Step One: Ascertain the Category of ‘Person’ to which ‘Assessee’ belongs to ‘Step Two: Identify the relevant ‘Assessment Year’ and ‘Previous Year’ Step Three: Determine the ‘Residential Status’ of the Assessee Step Four: Ascertain the incomes earned by the assessee during previous year Which must be ‘considered’ for computing taxable income Step Five: Classify the incomes to be ‘considered’ into Reyénue ana Capital Receipts Step Six: Determine “Taxable Incomes ’ by applying the Golden Rule of Income Tax Step Seven: Classify the Taxable Incomes under various ‘heads of Income’ INCOME UNDER EACH HEAD STEP EIGHT: COMPUTE TAXABLE Step Nine: Calculate Total Taxable Income Step Ten: Compute Tax LiabilityDr. V. Rajesh Kumar Dr. R.K. Sreekantha CHAPTER NUMBER NINE COMPUTATION OF TAXABLE INCOME UNDER EACH HEAD In the process of making assessment, the next step is to compute taxable income under each ‘head of income’. This chapter explains computation of taxable income under the first head ~ “Income from Salaries” Computation of taxable income under each head involves three aspects, viz., 1. When? 2. How? 3. How Much? ‘When?’ Aspect is about the ‘chargeability’ of income undef'the heads, This aspect explains the conditions to be fulfilled for charging an income undep’the heads (This has been explained in Chapter Number Eight. However, additional information and detailed explanation is provided under each respective head). "How? Aspect is about the ‘basis of charge’ ofthe income tnder each head. This aspect explains the criterion based on which the chargeability, of income is decided. The ‘How?’ aspect is most crucial in computing taxable income under éach head, The ‘Basis of Charge’ explained under each head, ensures uniformity in tax treatment, ‘How Much?" Aspect is about the “formats and provisions’ for computing the taxable income under each head. Under each head of incomé, fhe discussion is shown in the following order: 1. Chargeability, 2. Basis of Charges 3. Formats and Provisions. onDr. V. Rajesh Kumar Dr. R.K. Sreekantha INCOME FROM SALARIES CHARGEABILITY According to section 15 of the Income Tax Act, an income is chargeable under the head “Salaries” when- (a) The relationship between ‘payer’ and ‘assessee’ is in the nature of ‘employer-employee’; and (b) The payment made by ‘employer’ to assessee is ‘out of employment’ Notes: 1. An‘employer-employee’ relationship is bound by ‘service agreement’ 2. A contractual relationship is not ‘employer-employee’ relationship. For example; relationship between a Chartered Accountant and Client, Doctor and Patient, hawyer and Client ete,, is governed by ‘contract’ (whether expressed or implied), and not by,‘service agreement’ 3. Once governed by ‘service agreement’, ‘employer-employee’ relationship comes into existence, irrespective of the qualification and other traits of the employee. A person may be a Medical Practitioner (Doctor) by qualification. However, dnce'he is employed in a Medical Institution (Hospital etc,), he becomes an ‘employee’ andithe payment’by the Hospital to him for services rendered must be considered as ‘income from salary’ andnot as ‘income from profession’. 4, Only payments made by ‘employer’ to ‘employee’ based on ‘employment’ can be considered as ‘income from salary’, For examplé).suppose an employee of Reliance Industries Ltd., has invested in Debentures of the CompanyeThe interest on debentures paid by the company each year is not ‘income from salary’ t6:the assessee, although he is employee of the company, since the payment is not ‘out of employment’ (ie., it is not based on his employment in the company). The sameiis the tteatment even when the debentures are allotted by the Company. 5. Any income arising“out of employment’, but not from ‘employer’ is not ‘income from salary’ For example, suppose a Professor of Commerce has been chosen by Bangalore University for setting question paper, and the selection is based on long service rendered in his college, which is affiliatéd to thé said University. The remuneration for setting paper is not ‘income from salary'\though it is ‘out of employment (ie., based on his employment) since the payment of remiineration i8 not by his ‘employer’ 6. Unless both the conditions specified under section 15 are fulfilled, an income cannot be charged under the head “Salaries” BASIS OF CHARGE Under this head, the income is chargeable on ‘accrual’ basis or ‘receipt’ basis, whichever happens earlier. 92