Direct Taxation

INTRODUCTION & CHAPTER 1

History of Income Taxes - World
History of Income Taxes - India
Let’s delve into a Reading
 Components of Income Tax Law in India

Income Tax Law

Income Tax Act Income Tax Rules Circulars/ Legal Decisions

Finance Act
1961 1962 Notifications of Courts
Income Tax Act, 1961
Income Tax Act 1961: The levy of income-tax in India is governed by the Income-tax Act, 1961
The Finance Act
Income Tax Rules, 1962
Circulars and Notifications
Legal Decisions of Courts /Case Laws
• The study of case laws is an important and unavoidable part of income-tax law.

• It is not possible for Parliament to conceive and provide for all possible issues that may arise
in the implementation of any Act. Hence the judiciary will hear the disputes between the
assessee and the department and give decisions on various issues.

• The Supreme Court is the Apex Court of the country and the law laid down by the Supreme
Court is the law of the land.

• The decisions given by various High Courts will apply in the respective states in which such
High Courts have jurisdiction.
Computation of Total (Taxable) Income
1. Determine the residential status of the person as per section 6 of the Act.

2. Calculate the income as per the provisions of respective heads of income. Section 14 classifies
the income under five heads:
◦ (i) Income from salaries
◦ (ii) Income from House Property
◦ (iii) Profits and gains of business or Profession
◦ (iv) Capital Gains
◦ (v) Income from other sources
Computation of Total (Taxable) Income
3. Consider all the deductions and allowances given under the respective heads before arriving at the net income.

4. Exclude the income exempt under section 10 of the Act.

5. Aggregate of incomes computed under the 5 heads of income after applying clubbing provisions and making
adjustments of set off and carry forward of losses is known as Gross Total Income.

6. Deduct there from the deductions admissible under Sections 80C to 80U. The balance is called Total income.
The total income is rounded off to the nearest multiple of Rupees Ten (Section 288A).

Similarly tax payable/refundable shall be rounded off to the nearest multiple of Rupees Ten (Section 288B).
Computation of Total (Taxable) Income
Computation of Tax Liability
Income Tax Act – Section 1
Section 1 - defines Short title, extent and commencement
Income Tax Act – Section 2
Section 2 – captures Important Definitions (eg – Assessment Year, Person, Income & so on)
Section 2 – Important Definitions
• Terms like ‘person’, ‘assessee’, ‘income’ may have different definition & interpretion under IT Act

• Section 2 gives definitions of the various terms and expressions used

• The ones we will focus on includes

Assessment
Assessee Assessment Income Person Previous Year
Year

Section Section Section Section Section Section

2(7) 2(8) 2(9) 2(24) 2(31) 2(34)

Section 3
Section 2 – Important Definitions
Section 2 – Important Definitions
• Assessment - Section 2(8)

• As per IT Act – “assessment” includes reassessment

• Income tax assessment is estimation for an amount assessed while paying Income Tax by assessee
himself or by income tax officer.
Section 2 - Important Definitions

• What is the current Assessment Year? AY 2019-20

• Income earned in which year will be assessed /taxed during current Assessment year? FY 2018-19
Section 2 - Important Definitions
Income [Section 2(24)]
"Income" includes but not limited to
▪ profits and gains
▪ dividend
▪ the value of perquisite or profit in lieu of salary
▪ capital gains
▪ the profits and gains of any business
▪ any winnings from lotteries, crossword puzzles, races including horse races, card games and other
games of any sort or from gambling or betting of any form or nature whatsoever
▪ any sum received by the assessee from his employer as contributions to any provident fund or
superannuation fund or any other fund for the welfare of such employees
Section 2 - Important Definitions

Person includes :

• an Individual;
• a Hindu Undivided Family (HUF) ;
• a Company;
• a Firm including Limited Liability Partnerships (LLP);
• an association of persons or a body of individuals, whether incorporated or not;
• a local authority; and
• artificial juridical person (AJP) – everyone not falling under any of the above
Important Interpretation - Person
• Individual - It refers to a natural human being whether male or female, minor or major.

• Hindu Undivided Family (HUF)

• The term 'Hindu Undivided Family' has not been defined under the Income Tax Act. It is defined under the Hindu Law
as a family that consists of all persons lineally descended from a common ancestor, including wives and unmarried
daughters. This means membership of a HUF does not come from a contract but from status of the person in such
families. A HUF cannot be formed by a group of people who do not constitute a family. Lineal descendents with a
common ancestor is a must.
• A relationship created due to operation of Hindu Law. The manager of HUF is called “Karta” and its members are
called ‘Coparceners’.
• A Hindu family can come together and form a HUF. Buddhists, Jains, and Sikhs can also form a HUF.
• HUF has its own PAN and files tax returns independent of its members. HUF is taxed separately from its members.
Important Interpretation - Person
• Company - It is an artificial person registered under Indian Companies Act 1956 or any other law.

• Firm
• It is an entity which comes into existence as a result of partnership agreement between persons to share profits of
the business carried on by all or any one of them.
• Persons who have entered into partnership with one another are individually called "partners" and collectively "a
firm", and the name under which their business is carried on is called the "firm name".
• Though, a partnership firm does not have a separate legal entity, yet it has been regarded as a separate entity under
Income Tax Act.
• It is important to note that for Income Tax purposes, a limited liability partnership (LLP) constituted under the LLP
Act, 2008 is also treated as a firm.
Important Interpretation - Person
• A limited liability partnership (LLP) is a body corporate formed and incorporated under the Limited Liability
Partnership Act, 2008. It is a legally separated entity from that of its partner.

• A LLP is liable to the full extent of its assets but liability of the partners is limited to their agreed contribution in the
LLP. Since liability of the partners is limited to their agreed contribution in the LLP, it contains elements of both a
corporate structure as well as a partnership firm structure.

• There is no personal liability of a partner except in the case of a fraud. Moreover, a partner is not responsible or liable
for another partner’s misconduct or negligence as there is no joint liability in the case of LLP.

• For Income Tax purposes, a limited liability partnership (LLP) is also treated as a firm.
Important Interpretation - Person
• Association of Persons or Body of Individuals:
• When persons combine together to carry on a joint enterprise and they do not constitute partnership under the
ambit of law, they are assessable as an association of persons.
• Receiving income jointly is not the only feature of an association of persons. There must be common purpose, and
common action to achieve common purpose i.e. to earn income.
• An AOP can have firms, companies, associations and individuals as its members.

• A body of individuals (BOl) cannot have non-individuals as its members. Only natural human beings can be
members of a body of individuals. Whether a particular group is AOP or BOl is a question of fact to be decided in
each case separately.

• Membership clubs, Nidhi, Chit funds, Trusts, Co-operative societies like MARKFED, NAFED are the examples of such
AOP/BOI
Important Interpretation - Person
• Local Authority. Municipality, Panchayat, Cantonment Board, Port Trust etc. are called local authorities.

• Artificial Juridical Person. A public corporation established under special Act of legislature and a body
having juristic personality of its own are known to be Artificial Juridical Persons.
• Everyone not falling within any of the above definitions of person falls under AJP.
• Universities are an important example of this category
Quiz - Determine the Type of the following “Person”
• Reliance Industries Limited • Brahmin Parivar having Mr. A, • Mr. Narendra Modi, Prime
• [company] his brother B, Mrs. A and B Minister of India
• Punjab National Bank • [ H.U.F.] • [ Individual]

• [company] • Kalyani Publishers Ltd • A Village Panchyat

• Madras University • [ Company] • [ Local Authority]

• [Artificial Juridical person] • Reserve Bank of India • Markfed, Housefed

• Calcutta Municipal Corporation • [ Artifitial Judicial Person] • [ Association of Person - AOP ]

• [Local Authority] • Life Insurance Corporation of

• A partnership firm with A, B India
and C partners • [ Company]

• [Firm]
Section 2(34) & Section 3 – Previous Year
Section 2(34) & Section 3 – Previous Year
Section 2(34) & Section 3 – Previous Year
Section 4 – Charge of income-tax
BASIS OF CHARGE
4(1) Income-tax shall be charged during any assessment year on the total income of the previous
year of every person & at rates applicable for that previous year
4(2) In respect of income chargeable under sub-section (1), income-tax shall be deducted at the
source or paid in advance, where it is so deductible or payable under any provision of this Act
Tax Incidence is based on two factors
Indian Income

Scope of Income
Incidence of tax

Foreign Income

Resident & Ordinarily Resident

(ROR)
Resident
Residential Status of Resident but Not Ordinarily
Assessee Resident (RNOR)
Non-Resident
Scope of Income

Received in India Accrued in India Status of Income

Yes Yes Indian Income
Yes No Indian Income
No Yes Indian Income
No No Foreign Income

1) Income is accrued or arise at a place where source of Income is situated.

For example, for salary income, source is situated at the place where services are rendered.

2) Mere remittance of an income to India doesn’t make it Indian Income

Residential Status

• Residential Status has nothing

to do with citizenship

• It is merely Tax Status

Incidence of Tax
Received in Accrued in Status of Taxable? Taxable?
India India Income
Resident Non-Resident
Yes Yes Indian Income Yes Yes
Yes No Indian Income Yes Yes
No Yes Indian Income Yes Yes
No No Foreign Income Yes* No

• For a Non-Resident, only Indian Income is Taxable; foreign income is not taxable
• For a Resident, Indian as well as Foreign Income are taxable with following exception:
• For Individuals & HUF, Foreign income is taxable for RNOR (Resident but Not Ordinarily Resident) only if the business is controlled
from India / profession is setup in India; else it’s not taxable.
At this point – pls note few tax exemptions
Incidence of Tax – Exercise
Incidence of Tax – Exercise
Incidence of Tax – Exercise
Incidence of Tax – Exercise
Incidence of Tax – Exercise
Incidence of Tax – Exercise
Incidence of Tax – Exercise
Incidence of Tax – Exercise
Incidence of Tax – Exercise
Section 6 - Determination Of Residential Status
 Residential Status of Individual [Section 6(1) and 6(6)]

Stay in India >= 182 days in PY

Individual

Meet at least one of the two

Resident BASIC CONDITION Stay in India >=60 days in PY
AND
Cumulative stay in India >=365 days in
Not meeting both the BASIC 4 years preceding relevant PY
Non-Resident CONDITIONS

A Non-Resident Indian is also called NRI

BASIC CONDITIONS
NRI is only the Tax Status of an Individual
Residential Status of Individual [Section 6(1) and 6(6)]
Exceptions to BASIC CONDITIONS
Only 1st Basic Condition need to be checked for following individuals
◦ Indian Citizen who
◦ A crew of Indian Ship
◦ Outside India for Employment (not business)
◦ Indian Citizen or Person of Indian Origin (PIO) who visits India in PY (previous year)

◦ If 1st Basic Condition is met for above individuals, he/she is a Resident, else Non-Resident

PIO means a foreign citizen who:

• at any time held an Indian passport, OR
• whose either parent/grandparent/great-grandparent were born and permanently resident in India, OR
• is a spouse of a citizen of India or a PIO
Individual – Resident – ROR Vs RNOR

Resident in >= 2 out of 10 PYs

preceding relevant PY
ROR
Resident

Meets both the Additional

(Resident and Ordinarily Conditions
Resident)
Stay in India >= 730 days in 7
PYs preceding relevant PY
RNOR
Doesn’t meet any of the
(Resident but Not Ordinarily Additional Conditions
Resident)

ROR essentially means a Resident who stays mostly in India

RNOR essentially means a Resident who stays mostly out of India ADDITIONAL CONDITIONS
 Steps to follow to determine Residential status of a Person
Step 1: Check whether an Individual falls under any exception to basic conditions.

Step 2: If yes, check only first basic condition, otherwise check both the basic conditions. If he
satisfies any one of the basic conditions (only first in case of exception), then he would be
resident in India, otherwise he would be Non-resident in India.

Step 3: If an Individual is resident in India, then check whether he is ROR or RNOR.

Step 4: If Individual satisfies both the additional conditions, then he is ROR. Otherwise, he would
be RNOR.
Residential Status - Exercise
Residential Status - Exercise
Solution
• Determination of Residential status of A for Previous Year 2018-19 (Assessment Year 2019-20):

• In this case, both the basic conditions would be checked as A does not fall under any exception to basic
conditions.
• Stay of A in India during relevant PY 2018-19 = 1st April, 2018 to 27th December, 2018 i.e. 271 days (30
+ 31+ 30 + 31 + 31 + 30 + 31 + 30 + 27).
• A satisfies first basic condition by staying in India for more than 182 days during relevant PY, so A is a
Resident in India.

• Now, it would be checked whether A is ROR or RNOR. Since A had never been out of India before 27th
December, 2018, he would be satisfying both the additional conditions as follows:
• Resident in at least 2 PY out of 10 PYs immediately preceding relevant PY
• Stay in India >= 730 days during 7 PY immediately preceding relevant PY
Residential Status - Exercise
Residential Status - Exercise
Solution
• Determination of Residential status of A for Previous Year 2018-19 (Assessment Year 2019-20):

• In this case, both the basic conditions would be checked as A does not fall under any exception to basic
conditions
Residential Status - Exercise
Residential Status - Exercise
Residential Status - Exercise
Residential Status - Exercise
Residential Status - Exercise
Residential Status - Exercise
Residential Status - Exercise
Residential Status - Exercise
Residential Status - Exercise
Residential Status - Exercise
 Residential Status of HUF

ROR if Karta is ROR

(meets both additional conditions)
If Management & Control of HUF
Resident is partly or wholly in India
RNOR if Karta is RNOR
HUF

(not met any of the additional

conditions)
If Management & Control of HUF
Non-Resident is wholly outside India
Residential Status – Exercise
 Residential Status of
Firm, AOP/BOI, Local Authority, AJP (except Companies)

If Management & Control is partly

Resident or wholly in India

Firm, AOP/BOI, Local

Authority, AJP

If Management & Control is

Non-Resident wholly outside India

There is no concept of ROR or RNOR

Residential Status – Exercise
Residential Status – Exercise
 Residential Status of Company
A Company
incorporated under
Companies Act, 1956
Resident i.e. an Indian Company
(meets any of the
two conditions) POEM is wholly in India
(pls note wholly)
Company

None of the Resident

Non-Resident conditions met

POEM – Place of Effective Management (where key management /commercial decisions are taken)
There is no concept of ROR or RNOR
Residential Status of Company
In other words,

◦ An Indian Company is always a Resident

◦ A Foreign Company is Resident only if it’s Place of Effective Management (POEM) is wholly in India
Residential Status - Exercise
Residential Status - Exercise
Residential Status - Exercise
Residential Status - Exercise