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Recording Date: January 16, 2015

Intermediate (IPC) Course Paper 4 Taxation:


Chapter 1 Unit 1
CA. Arun K. Agarwal, ACA & ACS

The Institute of Chartered Accountants of India

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This lecture has been delivered by faculty members to supplement the


Study Material, Practice Manual and other content

The views expressed in this lecture are of the Faculty Member.

The content of this video lecture has not been specifically discussed
by the Council of the Institute or any of its Committees and the views
expressed herein may not be taken to necessarily represent the views
of the Council or any of its committees

This e-Lecture was Recorded on:


January 16, 2015

The e-Lectures, PPT, Podcasts


and Video lectures on ICAI
Cloud Campus aim to
supplement the Study Material,
Practice Manual and
Supplementary Study Material

The lecture recordings are made


according to the syllabus and
laws existing/ applicable as on
the date of recording.

Due to changes in law, there is


likely to be some time gap
between these changes and the
recording of updated lectures.

Hence, students are advised to


refer to the Study Material
including Supplementary Study
Material, if any, and other
relevant legislation for latest
provisions/ amendments
required for forthcoming
examination.

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The Income Tax Law in India


undergoes a change
annually with the passing of
the Annual Finance Act on
the 28th of Feb each year
(which is also referred to as
the Union Budget)

The study of Income Tax Law


requires the complete
understanding of the method
of computation of Total
Income which is the key of
the I T Law.

The computation of income


and the rates of applicable
tax are changed every year
in the Union Budget, hence
the students should keep
themselves informed of such
changes.

Quoting sections and sub


sections is not important. The
key thing is to quote the right
sections and sub sections
OR not to quote the sections
at all.

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Taxes are the sources of funding the expenditure of


Governments. In the context of India the following are the
categories of Govt Expenditure:

Establishment
Costs

Salaries of Govt
Employees &
establishment costs
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Armed
Forces

PSU Funding

Govt
Programs &
Policies

Indian Railways,
Posts &
Telegraph Etc

Food Bill,
Manrega, Road
Construction etc
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Direct Taxes Paid by the


person who bears the incidence
Collected directly from the
persons meant to bear these
taxes

Income
Tax

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Gift Tax

Wealth
Tax

Indirect Taxes Paid by one person but


incidence on another person These
taxes are collected indirectly from persons
other than those on whom the incidence of
these taxes are meant to fall

Sales Tax /
VAT

Excise
Duty

Customs
Duty

Person under the Income Tax Act has been defined to include the
following entities:
Individual including Non-resident,
Hindu Undivided Families (HUF),
Bodies of Individuals (BOI), Association of Persons (AOP) & Artificial Juridical
Persons ( such as Deities of Temples)
Societies & Charitable / Religious Trusts
Partnership Firms irrespective of their Income
Co-Operative Societies
Companies incorporated under the Companies Act
Local Authorities like, Panchayats, Municipal Corporation etc.

The term Person has been defined in the Income Tax Act to
identify the entities who are liable to pay income tax.

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Under section 2 (7) of the Income Tax Act, 1961 the term
"assessee means a person by whom any tax or any other
sum of money 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 assessment of fringe benefits 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 of the amount of refund due to
him or to such other person; OR
Who is deemed to be an assessee under any provision of this Act ; OR
Who is deemed to be an assessee in default under any provision of this Act ;

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Under section 3 of the Income Tax Act 1961 "previous year" means the financial
year immediately preceding the assessment year Provided that, in the case of a
business or profession newly set up, or a source of income newly coming into
existence, in the said financial year, the previous year shall be the period rates
with the date of setting up of the business or profession or, as the case may be,
the date on which the source of income newly comes into existence and ending
with the said financial year.

Under section 2(9) of the Income Tax Act,, 1961 "assessment year" means the
period of twelve months commencing on the 1st day of April every year.

It must be noted and understood that the income earned during the financial year
is taxed at the rates applicable in the relevant assessment year.

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a. Previous Year is the period in respect of taxable income is


computed for an assessee, whereas the Assessment Year is the
year which governs the taxability of income.

b. Thus for a salaried person the previous year is the financial year
starting from 1st April every year and ending on 31st March of the
next year.
c. For every other assessee the previous year will be generally the
same period as the financial year (as above), except in the case of
a new business in which case the previous year will be from the
date of start of business upto 31st March next.

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d. The current previous year


is from 1st April 2014 to 31st
March 2015.

e. The salaried persons will


be required to compute their
taxable income for the year
2014 -15 according to the
provisions of the I T Act
applicable for the
Assessment Year 2015 - 16.

f. The I T law that will be


applicable in an Assessment
Year is as determined in the
Annual Union Budget which
is announced on 28th Feb
each year.

g. The provisions of Union


Budget announced on 28th
Feb 2014 will be applicable
for the Assessment Year
2015-16 and the Previous
Year 2014-15.

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Answer
The Previous Year of A will be from 1st July 2014 to 31st
march 2015 i.e. a period of 9 months. Income earned by him
will be taxed in the Assessment Year 2015-16. The
Assessment Year 2015-16 is governed by the provisions of
the Union Budget which was passed on 28th February 2014.

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Answer
The current previous year of a salaried person is the
financial year 14-15 i.e. the period of 12 months from 1st
Apr 14 to 31st Mar 15 and the Assessment Year will be
2015-16

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Understanding the Residential Status of a person under the Income Tax Act
is extremely important as the taxability of a person and the scope of his total
income is computed on the basis of his residential status as defined under
section 6 of the Income Tax Act, 1961.
Under the Income Tax Act, the Residential Status of a person can be either of
the following:
Resident in India;
Not ordinarily Resident in India;
Non Resident in India

The Residential Status of a person is determined for each previous year and
may vary from his status in the earlier previous year / years.
If a person is resident in India in a previous year relevant to an assessment
year in respect of any source of income, he shall be deemed to be resident in
India in the previous year relevant to the assessment year in respect of each
of his other sources of income.
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Basic Conditions for determining


Resident in India

Additonal Conditions for


determining Residential Status

The Residential Status is


determined every year for
Additonal
Additonal
an assessee - hence, a
Condition 1 person may be a resident Minimum Stay in Min Stay in India Resident in India Condition 2 - Min
Stay in India in
in one previous year but India during the in the preceeding in the last 10
last 7 preceeding
Previous Year
Previous Years
not in the next
preceeding
Previous Years
Previous Years
Conditions of Residential
Status in India for
Individual Assessees
Only

182 Days

Must have been a 730 days in India


365 days in the 4
resident of India
in the 7
preceeding
for at least 2
preceeding
previous years
Years
previous years

Resident and Ordinarilty


Resident in India

Must fulfil at least one

Must fulfil both these additonal


Conditions

Resident but Not


Ordinarilty Resident in
India

Must fulfil at least one

Does not fulfil both the additional


Conditions

Non Resident in India

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Does not Fulfil even one of the basic May or May not fulfil any or both
conditions
the additional conditions
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A Hindu undivided family, firm or other association of persons is said to be resident in India in
any previous year in every case EXCEPT where during the relevant previous year the control
and management of its affairs is situated wholly outside India.
Resident and Ordinarilty If the management and control of its affairs are situated wholly or
Resident in India
partly in India during the Previous Year
Resident but Not
Ordinarilty Resident in
India

If the Karta or the Manager of the HUF satisfies both the additional
conditions mentoned above, i.e. he is resident in India in 2 of the
preceeding Previous Years out of 10 and has been in India for a
period or periods aggregating in all to 730 days or more in the 7
preceeding Previous Years.

Non Resident in India

If the management and control of its affairs are situated wholly


outside India during the Previous Year

Note: Control and management means de facto control and management and not merely the
right to control or manage. Control and management is situated at a place where the
head, the seat and the directing power are situated.

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Residential Status of Companies


a. If it is an Indian Company i.e. It has been incorporated in
India;
Resident and
Ordinarilty Resident in b. If it is a Foreign Company (incorporated outside India), the
management and control of its affairs are situated wholly
India
in India during the Previous Year
Only a foreign company can be Non Resident in India in a
previous year. A foreign company shall be non resident in
Non Resident in India
India, if the management and control of its affairs are situated
wholly or partly outside India during the previous year
Note: Control and management means de facto control and management and not
merely the right to control or manage. Control and management is situated at
a place where the head, the seat and the directing power are situated.

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Residential Status of All Other Assessess: These assessees can only be either
residents or non residents in India during a previous year.

Resident in India

If the management and control of its affairs are situated


wholly or partly in India during the Previous Year

Non Resident in India

If the management and control of its affairs are situated


wholly outside India during the Previous Year

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Sl

Financial Year

1
2
3
4
5
6
7
8
9
10
11

2014 -15
2013 - 14
2012 - 13
2011 - 12
2010 - 11
2009 - 10
2008 - 09
2007 -08
2006 - 07
2005 - 06
2004 - 05

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No of
Days in
India
177
40
200
130
45
75
186
183
150
118
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The previous year in respect of the Ass Year 2015


16 will be 2014 15.
The residential status of Mr A for the Previous year
2014 15 will be determined in the following steps:
1. Residence in India in the Previous Year: 177
2. Residence in India in the preceding 4 previous
years = 40+200+130+45 = 415 days;
3. Residence in India in the last 7 preceding
previous years out of the last 10 preceding
previous years = 40+200+130+45+75+186+183
= 859
4. From the above, Mr A fulfils one of the two
conditions under 1 and 2 above where his stay
exceeds 365 days in the 4 preceding prev yrs;
5. He also meets the condition of being in India for
730 days in the preceding 7 previous years out
of the 10 preceding previous years
6. It is also reasonable to assume that he would
have been resident in India in 2 yrs out of the
10 preceding previous years.
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Therefore Mr A is a resident in India in the


previous year 2014 15 which is taxable in
the Assessment Year 2015 - 16

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X Ltd was incorporated in New York in 2012. In June 2013 it set up a business
office in New Delhi. The business office in Delhi manages a auto parts plant set up
in March 2014 which started commercial production on 1st June 2014. The
company is managed by the Board of Directors based in New York. However, the
company has posted a Managing Director for heading its Indian Operations, a CFO
and a Legal Advisor who are all members of a Management Committee which
reports to the Board of Directors and works under its supervision.
Determine the Residential Status of X Ltd for the Previous Year 2014 - 15

Under section 6 of the Income Tax Act, 1961 a company incorporated in


India is resident in India in all cases and a company incorporated outside
India is resident in India if the management and control of its affairs is
situated wholly in India. In the given case X Ltd is a foreign company which
is incorporated in New York. Hence, X Ltd will be resident in India only if
the whole of its affairs are managed and controlled in India. In the case of X
Ltd although a management committee exists in India, it operates under the
supervision and control of its Board of Directors which is based in New
York. Hence, the management and supervision of X Ltd is based outside
India. In view of the above reasons, X Ltd will be a Non Resident in India
in the previous year 2014 15.

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a. The scope of Total Income of a person under the income tax Act 1961 depends on
his residential status in India during the previous year;

b. Under section 5 (1) of the Income Tax Act, 1961 the total income of any previous
year of a person who is a resident includes all income from whatever source derived
which:
i) Is received71 or is deemed to be received71 in India in such year by or on behalf of such person ; or
ii) Accrues or arises or is deemed to accrue or arise to him in India during such year ; or
iii) Accrues or arises to him outside India during such year :

c. Under the Proviso to section 5 (1) the total income of a person not ordinarily
resident in India, the income which accrues or arises to him outside India shall not
be so included unless it is derived from a business controlled in or a profession set
up in India.

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d) Under section 5(2) of the Income Tax Act, 1961 the total income
of any previous year of a person who is a non-resident includes all
income from whatever source derived which:
i) Is received or is deemed to be received in India in such year by or on behalf of
such person ; or
ii) Accrues or arises or is deemed to accrue or arise to him in India during such year.

e) In terms of explanation 1 of the above section it is clarified that


Income accruing or arising outside India shall not be deemed to
be received in India within the meaning of this section by reason
merely by the fact that it is taken into account in a balance sheet
prepared in India.

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F. In terms of explanation 2 for the removal of doubts it is


further clarified that income which has been included in
the total income of a person on the basis that it has
accrued or arisen or is deemed to have accrued or arisen
to him shall not again be so included on the basis that it is
received or deemed to be received by him in India.

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For Individuals and HUF Only

Resident

Not Ordinarily
Resident

Non Resident

A. Indian Income
B. Foreign Income is taxable
as under:
a. Business income which is
controlled wholly or partly
from India
b. Business income which is
controlled from outside
India
c. Income from Profession
which is set up in India

Taxable

Taxable

Taxable

Taxable

Taxable

Not Taxable in India

Taxable

Not Taxable in India Not Taxable in India

Taxable

Taxable

d. Income from Profession set


Taxable
up outside India
e. Any other Foreign income
Taxable
like rent, salary, interest etc

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Taxable in India

Not Taxable in India Not Taxable in India


Not Taxable in India Not Taxable in India

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Taxability of Income and Residential Status - For All Other Assessees Can
only be either Resident or Non Resident

All Other Assesses

Resident

Not Ordinarily
Resident

Non Resident

A. Indian Income

Taxable

Not Applicable

Taxable

B. Foreign Income

Taxable

Not Applicable

Not Taxable in
India

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Various situations
of earning of
Income

Status of Income

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Income
Income
Income accruing or
Income received
accruing or
accruing or arising (or deemed
in India & also
arising outside arising in India to accrue or arise
accruing or
India but
but received outside India) and
arising in India
received in India outside India received outside
during the
during the India in the Previous
during the
Previous Year
Previous Yr
Previous Yr
Yr

Indian Income

Foreign Income

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Under the Income Tax Law all incomes which are taxable at the hands of an
assessee have been classified under 5 heads. These are:

Income from Salaries Sections 15 -17


Income from House Property Sections 2 - 27
Profits and Gains from Business & Profession Section 28 - 44
Capital Gains Sections 45 - 55
Income from other sources Sections 56 - 59

The aggregate of the taxable income under all the above 5 heads of income is
called the Gross Total Income or GTI

From the GTI deductions under section 80 C to 80 U are allowed to arrive at the
Total Income or the Total Taxable Income

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The Taxable Income under any particular head of income is calculated as under:
Taxable Incomes under the particular head as computed in accordance with the
Income Tax Law
Less: Deductions allowed under the particular head in accordance with the
Income Tax Law
Deductions under the Income Tax Act are allowed under two categories:
a. Deductions allowed under each head of income; and
b. Deductions allowed from the Gross Total Income for computation of Taxable
Income

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Exemptions constitute a very major element of the Income Tax Law. Exemptions
are those incomes which are not taxable to the extent specified in the Income Tax
Act, 1961
Exemptions are allowed under two categories as under:
a. Those exemptions which are allowed in computing incomes under the different
heads of income, such as exemptions in respect of HRA, Gratuity, Commuted
Pension etc are allowed for computing the income under the head Salaries
b. Those exemptions which are exempt in general and are not governed under
any head of income, such as Agricultural Income etc
Deductions are first included in income and then they are removed / deducted
from the same. In other words, deductions are shown as reductions of incomes
where as Exemptions are not included in the income in the first place. Hence,
whereas Deductions are shown as reductions from income in the IT Returns, the
Exemptions are just ignored (to the applicable value) and not taken in the income
at all.

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The third kind of concession or relief under the


Income Tax Act comprises of Rebates. Rebates are
deductions which are allowed from the amount of tax
payable by an assessee. In other words, first the
income tax payable is computed for the relevant
previous year and then the amount of rebate allowed
is deducted therefrom to arrive at the final tax payable
by the assessee.

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Exemptions: are those incomes which are exempt from tax to the extent specified
in the Income Tax Act. These incomes are not included in the computation of
income to the extent they are exempt

Deductions: are those amounts which are allowed from the income of the
assessee. These are of two types:
a. Deductions allowed under each head of taxable income;
b. Deductions allowed from the Gross Total Income

Rebates: are those amounts which are deductable from the amount of income tax
payable by an assessee during a particular previous year.

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Incomes which are exempt from income Tax are provided for in section 10 of the Income
Tax Act and some of such exempt incomes are as under:
a. House Rent Allowance;
b. Gratuity;
c. Agricultural Income
Deductions from GTI are allowed under sections 80C to 80U of the Income Tax Act and
some deductions from GTI are as under:
a. Life Insurance premium paid by the assessee in the previous year;
b. Medical Insurance premium paid by the assessee during the previous year;
c. Principal and Interest on housing loan paid during the previous year

Deductions allowed in the computation of Income From House Property are as under:
a. Standard Deduction of 30 per cent of the net annual value;
b. Interest on moneys borrowed for constructing or buying the House Property

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Previous Year and Assessment Year

Residential Status and Scope of Total Income

Taxability under different heads

Gross Total Income

Categories of Reliefs / Concessions

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