certain items which are listed under the head income. These items include those heads also which normally will not be termed as income but for taxation we consider them as income. These items are included under section 2(24) of the income tax act, 1961. As per the definition in section 2(24), the term income means and includes:
y y y y y y

profits and gains dividends voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes the value of any perquisite or profit in lieu of salary taxable under clause (2) and (3) of section 17 of the act any special allowance or benefit, other than those included above any allowance granted to the assessee either to meet his personal expenses at the place where the duties of his office or employment of profits are ordinarily performed by him or at a place where he ordinarily resides or to compensate him for the increased cost of living

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y y y y

capital gains any sum chargeable to income tax under section 28 of the income tax act any winnings from lotteries, crossword puzzles, races, including horse races, card games and games of any sort or from gambling or betting of any form or nature whatsoever any received as contribution to the assessee's provident fund or superannuation fund or any fund for the welfare of employees or any other fund set up under the provisions of the emplyees state insurance act profits on sale of a licence granted under the imports (control) order, 1955 made under the imports and exports (control) act, 1947

Previous year The Financial Year in which the income is earned is known as the previous year. Any financial year begins from 1st of April and ends on subsequent 31st March. The financial year beginning on 1st of April 2003 and ending on 31st March 2004 is the previous year for the assessment year 2004-2005.

Capitalized and Revenue Receipts:

Receipts refer to the actual amounts of cash received. They can be either of capital nature or revenue nature. Capital receipts include the following:

1. Capital brought in by the proprietor at the commencement and any additions made
subsequently.

2. Money borrowed from partners, bankers, private individuals etc. 3. Money received by the sale of fixed assets. 4. Money received on account of capital profit.
Revenue receipts include the following:

1. Money received by the sale of floating assets - by sale of goods. 2. Money received on account of some revenue profit.

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Capital Expenditures:
Learning Objectives:

1. Define and explain capital expenditures

Expenditure means the amount spent. Any expenditure incurred for the following purposes is capital expenditure:

1. For acquiring fixed assets such as land, building, plant and machinery, furniture and
fitting and motor vehicles. These assets should not be acquired with a view to resell them at a profit but to retain in the business. The cost of fixed asset would include all expenditure up to the asset becomes ready for use. 2. For making improvement and extensions to the fixed asset e.g., additions to buildings. 3. For increasing the earning capacity of a business or for reducing the cost of manufacture, administration or distribution in a business e.g., expenditure incurred in removing the business to a central locality or compensation paid to retrenched employee. 4. For raising capital monies for the business such as brokerage paid for arranging loans, discount on issue of shares and debentures, underwriting commission etc. All capital expenditures represent either an asset or liability and are shown in the balance sheet.

List of Capital Expenditures - (Examples of Capital Expenditures):

The following is a list of the usual items of capital expenditures: y y y y y y y y y y y y y y Cost of goodwill. Cost of freehold land and building and the legal charges incurred in this connection. Cost of lease. Cost of machineries, plants, tools, fixtures, etc. Cost of trade marks, patents, copy rights, designs, etc. Cost of car, lorry etc. Cost of installation of lights and fans. Cost of any other assets acquired by way of equipment. Erection cost of plant and machinery. Cost of addition to existing assets. Structural improvements and alteration in the existing assets. Expenses for developments in case of mines and plantations. Expenses for administration incurred during construction and equipment of any industrial enterprise. Expenses incurred in experimenting which finally result in the acquisition of a patent or other rights.

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Revenue Expenditures:
Learning Objectives:

1. Define and explain revenue expenditures

Definition and Explanation:

Expenditures will be treated as revenue expenditures if it is incurred for the following purposes:

1. Expenditure for purchasing floating assets i.e., assets meant for resale at a profit or
for being converted into saleable goods, such as the cost of goods, raw materials and stores. 2. Expenditures incurred by maintaining assets in proper working order e.g., repairs to plant and machinery, building furniture and fittings etc. 3. Expenditures incurred for meeting day to day expenses of carrying on a business e.g., salaries, rent, rates, taxes, stationery, postage etc. All revenue expenditures have to be deducted from the income earned by the firm. That is to say, all revenue items will be taken to the profit and loss account.

List of Revenue Expenditures - (Examples of Revenue Expenditures):

The following is a list of the usual items of revenue expenditures: y y y y y y y y y y y y y y Expenses incurred for the ordinary administration and carrying on the business. Expenses for repairs, renewals and replacement of permanent assets. Cost of goods for resale. Cost of raw materials and stores acquired for consumption in course of manufacturing. Wages paid for manufacture of products for sales. Expenses for the manufacture and distribution of the finished goods. Loss from wear and tear and obsolescence of assets. Depreciation of lease. Interest on loans borrowed for business. Loss from sale of fixed assets. Fees for renewal of patent rights, etc. Up-keep and maintenance of motor car and van. Maintenance of fan and lights. Book value of assets discarded or totally damaged or destroyed by fire or other reason

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Revenue Receipts
Revenue receipts refer to receipts from the normal activities of the business. For example, revenue receipts of a trading organization are receipts from sale of goods, discounts received, commission received and interest on bank deposits. All revenue receipts earned for a particular period, whether payments for them have actually been received or not, have to be credited to the Trading and Profit and Loss Accounts. These will increase it profits.

Capital receipts
Capital receipts refer to receipts that is derived from sources other than the normal trading activities of the business. It may comprise capital paid by partners, or in the case of a limited company, sums received from its shareholders or debenture holders, loans and proceeds from the sale of its assets. Here is a list of Exempted Incomes for different categories. General Section 10(1) 10(2) 10(2A) 10(3) 10(10D) 10(16) 10(17) 10(17A) Nature of Income Agricultural income Share from income of HUF Share of profit from firm Casual and non-recurring receipts Receipts from life Insurance Policy Scholarships to meet cost of education Allowances of MP and MLA. Awards and rewards (i) from awards by Central/State Government (ii) from approved awards by others (iii) Approved rewards from Central & State Governments Income of Members of scheduled tribes residing in certain areas in Only on income arising in those areas or interest on securities or dividends For MLA not exceeding Rs. 600/- per month Winnings from races Rs.2500/- other receipts Rs.5000/Exemption limit, if any

10(26)

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North Eastern States or in the Ladakh region. 10(26A) 10(30) 10(31) Income of resident of Ladakh (i) Subsidy from Tea Board under approved scheme of replantation (ii) Subsidy from concerned Board under approved Scheme of replantation Minor's income clubbed with individual Dividend from Indian Companies, Income from units of Unit Trust of India and Mutual Funds, and income from Venture Capital Company/fund. Profit of newly established undertaking in free trade zones electronic hardware technology park on software technology park for 10 years (net beyond 10 year from 200001) Profit of 100% export oriented undertakings manufacturing articles or things or computer software for 10 years (not beyond 10 years from 2000-01) Profit of newly established undertaking in I.I.D.C or I.G.C. in North-Eastern Region for 10 years Upto Rs. 1,500/On income arising in Ladakh or outside India

10(32) 10(33)

10(A)

10(B)

10(C)

Income From Interest Section Nature of Income Exemption limit, if any To the extent mentioned in notification 10(15)(i)(iib)(iic) Interest, premium on? redemption or other payments from notified securities, bonds, Capital investment bonds, Relief bonds etc. 10(15)(iv)(h) Income from interest payable by a Public Sector Company on notified

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bonds or debentures 10(15)(iv)(i) Interest payable by Government on deposits made by employees of Central or State Government or Public Sector Company of money due on retirement under a notified scheme Interest on notified Gold Deposit bonds Interest on notified bonds of local authorities

10(15)(vi) 10(15)(vii)

Income from Salary Section 10(5) 10(5B) Nature of Income Leave Travel assistance/ concession Remuneration of technicians having specialised knowledge and experience in specified fields (not resident in any of the four preceding financial years) whose services commence after 31.3.93 and tax on whose remuneration is paid by the employer Allowances and perquisites by the government to citizens of India for services abroad Remuneration from foreign governments for duties in India under Cooperative technical assistance programmes. Exemption is provided also in respect of any other income arising outside India provided tax on such income is payable to that Government. Death-cum-retirement Gratuity(i) from Government (ii) Under payment of Gratuity Act Amount as per Sub-sections (2), (3) Exemption limit, if any Not to exceed the amount payable by Central Government to its employees Exemption in respect of income in the from of tax paid by employer for a period upto 48 months

10(7)

10(8)

10(10)

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1972 (iii) Any other 10(10A) Commutation of Pension(i) from government, statutory Corporation etc. (ii) from other employers

and (4) of the Act. Upto one-half months salary for each year of completed service.

Where gratuity is payable - value of 1/3 pension.? Where gratuity is not payable - value of 1/2 pension

(iii) from fund set up by LIC u/s 10(23AAB) 10(10AA) Encashment of unutilised earned leave (i) from Central or State government (ii) from other employers Upto an amount equal to 10 months salary or Rs. 1,35,360/- which ever is less Amount u/s. 25F(b) of Industrial Dispute Act 1947 or the amount notified by the government, whichever is less.

10(10B)

Retrenchment compensation

10(10C)

Amount received on voluntary retirement or termination of service or voluntary separation under the schemes prepared as per Rule 2BA from public sector companies, Amount as per the Scheme subject to statutory authorities, local authorities, maximum of Rs. 5 lakh Indian Institute of Technology, specified institutes of management or under any scheme of a company or Co-operative Society Payment under Provident Fund Act 1925 or other notified funds of Central Government Payment under recognised provident funds Payment from approved Superannuation Fund To the extent provided in rule 8 of Part A of Fourth Schedule

10(11)

10(12) 10(13)

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10(13A)

House rent allowance

least of(i) actual allowance (ii) actual rent in excess of 10% of salary (iii) 50% of salary in Mumbai, Chennai, Delhi and Calcutta and 40% in other places

10(14)

Prescribed [See Rule 2BB (1)] To the extent such expenses are special allowances or benefits actually incurred. specifically granted to meet expenses wholly necessarily and exclusively incurred in the performance of duties Pension including family pension of recipients of notified gallantry awards

10(18)

Exemptions to Non-citizens only Section 10(6)(i)(a) and (b) Nature of Income (i) passage money from employer for the employee and his family for home leave outside India (ii) Passage money for the employee and his family to 'Home country' after retirement/termination of service in India. 10(6)(ii) Remuneration of members of diplomatic missions in India and their staff, provided the members of staff are not engaged in any business or profession or another employment in India. Remuneration of employee of foreign enterprise for services rendered during his stay in India in specified circumstances provided the stay does not exceed 90 days in that previous year. Remuneration of foreign Government employee on training in certain Exemption limit, if any

10(6)(vi)

10(6)(xi)

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establishments in India.

Exemptions to Non-resident Indians (NRIs) only Section 11.2 Nature of Income The units purchased by them are out of the amount remitted from abroad or from their Non-resident (External) Account Exemption limit, if any

Exemptions to funds, institutions, etc. Section 10(14A) Nature of Income Public Financial Institution from exchange risk premium received from person borrowing in foreign currency if the amount of such premium is credited to a fund specified in section 10(23E) Central Bank of Ceylon from interest on securities Securities held by Welfare Commissioners Bhopal Gas Victims, Bhopal from Interest on securities held in Reserve Bank's SGL Account No. SL/DH-048 any local Authority (a)? Business income derived from Supply of water or electricity any where. Supply of other commodities or service within its own jurisdictional area. (b)? Income from house property, other sources and capital gains. 10(20A) 10(21) 10(23) Housing or other Development authorities Approved Scientific Research Association Notified Sports Association/ Exemption limit, if any

10(15)(iii) 10(15)(v)

10(20)

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Institution for control of cricket, hockey, football, tennis or other notified games. 10(23A) Notified professional association/institution All income except from house property, interest or dividends on investments and rendering of any specific services

10(23AA) 10(23AAA) 10(23AAB) 10(23B)

Regimental fund or Non-public fund Fund for welfare of employees or their dependents. Fund set up by LIC of India under a pension scheme Public charitable trusts or registered societies approved by Khadi or Village Industries commission Any authority for development of khadi or village industries Societies for administration of public, religious or charitable trusts or endowments or of registered religious or charitable Societies. European Economic Community from Income from interest, dividend or capital gains SAARC Fund Certain funds for relief, charitable and promotional purposes, certain educational or medical institutions Notified Mutual Funds Notified Exchange Risk Administration Funds Notified Investors Protection Funds set up by recognised Stock Exchanges Venture capital Fund/ company set up to raise funds for invest?ment in venture Capital undertaking Income from invest?ment in venture capital undertaking

10(23BB) 10(23BBA)

10(23BBB)

10(23BBC) 10(23C)

10(23D) 10(23E) 10(23EA)

10(23FB)

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10(23G)

Infrastructure capital fund, or infrastructure capital company

Income from dividend, interest and long term capital gains from investment in approved infrastructure enterprise Income from house property and other sources Interest on securities and capital gains from transfer of such securities

10(24) 10(25)(i) 10(25)(ii) 10(25)(iii) 10(25)(iv) 10(25)(v) 10(25A) 10(26B)(26BB) and (27)

Registered Trade Unions Provident Funds Recognised Provident Funds Approved Superannuation Funds Approved Gratuity Funds? Deposit linked insurance funds Employees State Insurance Fund Corporation or any other body set up or financed by and government for welfare of scheduled caste/ scheduled tribes/backward classes or minorities communities Marketing authorities Certain Boards such as coffee Board and others and specified Authorities

10(29) 10(29A)

Income from letting of godown and warehouses

Residential Status and Tax Incidence under the Income Tax Act, FEMA, Companies Act & Direct Tax Code 2009
by rajeev on August 25, 2009
Tax incidence on an assessee depends on his residential status. For instance, whether an income, accrued to a person outside India, is taxable in India depends upon the residential status of the person in India. Similarly, whether an income earned by a foreign national in India (or outside India) is taxable in India depends on the residential status of the individual, rather than on his citizenship. Therefore, the determination of the residential status of a person is very significant in order to find out his tax liability.

Module 1 The residential status of an assessee is to be determined in respect of each previous year as it may vary from previous year to previous year. The foreign investors may be Indian nationals residing outside India, person of Indian origin and other foreign investors including corporations.

Under Section 2(31) of the Income Tax Act, the term person includes an individual, a Hindu Undivided Family, a Partnership Firm, a Company, an Association of Persons, a Body of Individual, a Local Authority and every other Artificial Juridical Entity. Similarly, under FEMA, clause (u) of Section 2, person includes all the above categories and also any agency, office or branch owned or controlled by any such person.

The residential status of a person has been dealt under the Income Tax Act, 1961, Foreign Exchange Management Act, 1999 (FEMA), Companies Act, 1956 and under the proposed Direct Tax Code Bill 2009.
Residential status under Income Tax Act, 1961 Residential status of an Individual & Hindu Undivided Family Residential status of an assessee is important in determining the scope of income on which income tax has to be paid in India. Broadly, an assessee may be resident or non-resident in India in a given previous year. Under Section 6(1), an individual is said to be resident in India in any previous year if he satisfies any one of the following basic conditions: (a) He is in India in the previous year for a period of at least 182 days or, (b) He is in India for a period of at least 60 days during the relevant previous year and at least 365 days during the four years preceding that previous year. In case an Indian citizen leaves India for employment abroad in any year for the purpose of employment (or where an individual, who is a citizen of India, leaves India as a member of the crew of an Indian ship), or where an Indian citizen or a person of Indian Origin, who has settled abroad, comes on a visit to India in the previous year, shall not attract clause (b) of the basic conditions Therefore, such individuals may stay in India upto 181 days in a given previous year without becoming resident in India for that previous year. An individual who does not satisfy either of the above basic conditions is non-resident for that previous year. A Hindu Undivided Family (HUF) is said to be resident in India if control and management of its affairs is wholly or partly situated in India during the relevant previous year.

Module 1 A resident individual or HUF assessee may further be classified into (i) resident and ordinarily resident (ROR) and (ii) resident but not ordinarily resident (RNOR). A resident individual or HUF is treated as ROR in India in a given previous year, if he satisfies the following additional conditions:1) He has been resident in India in at least 9 out of 10 previous years (according to basic conditions noted above) preceding the relevant previous year; and 2) He has been in India for a period of at least 730 days during 7 years preceding the relevant previous year. An individual or HUF becomes ROR in India if the individual or Karta of HUF satisfies at least one of the basic conditions and both the additional conditions. An individual or Karta of HUF who is resident in India but does not satisfy both the additional conditions is RNOR for that previous year. Residential status of assessee other than an Individual & HUF

In case of an assessee, other than an individual and HUF, the residential status depends upon the place from which its affairs are controlled and managed. As per Section 6(2), a partnership firm or an association of persons are said to be resident in India if control and management of their affairs are wholly or partly situated within India during the relevant previous year. They are, however, treated as non-resident if control and management of their affairs are situated wholly outside India. As per Section 6(3), an Indian company is always resident in India. A foreign Company is resident in India only if, during the previous year, control and management of its affairs is situated wholly in India. Where part or whole of control and management of the affairs of a foreign company is situated outside India, it shall be treated as a non-resident company.
As per Section 6(4), every other person is resident in India if control and management of his affairs is, wholly or partly, situated within India during the relevant previous year. On the other hand, every other person is non-resident in India if control and management of its affairs is wholly situated outside India. Residential status under FEMA Under FEMA the residential status of an individual is determined by the purpose for which he goes abroad. Section 2(v) provides that a person residing in India for more than 182 days during the course of the preceding financial year is a person resident in India. Further, it says that in case any person comes to or stays in India for or on taking up employment or for carrying on business or vocation or for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period will be regarded as resident in India for such financial year. Similarly if any person goes out of India or stays outside India for fulfilling or achieving any of the aforesaid purposes as would indicate his intention to stay outside India for an uncertain period will be regarded as non-resident in India.

Module 1 Further, it provides that any person or body corporate registered or incorporated in India and an office, branch or agency in India owned or controlled by a person resident outside India or by a person resident in India will also be regarded as person resident in India. An Indian citizen who stays abroad for employment or for carrying on business or vocation outside India or stays abroad under circumstances indicating an intention for an uncertain duration of stay is a nonresident (persons posted in U. N. organizations and officials deputed abroad by Central / State Government and Public Sector Undertakings on temporary assignments are also treated as nonresident). Non-resident foreign citizens of Indian origin are treated on par with non-resident Indian citizens. Residential status under Companies Act, 1961 Schedule XIII of the Companies Act, 1961 deals with conditions to be satisfied for the appointment of a managing or whole-time director or a manager (referred to as managerial person ) of the Company without the approval of the Central Government. Explanation to Clause (e) of Part I of the Schedule provides that a resident in India includes a person who has been staying in India for a continuous period of not less than twelve months immediately preceding the date of his appointment as a managerial person and who has come to stay in India for taking up employment in India or for carrying on a business or vocation in India. Comparison of residential status under Income Tax Act, FEMA & Companies Act Since the criteria for determining an individual s residential status differs under FEMA and Income Tax Act, it is possible that an individual can be regarded as a resident under the Income Tax Act and a nonresident under FEMA, and vice versa. Under the Income Tax Act, an individual s residential status is determined for a particular year and is relevant to determine the taxability of income earned in that year. Under FEMA, the residential status is not only to be determined for a particular point of time, it is an ongoing process and is relevant for determining whether an individual can undertake a particular transaction at that particular point of time. A person who qualifies to be a non-resident under the income Tax Act, 1961 will also be considered a non-resident for the purposes of application of FEMA, but a person who is considered to be nonresident under FEMA may not necessarily be a non-resident under the Income Tax Act. For instance a resident Indian goes abroad to conduct a business in December 2008. Under the Income Tax Act, he will be regarded as resident during financial year 2008-09 as period of stay in India is more than 182 days. However, under FEMA, he will be regarded as non-resident the moment he leaves the country for business purposes.

Module 1 Under the Companies Act, 1956 a resident in India includes a person who has been staying in India for a continuous period of not less than twelve months immediately preceding the date of his appointment as a managerial person. Therefore, a person who has come to stay in India for taking up employment or for carrying on a business or vocation may not be eligible to be appointed as a managerial person of a company, without approval of the Central Government, till the time he has stayed in India for a continuous period of twelve months even though he will be treated as resident under FEMA the day he arrives in India for taking up employment or for carrying on business or vocation as would indicate his intention to stay for an uncertain period and under Income Tax Act upon his stay in India for atleast 182 days in the previous year. Incidence of Tax As per Section 5 of the Income Tax Act 1961, incidence of tax on a taxpayer depends on his residential status and also on the place and time of accrual or receipt of income. In order to understand the relationship between residential status and tax liability, one must understand the meaning of Indian income and Foreign income . An Indian income is one which satisfies any of the following conditions: 1) If income is received (or deemed to be received) in India during the previous year and at the same time it accrues (or arises or is deemed to accrue or arise) in India during the previous year, or 2) if income is received (or deemed to be received) in India during the previous year but it accrues (or arises) outside India during the previous year, or 3) if income is received outside India during the previous year but it accrues (or arises or is deemed to accrue or arise) in India during the previous year. Similarly, Foreign income is one which satisfies both the following conditions: 1) 2) Income is not received (or not deemed to be received) in India; and income does not accrue or arise (or does not deemed to accrue or arise) in India.

Indian income is always taxable in India irrespective of the residential status of the taxpayer. Foreign income of an individual and HUF from a business controlled or profession setup in India will be taxable in the hands of resident and ordinarily resident and resident but not ordinarily resident but not in the hands of a non-resident. However, Foreign income from a business controlled or profession setup outside India will be taxable only in the hands of resident and ordinarily resident and not in the hands of a resident but not ordinarily resident or a non-resident person.

Module 1 Foreign income of any other taxpayer (Company, Firm, AOP, BOI etc.) will be taxable if the taxpayer is resident in India and will not be taxable in case the taxpayer is non-resident in India. Residential status under the proposed Direct Tax Code Bill, 2009 The proposed Direct Tax Code Bill, 2009 (referred to as the Code ) is a comprehensive legislation that consolidates the entire law relating to direct taxes (income-tax, dividend distribution tax, fringe benefit tax and wealth-tax) in India and aims to simplify the existing laws which have for long been considered as complex by the practitioners of the laws. As per the Code, an individual shall be resident in India in any financial year, if he is in India (a) for a period or periods amounting in all to 182 days or more in that year; or (b) for a period or periods amounting in all to (i) 60 days or more in that year, and (ii) 365 days or more within the four years immediately preceding that year. The Code proposes to do away with the classification resident but not ordinarily resident, which is available under the present system of taxation. This would mean that Indians working abroad would be classified as resident even if they fall under the category of resident but not ordinarily resident and, consequently, such income would be taxable in India. Further, it provides that a company shall be resident in India in any financial year, if it is an Indian company or its place of control and management, at any time in the year, is situated wholly, or partly, in India. In contrast, under the Income Tax Act, 1961 a Company is resident in India in any previous year if the control and management of its affairs is situated wholly in India. In effect, the definition under the Code, which is expected to come into effect from April 1, 2011, would regard any foreign company as a domestic one if any part of its control and management were to be situated in India for the concerned financial year. So, for instance, if the board of directors of a foreign company meets in India even once during a year, it would be considered a resident company and its entire global income would be liable to corporate tax in India. The provision pertaining to residential status under the Code will shift the burden on the company to show that its control and management is not situated in India. In case a foreign Company is held to be a resident of India, its tax exposure would significantly increase. Conclusion Ironically, contrary to the objectives of the Code to simplify tax laws and reduce disputes, the provision is also likely to expand the scope of litigation as it would be up to the assessing officer to decide if a foreign company is indeed a resident. Unless, situations describing part management and control in India are clarified, this could have significant implications for a foreign company s operations in India.