1

CHAPTER
Basic concepts that
one must know

WHATIS AN ASSESSMENT YEAR

1. "Assessment year" means the period starting from April 1 and ending on March 31 of the next year. For
instance, the assessment year 2020-21 commenced on April 1, 2020 and will end on March 31, 2021
Income of a previous year of an assessee is taxed during the next following assessment year at the rates
prescribed by the relevant Finance Act [for tax rates, see Appendix 1].

WHAT IS APREVIOUSYEAR
2. Income earned in a year is taxable in the next year. The year in which income is earned is known as previous
year and the next year in which income is taxable is known as assessment year.

Provisions illustrated-
Income earned by an individual during the previous year 2019-20 is taxable in the immediately following assessment
year 2020-21 at the rates applicable for the assessment year 2020-21. Similarly, income earned during the previous
year 2020-21 by a company will be taxable in the assessment year 2021-22 at the rates applicable for the assessment
year 2021-22. This rule is applicable in all cases [see, however, para 2.4 for exception to this rule].

2.1 Uniform previous year - All assessees are required to follow financial year (i.e., April 1 to March 31) as
previous year. This uniform previous year has to be followed for all sources of income. However, it is not
necessary that one should maintain books of account on the basis of financial year.
2.2 Previousyear in the case ofa newly set-up business/profession or new source of income - In the case
of newly set-up business/profession or a source of income newly coming into existence, previous year shall be
as follows-
First previous year First previous year is the period commencing from the date of setting up of business/
profession (or, as the case may be, the date on which the source of income newly comes into existence) and
ending on the immediately following March 31. Thus, in the case of a newly set-up business/ profession or new
source of income, the first previous year is a period of 12 months or less than 12 months. It can never exceed 12
months.
Second and subsequentprevious year - The second and subsequent previous years are always of 12 months each
ile., April to March).
Para 2.3 BASIC CONCEPTS THAT ONE MUST KNOW

Problems
2.2-P1 X starts a ew businc's8 O (tobr 20, 200I9, WiMl re e firsl anl second previous years and ace.
years Sessment
Solution: 1he first previous year will be the period conmencing on October 20, 2019 and ending on March 2,
Income of this previous year will be laxable in the assessment year 2020-21. The second previous vear
2020-21, income of which will be taxable in the assessment year 2021-22. year will previous be

2.2-P2 Suppose in the alborr case, business is slarled on March 29, 2020.
Solution:The first previous year will be the periol commencing on March 29, 2020 and
Income of this previous year will be taxable in the assessment
ending on March 21. 20
year 2020-21, The second previous year Wonild.
2020-21, income of which will be taxable in the assessment year 2021-22.

2.2-P3 Y joins a company as a consultant on February 10, 2020 (before that ihe is not in cmployment). What are the firsto
st and
Second previous years and assessment years ?
Solution: The first previous year will be from February 10, 2020 to March 31, 2020. Income of this
would be taxable in the assessment year 2020-21. The second previous
previous year will be 2020-21 and year
taxable in the assessment year 2021-22. income wil he
2.2-P4 X sets up a new business
March 30, 2020. He wants to close down his
on
wants to adopt the
first books of account on March 31, 2021, He
period commencing on March 30, 2020 and ending on March 31, 2021 as first previous year. Can he do so 2
Solution: No one can cross March 31 without ending previous In this case, the first
year. previous year will be the
period of 2 days commencing on March 30, 2020 and ending on March 31, 2020. Income of this
taxable in the assessment year 2020-21. The second previous year will be
previous year will be 2020-21 and income is taxable in the
assessment year 2021-22.

2.2-P5 The income of X comprises of only

business of computer hardware. From the data
property income up till March 10, 2019. On March 10, 2019, he starts a new
2020-21
given below, find out the taxable income of Xfor the assessnment years 2018-19 to
Property income: Rs. 42,000 every year.
Business income : Rs. 69,000 from March 10, 2019 to March 31, 2020 (out
31, 2019). of which Rs.10,000 is for the period ending March
Solution
Assessment Property 1ncomme Business income
year
Total
Previous Income Previous ncome Rs.
year Rs.
year Rs.
2018-19 2017-18 42,000 42,000
2019-20 2018-19 42,000 March 10, 2019 to March 31, 2019
10,000 52,000
2020-21 2019-20 42,000 2019-20 59,000 1,01,000
Note For the assessment year 2019-20, the
-

assessee has income from house

existing source of income during the previous year. His new source of incomeproperty which
comes into can be said to be
existence in the tormhis
or
business income from March 10, 2019.
Therefore, the assessee has two previous for assessment
For the property income which is his existing source, the previous year is 2018-19.years year whichs
For the business income, 2019-.
his new source of
income, the
previous year is the period commencing from March 10, 2019 to March 31, 2019.
For
computing taxable income for the assessment year 2019-20 (and subsequent
previous years will be aggregated. years), the income from both tne

2.3
Previous year as defined in section 3- Except in the case mentioned in 2.2, previous year ls the
financial year
immediately preceding the assessment year. For instance, for thepara
assessment year 2020-41 the
immediately preceding financial year (i.e., 2019-20) is the
previous year.
2.4 When income
of previous year is not taxable in the immediately following
that the income of the previous year is assessable as the income of the immediately assessment year-Theyeas
following assessment r
has certairn
exceptions. These are:
a. income of non-resident from
6. income of
shipping;
persons leaving India either permanently or for a long of time;
period
3
WHO IS REGARDED AS ASSESSEE Para 4
C. income of bodies formed for short
.
duration;
m c o e ot a
per'son trying to alienate his assets with a view to avoiding payment of tax ; and
e. income of a discontinued business.
In these
cases, income of a previous year be taxed the income of the assessment year
may as immediately
preceding the normal assessment year.
These
exceptions
have been incorporated
in order to ensure smooth collection of income-tax from the
taxpayerS Who may not be traceable, if tax assessment procedure is postponed till the commencement of the aforesaid
normal assessment.

2.5 A financial year has a double role to It is a previous year as well as an

play -

assessment year-On the

basis of the aforesaid
discussion, it canbe said that a financial year plays a double role-it is a
previous year as
well as an assessment
year. Examine the cases given in the table below-
Financial Previous year Assessment year

2019-20 2019-20 is previous year for the income 2019-20 is the assessment year for the income received
received or accrued during April 1, 2019 or accrued in the immediately preceding previous year
to March 31, 2020 ie, April 1, 2018 to March 31, 2019)
2020-21 2020-21 is previous year for the income 2020-21 is the assessment year for the income received
received or accrued during April 1, 2020 or accrued in the immediately
to March 31, 2021
preceding previous year
i.e, April1, 2019 to March 31, 2020)

WHO ARE INCLUDED IN "PERSON"

3. The term "person" includes :
a. an individual;
b. a Hindu undivided family;
C. a company;

d. a firm
e. an association of persons or a body of individuals, whether incorporated or not;
f a local authority; and
8. every artificial juridical person not falling within any of the preceding categories.
These aresevencategories of persons chargeable to tax under the Act. The aforesaid definition is inclusive and
not exhaustive. Therefore, any person, not falling in the above-mentioned seven categories, may still fall in the
four corners of the term "person" and accordingly may be liable to tax under section 4.

Problemss
3-P1 Determine the status ofthefollowing
1. Delhi University.
2. DCM Ltd.
3. Delhi Municipal Corporation.
4. Taxmann Publications (P.,) Ltd.
5. Laxmi Commercial Bank Ltd.
6. ABC Group Housing Co-operative Society.
7. XY&Co,firm of X and Y
8. A joint family of X, Mrs. X and their sons A and B
9.X and Ywho are legal heirs of Z (Z died in 1996 and X and Y carry on his business without entering into partnerslip).
Solution: (1) artificial juridical person : (2) a company : (0) a local authority; (4) a company (5) a company : (6) an
association of persons ; (7) a firm; (8) a Hindu undivided family; (9) an association of persons.

23 WHO IS REGARDED AS "ASSESSEE"

4."Assessee" means a person by whom income-tax or any other sum of money is payable under the Act. It
includes
Para 5 BASIC CONCEPTS THAT ONE MUST KNOW 4

FIrst tnlrgory - A person (i.e., an individual; a Hindu undivided family; a company;a firm; an association of
persons or body of individuals, whether incorporated or not; a local authority; and every artificial juridical
under the Act
by whom any lax or any other sum of money (including interest and penalty) payable
is
person)
(Tespective of the lact whether any proceeding under the Act has been taken against him or not).
taken (whether or not
A person in respect of whom any proceeding under the Act has been
econd tnlegory
-

he is liable for any tax, interest or penalty). Proceeding may be taken :

. either lor the assessment of the amount of his income or of the loss sustained by him; or

. o f the income (or loss) of any other person in respect of whom he is assessable ; or

C. of the amount of refund due lo him or to such other person.

1hird category - Every person who is deemed to be an assessee. For instance, a representative assessee is

deemed to be an assessee by virtue of section 160(2).

Fourthh calegory - Every person who is deemed to be an assessee in default under any provision of the Act. For
nstance, under section 201(1), any person who does not deduct tax at source, or after deducting fails to pay
Such tax, is deemed to be an assessee in default. Likewise, under section 218, if a person does not pay advance
tax, then he shall be deemed to be an assessee in default.

Provisions illustrated- * mm moom.m

The following examples are given to clarify the above points

1. Income of X (age:35 years) is Rs. 2,50,000 for the assessment year 2020-21. He does not file his return of income
because his income is not more than the amount of exempted slab. Income-tax Department does not take any action
him. He is not an "assessee" because no tax or any other sum is due from him.
against
2. Income of Y(age:38 years) is Rs. 2,55,0 for the assessment year 2020-21. He does not file hisretum of income.
Since he is supposed to file his return of income (income being more than exempted slab of Rs. 2,50,000), he is an
"assessee".
3. Income of Z (age:51 years) is Rs. 75,000 for the assessment year 2020-21. He files his return of income (even if his
taxable income is less than Rs. 2,50,000). Assessment order is passed by the Assessing Officer without any
adjustment. Z is an "assessee".
4. Income of A for the assessment year 2020-21 is (-) Rs. 60,000. He files his return of income. He is an "assessee".
5. Income of B (age: 28 years) is less than Rs. 2,50,000 for the assessment year 2020-21. He files his return of income
to claim refund of tax deducted by X Ltd. on interest paid to him. B is an "assessee".
6. Income ofC (age:30 years) is less than Rs. 2,50,000 for the assessment year 2020-21. He does not file his return of
income. During 2019-20, he has paid salary of Rs. 16,90,000 to an employee. Though he is supposed to deduct tax at
source, yet due to ignorance of law, no tax is deducted by him. In this case, C is an "assessee" as he has failed to
deduct tax at source. This rule is applicable even if his own taxable income is below Rs. 2,50,000.

HOW TOCHARGE TAX ON INcOME

5. To know the procedure
forcharging tax on income, one should be familiar with the following:
5.1 Annual tax - Income-tax is an annual tax on income.
5.2 Tax rate of assessment
year Income of previous year is chargeable to tax in the next following
assessment year at the tax rates applicable for the assessment year. This rule is, however, subject to some
exceptions.
5.3 Rates fixed by Finance Act-Tax rates are fixed by the annual Finance Act and not by the Income-tax Act.
For instance, tax rates for the assessment year 2020-21 are fixed by the Finance Act, 2020. If, however, on the
first day of April of the assess1ment year, the new Finance Bill has not been placed on the statute book, the
provisions in force in the preceding assessment year or the provisions proposed in the Finance Bill before
Parliament, whichever is more beneficial to the assessee, will apply until the new provisions become effective.
5.4 Tax on person Tax is -

charged on every person.

5.5 Tax on total income- Tax is levied on the "total income" of
the provisions of the Act.
every assessee computed in accordance with
5.6 Provisions as on April 1 of the
assessment
year applicable for computing income for the assessment
year-Total income is calculated in accordance with the provisions of the Income-tax Act, as they stand on the
first day of April of the assessment year.
s MEANING OF INCOME AS GENERALLY UNDERSTOOD Para 6.1

For calculating tanable income tor the assessment year 2020-21, the provisions of the Income-tax Act as on
T i 0 0 are applicable. If an anmendment is made with effectfrom April 2, 2020, it is irrelevant for
calculating inconme tor tlhe assessment year 2020-21. Likewise, the law existing during the previous year
2019-20 has no relevance tor determininy, the total income for the assessment year 2020-21.
The above rule is applicable only for the purpose of computing taxable income and tax liability. If, however,
an amendnment is made in procedural law (not in substantive law), then it is applicable from the date of
amendnment.

Provisionsillustrated-
Consider the cases given beow. Eample 1 is on amendment in substantive law, Example 2, however, covers an
amendent in praedural law. Rates, dates and form numbers are imaginary (only for illustration purposes).
L. Suppose depreciationrateis reduced from 22 per cent to 18 per cent with effect from April 10, 2020. For calculating
income and income-tax liability for the assessment year 2020-21, the provisions of income-tax law on April 1, 2020 is
applicable. On April 1. 2020, depreciation rate is 22 per cent. Consequently, income for the assessment year 2020-21
shall be calculated by taking into consideration depreciation at the rate of 22 per cent.
2.A new Form Ul is introduced with effect from July 7, 2020 (in place of old Form T3) for making application to the
Assessing Otficer for waiver of income-tax penalty. This is an amendment in procedural law. It is applicable from
the date otf amendment. If an application for waiver is filed on or after July 7, 2020, it should be submitted in the new
form Ul regardless of the assessment year for which waiver is to be obtained.

WHAT IS REGARDED AS INCOME" UNDER THE INCOME-TAX ACT

6. The definition of the term "income" in section 2(24) is inclusive and not exhaustive. Therefore, the term
income" not only includes those things which are included in section 2(24) but also includes such things
which the term signifies, according to its general and natural meaning. Before discussing the definition of
income given in section 2(24), it is imperative to know meaning of "income" as generally understood.
6.1 Meaning ofincome as generally understood- Income is a periodical monetary return with some sort of
regularity. It may be recurring in nature. It may be broadly defined as the true increase in the amount of wealth
which comes to a person during a fixed period of tinme.
6.1-1 BROAD PRINCIPLES WHICH CLARIFY THE CONCEPT OF INCOME A study of the following broad principles
will be helpful for understanding the concept of income:
Regular and definite source - The term "income" connotes a periodical monetary return coming in with some
sort of regularity or expected regularity from definite sources.
Different forns of income - Income may be received in cash or in kind. When incomeis received in kind, its
valuation is to be made according to the rules prescribed in the Income-tax Rules. If, however, there is no
prescribed rule, valuation thereof is made on the basis of market value.
Receipt vs. Accrual - Income arises either on receipt basis or on acerual basis. Income may accrue to a
taxpayer without its actual receipt. Moreover, in some cases, income is deemed to accrue or arise to a person
without its actual accrual or receipt.

Illegal income -The income-tax law does not make any distinction between income accTued or arisen trom a
legal source and income tainted with illegality.

Disputed title Income-tax assessment cannot be held up or postponed merely because of existence of a
-

dispute regarding the title of income.

is not
Relief or reimbursement ofexpenses not treated
as income Mere
-
relief or
reimbursement of enpenses
treated as income. For instance, reimbursement of actual travelling expenses to an employee is not anincome
Diversion ofincome by overriding title vs. Applicationm ofincome - Any expenditure/investment, after income is
received, is application of income. "Income" under the Income-tax Act, which is chargeable totax, is income
before application of income. Any expenditure/ investment out of such income is deductible only if it is
o r Income-tax Rules.
permitted by provision under the Income-tax Act
a

"Diversion of income" is where by an obligation, income is diverted to some other person. When an assessee
on behalf of some other person receives income and later on it is diverted to such person, it is known as
diversion of income and, consequently, it is not chargeable to tax.
 6
Para 6.1 BASIC CONCEPTS THAT ONE MUST KNOW

Provisions illustrated-
law weekly magazine, on the understarnding
Aand Y prepare article for pulblication in Taxman, tax and corporate
an a

in 8, 2019 issue' of Taxman. On September

that remuneration will be shared equally. The article is published August the magazine, the remuneration is paid to
, 2019, X receives the entire remuneration of Rs. 9,000 (as per practice of
diversion of income
The payment of Rs. 4,500 by X to Y is
the first author), half of which is later paid by X to Y.
a on
of Rs. 4,500 to Y will not be treatedas income
Dy overriding title. The taxable income of X will be Rs. 4,500 (payment
of X as it is diverted by an overriding title).

transaction with himself. Income

A person cannot make taxable profit out of a
Surplus from mutual activity
-

as income
to a mutual concern cannot be regarded
must, therefore, come from outside. A surplus arising to a common fund for the mutual benefit of
chargeable to tax. A body of individuals, raising contribution members and some
that it has overcharged
members, cannot be said to have earned an income when it finds
portion of contribution raised may safely be refunded.
Provisions illustrated-
X Ltd. has 50 employees. Employees have formed a tea club in the office. Each one of them contributes Rs. 80 per

month to the club. Club provides tea in tea breaks. During the financial year
2019-20, the excess of receipt over
the club as it is surplus arising to a mutual
expenditure of the club is Rs. 470. It cannot be taken as taxable income of
activity for the mutual benefit of the members.
there is distinction between temporary
Tennporary and permanent income For the purpose of income-tax,
-
no

and permanent income. Even temporary income is taxable.

sum or in instalments, is liable to
tax. For instance,
Lump sum receipt Income, whether received in lump
-

arrears of bonus, received in lump sum, is income and is taxable as salary.

Tax-free income If a person receives tax-free income on which tax is paid by person
-
the making payment on
behalf of the recipient, it has to be grossed up for inclusion in his total income.
For instance, X pays Rs. 25,000 per month to Y as tax-free salary (tax of Rs. 3,000 per month is borne by X and directly

paid to the Government). In this case, the amount taxable in the hands of Y is, Rs. 28,000 per month.
Receipt on account of dharmada, etc. - Receipt on account of dharmada, gaushala and pathshala is not income and,
therefore, not liable to tax.
Devwluation ofcurrency - If any assessee receives extra money on account of devaluation of currency, it is
taxable.
Income includes loss- Income includes loss. While income, profits and gains represent"plus income", losses
represent "minus income"
Same income cannot be taxed twice - It is a fundamental rule of the law of taxation that, unless otherwise

expressly provided, the same income cannot be taxed twice.

Income should be real and notfictional - Income means real income and not fictional income. A person cannot
make a profit by trading with himself or out of transfer of funds/assets from one pocket to another pocket.
Similarly, income does not arise in a transaction between head office and branch office even if goods are
invoiced at a price higher than the cost price. Likewise, income does not accrue or arise at the time of
revaluation of assets.
Source ofincome need not exist in the assessment year - It is not necessary that a source of income should exist in

the assessment year.

P i n money - Pin money received by wife for her dress/personal expenses and smal savings made by a
woman out of money received from her husband for meeting household expenses is not treated as her income.
Award received by a sportsman - In the case of a sportsman, who is a professional, the award received by him
is in the nature of a benefit in exercise of his profession and, therefore, it is chargeable to tax.
Revenue receipt vs. Capital receipt- A revenue receiptis taxable as income unless it is expressly exempt under
the Act. On the other hand, a capital receipt is generally exempt from tax unless it is expressly taxable.
Voluntary payment - In some cases, a sum of money received without consideration is chargeable to tax [see
para 114].
Burden of proof - In all cases in which a receipt is sought to be taxed as income, the burden lies upon the
Department to prove that it is within the taxing provision. Where, however, a receipt is in the nature of income,
the burden of proving that it is not taxable, because it falls within an exemption provided by the Act, lies upon
the assessee.
 EXTENDED MEANING OF "INCOME" U/S 2(24) Para 6.2

6.2 Extended meaning of "income"under sectlon 224)- Under section 2(24), the term "income" specifically
includes the following:
6.2-1 PROFITS AND GAINS - Income includes profits and gains. For instance, profit generated bya businessman
is taxable as "income".
6.2-2 DIVIDEND- Income includes "dividend"
|see para 109.1.
6.2-3 vOLINTARYCONTRIRLuTIONS RECEIVED BYA TRUIST- In the hands of a trust, income includes voluntary
contributions received by it.
Provisions illustrated *****************************

XY Trust is created for public charitable purposes. On June 10, 2019, it receives a sum of Rs. 1 lakh as voluntary
contribution (not being with any specific direction) from a business house. Rs. 1 lakh would be included in the
income of the trust.

6.2-4 PERQuisITES IN THE HANDS OF EMPLOYEE Any perquisite or profits in lieu of salary is treated as
"income" in the hands of an
employee.
Provisions illustrated-
Xis employed by A Ltd. Apart from salary, he has been provided a rent-free house by the employer. The value of
perquisite in respect of rent-free house is taxable as "income" in the hands of X.

6.2-5 ANY SPECIAL ALLOWANCE OR BENEFIT Any special allowance or benefit specificaly granted to the
assessee to meet expenses wholly, necessarily and exclusively for the performance of the duties of an office or
employment is treated as "income".

Provisions illustrated- *************************

X is employed by A Ltd. He gets Rs. 3,000 per month as conveyance allowance apart from salary. Rs. 3,000 per
month is treated as "income" [any amount which is spent for official purposes out of conveyance allowance is
exempt under section 10(14)].

6.2-6 CITY COMPENSATORY ALLOWANCE/DEARNESS ALLOWANCE - City compensatory allowance or dearness

allowance is treated as "income".

6.2-7 ANY BENEFIT OR PERQUISITE TO A DIRECTOR - A non-monetary benefit or perquisite is treated as "income"

in the hands of the following:

a. if it is given by a company to a director" (whole time or part time) or a relative of a director; or
b. if it is given by a company to a person who has a substantial interest in the company or a relative of such
person.
Relative, for this purpose, means the husband, wife, brother or sister or any lineal ascendant or descendant of
that individual. If a person is beneficial owner of 20 per cent (or more) of equity share capital in a company
then such person is known as a person who has substantial interest in the company.
The aforesaid rule is also applicable if any sum is paid by a company in respect of any obligation which, but for
such payment, would have been payable by the director or any other aforesaid person.

Provisions illustrated-
The following illustrations are given to have better understanding:
1. Xis a director in a company. The company provides a domestic servant for private purposes. The perquisite value
of domestic servant is treated as "income" of X.
2. X holds 20 per cent equity share capital in A Ltd. A Ltd. repays a loan of Rs.15,000 on behalf of X. Rs.15.000 is
treated as "income" of X.
3. Bis a director in C Ltd. C Ltd. pays a sum of Rs.47,000 to ITC Hotels on behalf of Mrs. B (the payment is made only
because B is director in C Ltd.). Rs.47,000 is treated as "income" of B.

6.2-8 ANY BENEFIT OR PERQUISITE TO A REPRESENTATIVE ASSESSEE - Any non-monetarybenefit or perquisite to

a representative assessee (like a trustee appointed under a trust) is treated as "income"

Director need not be a person having substantial interest.

 8
Para 6.2 BASIC CONCEPTS THAT ONE MUST KNOWw

Provisions illustrated
The perquisite value of
provides hima residential accommodation.
oneot Irusteesof a charitable trust. The
tust
Ais
the accommodation is treated as "incoe of X.

28, 41 and 59.

6.2-9 AN SUMCHARGIABIIUINDIR SECIONS 28, 41 AND 59 -Anysum chargeable under sections
is taxable as income. Sone of such cases are given below -

the time of termination of his agency from

1. A 1s an agent of A LId. Tle gets a compensation of Rs. 2,00,O00 at
A Ltd. Rs. 2,00,000 is treated as "income" of X.
licence granted under the Imports (Control) Order
2.A of Rs. 2,50,000 is generated by A Ltd. on sale of
protit
1955. Rs. 2,50,000 is treated as "income" of A Ltd.
Ihe perquisite value
3. A car owned a firm is used by one of the partners for private purposes.
by partnership
of the case is "inconme" in the hands of the partner.
4. X Ltd. of Rs. 8,00,000 from A Ltd. for not carrying out
the activity of selling goods in Agra for a
gets a sum
is treated as "income" of X Ltd.
period of two years from June 1, 2020. Rs. 8,00,000
"income".
6.2-10 CAPITAL GAINS -

gain under section 45 is treated as

Any capital
under section 44 is treated as "income".
6.2-11 INSURANCE PROFIT Any insurance profit computed
-

6.2-12 BANKING INCOME OF A CO-OPERATIVE SOCIETY- Profit from banking (including providing credit
members is taken income.
by a co-operative society with its
as
tacilities) carried on
Winnings from lottery, crossword puzzles, races (including horse races),
6.2-13 WINNINGS FROM LOTTERY
card games, other games (including entertainment programme on television), gambling betting, etc., are
chargeable to tax.
6.2-14 EMPLoYEES CONTRIBUTION TOWARDS PROVIDENT FUND- Any sum received by an employer from his
employees as employees' contribution to any provident fund, superannuation fund or staff welfare fund, is
taxable as income of the employer. Employer can claim deduction under section 36(1)(on), if such sum is
credited by the employer to the employees' account in the relevant fund before the due date (under provident
fund regulations).

Provisions illustrated-
Net profit of X Ltd. for the previous year 2019-20 is Rs. 7,86,000. It is calculated after debiting salary to employees:
Rs. 5 lakh. Out of Rs. 5 lakh, Rs. 50,000 is employees' contribution towards provident fund. Rs. 50,000 is transferred
by X Ltd. to the provident fund account of the employees as follows Rs. 30,000 before the due date of making such
payment and Rs. 20,000 after the due date of such payment. Income of X Ltd. shall be calculated as under:
Rs
Net profit as per profit and loss account 7,86,000
Add: Employees' contribution towards provident fund which is treated as "income" of X Ltd.
Total
50,000
8,36,000
Less: Amount paid by X Ltd. before the due date of
on or
making provident fund payment
see para 81.25] 30,000
Taxable income of X Ltd.
8,06,000

6.2-15 AMOUNT RECEIVED UNDER KEYMAN INSURANCE POLICY-

Any sum received under a Keyman insurance
policy (including bonus) is treated as "income" in the hands of the recipient.
6.2-16 FAIR MARKET VALUE OF INVENTORY Fair market value for inventor
-

hich is converted into stock-in

trade) is treated as income of the year in which conversion takes place.
6.2-17 AMOUNT EXCEEDING RS. 50,000 BY WAY OF GIFT -Gift
is taxable as income in a few cases. See para 114. exceeding Rs. 50,000 received without considering
6.2-18 CoONSIDERATION FOR ISSUE OF SHARES Consideration
market value of shares referred to in section received for issue of shares [as exceeds fair
56(2)(viib)] is taxable as income [see para 114.3].
6.2-19 ADVANCE MONEY Any sum of money received as advance
-

is taxable as income |see money and referred to in section 56(2)(ir)

para114.4]
6.2-20 COMPENSATION ON TERMINATION OF EMPLOYMENT OR
MODIFICATION OF TERMS OF EMPLOYMENT-
Any compensation or other payment
retferred to in section
56(2)(xi) [i.e.,
employment or modification of terms ot employment| is treated as income.
compensation on termination of
 WHAT IS TOTAL INCOME Para 8

6.2-21 ASSISTAN1 IN ORM O A sIRSD)A.RANI Subsicly/grant in taxahle aa ineome from the

assessnent vear 20lo-17 if the followinyg conditios are satifird
1. Assistance is in the f o m o fa sulsicdy or grant or cash incentive or duty drawback or waiver o r coric ession or

reimbursement (by whatever name called).

2.1t is received from the Central Goverment or State Government or any authority or body or agericy

3. It may be in cash or kind.

4. It 1s not a s u b s i d y o r g r a n t or reimbursement which is taken i n t o consideration for determination ot "actual

cost within the parameters of Explanation 10 to section 43(1).

5. It is not a subsicdy or grant by the Central Government for the purpose of the corpus of a trust or institution
established by the Central Government or State Government.
If the above conditions are satisfied, subsidy, grant, etc., shall be considered as "income".

WHAT IS GROSS TOTAL INCOMAE

7. As per section 14, income of a person is computed under the following five heads:
1. Salaries.
2. Income from house property.
3. Profits and gains of business or profession.
4. Capital gains.
5. Income from other sources.
total income
The aggregate income under these heads is termed as "gross total income". In other words, gross
before deduction
m e a n s total income computed in accordance with the provisions
of the Act making any
under sections 80C to 80U.
7.1 Expenditure in respect o f income not chargeable to tax - If income is not chargeable to tax, any

not deductible.
expenditure for earning such income is

WHAT ISTOTAL INCOME AND HOW IS IT COMPUTED

amount permissible
8. Total income of an is gross total income as reduced by the
assessee

80C 80U. The scheme of computation of total income and tax liability thereon
a s deduction under sections
to

c a n be easily understood with

the help the following chart:
of
YEAR
COMPUTATION OF INCOME FOR AN ASSESSMENT
Rs. Rs.
*
1. Income from salaries
***

Income from salary

*
Income by way of allowances
..

Taxable value of perquisites

Gross salary
Less : Deduction under section 16 *****

Standard deduction ****

Entertainment allowance
Professional tax
Income from salaries
2. Income from house property
net annual value
Adjusted 24
***

Less : Deduction under section

Income from house property
3. Profits and gains of business or profession
***

and loss account

Net per profit
profit as deduction under
Add: Amounts which are debited to P & La/c but are not allowable as

the Act

deduction under
Less: Expenditure which are not debited to P & La/c but are allowable as

the Act

taxable
but are exempt under section 10 or
are
credited to P&La/c
Less Income which are
under other heads of income
 10
Para 8.1 BASIC CONCEPTS THAT ONE MUST KNOW

Rs. Rs.
Auhd: Those ncome whieh are not eredited to P&Ia/c but are taxable under the head
"I'hofits and gains of business or profeaskon"
Tolits and gains ot business or prolesaion
4. apital gains
Amount of eapital gains
54GA, 5GB and 54H
ess: Amnt eempt undersectiona 54, 54B, 54D, 541iC, 54F, 54G,
Income Inm capilal gnins
5, Inovme from other sourrs
Gross iwoe
Less: Deductions undersection 57
Income trom other sources
Totallie, (1)+ (2)+ (3)+ (4)+ (51
Less: Auljustment on acvount of set-off and carry forward of losses ****"*

Gross total income ****

Less: Deductions under sections 80C to 8OU ****

Total inconme or net income* [rounded off - see para 8.1] ******

COMPUTAnON OF TAX LIABILITY|

Tax on net income Ise Appendix 1]
Les: Rebate under section 87A [in the case of a resident individual having net income not
exceeding Rs. 5 lakh]
Income-tax after rebate under section 87A ******

Add Surcharge
*******

Tax and surcharge

...-

Add: Health and education cess [4 per cent of tax and surcharge]
Less: Rebate under sections 86, 89, 90, 90A and 91
*****

Tax
*****

Less: Pre-paid taxes

Tax-paid on self-assessment
Tax deducted
or collected at source
Tax paid in advance **

Tax liability [rounded off -see para 8.2]

8.1 Rounding-off of
income- The taxable income shall be rounded off to the nearest
and for this purpose
any part of a rupee consisting of paise shall be multiple of ten rupees
a ignored and
multiple of ten, then, if the last figure in that amount is five or more, the amount thereafter if such amount is not
higher amount which is a multiple of ten and if the last shall be increased to the next
the next lower amount which is a figure is less than five, the amount shall be reduced to
multiple of ten.
Provisions illustrated
The above
provisions may be illustrated as follows-=
Income before rounding off
Rs Income after rounding
of
7,80,514.99 Rs.
7,80,515.00 7,80,510
7,80,515.99 7,80,520
7,80,519.99 7,80,520
7,80,524.99 7,80,520
7,80,520

tIn the case of a

company, tax liability cannot be less than minimum
be less than alternate
minimum tax (see para 194.2]. alternate tax. In the case of
This income is
non-corporate assessee it cannot
for this purpose.
chargeable
to tax. In the
Income-tax Act it is termed as "total income".
In this book,
however, "net income" is usedd
 WHAT ARE CAPITAL AND REVENUE RECEIPTS Para 111

8.2 ounaing-off of tax - The amount payable by the assessec and the amount of refund due, under the
provisions of the Act shall be rounded off to the nearest ten rupcCs,

WHAT IS AGRICULTURAL INCOME

9. Agricultural income in India is not chargeable to tax. It is defined by section 2(1A). For detailed discussion
please refer to paras 185 to 188.

B WHAT IS DIFFERENCE BETWEEN EXEMPTION AND DEDUCTION

10. If an income is exempt from tax, it is not included in the computation of income. Exemption can never
exceed the amount of income. Deduction is generally given from income chargeable to tax. Deduction can be
less than or equal to or more than the amount of income. If the amount deductible is more than the amount of
income, the resulting amount will be taken as loss.

S WHAT ARE CAPITAL AND REVENUE RECEIPTS

11. Receipts are of two types-capital receipts and revenue receipts. The distinction between the two is vitalI
because capital receipts are exempt from tax unless they are expressly taxable. For instance, capital gains are
taxable under section 45 even if they are capital receipts. On the other hand, revenue receipts are taxable,
unless they are expressly exempt from tax. For instance, income exempt under section 10.
As the Act does not define the terms "capital receipts" and "revenue receipts", one has to depend upon natural
meaning of the concepts as well as decided cases.
Circulating capital and fixed capital - A receipt on account of circulating capital is a revenue receipt, whereas a
receipt on account of fixed capital is a capital receipt.
Receipt in the hands of recipient is material - In order to determine whether a receipt is capital or revenue in
nature, one has to go by its nature in the hands of the recipient. The source from which the payment is made,
has no bearing on the question.
Payer's notive irrelevant - The motive of payer is not relevant while deciding whether a particular receipt is
revenue or capital in nature.
Receipt in lieu ofsource ofincome A receipt in lieu of source of income is a capital receipt. A receipt in lieu of
income is a revenue receipt.
that it is
Lump sum payment In order to determine whether a
- is
revenue in nature,
receipt capital
or
a lump sum payment, large payment or periodic payment is not relevant. It is not necessary that a revenue
the fact
receipt should be recurring or a capital receipt should be a single receipt.
Natureofreceipt under company law irrelevant- Treatment of a receipt under company law is not relevant while
deciding whethera receipt is capital or revenue in nature under tax laws.
is measured by estimated
Compensation measured by estimated profits - The mere fact that compensation a

annual profits, it cannot make the receipt as revenue receipt. It is the quality of payment that is decisive of the
character of the payment and not the method of payment or its measure.

Disallowance to person making payment -The fact that the amount paid is not allowed as permissible deduction
in the assessment of a person making payment, cannot determine the character of receipt in the hands of the

recipient.
rate of currency, excess amount is
Changes in rate ofexchange of currency - If by virtue of change in exchange
the excess amount is treated as revenue
realised by an assessee engaged in the business of exporting goods,
receipt. On the other hand, if foreign currency is kept as investment or to acquire a capital asset, the profit
made due to change in the rate of exchange of currency is capital receipt.
of receipt. is, however, It difficult to
principles which one has to follow while deciding nature
a
These are a few
state any specific test for determining true
nature of a receipt. Though the dividing line between a capital and
r e v e n u e receipt is real, yet sometimes
it be omes difficut to draw. Therefore, a decision will have to be taken
in each case in the light of its facts and surrounding circumstances. The onus of proving that a particular
on the Income-tax Department. Where, however, the
receipt is of capital or r e v e n u e nature is normally
assessee in the normal circumstances
is in a position to prove his contention, the onus will be on him to

produce the necessary evidence.

Para 12 BASIC CONCEPTS THAT ONE MUST KNOWN 12

WHAT Is CAPITAL AND REVENUE EXPENDITURE

12. r paBLW

HOW FAR METHOD OF ACcoUNTING IS RELEVANT IN CcOMPUTING INCOME

13.In ome hargoalle under the head "Trofits and yains of business or profesqion or "Income irom other
sn es" is to be computed in a eordae with the nethod of acounting repgularly enployed by the assessee,
13.1 Types ofaccountingmethods- Mainly there are two types of accounting methods mercantile system
and cash systenm.
Merwanlile system- Under mercantile system, income and expenditure are recorded at the time ofoccurrence
during the previous year. For instane, income accrued during the previous year is recorded whether it is
received during the previous year or during a year preceding or following the previous year. Similarly,
expendilure is recorded il it becomes due during, the previous year, irrespective of the fact whether it is paid
urng the previous year or not. The profit caleulated under mercantile system is, thus, profit actually earned
during the previous year, though not necessarily realised in cash.
ash system-Undercash system of accounting, revenue and expenses are recorded only when received or
pand. For instance, income received during the previous year is included in taxable income whether it is earned
during the previous year or it is earned during a year preceding or following the previous year. Similarlv,
expenditure is deductible from the taxable income only if it is paid during the previouS year, irrespective of the
fact whether it relates to the
previous year or not. Income under cash system of accounting is, therefore, excess
of receipts over disbursements
during the previous year.
13.2 Method of
accounting for computing income-Section 145 provides the following:
1. Income
chargeable under the head "Profits and gains of business or
profession" or "Income from other
sources" shall be computed only in accordance with either the cash or the mercantile
system of
accounting
regularly employed by an assessee. For instance, if a trader follows mercantile system of accounting, his
business income will be taxable on "accrual" basis and business
expenses will be deductible on "due" basis. If
a
professional follows cash system of accounting, his professional income will be taxable
professional expenses will be deductible on "payment" basis. on"receipe" basis and
2. The Central Board of Direct Taxes has
notified the Income Disclosure and Tax Accounting Standards vide
Notification No.87/2016, dated
than
September 29, 2016. These standards are to be followed
by all assessees (other
an
individual/HUF who is not
required get his account of the
to
44AB) following mercantile system of accounting. These standards are previous year audited under section
chargeable under the head "Profits and gains of business or profession"applicable for
computation of income
or "Income from other
not for the
purpose of maintenance of books of account. These standards are sources" and
year 2017-18. applicable from the assessment
3. In the case of income
chargeable under the heads "Salaries", "Income from house
gains", method ofaccounting adopted by the assessee is not relevant
in
property" and "Capital
calculating taxable income under these heads, one has to follow the calculating taxable income. For
statutory
(or expenditure) is taxable (or provisions on Income-tax Act
which expressly of the
provide whether revenue
"cash basis". deductible) "accrual basis" or
TAX COMPUTATION
14. Provisions for
computation of taxable income are given by the Income-tax Act.
the Income-tax Act, but
by the Finance Act which is passed by Parliament Tax rates are not
Government every year. Apart from givent
making various along with budget for the Central
indirect tax laws) every Finance Act amendments to the Income-tax Act (and other direct/
year and specifies (in
advance tax rates for the next assessment
the First
Schedule) income-tax rates for the current assessment
in the First Schedule year. For instance, the
(Parts I, II and II) as follows- Finance Act, 2020,
provides tax rates
Part I of the First Schedule to the Finance
assessment year 2020-21.
Act, 2020 It gives income-tax
-

rates for different

assessees for the
Part II of the First Sched1ule to the
financial year 2020-21. To Finance Act, 2020- It gives rates for deduction of tax at
put it differently, if a person is source
applicable to the
supposed to deduct tax at source during the financial responsible for making a payment on which he is
during 2020-21 at the rates year 2020-21, then tax has to be
deduction from salary is given Part III.
in Part II of the First
Schedule to the Finance Act, 2020. deducted at source
given by However, rate for tax
13
COMPUTATION OF TAX FOR ASSESSMENT YEAR 2020-21 Para 14.1

Part ll of the First

Schedule to the l'iane Act, 2020 - It gives lax rates for different assessees for of
advance tax
during the financial year 2020-21 (i.e., for the assessnent year 2021-22). The samepayment
rates are
applicable, for the ax deduction from salary paynment duriny, the finacial year 2020-21.

Generally, Part lll of the irst Schedule of a linance Act becoes P'art I of the lirst Schedule of the
Fnance Act. For
instance, subsequent
Part 111 of the lirst Sehedule to the Finance Act, 2020 will become Part I of the First
Schedule to the Finance Act, 2021.
14.1 Computation of tax
2020-21 are given in
for the assessment year 2020-21t - Tax rates applicable for the assessment year
below
Appendix 1. Some of the important rates for the assessment year 202-21 are given
14.1-1 INCOME-TAX - Inconme-tax rates are as follows
14.1-1a INDIVIDUAL, HUF, AOP, BOI The -

tax rates applicable to an individual, HUF, AOP, BOI, etc.,

below - are
given
1. Senior citizen In the case of a
resident individual who is at least 60 years of
-

age at any time during the previous

year 2019-20 but less than 80 years on March 31, 2020 born during April 2,1940 and April 1,1960), first Rs.
(i.e.,
3,00,000 of net inconme is exempt from tax. Net income in the
rate of 5 per cent. Between Rs. range of Rs. 3,00,000 to Rs. 5,00,000 is taxable at the
5,00,000 and Rs. 10,00,000, the slab rate is 20 per cent and the income in excess of
Rs. 10,00,000 is taxable at the rate of 30
per cent. These rates are applicable
otherwise) senior citizen. In the case of anon-resident senior citizen, theonly
in the case of a resident
or (ordinarily
below. exemption limit is Rs. 2,50,000 as given
2. Super senior citizen In the of
-

case a resident individual who is at least 80 of at time

years
previous year 2019-20 (i.e., born before April 2, 1940), first Rs. 5,00,000 of net ageis exempt
income any from during
tax. Net
the
income in the range of Rs. 5,00,000 to Rs.
10,00,000 is taxable at the rate of 20 per cent. Net income in excess of
Rs.10,00,000 is taxable at the rate of 30 per cent. These rates are
applicable only in the case of aresident (ordinarily
or
otherwise) super senior citizen. In the case of a non-resident, the exemption limit is Rs. 2,50,000
3. Any other resident individual,
as
given below.
any non-resident individual, any HUF, AOP, BO1 In the case of any other resident -

individual (born on or after April 2,

1960), any non-resident individual, any HUF/AOP/BOI, the first
Rs. 2,50,000 of net income is exempt from tax. Net income in the range of Rs. 2,50,000 to Rs.
at the rate of 5 per cent. Between Rs. 5,00,000 and Rs. 5,00,000 is taxable
10,00,000, the slab rate is 20 per cent and the income in excess
of Rs. 10,00,000 is taxable at the rate of 30 per cent.
Rebate under section 87A A resident individual
-

(whose taxable income does not exceed Rs. 5 lakh) can claim
arebate under section 87A from income-tax. The amount of rebate is income-tax on
total income or Rs. 12,500,
whichever is less.
14.1-1b FIRM A -

partnership firm (including a limited liability partnership firm) is taxable at the rate of 30 per
cent (no exemption limit).
14.1-1c COMPANY A domestic company is taxable at the rate of 30
per cent and a non-domestic company is
-

taxable at the rate of 40 per cent. Dividend distribution is taxable at the rate of 15 per cent.
14.1-2 SURCHARGE ON INCOME-TAX - Income-tax (as computed above) shall be increased
follows
by a
surcharge as

Net incone range Surcharge (as % of income-tax)

Individuals/HUF/AOP/BOI/artificial juridical 0- Rs. 50 lakh Nil
person Rs. 50 lakh - Rs. 1 crore
10%
Rs. crore Rs. 2 crore 15%
Rs. 2 crore - Rs. 5 crore
25% [see Note 1]
Above Rs. 5 crore 37% [see Note 1]
Firm/co-operative society/local authority 0-Rs. 1 crore Nil
Above Rs. 1 crore 12%

fIn the case of a company, tax liability cannot be less than minimum alternate tax. In the case of a
cannot be less than alternate minimum tax [see non-corporate assessee, tax liability
para 194.2].
Ifa few conditions are satisfied a domestic company has an option to pay tax at the rate of 25
(a) cent under section 115BA,
(6) 22 per cent under section 115BAA or (c) 15 per cent under section 115BAB. Besides, a domestic per
company (whose turnover/gross
receipt during the previous year 2017-18 does not exceed Rs. 400 crore) is taxable at the rate of 25 per cent for the assessment
2020-21. year
Para 14.1 BASIC 14
CONCEPTS THAT ONE MUST KNOW

Net ncone range Surcharge (as % ofincome-tax)

Nil [see Note 2]
Domestic company 0- Rs. 1 crore
Rs. 1 crore - Rs. 10 crore 7% see Note 2]
Above Rs. 10 crore 12% see Note 2]
0- Rs. 1 crore Nil
Foreign company Rs. 1 crore - Rs. 10 crore 2%
Above Rs. 10 crore 5%

Notes
1. Surcharge is 15% of income-tax pertaining to income which is chargeable under section 111A or 112A.
2. Surcharge is 10% if income is chargeable to tax under section 115BAA or 115BAB.
14.1-3 HEALTH AND EDUCATION CESS - Amount of income-tax and surcharge shall be increased by health and
education cess which is 4 per cent of (income-tax + surcharge).

Problems
14-P1 How would you calculate income-tax for the assessment year 2020-21 in the case of diferent assessees? What is the
maximum marginal rate of tax and the exemption limit ?
Solution: Income-tax shall be calculated according to the rates given in relevant Finance Act. For the assessment
year 2020-21, tax shall calculated at the rates which are prescribed by the Finance Act, 2020. In this book, tax
calculations are based upon tax rates prescribed by the Finance Act, 2020 (Part I of the First Schedule) which are
given above. Different assessees are taxable at different rates.
Individual or Hindu undivided family - Suppose taxable income of an individual (age: 45 years) for the assessment
year 2020-21 is Rs. 10,86,920. Tax shall be calculated as under-
Rate of tax Amount of tax
Rs.
First Rs. 2,50,000 Nil Nil
Next Rs. 2,50,000 5% 12,500
Next Rs. 5,00,000 20% 1,00,000
Income in excess of Rs. 10,00,000 (ie., Rs. 10,86,920 Rs. 10,00,000) 30% 26,076
Taxt 1,38,576
Add: Surcharge (applicable onlyif net income exceeds Rs. 50 lakh) Nil
Tax and surcharge 1,38,576
Add Health and
education cess (4% of tax and surcharge) 5,543
Tax liability (rounded off) 1,44,120
Firm-Suppose for the assessment year 2020-21, taxable income of afirm is Rs. 10,86,920, then tax shall be calculated
as under -

Rs.
Tax (30% of Rs. 10,86,920)
3,26,076
Add: Surcharge (12% of income-tax
if net income exceeds Rs. 1 crore) Nil
Tax and surcharge 3,26,076
Add: Health and edu tion cess (4% of tax and surcharge) 13,043
Tax liability (rounded off)
3,39,120
Company-Suppose taxable incomeofa company (turnover always more than Rs. 400 crore) for the assessment year
2020-21 is Rs. 10,86,920, then tax liability will be as under

Rebate under section 87A is not available (income being more than Rs. 5,00,000).
 ASSESSMENT YEAR 2020-21 Para 14.1
15 COMPUTATION OF TAX FOR

Amont oflax Surcharge Health and Total

Tax rale
education (rounded
cess 4% off
of tax and
BUrcharge
Rs. Rs. Rs. Rs.
-
If it is a domestic company 30% 3,26,076 Nit 13,043 3,39,120
If it is 4,34,768 Nil 17,391 4,52,160
-
a foreign company 40%
Co-opperafie socicty-If for the assessment year 2020-21, income of a co-operative society is Rs. 10,86,920, tax liability
shall be determined as follows-
Rate of tax Amount of tax
Rs.
First Rs. 10,000 10% 1,000
Next Rs. 10,000 20% 2,000
Income in excess of Rs. 20,000 (i.e., Rs. 10,86,920 - Rs. 20,000) 30% 3,20,076
Tax 3,23,076
Add: Surcharge (12% of income-tax if net income exceeds Rs. 1 crore) Nil

Tax and surcharge 3,23,076

Add: Health and education cess 12,923
(4% of tax and surcharge)
Tax liability (rounded off) 3,36,000
Rebate under section 87A - Rebate under section 87A is available in the case of a resident individual if his taxable
income is Rs. 5,00,000 or less for the assessment year 2020-21. Suppose taxable income is Rs. 5,00,000. Tax liability for
the assessment year 2020-21 for different taxpayers will be determined as follows -

Resident individual Non- Firm

Super senior Senior Any other Tesident domestic
citizen (80 years citizen (60- (less than indioidual Company
md above) 80 years) 60 years) or any HUF
Rs Rs. Rs. Rs. Rs
Income-tax on Rs. 5,00,000 Nil 10,000 12,500 12,500 1,50,000
Less: Rebate under section 87A in the
case of resident individual (100% of
income-tax or Rs. 12,500, whichever is
lower) Nil 10,000 12,500 Nil Nil

Income-tax Nil Nil Nil 12,500 1,50,000

Add: Surcharge Nil Nil il Nil Nil

Income-tax and surcharge Nil Nil Nil 12,500 1,50,000

Add: Health and education cess @4% Nil Nil Nil 500 6,000
Tax liability Nil Nil Nil 13,000 1,56,000
Special tax rates - The above rates are given in the Finance Act, 2020 (Part I of First Schedule). Besides the above tax
rates, some income is taxable at special rates given under the Income-tax Act [these rates are given in the book in
Appendix 1, para 0.6]. For instarnce, long-term capital gains are taxable at the rate of 20%; [sec. 112], winnings from
lotteries, races, card umes, etc., are taxable at the rate of 30%f [sec. 115BB], royalty income in hands of a foreign
company is taxable at the rate of 10%1 [sec. 115A(1)(6)].
Suppose income of X, a resident, for the assessment year 2020-21 is determined as follows -
Rs. Rs.
Salary (after standard deduction) 1,12,60,000
Capital gain
- Long-term
26,000
- Short-term
90,000 1,16,000
Winnings from lottery
5,00,000
Net income 1,18,76,000

"Surcharge is applicable only if taxable income exceeds Rs. 1 crore.

Plus surcharge, and health and education cess.
ASIC CONCEPTS 1HAT ON
MUST KNOW
6
TaN onR«
1,I8,/6,0000 hall l a l nlated a under-
Natu o 1m Amount af Tax rate
Tax
income
P Rs
Tong temeapital gain 26,000 20% 5,2500
IWinning Irom lottery 5,00,000 0% 1,50,000
her iome (i.r., Rs. 1,18,76,000 - R«. 26,000 Rs. 5,00,000) 1,13,50,000
Tan on Rs. 1.13,50,000
Tirst Rs. 2,50,000 2,50,000 Nil Nil
Next Rs. 2,50,000 2,50,000 12,500
Next Rs. 5,00,000 5,00,000 20% 1,00.000
Income in excess of Rs. 10,00,000 (i.e., Rs. 1,13,50,000 - Rs. 10,00,000) 1,03,50,000
30% 31 0500
Taxt 33.72,700
Add:Surcharge 15% 5,05,5
Tax and surcharge
Add: Health and education of tax and
38,78,F65
cess (4% surcharge) 1,55,144
Tax liability (rounded off) 40.33,750
Mavimum marginal rate oftax- Itisdefined by section 2(29C) asthe rate of income-tax (including surcharge) applicable
in relation to the highest slab of income in the case of an individual as specified by the relevant Finance Act. For
instance, for the assessment year 2020-21, the maximum marginal rate of tax is 42.744 per cent (i.e., 30 per cent
surcharge: 37 per cent of income-tax + health and education cess: 4 per cent of income-tax and surcharge)
Exemption limit orexempted slab- The amount of the first slab of income which is taxable at nil rate is known as
exemption limit orexempted slab [see Appendix 1]. For the assessment year 2020-21, the amount of exemption limit
is as follows for different assessees
Individual Rs.
Resident senior citizen (who is 60 years or more)
3,00,000
-

-
Resident super senior citizen (who is 80 years or more) 5,00,000
- Any other individual
2,50,000
Hindu undivided family
2,50.000
Company Ni
Firm Ni
Association of persons or body of individuals 2,50,000
Local authority Nil
Artificial juridical person 2,50,000
The above limit is not applicable in a case where special tax rates are applicablet [these rates are given in Appendix
1.para0.6]. For instance, if anindividual gets a lottery prize of Rs. 33,000 arnd he does not have any other income, then
Rs. 33,000 is taxable (even if it is below Rs. 2,50,000) at the rate of 31.2%** (i.e., Rs. 7,700)

Test your knowledge

1. Define the relationship between "previous year" and "assessment year". What will be the first previous year
when a business is newly started on February 20, 2020?
2. How would you define "person"?
3. Who is an assessee?
4. What is regarded as "income" under the Income-tax Act?
5. Income of previous year is taxable in the inmmediately following assessment year. Is there any exception to this
rule?
6. What are the tax rates applicable in the case of an individual for the assessment year 2020-21?
7. (P1.5) Let the depreciation rates in respect of a depreciable asset be as under

tRebate under section 87A is not available (income being more than Rs. 5,00,000).
See, however, paras 104.1-2 and 104.4-2.
**Tax rate 30% t education cess 4% of tax. Surcharge not applicable.
***It is after rebate under section 87A.
Number given in the bracket is solved Problem No. of Students' Guide to Income-tax, Problenis and Solutions.
17
TEST YOUR KNOWLEDGE
. 16 per cent
up to April 1, 2020;
b. 36
per cent from April 2, 2020 to April 10, 2021;
40 per
c.
cent from April 11, 2021 to May 10, 2022;
d. 31 per
cent from May 11, 2021 to March 31, 2022 ; and
e. 50 per cent from
April 1, 2022 onwards.
At what rate
depreciation is admissible in respect of that asset for the assessment years 2020-21 to 2022-23.
8. (P1.6)* Find out the tax
liability in the following cases pertaining to the assessment year 2020-21
Assessee
Taxable Long-term Winnings
income capital gain from lotteries
included in includedin
taxable taxable
income income
Rs. Rs Rs.
X, a resident Hindu undivided
Y, a Hindu undivided
family 2,30,000 18,000
family 2,86,000 2,000 16,000
Z, an individual (age:
Mrs. A, a
42 years) 11,70,000 40,000 70,000
resident
individual (age: 58 years) 42,50,000
B Ltd., Indian conmpany
an

CLtd, an Indian company 1,12,00,000 50,000 73,000

D Society, a 35,000 500
E & Co.,
co-operative society 5,000 700 150
partnership firm 10,30,000 60,000
F, a non-resident individual (age: 74 years) 2.65,000 12,000

*Number given in the bracket is solved Problem

No. of Students' Guide to Income-tax, Problems and Solutions.