Chapter 1 BASICS – INCOME TAX

Quick Review of the Chapter
Sections 2(7) 2(9) 2(24) 2(31) 2(34) & 3 80B(5) Particulars Assessee Assessment year Income Person "Previous Year" defined Gross total income

Income Tax Law includes ⇒The Income-tax Act, 1961 (amended up-to-date) ⇒The Income-tax Rules, 1962 (amended up-to-date) ⇒Circulars, clarifications issued from time to time by the CBDT ⇒Judicial decisions The provisions of income-tax are contained in the Income-tax Act, 1961 which extends to the whole of India and became effective from 1-4-1962 Annual amendments: Every year a Budget is presented before the Parliament by the Finance Minister. One of the most important components of the Budget is the Finance Bill, which declares the financial proposals of the Central Government for the next financial year. The Bill contains various amendments which are sought to be made in the areas of direct and indirect taxes levied by the Central Government. The Finance Bill also mentions the rates of income-tax and other taxes. When the Finance Bill is approved by both the Houses of Parliament and receives the assent of the President, it becomes the Finance Act. The provisions of such Finance Act are thereafter incorporated in the Income-tax Act, Central Excise Act, etc. Besides the annual amendments, sometimes amendments are brought through an amendment Act, e.g. Income Tax Amendment Act/Taxation Amendment Act, etc. Scheme of Taxation: Every person whose total income of the previous year exceeds the maximum amount which is not chargeable to income-tax is an assessee and chargeable to income-tax in the assessment year at the rate or rates prescribed in the Finance Act and the Income Tax Act for the relevant assessment year. However his total income shall be determined on the basis of his residential status in India. Besides the rates which are given in the Finance Act every year, there are certain incomes which are taxable at the special rates given in the Income-tax Act itself e.g. long-term capital gain is taxable @ 10%/20% and income from lotteries, crossword puzzles, etc. are taxable @ 30% for assessment year 2009-10. Person: Sec 2 (31) Person includes - An Individual - A Hindu Undivided Family (HUF) - A Company - A Firm - An AOP or a BOI, whether incorporated or not - A local authority - Every artificial juridical person not falling within any of the preceding sub-clauses.

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Name
Delhi University Essen Paints Pvt. Ltd Punjab Bank Ltd A and B are legal heirs of C. C died in 2008 and A and B carry on his business without entering into a partnership. Shri Krishna Enterprises, a firm consisting of S, K and P A joint family consisting of P, Mrs. P and their son S. Municipal Corporation of Delhi. Mr. Sachin Mr. Atal who’s age is 72 years Mrs. A who’s age is 80 years non-resident in India Ms. Rani age 42 resident in India

Income Nil Rs. 50 lakhs Rs. 200 lakhs Rs. 1,00,000

Status

Basic Tax

Surcharge

EC & SHEC

Rs. 100 lakhs Rs. 5 lakhs Nil Rs. 50,000 Rs. 3,45,960 Rs. 3,40,250 Rs. 5,44,240

Assessment year [Section 2(9)]: It means the period of 12 months commencing on the first day of
April every year.

Previous year [Section 3]: It means the previous year as defined in section 3. According to section
3, previous year means the financial year immediately preceding the assessment year. (Note: First previous year for a business/profession newly set-up during the financial year or for a new source of
income, starts from the date of setting up of the business or from the date the new source came into existence).

However, subsequent previous years shall always be a financial year.
Assessment Year

Date of earning 25th July 2008 10th May 2009 31st March 2008 1st April 2008

Previous Year

Assessment Year

Income Earned Rs. 1,00,000 Rs. 10,000 Rs, 5,000 Rs. 8,000

Previous Year 2008-09

Assessment Year 2009-10

Income of previous year is taxed in the assessment year. Some times income of the previous year is taxed in the same financial year in which income is earned. In other words, previous year and assessment year are same:
(1) Shipping business of non-residents [Section 172] (2) Assessment of persons leaving India [Section 174] (3) Where an association of persons or a body of individuals or an artificial juridical person formed or established for a particular event or purpose is likely to be dissolved in the previous year in which it is formed or established or immediately thereafter, he shall tax such AOP or BOI in the same previous year in which income is earned. [Section 174A] (4) Assessment of persons likely to transfer property to avoid tax [Section 175]: (5) Discontinued business [Section 176]: Where a business or profession is discontinued in any previous year, the income of the period starting from 1st April of the previous year to the date of

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discontinuance may be taxed in the same previous year.

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Income [Section 2(24)]: See text book.

Gross Total Income: As per section 14, all income shall, for purposes of Income-tax and computation
of total income, be classified under the following heads of income:  Salaries,  Income from House Property,  Profits and Gains of Business or Profession,  Capital Gains,  Income from Other Sources. Aggregate of incomes computed under the above five heads, after applying clubbing provisions and making adjustments of set off and carry forward of losses, is known as Gross Total Income (GTI).

Total Income: The total income of an assessee is computed by deducting from the gross total income,
all deductions permissible under Chapter VIA of the Income-tax Act i.e., deductions under sections 80C to 80U. Total income so computed shall be rounded off to the nearest ten. Answer the following 1 Income-tax Act extends to: (A) whole of India (B) whole of India except Jammu & Kashmir (C) whole of India except Sikkim (D) whole of India except Jammu & Kashmir and Sikkim 2 Finance Bill becomes the Finance Act when it is passed by: (A) the Lok Sabha (B) both Lok Sabha and Rajya Sabha (C) both Houses of Parliament and given the assent of the President (D) both Houses of Parliament and given the assent of the Prime Minister/ Finance Minister 3 A.O.P. should consist of: (A) individuals only (B) persons other than individuals only (C) both the above 4 Body of individuals should consist of: (A) individuals only (B) persons other than individuals only (C) both the above 5 'X', who is a famous singer, came to India from America for the first time on 26-1-2009. He gave many
performances in India from which he got Rs. 2,00,000. When he was to return to America, the Income-tax Officer gave him a notice and asked him to pay income-tax immediately. He said in his reply, 'My previous year ends on 31-3-2009 and my tax liability will be in the assessment year 2009-10.' What is your opinion in this regard?

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'R', who has been permanently in India, migrated to USA on 18-11-2008. Explain how he will be taxed with regard to the income earned between 1-4-2008 and 18-11-2008.
A is 60 years old. His total income for the assessment year 2009-10 is Rs. 3,50,000. His tax liability shall be: ▫ Rs. 25,750 ▫ Rs. 25,500 ▫ Rs. 27,500 ▫ Rs. 28,330

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Annexure I

Rates of income-tax for assessment year 2009-10
For woman - resident in India - below the age of 65 years at any time during the previous year. Upto Rs. 1,80,000 Rs. 1,80,010 to Rs. 3,00,000 Rs. 3,00,010 to Rs. 5,00,000 Above Rs. 5,00,000 Nil 10% 20% 30%

For an individual (man or woman) - resident in India who is of the age of 65 years or more at any time during the previous year. Upto Rs. 2,25,000 Rs. 2,25,010 to Rs. 3,00,000 Rs. 3,00,010 to Rs. 5,00,000 Above Rs. 5,00,000 Nil 10% 20% 30%

For individuals, [other than mentioned above] HUF, AOP/BOI (other than co-operative societies, whether incorporated or not). Upto Rs. 1,50,000 Rs. 1,50,010 to Rs. 3,00,000 Rs. 3,00,010 to Rs. 5,00,000 Above Rs. 5,00,000 For Companies and Firms Surcharge 30% 10% if the total income exceeds - Rs. 10 lakhs in case of Individual & HUF - Rs. 1 crore in case of Company & Firm 10% is substituted by 2.5% in case of Foreign Company 2% on income-tax and surcharge, if any 1% of income-tax and surcharge, if any Therefore total education cess and SHEC shall be 3% of income and surcharge, if any Nil 10% 20% 30%

Education Cess (EC) Secondary and Higher Education Cess (SHEC)

Marginal Relief in case of assessment year 2009-10: Marginal relief would be provided to ensure that the additional income-tax payable, including surcharge, on the excess of income over Rs. 10,00,000 is limited to the amount by which the income is more than Rs. 10,00,000.

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Example
Total income (Rs.) Man and woman Woman resident in India resident in India of age below 65 years of age Other Persons of 65 years or more Basic Tax Surcharge Tax Basic Tax Surcharge Tax Basic Tax Surcharg Tax including including e including surcharge surcharge surcharge but but but excluding excluding excluding EC + EC + SHEC EC + SHEC SHEC 1,97,500 2,00,500 2,03,500 2,06,344 Nil 7,000
(1)

10,00,000 10,10,000 10,20,000 10,29,480

1,97,500 2,07,500 2,17,500 2,26,978 No marginal relief 2,27,203

2,02,000 2,05,000 2,08,000 2,10,844

Nil 7,000
(2)

2,02,000 2,05,000 2,12,000 2,08,000 2,20,000 2,11,000 2,31,480 2,13,844

Nil 2,05,000 7,000(3) 2,15,000 14,000(6) 2,25,000 20,636(9) 2,34,480

14,000(4) 20,634(7)

14,000(5) 20,636(8)

10,30,160

2,06,548 20,655(10)

2,11,048

21,105(11)

2,32,153 2,14,048 21,112(12) 2,35,160 No marginal relief 2,32,201 2,14,183 21,418(13) 2,35,601 No marginal relief

10,30,610

2,06,683

20,668

2,27,351

2,11,183

21,118

(1) Surcharge @ 10% of Rs. 2,00,500 i.e. Rs. 20,050 or Rs. 7,000 (Additional income Rs. 10,000 – 3,000 Tax) whichever is less. (2) Surcharge @ 10% of Rs. 2,05,000 i.e. Rs. 20,500 or Rs. 7,000 whichever is less. (3) Surcharge @ 1% of Rs. 2,08,000 i.e. Rs. 20,800 or Rs. 7,000 whichever is less. (4) Surcharge @ 10% of Rs. 2,03,500 i.e. Rs. 20,350 or Rs. 14,000 (Additional income Rs. 20,000 – 6,000 tax) whichever is less. (5) Surcharge @ 10% of Rs. 2,08,000 i.e. 20,800 or Rs. 14,000 whichever is less. (6) Surcharge @ 10% of Rs. 2,11,000 i.e. Rs. 21,100 or Rs. 14,000 whichever is less. (7) Surcharge @ 10% of Rs. 2,06,344 i.e. Rs. 20,634 or Rs. 20,636 (Additional income Rs. 29,480 – 8,844 Tax) whichever is less. (8) Surcharge @ 10% of Rs. 2,10,844 i.e. Rs. 21,084 or Rs. 20,636 whichever is less. (9) Surcharge @ 10% of Rs. 2,13,844 i.e. Rs. 21,384 or Rs. 20,636 whichever is less. (10) Surcharge @ 10% of Rs. 2,06,548 i.e. Rs. 20,655 or Rs. 21,112 (Additional income of Rs. 30,160 – 9,048) whichever is less. (11) Surcharge @ 10% of Rs. 2,11,048 i.e. Rs. 21,105 or Rs. 21,112 whichever is less. (12) Surcharge @ 10% of Rs. 2,14,048 i.e. Rs. 21,405 or Rs. 21,112 whichever is less. (13) Surcharge @ 10% of Rs. 2,14,183 i.e. Rs. 21,418 or Rs. 21,427 (30,610 – 9,183) whichever is less. Note.—After including the surcharge as above, education cess @ 2% and SHEC @ 1% shall be added to Tax including surcharge. There is no marginal relief in case of education cess and SHEC.

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