Income

Introduction

Money that an individual or business receives in
exchange for providing a goods or service or through
investing capital. Income is consumed to fuel day-to-
day expenditures. Most people age 65 and under
receive the majority of their income from a salary or
wages earned from a job. Investments, pensions and
Social Security are primary sources of income for
retirees. In businesses, income can refer to a
company's remaining revenues after all expenses and
taxes have been paid. In this case, it is also known as
"earnings". Most forms of income are subject to
taxation.
Agriculture Income [Sec.2(1A)]
Agriculture income is exempt under the Indian
Income Tax Act. This means that income earned
from agricultural operations is not taxed. The
reason for exemption of agriculture income from
Central Taxation is that the Constitution gives
exclusive power to make laws with respect to
taxes on agricultural income to the State
Legislature. However while computing tax on
non-agricultural income agricultural income is
also taken into consideration.
What does the term Agricultural
Income mean?
As per Income Tax Act income earned from any of the under given
three sources meant Agricultural Income;

(i) Any rent received from land which is used for agricultural
purpose.
(ii) Any income derived from such land by agricultural
operations including processing of agricultural produce,
raised or received as rent in kind so as to render it fit
for the market, or sale of such produce.
(iii) Income attributable to a farm house subject to the
condition that building is situated on or in the immediate
vicinity (near) of the land and is used as a dwelling (housing
that some one is living in) house, store house etc.

Now income earned from carrying nursery operations is
also considered as agricultural income and hence exempt
from income tax.
In order to consider an income as agricultural income
certain points have to be kept in mind:
(i) There must me a land.
(ii) The land is being used for agricultural operations.
(iii) Agricultural operation means that efforts have been
induced for the crop to sprout out of the land .
(iv) If any rent is being received from the land then in order
to assess that rental income as agricultural income
there must be agricultural activities on the land.
(v) In order to assess income of farm house as agricultural
income the farm house building must be situated on
the land itself only and is used as a store
house/dwelling house.

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(LATA).
(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) Income of salt produced by flooding the land with sea
water.
(g) Royalty income from mines.
(h) Income from butter and cheese making.
(i) Receipts from TV serial shooting in farm house is not
agriculture
income.

Certain points to be remembered;
(a) Agricultural income is considered for rate
purpose while computing tax of
Individual/HUF/AOP/BOI/Artificial
Judicial Person.
(b) Losses from agricultural operations could
be carried forward and set off with
agricultural income of next eight
assessment years.
(c) Agriculture income is computed same as
business income.
Casual Income
Casual income is a non recurring income that is not likely to occur
again in a year. It is an income which is earned by chance. Such
income is neither anticipated nor provided for in any agreement.
Such incomes are received at uncertain times.

Casual income as defined in the Income Tax Act, means Income
earned from -

Winning from lotteries, Winning from races, Winning from
crossword and puzzles, Winning from card games and other games
of any sort & Winning from Gambling or betting of any type or
nature.

This income is chargeable under the income head - Income from
other sources when computing income tax.
Assessment Year : [ Sec. 2 (9)]
Assessment Year means the period of 12 months commencing on
the 1
st
day of April every year.
In India, the Govt. maintains its accounts for a period of 12 months
i.e. 1
st
April to 31
st
March every year. As such it is known as
Financial Year. The Income Tax department has also selected same
year for its Assessment procedure.
The Assessment Year is the Financial Year of the Govt. of India
during which income a person relating to the relevant previous year
is assessed to tax. Every person who is liable to pay tax under this
Act, files Return of Income by prescribed dates. These Returns are
processed by the Income Tax Department Officials and Officers.
This processing is called Assessment. Under this Income Returned
by the assessee is checked and verified.
Tax is calculated and compared with the amount paid and
assessment order is issued. The year in which whole of this process
is under taken is called Assessment Year.
At present the Assessment Year 2013-2014 (1-4-2013 to 31-3-2014)
is going on.



Previous Year : [ Sec. 3 ]
As the word Previous means coming before ,
hence it can be simply said that the Previous Year is
the Financial Year preceding the Assessment
Year e.g. for Assessment Year 2013-2014
the Previous Year should be the Financial Year
ending 31
st
March 2013.
Previous Year in case of a continuing Business :
It is the Financial Year preceding the Assessment
Year. As such for the assessment year 2012-2013, the
Previous Year for continuing business is 2011-2012
i.e. 1-4-2011 to 31-3-2012.
Previous Year in case of newly set up Business :
The Previous Year in case of newly started business
shall be the period between commencement of
business and 31
st
March next following . e.g. in case
of a newly started business commencing its
operations on Diwali 2011, the Previous Year in
relation to Assessment Year 2012-2013. shall be the
period between Diwali 2011 to 31 March 2012.
Definition of 'Gross Income'
1. An individual's total personal income before
taking taxes or deductions into account.
2. A company's revenue minus cost of goods
sold. Also called "gross margin" and "gross
profit."
How to Compute Total Income

The steps in which the Total Income, for any assessment year, is
determined are as follows:

1. Determine the residential status of the assessee to find out which
income is to be included in the computation of his Total Income.

2. Classify the income under each of the following five heads.
Compute the income under each head after allowing the deductions
prescribed for each head of income.

(a) Income from Salaries
Salary/Bonus/Commission, etc. ---
Taxable Allowance ---
Value of Taxable perquisites ---
Gross Salary ---
Less: Deductions under section 16 ---
Net taxable income from Salary ---
(b) Income from House Property
Net annual value of House Property ---
Less: Deductions under section 24 ---
Income from House Property ---

(c) Profit and Gains of Business and Profession
Net profit as per P & L Account ---
Less/Add: Adjustments required ---
to be made to the profit as per
provisions of Income-tax Act.
Net Profit and Gains of Business and Profession ---

(d) Capital Gains
Capital Gains as computed ---
Less: exemptions under section 54/54B/54D, etc.---
Income from Capital Gains ---
(e) Income from Other Sources
Gross Income ---
Less: Deductions ---
Net Income from Other Sources ---

Gross Total Income [(a) + (b) + (c) + (d) + (e)]
Less: Deduction available under Chapter VIA ---
(Sections 80C to 80U) ---

Total Income
Avoid and evade difference
In tax planning one must be clear on the difference
between
Tax avoidance
Tax evasion
TAX AVOIDANCE is the "legal and logical arrangement
on ones affairs so that full advantage is taken of all the
favourable terms and allowances available in the Tax Act
and by doing so, the tax finally payable is less than it
otherwise would be".
TAX EVASION is "where one willfully attempts to evade
the liability for tax by submitting false information and
records or omitting any material or details that should
have been disclosed". To constitute EVASION there must
have existed the fraudulent intention to deceive. In
avoidance there is no deceit.
Tax Avoidance - not illegal
There is nothing illegal or immoral in tax avoidance. Tax
advisers have a positive obligation to clients.
Unfortunately for many advisers it is easy to use a
professed abhorrence of tax avoidance as a screen for lack
of activity or knowledge. The role of the Tax Planner is to
advise on the legitimate courses open to taxpayers
wishing to rearrange their affairs to minimise as far as
possible the incidence of income tax.
Any taxation plan formulated for the purpose of
minimising taxation must take into account the complex
interplay of legislation, tax and business. Taxation today
is a very complex subject with many pitfalls.
What is tax planning
Tax Planning is where the taxpayer very sensibly changes
around or re-arranges their affairs so that their business
and financial involvements will result in increased
profitability (their primary objective) and minimise tax
payable (their secondary but just as important objective).
In professional language, Tax Planning is - "the process of
organising a taxpayers affairs so that as far as possible
legally or commercially, the liability of the taxpayer to
income tax (or any other taxes for that matter) is
minimised".
This type of tax planning is loosely referred to today as
tax avoidance. A better term is Tax Minimisation or even
better - Tax Saving Planning.

Nature of Tax Planning
The tremendous growth in tax planning over the last
decade is undoubtedly due to the present high tax rates
faced by most taxpayers.
Tax is a fact of life. The more one has to pay, the more
tempting it is going to be to try to beat the system.
Tax planning requires a thorough knowledge of taxation
law as well as knowledge of other relevant legislation
(e.g. Company law, estate duty, customs duty etc). It
would of course be pointless making tax arrangements
however ingenious if by following that course of action
problems arise in other areas (e.g. Too costly to adapt,
cumbersome, not practical, unsound legally).
In all planning therefore, a fine sense of balance is vital,
to tie in any tax saving with the cost of implementation
and administration and the effect of the plan on other
laws.
Objectives in Tax Planning
The objects of any tax planning exercise are to maximise
after tax income in respect of a given quantity of income.
There are a number of ways that some taxpayers do this.

Good tax planning aims at the overall reduction of
liability for tax. This aim involves these 4 basic
principles:
1 Reducing taxable income
2 Increasing allowable deductions
3 Reducing the tax rate applicable
4 Deferring or delaying the payment of tax