Income Tax: Introduction

The tax statutes in India:

 Income Tax Act,1961
 Income Tax Rules, 1962
 Amendments made by Finance Acts
 Decisions of Supreme Court
 Decisions of respective High Court
 Decisions of Income Tax Appellate Tribunals (ITAT)
 Notifications and circulars issued by Central Board of
Direct Taxes (CBDT)
 Finance Act 2020
 Finance Ministry Press Releases (viz. 13 May 2020)

A.
Assessee
 Any person assessable under the IT act for assessment of
o his income or
o income of any other person for whom he is assessable
(representative assessee)
 Assessee in default (Assessee-in-default is a person who has
failed to fulfil his statutory obligations as per the income tax
act such as not paid taxes to the government or not file his
income tax return.)

B.
Person
(i) An individual
(ii) A Hindu Undivided Family (HUF)
(iii) A Company
(iv) A Firm or Limited Liability Partnership
(v) An Association of persons (AOP) or Body of
Individuals (BOI)
- Association is Persons (AOP) means a
group of people who comes together to
 achieve a common objective with same
mind sets. Members in the AOP can be
natural (Human beings) or artificial
(Artificial Persons-e.g. company, LLP,
etc.)
- Body of Individuals (BOI) means a group
of INDIVIDUALS (Human Beings) who
come together to achieve a common
objective.
(vi) A local Authority
(vii) Every Artificial Judicial Person not falling
under any of the above

C.
Assessment year
- 12 months commencing on the 1st April every year

D.
Previous year
- the financial year (1st April - 31st March next year)
immediately preceding the assessment year

E.
Charging of Tax
- Income of previous year chargeable to tax during
assessment year
- Income tax rates fixed by Finance Act
- For computing Total Income, provisions of the Act as
applicable on 1st April of the relevant Assessment
Year will be applied (for procedural matters,
provisions of the Act will be applicable from the date
of amendment)
F. Gross Total Income (GTI) and Total
Income
Total Income = GTI less deductions u/s 80C to 80U

G. Exemptions and deductions

 Exempt income not included in the computation of
income - Exemption cannot exceed the amount of
income
 Deduction is generally applied on income chargeable
to tax – deduction could be less than, equal to or
more than the amount of income - deduction may
exceed income in which case the resulting figure will
be taken as a loss

H. Conditions for taxability

 Residential status during previous year
 place of accrual/ receipt of income
 time of accrual/ receipt of income - Previous Year

I. Incomes

a. Concepts of capital receipts and revenue receipts

All REVENUE INCOMES are taxable unless exempted by a specific

provision in the statute

Salary, rental income from letting of houses, profits from business or

profession, return from investments

Other examples: stipend, private tuition, temporary recurring or non-

recurring income from employment, profession/ exercise of skills,
interest or similar returns from investments

Taxable - unless exempted : Some incomes exempted u/s 10

  Agricultural Income (Section 10(1)).
 Amount received by a member of the HUF from the income of the
HUF [Section 10(2)]
 Share of profit received by a partner from the firm [Section
10(2A)]
 Educational scholarship [Section 10(16)]
 Daily allowance to a Member of Parliament [Section 10(17)]
 Awards [Section 10(17A)]
 Pension to gallantry award winner [Section 10(18)]
 Income of a fund established for welfare of employees [Section
10(23AAA)] if such the fund applies its income, wholly and
exclusively to the objects for which it is established; and invests its
funds/ contributions in modes specified Section 11(5)
 Income of Hospital [Section 10(23C)(iiiac)/(iiiae)/(via)]
 Income of Charitable Institution or Fund [Section 10(23C)(iv)]
 Income of religious/charitable trust [Section 10(23C)(v)]
 Income of mutual fund [Section 10(23D)]
 Income of minor [Section 10(32)]
in case income of a child is clubbed with his/ her parent, income
of the parent will be exempt for such actual income of child so
included or Rs. 1500 whichever is less
 Income from international sporting event [Section 10(39)]
CAPITAL RECEIPTS are not taxable unless specific provision in
the statute expressly make it taxable

1. Capital gains from capital /fixed assets e.g from sale of house
property (after knocking-off effects of inflation), profit from sale
of fixed assets, profit on sale of investments due to higher
returns from increased value (may be shares, bonds etc).
2. If the assets are of the nature of stock-in-trade, which are traded
in the course of business, increase in value of such stocks at the
time of sale, are profits – not capital gains. E.g profits from flats
sold by a promoter (who treats such flats as stock-in-trade,
which the promoter sells in the course of promoting business)
are revenue profits, not capital gains; on the other hand if you
as an individual sell a flat (which is capital asset for you), profit
from such sale (after knocking-off effects of inflation) are capital
gains
 3. Insurance receipts for replacement value of an asset on
destruction – capital receipt – wouldn’t have been otherwise
taxable but section 45(1A) specifically taxes it. --- - Insurance
receipts against a policy covering stock-in-trade or trading asset
is revenue.
4. Profit from sale of Shares – depends on whether shares are
held for investment purposes or as stock-in-trade of a share
trading business.

Sources of Income
Revenue Capital
Receipt from sale of trading asset Receipt from sale of capital asset
Receipt from substitution of Receipt from substitution of
sources Income
Received towards circulating Received towards fixed capital
capital
Compensation for loss of future Compensation for surrender of
profit rights

Income generated by Sources of Income are revenue incomes (e.g rent

from a house) vs. receipt from replacement/ relinquishment of the
sources of income( capital - profit on sale of such house property – S.
45(1) brings it under taxation)

Test Question

Compensation to an employee on termination? Capital or Revenue? Is it

taxable?

Hint.

S. 17(3) - “profits in lieu of salary” includes-

compensation received by an employee from his employer for termination
of employment or the modification of the terms of employment;
 any payment received by an employee from an employer or from a
provident or other fund, to the extent it does not consist of his own
contributions.
any amount due to or received, whether in lump sum or otherwise, by any
assessee from any person
 before his joining any employment with that person; or
 after cessation of his employment with that person.

b. Types of income
I. Cash or kind
II. Illegal income
III. Accrued or received

Methods of accounting

o Accrual or mercantile basis

o Cash basis

IV. Reimbursement
V. Diversion of income vs. Application of income

Diversion of income by overriding title - If a third person

becomes entitled to receive an amount under an
obligation of an assessee even before assessee could lay
claim to receive it as his income, there would be a
diversion of income by overriding title.

E.g While writing a book, co-authors decide to equally

share the proceeds 70% - 30%; as per normal practice,
royalty is paid to the first author. By the overriding title
(agreed before accrual/ receipt of income), the first
author can divert 30% income from book to the second
author and himself get taxed only for 70%.

Application of income - However, when after receipt of

the income by the assessee, the same is passed on to a
 third person, it will be a case of application of income
by the assessee and not of diversion of income by
overriding title.

E. g income received and thereafter donated – is an

application of income.

J. Tax Rates and alternative Tax regime

K. Heads of Income
 Income from Salaries - accrual basis or receipt
basis, whichever is earlier - so worst of both worlds
 Income from House Property -accrual basis
 Profits and Gains of Business or Profession - accrual
or cash basis
 Capital Gains - taxable in the year in which capital
asset is transferred (accrual)
 Income from Other Sources - accrual or cash basis

Test Question

Dr. M. K. Khatri furnishes the following estimates of his income for the
financial year 2019-20: He is a professional doctor aged 27 years, works as a
resident physician of a private Nursing Home in Kolkata for a consolidated
salary and his employers allow private practice and other occupations.
Rs.
(1) Income from private practice as a doctor 5,30,000
(2) Share of profits from a registered partnership firm
which runs a diagnostic centre in Dhanbad in which
he is a partner 3,20,000
(3) Consolidated salary from private nursing home in Kolkata 4,00,000
(4) Share of income from HUF in which he is the Karta 40,000
(5) Interest estimated to be earned on Govt. securities (net
of TDS of Rs. 2000) 18,000
1. Show a statement of his estimated total income under specific heads of
income for the assessment year 2020-21.
530000 (business/ profession + 400000 (salaries) + (18000+2000) income
from other sources
HUF, partnership income exempt
TDS of 2000 to be deducted from total tax payable

2. Compute the tax payable by Dr. Khatri. Rs. 1,06,600

3. By which date should he file his return of Income Tax?
31st July, 2020
4. Is he required to pay any advance tax? If no, why? If yes, which of the
foregoing incomes would be considered and which ones wouldn’t be
covered?
Yes, only for business income and Other Income .... 15% (15Jun19) 45%
(15Sep19) 75% (15 Dec19) and balance (15Mar20) less deduct TDS (10%
must have been deducted while payment was received on account of
business income and other income) while computing advance tax
TDS on salary fully deducted by employer
Statement of Computation of Income and
Taxes
1. Income from Salaries
2. Income from House Property
3. Profits and Gains of Business or Profession
4. Capital Gains
 Long-term capital gains
 Short-term capital gains
5. Income from Other Sources
GROSS TOTAL INCOME
Less: Deductions under sections 80C to 80U
(deductions cannot exceed Gross Total Income)
TOTAL INCOME
Total Income --
Subject to Special Tax Rates
Remaining Income Subject to Normal Rates
 tax at special rates
 tax at normal rates
Income tax on Total Income
Add: Surcharge on Tax
(0%/ 10% /15% /25%/ 37% of Income Tax )
Total Tax and Surcharge
Less: Rebate u/s 87A
Add: Health & Education Cess on Tax + Surcharge
(at 4% of Income Tax and Surcharge)
Total Tax, Surcharge and Education Cess
Less: Rebates under sections 89, 90 and 91
Total Tax Liability
Add: Interest/Penalty etc
Less: Prepaid Taxes (advanced Tax, self-assessment
tax, TDS, TCS etc
Tax Payable
 L. Tax incidence based on residence
The income tax laws classify the residential status of an individual into three categories, depending on the
individual's stay in India in the relevant financial year as well as his/her stay in the previous years. These categories
are:
1. Resident and Ordinarily Resident (ROR)
2. Resident but Not Ordinarily Resident (RNOR)
3. Non resident (NR)

Income type How such income arises? Taxability

Income received (or deemed to be
received e.g employer’s
contribution to PF in excess of
12%, PF interest in excess of 9.5%)
in India, whether earned in India or Taxable in India
elsewhere -- the term received here irrespective of residential
Indian income
means the first occasion when the status
assessee gets the money under his ROR, NR, RNOR – taxable
control in India
Income which accrues or arises (or
is deemed to accrue or arise) in
India, whether received in India or
elsewhere
 Income received/ accrued outside
India from any head of income,
other than business ROR – taxable on global
income (Indian as well as
Foreign income foreign income)
Income received/ accrued outside
India from a business controlled NR, RNOR – Foreign
outside India or from a profession income not taxable in India
set up outside India

Foreign business/ Income received/ accrued outside ROR– taxable on global

profession income India from a business controlled in income
from Indian set- India or from a profession set up in RNOR – taxable
ups India NR–not taxable in India
 Test questions

1. True or False?

The income earned in India by a non-resident Indian employed in USA,

where he is currently resident, will be exempted from payment of Indian
Income Tax since USA has signed a Double Taxation Avoidance Agreement
with India.
2. Choose the correct answer:

When salary is paid in Singapore to a Person of India Origin (PIO) who is a

U.S Citizen, for services rendered by him in India, such salary income will
(a) not be taxable under Indian Income Tax Act since such income is deemed
to accrue or arise outside India
(b) be taxable in India since such income is earned in India
(c) not be taxable based on provisions of relevant Double Taxation Avoidance
Agreement
(d) Sufficient information regarding residence of the person is not available to
determine taxability (please show reasons in support of your choice).

Residence in India: Individuals

 Resident and Ordinarily Resident (ROR)

 Resident and Not ordinarily resident (RNOR)
 Non Resident (NR)

Tax incidence Whether chargeable to tax

Resident Not Non
Ordinarily Resident
resident
Income received (or deemed to be received) Yes Yes Yes
in India, whether earned in India or
elsewhere -- the term received here means
the first occasion when the assessee gets the
money under his control
Income which accrues or arises (or is Yes Yes Yes
deemed to accrue or arise) in India, whether
received in India or elsewhere
Income received/ accrued outside India from Yes No No
any head of income, other than business
Income received/ accrued outside India from Yes No No
a business controlled outside India or from a
profession set up outside India

Income received/ accrued outside India from Yes Yes No

a business controlled in India or from a
profession set up in India

Test Question

1. From the following incomes earned by Mr. Rajesh during the

Previous year 2019-20, determine the total income for the
assessment year 2020-21 if he is
 Resident and ordinarily resident
 Not ordinarily resident
 Non-resident
a) Profits from a business in Mumbai, managed from London Rs. 300,000
b) Profits for services rendered in India but received in Singapore Rs. 150,000
c) Interest on UK govt. Bonds quarter of which is received in India Rs. 40,000
d) Income from property situated in Japan, received there Rs.200,000
e) Past Foreign untaxed income brought to India
during the prev. year Rs. 70,000
f) Income from agricultural land in Nepal, received there
and then brought to India Rs. 300,000
g) Income from profession in Kenya, which was set up
in India but received in Kenya Rs. 120,000
 Nature of Income Amount Rs. Resident Not Non-
and ordinarily resident
ordinarily resident
resident
a) Profits from a business in Rs. 300,000 300000 300000 300000
Mumbai, managed from London
b) Profits for services rendered in Rs. 150,000 150000 150000 150000
India but received in Singapore
c) Interest on UK govt bonds Rs. 40,000 40000 10000 10000
quarter of which is received in India
d) Income from property situated in Rs.200,000 200000 0 0
Japan, received there
e) Past Foreign untaxed income Rs. 70,000 0 0 0
brought to India during the prev yr
f) Income from agricultural land Rs. 300,000 300000 0 0
received in Nepal and then brought
to India
g) Income from profession in Kenya, Rs. 120,000 120000 120000 0
which was set up in India but
received in Kenya