Income Tax - Law & Practice - I

Ms. Eswari, Lecturer

KCC – Kodaikanal – 624 104.

Income Tax - Law & Practice - I

Unit – I Income Tax Act, 1961

Unit – II Exempted Incomes

Unit – III Computation of Taxable Income

Unit – IV Profits and Gains

Unit – V 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. Assessee – section 2(7)2. Assessment – section 2 (8)3. Assessment year – section 2(9)4. Person – section 2(31)5. Previous year – section 36. Principal officer7. Relative8. Casual Income – section 10(3)9. Gross Total Income – section 1410. Total Income – section 2(45)11. Income12. Dividend Income – section – 813. Deemed Income14. Average Rate of Income Tax – Section 2(10)15. 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

2. Difference between capital and revenue expenditure

RESIDENTIAL STATUS (SECTION – 6)

Residential Status

Resident Non-Resident

Ordinarily 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 non-resident.

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.

CompaniesAs 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 ofits 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

Assignment topics:

1.1. History of Income Tax In IndiaHistory of Income Tax In India

2.2. Difference between capital receipts and Difference between capital receipts and revenue receiptrevenue receipt

3.3. provisions for find out residential of an provisions for find out residential of an IndividualIndividual

4.4. scope of Income Taxscope of Income Tax

5.5. Definition of assessee, previous year, Definition of assessee, previous year, assessment year, deemed Income, Income, assessment year, deemed Income, Income, person, etc.,person, etc.,

Further Readings:

1. Students Guides to Income Tax - Vinod K. Singhania

2. Income Tax – Theory, Law & Practice - Ts. Reddy & Y. Hari Prasad Reddy

3. Income Tax Law & Practices - H.C. Mehrotra

4. Income Tax Law and Practices - V.P. Gaur & D.B.Narang

5. Income Tax Law and Practice - Bhagavathi Prasad

Unit - IIINCOME EXEMPT FROM TAX (SECTION – 10)

1. Agricultural income sec 2(1A)2. Sum received by a member from HUF3. Tax-free income under the head

salary4. 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 policy8. Income of any regimental fund of the

armed forces9. 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. Employees14. Relief to foreign companies15. Incomes of non-residents16. Interest on certain securities: sec-

10(15)17. Share of profit from partnership firm18. Income of SAARC fund19. Capital gain on transfer of US 64 units

of the UTI20. Exemption to political parties – section

13A 21. Etc.,

Assignment Topics

• Write any 15 Exempted Incomes

Further Readings1. Students Guides to Income Tax - Vinod K.

Singhania

2. Income Tax – Theory, Law & Practice - Ts. Reddy & Y. Hari Prasad Reddy

3. Income Tax Law & Practices - H.C. Mehrotra

4. Income Tax Law and Practices - V.P. Gaur & D.B.Narang

5. Income Tax Law and Practice - Bhagavathi Prasad

Unit - IIIHEADS 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 (SEC-17)

1. Basic Salary Etc.

2. 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

5. Retirement benefits• Pension• Gratuity• Leave salary encashed at the time of

retirement

6. Profit in lieu of salary

INCOME FROM HOUSE PROPERTY (SEC 22 TO 27)

1. Annual value

2. Let-out house properties

3. Self- occupies house properties

4. Partly let-out and partly self – occupies house properties

5. Deductions under section 24

Assignment Topics

1. Write any 10 Fully Exempted allowance

2. Write any 10 Partly exempted allowance

3. Write any 15 tax free perquisities

4. Types of provident fund

5. Write the provision for retirement benefits

Further Readings

• Students Guides to Income Tax - Vinod K. Singhania

• Income Tax – Theory, Law & Practice - Ts. Reddy & Y. Hari Prasad Reddy

• Income Tax Law & Practices - H.C. Mehrotra• Income Tax Law and Practices - V.P. Gaur &

D.B.Narang• Income Tax Law and Practice - Bhagavathi Prasad

Unit - IVPROFITS AND GAINS OF BUSINESS OR

PROFESSION

BusinessAccording to Sec.2(13), the term

‘Business’ includes, “any trade, commerce or manufacture or adventure in the nature of trade, commerce or manufacture”.

ProfessionAccording 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. Scientific research expenditure2. Expenditure on acquisition of

copy rights3. Payment to rural development4. Payment made for the

conservation of natural resources5. Expenditure on prospecting of

certain minerals6. Etc.,

• Deductions allowed

Assignment Topics

1. Definition of business, Profession and Vocation

2. Write any 10 admissible Expenses

3. Deductions allowed for business and profession

Further Readings

• Students Guides to Income Tax - Vinod K. Singhania

• Income Tax – Theory, Law & Practice - Ts. Reddy & Y. Hari Prasad Reddy

• Income Tax Law & Practices - H.C. Mehrotra• Income Tax Law and Practices - V.P. Gaur &

D.B.Narang• Income Tax Law and Practice - Bhagavathi Prasad

Unit - V CAPITAL GAINS

1. MeaningAny income derived from

the transfer of capital assets is known as “Capital gain”

2. Capital Assetu/s 2(14). Capital asset

means any property held by an assessee.

3. Transferu/s 2(47). Transfer means

sales, Exchange, Relinquishment of an asset etc.,

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 gainThe 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. Cost of acquisition7. CII8. Cost of improvement9. 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

2. Gross interest3. Grossing up of interest4. Deduction of tax at source sec 193 and 1945. Deductions allowed sec – 576. Deductions disallowed sec – 587. Kinds of securities8. Bond washing transactions9. Exempted persons sec - 10

Assignment Topics

1. Write any 15 examples of income from other sources

2. Meaning of capital gain, capital asset, short term capital gain, long term capital gain, cost of acquisition etc.,

3. Exemption under section 544. Types of securities5. Tds Rates

Further Readings

• Students Guides to Income Tax - Vinod K. Singhania

• Income Tax – Theory, Law & Practice - Ts. Reddy & Y. Hari Prasad Reddy

• Income Tax Law & Practices - H.C. Mehrotra• Income Tax Law and Practices - V.P. Gaur &

D.B.Narang• Income Tax Law and Practice - Bhagavathi Prasad