INCOME TAX- VI SEM

SYLLABUS:

Unit 1: INTRODUCTION TO INCOME TAX 14 Hrs

Income Tax: Brief History - Legal Frame Work – Types of Taxes - Cannons of Taxation – Important Definitions:
Assessment – Assessment Year – Previous Year – Exceptions to the general rule of Previous Year - Assessee –
Person – Income - Casual Income – Gross Total Income – Total Income – Agricultural Income

Residential Status: Determination of Residential Status of an individual (simple problems) - Incidence of Tax
(Simple Problems on Computation of Gross Total Income).

Exempted Incomes: Introduction – Exempted Incomes U/S 10 (Restricted to Individual Assessee) –

Only theory

Unit 2: INCOME FROM SALARY 16 Hrs

Meaning & Definition – Basis of Charge – Allowances – Fully Taxable Allowances – Partly Taxable Allowances:
House Rent Allowance, Entertainment Allowance, Transport Allowance, Children Education & Hostel Allowances -
Fully Exempted Allowances – Perquisites – Tax Free Perquisites – Perquisites Taxable in all Cases: Rent free
accommodation - Concessional accommodation, Personal obligations of the employee met by the employer –
Perquisites Taxable in Specified Cases : Gardener, Sweeper, Gas, Electricity, Water and Motor car facility (when
the motor car is owned or hired by the employer )– Provident Funds – Deductions from Salary U/S 16 – Problems
on Income from Salary(excluding retirement benefits).

Unit 3: INCOME FROM HOUSE PROPERTY 10 Hrs

Basis of Charge – Exempted Incomes from House Property – Annual Value – Determination of Annual Value – Loss
due to Vacancy – Deductions from Annual Value – Problems on Income from House Property(Excluding Pre-
Construction interest)

Unit 4: PROFITS AND GAINS FROM BUSINESS AND PROFESSION 10Hrs

Meaning and Definition of Business & Profession – Expenses & losses Expressly Allowed – Expenses and losses
Expressly Disallowed – Expenses Allowed on Payment Basis - Problems on computation of income from Business
of Sole Proprietor.

Unit 5: COMPUTATATION OF TOTAL INCOME 06 Hrs

Income from Capital Gains (excluding exemptions - Theory only) - Income from Other Sources (Theory only) -
Deductions U/S 80 C, D & G. Simple problems on Computation of Total income of an Individual.
 Basic Concepts(Definition):
1. Meaning of Tax: Tax is compulsory contribution made by citizen of a nation to meet various
expenditure of the state. Taxes are of two types, viz. Direct tax and Indirect Tax.

2. Direct Tax: It is a kind of tax where in incidence and impact is on the same person.

‘Incidence’ means liability to pay tax to the Government and ‘Impact’ means burden of paying the tax.

3. Indirect Taxes: It is a kind of tax where in ‘ Incidence’and ‘impact’ is on two different persons.

Ex: Excise duty, Customs duty, VAT, service tax etc.

4. Assessment Year (Sec 2(9)): Assessment year is defined as “ the period of twelve months starting
from 1st of April and ending on 31st March every year.”

The income of the previous year is assessed to tax in the assessment year. The present assessment year
is 2020-21.

5. Previous year: Previous year is the financial year immediately preceding the assessment year. In
other words, the year in which income is earned is known as previous year. The previous year for the
assessment year 2020-21 is 2019-20.

Exceptions to the General Rule Previous year:

1. Sec.172- Income of non-resident from shipping business.

2.Sec 174- Income of persons leaving india either permanently or for a long period of time.

3.Sec. 174(A)- Income of bodies formed for short duration.

4. Sec.175- Income of a person trying to transfer his/her assets to avoid the payment of tax and

5. Sec. 176- Income of a discontinued business.

6. Person( Sec 2 (31):

Person has been defined under section 2(31) . It include:

i. An individual
ii. A Hindu Undivided Family
iii. A Company
iv. A firm
v. An Association of persons or a body of individuals, whether incorporated or not.
vi. A Local authority and
vii. Every Artificial jurdical person not falling within any of the preceding sub-categories.

7. Assessee: (sec 2(7)):

1. An Assessee is a person:

A) who is liable to pay any tax; or

B) who is liable to pay any other sum of money under this Act(interest, fine or penalty); or

C) In respect of whom any proceeding under this act has been taken for assessment of is income;

d) In respect of whom any proceeding under this act has been taken for the assessment of income of any
other person in respect of which he is assessable for; or

E) In respect of whom any proceeding under this act has been taken for the assessment of loss sustained
by him or by such other person; or

F) in respect of whom any proceeding under this act has been taken for the amount of refund due to him
or to such other person; or

2. Deemeed Assessee: A person who is deemed to be an assessee for some other person is called ‘
Deemed Assessee’ . It includes legal representatives, agent of a non-resident, guardian or manager of
an infant and lunatic, trustee and administrators etc. In other words a person who is liable to pay tax not
only his own income but on the income accrued to another.

3. Assessee in Default: When a person is responsible for deducting tax at source under the act and he
fails to do it, he is called “ Assesses in Default” .

8. Income ( Sec.2 (24)

The income is very important term for the Income tax purpose. The tax is charged on the income of
the person. This term has not been derived in the income tax Act, except that it states as to what is
include in income . Under this section income includes the following:

1.Profits and gains of business.

2. Dividends.

3. Voluntary contributions received by a trust or an institutions.

4. Perquisites or profit in lieu of salary.

5. Any special allowances.

6. Other Allowances

7. Value of any benefits.

8. Any sum paid by the company in the interest of the assessee.

9. Any profits on sale of license granted under the import control order of 1955.

10. Any cash assistance received by the government of India.

11. Any duty or excise against exports to be received.

12. Any interest, salary, bonus, commission or remuneration due or received by a partner from the firm.

13.Any Capital gains.

14.Insurance profit.

15. Any Income from other sources.

16. Any Contributions towards provident fund or employee state Insurance fund.

17. Any sum received under a keyman Insurance policy including the sum by way of bonus such
policy.

8. Gross Total Income(GTI) (Sec.14):

Gross total Income is the aggregate of the incomes computed under various heads of Income according
to the provisions of the Income tax before making any deductions u/s80C to 80U.

Section 14 deals with the gross total income and it includes:

1) Income from salaries.

2) Income from house property.

3) Profits and Gains of business or profession.

4) Income from capital Gains.

5) Income from Other sources.

9. Total Income(Sec.5): Total income of an assessee is Gross total Income after making deductions
u/s 80C to 80U.

Total Income means the total income referred to in section 5 and computed in the manner laid down in
the income tax Act. Under sect 5 different incomes of an assessee are included in his total income on
the basis of his residential status. It is will be determined after making deductions under section 80C
and 80Ufrom the total income.

10. Casual Income:

An Income becomes casual income, if it contains the following features: it is unanticipated, it is non-
recurring in nature, it arises from an unknown source, no specific efforts were put in to earn such
income.

For Example:

1. Winning from lottery,

2. Income from cross word puzzles and card games,

3. Prize awarded for coin or stamp collection.

Exemption Deduction

If an income is exempt from tax, it is not included in the

Deduction is given from income chargeable to tax.
computation of income.

AGRICULTURAL INCOME:
Agricultural Income means-

1) Any rent or Revenue derived from a land situated in India and used for agricultural purposes. ( i.e
basic operations like tilling of land, sowing of seeds, planting, harvesting, irrigation should be carried
out on the land).

ii) Any rent or revenue received from a house property situated in the immediate vicinity of agricultural
land and used for residences of the owner or tenant or for storing agricultural equipments or produces.

Example of Agriculture Income:

1. Income from growing and selling paddy, wheat, flowers, trees.

2. Insurance money received for destruction of agricultural produce.

3. Income from sale of dried tobacco leaves.

4. Income from sale of straw.

5. Income from growing and maintaining nursery, tea leaves.

Examples of Non-agricultural Income

• Income from sale of trees, grass of spontaneous growth.

• Income of salt produced by flooding the land with sea water.

• Interest received by money-lender in the form of agricultural produce.

• Income from butter and cheese making.

• Income from poultry farming.

• Income from fishing.

• Income derived from land let-out for storing crops.

• Income from dairy farming.

• Interest on loan given to a farmer.

• Dividend received from a company engaged in agricultural operations.

Taxation of Agricultural Income

It is totally exempted from tax U/S 10(1). But, in case of agricultural income from land situated outside
India, it will be fully taxable under the head other sources.

Partly Agricultural Income and Partly Business Income

If agricultural produce is subjected to any manufacturing process, the profit from the sale of finished
product is partly from agriculture. Profit attributable to agriculture is exempt, while business profit is
liable to tax.

IIlustration-1

State, the following incomes are agricultural or non-agricultural incomes:

A) Income from growing flowers and creepers- Agricultural Income.

B) Dividend received from a company engaged in agricultural operations- Non-agricultural Income.

 C) Interest on loan given to a farmer- Non-agricultural income.

D) Income from agricultural activities in Srilanka- Non-agricultural income.

E) Income from conversion of sugarcane into jaggary by the farmer himself- Difference between
market price and cost price of sugarcane is agricultural income

Illustration -2

State whether the following incomes from land situated in India are agricultural income or not.

A) Income from sale of forest trees of spontaneous growth- Non-agricultural income

B) Income from agricultural land situated in urban area- Agricultural Income.

C) Income derived from lease of land for grazing of cattle required for agricultural operations-
agricultural income.

D) Income from the sale of earth for brick making- Non-agricultural income.

E) Income from dairy farming- Non-agricultural income.

Residential Status:
Introduction

Tax is charged on the income of the assessee. Under the Income tax Act, 1961, the total income of
every person is computed based upon his/her residential status. For the purpose of determining the
residential status, assessee’s are classified in to the following categories.

1. Individual, 2. HUF 3. Firms 4. Companies 5. Any other person.

Residential status of an Individual
It refers to the status of an individual, which is determined on the basis of his/her total stay in India.
Under section 6, the residential status of an individual is divided in to the following categories:

Basic Conditions(sec.6 (1)):

To find out whether an individual is Resident or Non-Resident in India during the previous year, the
following basic conditions shall be applied:

A) First basic conditions= Individual assessee must be in India for at least 182 days or more during the
previous year. Or

B) Second Basic condition= Individual assessee must be in India for at least 60 days or more during the
previous year and 365 days or more during 4 years preceding the previous year.

1. If an individual assessee fulfills any one of the basic condition, he/she is said to be Resident in
India.

2. If an individual assessee fulfills none of the basic condition, he/she is said to be Non-Resident in
India.

Exceptions to Basic Conditions u/s (6(1)b)

In the following cases, an individual has to stay in India for a period of 182 days or more instead of 60
days or more during the relevent previous year.

1. In case of an Indian citizen leaving India for the purpose of employment in the previous year.

2. In case of Indian Citizen leaving India as a crew member of a ship in the previous year.

3. In case of a person of Indian origin settled in the foreign country coming on a visit to India
during the previous year.

Additional Conditions( sec.6 (6)):

If an Individual assessee becomes resident in India, the following additional conditions U/s 6(6) shall be
applied to find out whether an individual assessee is resident and Ordinary resident or Resident but Not
Ordinarily Resident.
First Additional Condition: Resident in India for 2 out of 10.P.Ys preceding the P.Y

and

Second Additional Condition: Stay in India for 730 days or more during the P.Ys immediately
preceding the P.Y

1. If an individual assessee satisfies both the additional conditions, he/she is said to be resident and
ordinary resident in India.

2. If an individual assessee satisfies one or none of the additional conditions, he/ she is said to be
resident but not ordinarily resident in India.

Illustration-1

What is the residential status of Mr. Ganesh for the Assessment year, 2020-21 who was
in India as follows:

Previous year Presence in India

2019-20 182days

2018-19 55days

2017-18 28days

Working Note:

Previous Details of his stay in His Residential Total Stay in 4years Total stay in 7
Years India Staus PPY year PPY
2009-10 Nil N.R
2010-11 Nil N.R
2011-12 Nil N.R
2012-13 Nil N.R 83days
2013-14 Nil N.R
2014-15 Nil N.R
2015-16 Nil N.R 83days
2016-17 Nil N.R
2017-18 28days N.R
2018-19 55days N.R
2019-20 (P.Y) 182days Resident
 Determination of Residential Staus

Previous
Assessee: Mr. Ganesh Year:2019-20
Assessment Year:
2020-21

For determining the Residential status of Mr.Ganesh , the following Satisifed/Not

conditions shall be applied Satisified
Basic Conditions U/s 6(1)
1. Stay in India for 182 days or more in the P.Y (2019-20) Satisified
Or
2. Stay in India for 60days or more in the P.Y(+) Not satisified (N.A)
365 days or more in 4.P.Y preceding the P.Y

Additional Conditions U/s 6(6) Not Satisified

1. Resident in India for 2 years out of 10 P.Y.s preceding the P.Y
2. Stay in India for 730 days or more during &. 7. P.Y.s preceding the
P.Y Not Satisfied

As Mr. Ganesh satisfies first basic conditions and None of the additional conditions his
residential status in India in the previous year is (2019-20) “ Resident but Not ordinarily resident”
 Illustration:2
Mr. Peter, a foreign cricketer comes to India for 100 days every year since the financial
year 2010-11 . Find out his residential status for the assessment year 2020-21.

Working Note:

Previous Details olf his stay in His Residential Total Stay in 4years Total stay in 7
Years India Staus PPY year PPY
2009-10 Nil NR
2010-11 100days NR
2011-12 100days NR
2012-13 100days NR 700days
2013-14 100days NR
2014-15 100days Resident
2015-16 100days Resident 400days
2016-17 100days Resident
2017-18 100days Resident
2018-19 100days Resident
2019-20 100days Resident

Determination of Residential Staus

Previous
Assessee: MR. Peter Year:2019-20
Assessment Year:
2020-21

For determining the Residential status of Mr.Peter , the following Satisifed/Not

conditions shall be applied Satisified
Basic Conditions U/s 6(1)
1. Stay in India for 182 days or more in the P.Y (2019-20) Not Satisfied
Or
2. Stay in India for 60days or more in the P.Y(+) Satisified
365 days or more in 4.P.Y preceding the P.Y

Additional Conditions U/s 6(6) Satisfied

1. Resident in India for 2 years out of 10 P.Y.s preceding the P.Y
2. Stay in India for 730 days or more during &. 7 P.Y.s preceding the
P.Y Not satisfied
As Mr. Peter satisfies the second basic condition and first additional conditions , his residential
status in India in Previous year ( 2019-20) and Assessment year 2020-21 is “ Resident but not
Ordinary Resident”.