DIRECT TAX – LAWS AND PRACTICE

Overview of Lesson 1.4

There are some fundamentals on which income tax is charged. The Income-tax Act is
very specific in defining the basis of charge for each head of income. Actually, provisions
for each head of income starts with the basis of charge. Section 4 of the Income-tax
Act presents the overall issues on which income tax is charged on persons.

Charge of income tax (Section 4)

The following basic principles are taken into consideration-

a) Annual tax
Income tax is assessed annually; it is an annual tax on income.

b) Tax rate of assessment year

According to the Act, income for the previous year is chargeable in the next
following assessment year at the tax rates applicable for the assessment year.
This rule is however subject to some exceptions under sections 172, 174, 174A,
175,176.

c) Rates fixed by Finance Act

Income tax Act does not specify any tax rate, Tax rates are fixed by the Annual
Finance Act. If, however, on the first day of April of the assessment year, the
new Finance Bill has not been placed on the statute books, the provisions in force
in the preceding assessment year or the provisions of the proposed Finance Bill
before Parliament, whichever is more beneficial to the assessee, will apply until
the new provisions become effective.

d) Tax on Person
Tax is charged on every type of person.
 e) Tax on total income
A tax is levied on the “total income” of every assessee computed in accordance
with the provisions of the Act.

Provisions as on April 1 of the Assessment Year are applicable

Rule 1:- For computing Income

The 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.

Rule 2:- For other purpose

The above rule is applicable only for computing Taxable income. It can be said
that the provisions applicable on April 1 of the assessment year are relevant only
for determining the taxable income for that assessment year. If, however, an
amendment is made which is purely procedural (not for computing taxable income),
then, it is applicable from the date of the amendment.

Format for Computation of Income and tax liability under Income Tax Act
Particulars Amount(Rs.) Amount(Rs.)
Income from Salary
Salary Xxxx
Allowances received (taxable allowances) Xxxx
Taxable value of perquisite Xxxx
Gross Salary Xxxxx
Less: Deduction under section 16
Professional Tax Xxx
Entertainment allowance Xxx
Income from Salary (1) xxxxx
Income from house property
Adjusted net annual value Xxxx
Less: Deduction under section 24 Xxxx
Income from House Property (2) Xxxx
Profit and gains of business and profession
Net Profit as per profit and loss account Xxxx
Add:- Income which are debited to profit and loss Xxxx
account but not allowable as deduction
Less:- Expenditure which are not debited to profit Xxxx
and loss account
but allowable as deduction
Less:-Income which are credited to profit and loss Xxxx
account but are
exempt under section 10 or taxable under any
other head of income
Add:- Income which are not credited to profit and Xxxx
loss account but
are taxable under the head “Profit and gains of
business or profession”
Profit and gains of business and profession (3) Xxxxx
Capital Gains
Amount of capital gain Xxxx
Less: Amount exempt under section 54 to 54H Xxxx
Capital gain (4) xxxx
Income from other sources
Gross Income Xxxx
Less: Deduction under section 57 Xxxx
Income From Other Sources (5) Xxxx
Total Income (1+2+3+4+5) Xxxxxx
Less:- Adjustment on account of setoff and Xxxx
carried forwarder of losses
Gross Total Income Xxxxxx
Less:-Deduction under section 80C to 80U Xxxx
Total Income (Income liable to tax) Xxxxxx

Computation of tax liability

Tax on net income Xxxxx
Less: Rebate under section 87 A Xxxx
Balance Xxxxx
Add: Surcharge Xxxx
Tax and Surcharge Xxxxx
Add: Education Cess and secondary and higher Xxxx
education cess
Less: Rebate under section 86,89,90,90 A and 91 Xxxx
Tax Xxxxx
Less: Pre-paid Taxes Xxxx
Tax paid on self assessment Xxxx
Tax deducted or collected at source Xxxxx
Tax paid in advance Xxxx
Tax liability (Rounded off) xxxxx