PONDICHERRY UNIVERSITY

KALAPET, PONDICHERRY-14

SCHOOL OF MANAGEMENT
DEPARTMENT OF COMMERCE

ASSIGNMENT
DIRECT TAXES: PRINCIPLES AND PRACTICES
SUBMITTED TO

Prof. NIDHEESH K BALU

SUBMITTED BY

NAMITHA K CHERIYAN I M.COM BUSINESS FINANCE

ASSESSMENT YEAR
Assessment year refers to a period of twelve months commencing on 1st April every year and ending on 31st March of the following year. It is the financial year of the government. Income of previous year of an assessee is taxed during the following assessment year at the rates prescribed by the relevant Finance Act.

PREVIOUS YEAR
The Financial Year in which the income is earned is known as the previous year. It is the financial year which immediately precedes the assessment year, but in case of newly set up business or profession or new source of income, the first previous year will begin from the date of setting up of new business or profession and will ends on the 31st March of the next year. In such cases, the first previous year may be less than 12 months.

ASSESSEE
Income Tax Act 1961 (Act no. 43) defines 'assessee' as a person by whom any tax or any other sum of money (such as interest, penalty, fines, etc.) is payable under this Act, and includes 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. A person is deemed to be an assessee in default if he fails to fulfil his statutory obligation. For example, in case of an employer paying salary, it is his duty to deduct the Tax At Source (TDS) and deposit the same amount of tax so collected in government treasury. If he fails to deduct TDS or deducts it but fails to pay to government, then he is called an assessee in default.

HINDU UNDIVIDED FAMILY (HUF)

Hindu Undivided Family (HUF) which is same as joint Hindu family is a body consisting of persons lineally descendant from a common ancestor, including their wives and unmarried daughters, who are staying together jointly; joint in food, estate and worship. The daughter, on her marriage, ceases to be a member of her fathers HUF and becomes a member of her husbands HUF. The Income-tax Act, 1961 as well as Wealth-tax Act, 1957 recognise HUF as an independent assessable or taxable entity. This is done by specifically including "Hindu Undivided Family" in the definition of "person", in section 2(31) of the Income-tax Act. As such, the income earned by such HUF will enjoy all exemptions and deductions; including the basic exemption from income-tax, so far as applicable. HUF is a creature of law. It cannot be created by act of parties, except in rare cases of adoption and reunion. Birth of a son in a Hindu joint family automatically makes him a member of the HUF. In view of this, all male members automatically become members of the HUF. In addition to that, if a child is adopted, then he also becomes a member of the HUF. Similarly, in case of reunion of erstwhile HUF family members, such reunited members become members of the reunited HUF. Moreover, upon marriage, wife becomes a member of her husbands joint family. Section 6 of the Income-tax Act, 1961 clearly contemplates a situation where a HUF can be non-resident also. In fact, HUF can also be Not Ordinarily Resident. A HUF will be considered to be resident in India unless, during the previous year, the control and management of its affairs is situated wholly outside India. In such a case, it will be treated as non-resident HUF. Moreover, in case of a HUF whose manager has not been resident in India in nine out of ten previous years preceding the previous year or has, during the seven previous years preceding that year, been in India for a total 729 days or less, such HUF is to be regarded as Not Ordinarily Resident within the meaning of the Income-tax Act, 1961. As such, it is not necessary for a HUF to be resident in India.

PARTNERSHIP
Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have entered into partnership with one another are called individually as partners and collectively as a firm, and the name under which their business is carried on is called the firm name. From the above definition of partnership, the essential elements of partnership can be understood as follows: 1. Persons There should be at least two persons to form a partnership or partnership firm. Restrictions on the number of persons The maximum number of members that can exist in partnership is 10 in case of a firm carrying on banking business and 20 in case of any other business. This restriction is placed by the companies act and not the partnership act. 2. Who have agreed There should be an agreement between those persons who are forming the partnership. The agreement is the foundation for the partnership. Partnerships can arise only from a contract and not status. 3. The profits of a business There should be a business carried on by the partnership and that too with an intention to make and share profits of that business. Therefore it can be said that "No Business No Partnership" as well as "No intention to share profits No Partnership"

Though, no specific mention of sharing of losses is made, it is considered that Sharing profits implies Sharing Losses also. 4. Carried on by all or any of them acting for all The business may be carried on by any one or more of the partners. 5. Acting for all This implies that a partner conducting the business should be understood as conducting the business on behalf of all the partners. Each partner would be responsible for the acts of the other partners in relation to the firm. As far as the outsiders are concerned, the partners and the firm are one and the same. 6. Mutual Agency [Principal Agent Relationship] In his/her role as a partner, a person acts both as a principal as well as an agent. A partner is an agent for the acts that the he/she does on behalf of the firm, whereby he/she can bind the other partners for such acts. The other partners would be the principals for such acts. With regard to the acts of the other partners, he/she will act as the principal (since he as a partner is bound by the acts of the other partners on behalf of the firm) Where a partner cannot be made responsible for the acts of one or more other partners we cannot say they together form a partnership. This mutual agency is what really decides whether there is a partnership or not. Thus it is said the "Mutual Agency" is the real test of partnership. Section 40(b) of Income Tax Act places some restrictions and conditions on the deductions of expenses available to an assessee assessable as a partnership firm in relation to the remuneration and interest payable to the partners of such firm. The deductions regarding salary to partners and any payment of interest to partners cannot exceed the monetary limits specified u/s 40(b) and are available subject to the fulfilment of conditions mentioned therein.

COMPANY
Company is a voluntary association of persons formed for the purpose of doing business having a distinct name and limited liability. It is a juristic person having a separate legal entity distinct from the members who constitute it, capable of rights and duties of its own and endowed with the potential of perpetual succession. The Companies Act, 1956, states that 'company' includes company formed and registered under the Act or an existing company i.e. a company formed or registered under any of the previous company laws.

However, company is not a citizen so as to claim fundamental rights granted to citizens. Company is a 'juristic person' and it can file a suit as an 'indigent person' An Expression 'person' includes not merely a natural person but also other juridical persons. A company being a juristic person would be represented before a Court of law or any other place by a person competent to represent it. It is enough that the person competent to represent a company presents the application on behalf of the company. Minors, lunatics or person under any disability are also entitled to file a suit either through guardian or the next friend. In such a case it is the guardian or next friend who is competent to represent the petitioner. Company is a separate legal entity Company is separate legal entity distinct from its shareholders. The major constituents of a company are its members, who are the ultimate owners and its directors. It is an important feature of the company form of business, that there is a gap between the ownership and control over the affairs of the company. In real sense the members are the owners of a company, but it is being managed by the directors who are elected representatives of its members, because it is absolutely necessary for it to have a human agency called as the Company's board of directors. The Board of Directors comprises the directors. Section 2(17) of the Income Tax act, 1961 also defines company. It gives that the term company includes:

1. Any Indian company - Indian company means a company formed and registered under the companies act, 1956. Any company formed and registered under any law relating to companies formerly in force in any part of India, other than Jammu and Kashmir and the union territories as specified or a corporation established by or under a central, state or provincial act or any institution, association or a body which is declared by the board to be company under section 2 (17) are referred as Indian company. In the case of state of Jammu and Kashmir, a company formed and registered under any law for the time being in force in the state. Similarly in case of union territories. 2. Any corporate incorporated by or under the laws of a country outside India 3. any institution, association or body whether Indian or non Indian, which is declared by general or special order of the board to be a company 4. any institution, association or body which is or was assessable or was assessed as a company for any assessment year under the Indian Income tax Act, 1922 or which is or was assessable or was assesses under this act as a company for any assessment year commencing on or before the 1st day of April 1970

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 also include those heads which normally will not be termed as income but for taxation it is considering 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:

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

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 employees 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

CAPITAL RECEIPTS
Any receipt of money can either be categorized as revenue or capital. Capital receipt is generally referable to fixed capital. For example, Sale price on the sale of assets, which assessee uses as a fixed asset in his business is a capital receipt. Payment received towards the compensation for the extinction of a profit earning source is a capital receipt. A receipt in lieu of source of income is a capital receipt. For example, Compensation for the loss of employment is a capital receipt. Capital receipts are never taxable. Thats why amount received from insurance company at the time of maturity is not taxed u/s 10(10D). Similarly loan taken is also not taxed. However, some of the capital receipts are taxable since they have been specifically provided in the definition of Income such as tax on Capital gains on sale of Capital asset.

REVENUE RECEIPTS
Revenue receipt refers to circulating capital. For example, Sale price of the stock in trade is a revenue receipt. Payment received to compensate loss of earnings is a revenue receipt. A receipt in lieu of income is a revenue receipt. Revenue receipts are always taxable unless expressly exempt from tax under section 10.

DIFFERENCES BETWEEN ASSOCIATION OF PERSONS (AOP) AND BODY OF INDIVIDUALS (BOI)

An AOP means a group of persons (whether individuals, HUF, companies, firms, etc.) who join together for common purpose(s). Every combination of person cannot be termed as AOP. It is only when they associate themselves in an income-producing activity then they become AOP. BOI refers to a group of individuals (individual only) who join together for common purpose(s) whether or not to earn income. Differences between AOP and BOI In case of BOI, only individuals can be the members, whereas in case of AOP, any person can be its member i.e. entities like company, firm, etc. can be the member of AOP but not of BOI. In case of an AOP, members voluntarily get together with a common will for a common intention or purpose, whereas in case of BOI, such common will may or may not be present.

Co-heirs, co-donees, etc. joining together for a common purpose or action would be chargeable as an AOP or BOI. In case of income of AOP, the AOP alone shall be taxed and the members of the AOP cannot be taxed individually in respect of the income of the AOP.

TAX
Tax refers to the fee charged (or levied) by a government on a product,income, or activity. Tax can be classified into two broad categories. If tax is levied directly on personal or corporate income, then it is a direct tax. If tax is levied on the price of a good or service, then it is called an indirect tax. The purpose of taxation is to finance government expenditure. One of the most important uses of taxes is to finance public goods and services, such as street lighting and street cleaning. Since public goods and services do not allow a nonpayer to be excluded, or allow exclusion by a consumer, there cannot be a market in the good or service, and so they need to be provided by the government or a quasi-government agency, which tend to finance themselves largely through taxes.

DIFFERENCES BETWEEN DIRECT TAX AND INDIRECT TAX

Direct tax
The term direct tax generally means a tax paid directly to the government by the persons on whom it is imposed. The person from whom it is collected cannot shift its burden to any other person. The tax payer is the tax bearer. examples - Income Tax, Wealth Tax, Capital Gains Tax

Indirect tax
Indirect Tax means the tax which are paid by tax payer indirectly:i.e. while purchasing goods and commodities, paying for services Indirect Tax is imposed on one person but is paid partly or wholly by another. Tax payer does not feel the burden of the tax examples - Central Excise Duty, Customs Duty, Octroi, Interest Tax, Entertainment Tax, Foreign Travel Tax

Reference: 1. Income Tax: Law and Practice by Gaur and Narang, Kalyani Publications 2. Income Tax: Law and Accounts by Mehrotra and Goyal, Sahitya bawan 3. Internet - Google