Income Tax - Law & Practice - I

Income Tax - Law & Practice - I

Unit I Income Tax Act, 1961
Unit II Unit III Unit IV Unit V Exempted Incomes Computation of Taxable Income Profits and Gains Capital Gains

Unit 1
HISTORY OF INCOME TAX IN INDIA
1. Income tax Act of 1961:

on the basis of the recommendations made by the various committees, a new Act of Income-tax had been passed during the year 1961 termed as the Income Tax Act, 1961. This Act came into force from 1st April, 1962. This Act contains more than 400 sections and a number of sub-sections and 10 schedules. The Income Tax department framed 121 rules for the effective application of this Act. These rules are termed as Income - Tax Rules of 1962. It also includes a number of sub - rules.

BASIC CONCEPTS DEFINITIONS

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. Assessee section 2(7) Assessment section 2 (8) Assessment year section 2(9) Person section 2(31) Previous year section 3 Principal officer Relative Casual Income section 10(3) Gross Total Income section 14 Total Income section 2(45) Income Dividend Income section 8 Deemed Income Average Rate of Income Tax Section 2(10) Charitable purpose section 2(15)

CAPITAL AND REVENUE

Capital Receipts:
Receipts from fixed capital Ex: Receipt from plant and machinery

Revenue Receipts:
Receipts from circulating capital
1. Difference between capital and revenue receipts Difference between capital and revenue expenditure

2.

RESIDENTIAL STATUS (SECTION 6)

Residential Status
Resident
Ordinarily Resident

Non-Resident

Not- ordinarily Resident

1 .Individuals
If an individual who satisfies understated both the conditions of section 6 of the Income-tax Act, then he becomes a non-resident.

Condition Status1.
He is not in India for 182 days or more during the relevant previous year. If yes, then he is a non-resident. (so check the next condition.)2. He is not in India for 60 days or more during the previous year and he is not in India for 365 days or more during the 4 years prior to the previous year. If yes, then he is a nonresident. If you are not satisfying any of the above conditions to become non-resident, check whether following assists you to become a non-resident. In the case of an individual on visit to India or a member of the crew of an Indian ship or a person leaving India for employment outside India, the requirement of stay in India of 60 days in condition 2 above is extended to 182 days.

Cont
Resident but not ordinarily Resident (RNOR)
A NRI who has returned to India for good is covered under the provisions of section 6(6) of the Income-tax Act. He is given a special status of Resident but not ordinarily Resident (RNOR) if he satisfies one of the following conditions:
Condition Status1.He is not a resident, as per the above provisions, for at least 9 out of 10 previous years prior to the previous year under consideration. If yes, he is RNOR2. His stay in India during the 7 previous year prior to the previous year under consideration should not be 730 days or more. If yes, he is RNOR

Note : An individual who is non-resident for 2 consecutive years, shall remain RNOR for 9 subsequent years and as such his foreign income is not taxable in India while his status RNOR. The status of RNOR renders certain income of such individual non-taxable.

2. Hindu Undivided Family

As per section 6(2), a Hindu undivided family (like an individual) is either resident in India or non-resident in India. A resident Hindu undivided family is either ordinarily resident or not ordinarily resident. A Hindu undivided family is said to be resident in India if control and management of its affairs is wholly or partly situated in India. A Hindu undivided family is non-resident in India if control and management of its affairs is wholly situated outside India.

3. Firms, Association Of Persons

As per section 6(2), a partnership firm and 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 in India if control and management of their affairs are situated holly outside India.

Companies
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. However, a foreign company is treated as non-resident if, during the previous year, control and management of its affairs is either wholly or partly situated out of India.

SCOPE OF TOTAL INCOME OR INCIDENCE OF TAX (SECTION 5)

Incidence of tax
Untaxed foreign Income of past years Receipt of income Remittance Accrual of income Arisal of income Deemed income

Unit - II
INCOME EXEMPT FROM TAX (SECTION 10)
1. 2. 3. Agricultural income sec 2(1A) Sum received by a member from HUF Tax-free income under the head salary 4. Exempted to former ruler: sec 10 (19A) 5. Awards: sec 10(17A) 6. Income of local authority: Sec 10(20) 7. Any sum received under a life insurance policy 8. Income of any regimental fund of the armed forces 9. Income of certain national funds; sec 10(23-c) 10. Income of mutual funds

Cont..,
10. Income of Registered Trade union section 10(24) 11. Income of provident funds: sec 10(25) 13. Relief to foreign Govt. Employees 14. Relief to foreign companies 15. Incomes of non-residents 16. Interest on certain securities: sec10(15) 17. Share of profit from partnership firm 18. Income of SAARC fund 19. Capital gain on transfer of US 64 units of the UTI 20. Exemption to political parties section 13A 21. Etc.,

Unit - III HEADS OF INCOME 1. Income under Head Salaries 2. Income from House Property 3. Income from Profits and Gains of Business or Profession 4. Income from Capital Gains 5. Income from other Sources

INCOME FROM SALARY (SEC17)

1. 2. Basic Salary Etc. Allowances 2.1. Full exempted allowances 2.2. partly exempted allowances 1. Special allowances 2. House rent allowance 3. Entertainment allowance 2.3 fully taxable allowances

Cont..,
3.

Provident funds
Statutory provident fund Recognised provident fund Unrecognised provident fund Public provident fund Approved super annuation fund

4.

Perquisites
Perquisites taxable in all cases Fully exemptes perquisites Perquisites taxable in specified cases only
Pension Gratuity Leave salary encashed at the time of retirement

5.

Retirement benefits

6.

Profit in lieu of salary

INCOME FROM HOUSE PROPERTY (SEC 22 TO 27)

1. 2. 3. 4. Annual value Let-out house properties Self- occupies house properties Partly let-out and partly self occupies house properties 5. Deductions under section 24

Unit - IV PROFITS AND GAINS OF BUSINESS OR PROFESSION

Business
According to Sec.2(13), the term Business includes, any trade, commerce or manufacture or adventure in the nature of trade, commerce or manufacture.

Profession
According to Sec. 2(36), profession includes vocation, it is an occupation tequiring purely intellectual skill or manual skill controlled by the intellectual skill of the operator e.g. Lawyer, Doctor, Engineer, etc.

Vocation
It is only a way of living for which one has special fitness it does not involve any organised or systematic activity like business Computation of profit and gains

Admissible or allowable expenses sec 30 37

1. 2.
3. 4. 5. 6.

Scientific research expenditure Expenditure on acquisition of copy rights Payment to rural development Payment made for the conservation of natural resources Expenditure on prospecting of certain minerals Etc.,

Deductions allowed

Unit - V CAPITAL GAINS

1. Meaning Any income derived from the transfer of capital assets is known as Capital gain Capital Asset u/s 2(14). Capital asset means any property held by an assessee. Transfer u/s 2(47). Transfer means sales, Exchange, Relinquishment of an asset etc.,

2.

3.

Cont..,
4. Short term capital gain A capital gain resulting from the transfer of a capital asset within 36 months from the date of its acquisition is known as short term capital gain

5. Long term capital gain The gain resulting from the transfer of a capital asset after the expirty of 36 months from the date of its acquisition is known as long term capital gain 6. 7. 8. 9. Cost of acquisition CII Cost of improvement Exemptions under section 54

INCOME FROM OTHER SOURCES

It is the residuary head of income. Under this head, income of every kind which is not charged to tax under any of the other four heads are chargeable to tax. 1. Examples of income from other sources Dividends (Exempted u/s 10) Winning from lotteries, crossword puzzles, races Annuities granted under a will Gross interest Grossing up of interest Deduction of tax at source sec 193 and 194 Deductions allowed sec 57 Deductions disallowed sec 58 Kinds of securities Bond washing transactions Exempted persons sec - 10

2. 3. 4. 5. 6. 7. 8. 9.