MBA (Sem-IV)

Sub: CORPORATE TAXATION

Income:
Income is the money an individual receives in compensation for their work,
services, or investments. For businesses, Income means revenue that a business generates
by selling its goods and services. Revenue is the money earned by a company from selling
goods or services throughout its operations.

The definition and explanation of income is given 2(24) of the Income Tax Act, 1961.
Income under Indian Tax law encompasses every aspect of Gross Income, including all
sources of revenue, and taxable income, which is gross income minus expenses and other
adjustments. Income from all sources and in any form, for example, money and property, is
derived, adjusted, and lowered by permissible deductions. It’s the amount of money that’s
susceptible to income tax.

To make the exhaustive definition of Income under the Income tax act comprehensible. The
Income can be divided into a total of five categories.

1. Income From Salary:

The first category of income is salary, which includes any remuneration an
individual receives in exchange for services rendered under a contract of employment. This
sum qualifies for income tax consideration only if an employer-employee relationship
exists between the payer and the payee. The salary; advance compensation, pension,
commission, gratuity, perquisites, and annual bonus should all be included in the
salary. Salary is taxable on the due or received basis, whichever is earlier.

The complete amount or gross salary is taxed after making a total aggregate of the total
amount of income excluding the exemptions if any are present. All basic salary, as well as
commissions and bonuses, are subject to full taxation.

Under this head salary includes various allowances such as;

Leave travel allowance: When you go on a holiday, the expense required for travel is a
leave Travel allowance or LTA. Because this is paid, it is tax-free twice over four years.

Conveyance Allowance: Up to Rs 800 a month is exempt from tax.

House rent allowance: HRA can be claimed to lower taxes by individuals who live in a
rented house.

Medical allowance: Medical expenses up to Rs 15000 per annum is tax-free. The medical
expense of the individual and the family of the individual is included.
 2. Income From House Property:
In terms of income tax, a vacant residential property is considered self-occupied.
When a taxpayer owns more than one self-occupied house, only one is classified as house
property. Rest is regarded as let out. Taxes are imposed on any commercially owned
residence or property.

 A few conditions must be met in order for income from housing property to be
taxable.
 A house, a building, or any land must be included in the house property.
 The taxpayer should be an owner of the property.
 The taxpayer may not use the residential property for any company or professional
purposes that he or she is involved in.

When these conditions are met, the income generated by a home property becomes
chargeable and subject to tax deduction.

3. Income from business or Profession:

The money earned through the profits of a business or profession will be included to
the computation of total income. The difference between the revenue collected and the
expenses is charged.

Income derived from the practice of trade or commerce or by services of a

professional is also subject to taxation. Profits from the sale of imported goods, incentives,
any interest, any wage or bonus, and a commission from a business are all taxed under the
Income Tax Act’s head of income.

The income that may be taxed under this heading;

 All the profits earned during an assessment year.

 Profits, salary or bonus received from working as a partner in a firm.
 Profits from an organization’s revenue.
 Profits made from the selling of a specific licence.
 Cash received as a result of an individual’s export under a government
scheme.

4. Income from Capital Gains:

Profits or gains obtained by an Individual from the sale or transfer of a capital asset
are referred to as capital gains. Capital gains are earned on an investment made by an
individual for a business or profession. Capital gains includes income earned from
investments in mutual funds, equities, real estate, and other assets.
 There are total two types of gains short term and long term capital gains. Short-term
capital gains are profits earned when an individual sells an asset within 36 months (3
years) of acquiring it. Long Term Capital Gains are the profits made on an asset transfer
after 36 months (3 years) from the day of acquiring it.

5. Income from other Sources:

This category includes all other type of income that does not fit into the above
categories. This category includes income earned through interest on bank deposits,
prizes, card games, gambling, and other sports prizes. Money obtained in excess of Rs.
50,000 from a third party who is not a relative, spouse, or if the money was gained by
inheritance or will. All these sources are eligible for tax under section 56(2) of the income
tax act.

Income under the above heads is considered as Income for tax purposes. The
taxation and Income of an individual may vary in each Financial year. Once it’s known
under which head the Income falls, it becomes easy to understand and plan taxes.

Assessee:
An income tax assessee is a person who pays tax or any sum of money under the
provisions of the Income Tax Act, 1961.

The term ‘assessee’ covers everyone who has been assessed for his income, the income of
another person for which he is assessable, or the profit and loss he has sustained.

Now that you know who an assessee is, let us get deeper and understand the types of
assessees as per the Income Tax Act:

1. Normal Assessee:
An individual who is liable to pay taxes for the income earned during a financial year
is known as a normal assessee. Every individual who has earned any income earned or
losses incurred during the previous financial years are liable to pay taxes to the
government in the current financial year.

All individuals who pay interest/penalty or who are supposed to get a refund from the
government are categorised as normal assessees. Say, Mr A is a salaried individual who has
been paying taxes on time over the past 5 years. Then, Mr A can be considered as a normal
assessee under the Income Tax Act, 1961.
 2. Representative Assessee:
There may be a case in which a person is liable to pay taxes for the income or losses
incurred by a third party. Such a person is known as a representative assessee.

Representatives come into the picture when the person liable for taxes is a non-resident,
minor, or lunatic. Such people will not be able to file taxes by themselves. The people
representing them can either be an agent or guardian.

Consider the case of Mr. X. He has been residing abroad for the past 7 years. However, he
receives rent for two house properties he owns in India. He takes the help of a relative, Mr.
Y, to file taxes in India. In this case, Mr. Y acts as a representative assessee. If the assessing
officer plans to investigate the tax filing, Mr. Y will be asked to provide the necessary
documents as he is the guardian of the property and represents Mr. X.

3. Deemed Assessee:
An individual might be assigned the responsibility of paying taxes by the legal
authorities and such individuals are called deemed assessees.

Deemed assessees can be:

 The eldest son or a legal heir of a deceased person who has expired without writing
a will.

 The executor or a legal heir of the property of a deceased person who has passed on
his property to the executor in a writing.

 The guardian of a lunatic, an idiot, or a minor.

 The agent of a non-resident Indian receiving income from India.

For example, Mr. P owns a commercial building from which he earns rent income. He has
prepared and signed a will stating the property should be handed over to his niece after his
death. Upon his death, his niece will be considered as the executor of the property, i.e.
deemed assessee. She will be responsible for paying tax on the rental income thereon.

4. Assessee-in-default:
Assessee-in-default is a person who has failed to fulfill his statutory obligations as
per the income tax act such as not paying taxes to the government or not file his income tax
return. For example, an employer is supposed to deduct taxes from the salary of his
employees before disbursing the salary. He is, then, required to pay the deducted taxes to
the government by the specified due date. If the employer fails to deposit the tax deducted,
he will be considered as an assessee-in-default.
 Persons:
According to section 2(31) of Income tax act person includes:

– Individuals

– Partnership Firms

– HUF

– Company

– Association of person or body of individuals whether incorporated or not

– Local authorities

– Any other artificial judicial person not falling under any of the above sub sections

Assessee is a person who is liable to pay any tax or any other dues mentioned under the
act. However, from the above section it can be noted that person not only includes natural
person but also artificial judicial person.

The types of persons mentioned under the sections are defined as below;

 Individuals: Individuals refers to natural human beings whether Male or female or

transgender, Major or minor, Resident or non-resident.

 Partnership Firm: A partnership is a contractual relationship between two or

more individuals that have agreed to carry on a business represented by all or any
one of them acting on behalf of all with an objective to share the profits obtained
from the business. LLP is considered or taxed as a firm under the Income tax act,
1961.

 HUF: Hindu Undivided Family (HUF) is a family-owned business covered as per the
rules of Hindu laws that consists of all persons lineally descended from the same
family having its head as Karta and members as coparceners. Jain and Sikhs families
are also considered as HUF under this act.

 Company: Company is a legal judicial entity that is formed under companies Act,
2013 or any other previous act. Companies include;
 Any Indian company
 Foreign company
 Parent, Associate or subsidiary company
 Statutory company
 Government company
 Any other sort of company
  Association of persons or body of Individuals: Association of persons means a
group of people who have come together for achieving a common goal by working in
the same direction. Members of AOP can be a natural or judicial persons.

 Local authorities: Local authorities are an organization that is officially responsible

for public services formed for providing services in a particular area.

Previous Year:
As per Section 3 of the Income Tax Act, 1961, Previous Year is the Year immediately
preceding the assessment year. Previous year is also known as Financial Year. It basically
means the period starting from April 1 and ending on March 31 of the next year. For the
income earned in the previous/financial year, tax is paid in the assessment year.

However, in those cases, where a new business/profession/ new source of income,

is set up in a particular previous/financial year, then in such cases, the previous/financial
year will not begin/calculated from 1st April but will begin/ calculated from the date when
the new business/profession/ new source of income was set up.

YEAR 2020-21: For the year 2020-21, if it is considered to be the previous year,
then in this case, the previous year begins on 1st April 2020 and will end on 31st March
2021. And the assessment year for this previous/financial year will be 2021-22, i.e, will be
from 1st April, 2021 to 31st March 2022.

Similary if the year 2020-21 was the assessment year, then the year 2019-20 would have
been the previous / financial Year.

Tax on Income earned in the previous year is paid in the assessment year. However, there
are a few exceptions where the tax on Income earned in the previous year is paid in the
previous year itself. These exceptions are:

 Income earned by a non resident through a shipping business in India

 Income earned by the person who is leaving India permanently or for a long
period of time.
 Income earned by those bodies which are formed for a short period of Time.
 Income earned by those person who are likely to transfer their property in
order to avoid tax
 Income earned from a discontinued business.

Assessment Year:
It is assumed that Income cannot be taxed before it is earned. Therefore,
Assessment Year always appears after the Previous Year or follows the Previous Year in
which income is collected. Section 2 (9) of the IT Act defines Assessment Year as the period
of twelve months commencing on the 1 st day of April every year. Assessment Year is
Financial Year whereby the income accrued by a person in Previous Year or in Year
preceding this Financial Year shall be Taxed or assessed. Calculation of tax requires
assessment, calculation and payment of taxes which shall be done in the 12 months period
of Assessment Year. It is the period during which an assessee is required to file the return
of income i.e. Income Tax Return (ITR) for the income earned in the Previous Year and the
Income Tax Officer (ITO) has to initiate assessment proceedings for such returned income
and tax thereon.

Income tax forms have an Assessment Year because the income for any Financial
Year is evaluated and taxed in the following or next or subsequent year i.e. the Assessment
Year. Hence, it made it mandatory to select Assessment Year while filing income Tax
Returns. The selection of the correct Assessment Year is also very important because
assessment may hamper by adverse situations that can come up either in the beginning,
middle or end of a Financial Year. Therefore, to streamline the process of collection tax
mentioning of correct Assessment Year is important.

Gross Total Income: [Section-80B(5)] (Definition under Income Tax)

As per section 14, all income shall, for purposes of Income-tax and computation of
total income, be classified under the following heads of income:

1. Salaries,
2. Income from House Property,
3. Profits and Gains of Business or Profession,
4. Capital Gains,
5. Income from Other Sources.

Aggregate of incomes computed under the above 5 heads, after applying clubbing
provisions and making adjustments of set off and carry forward of losses, is known as
Gross Total Income (GTI). [Section 80B(5)]

G. T. I. = Salary Income + House Property Income + Business or Profession Income +

Capital Gains + Other Sources Income + Clubbing of Income - Set-off of Losses

Total Taxable Income:

The total income of an assessee is computed by deducting from the gross total
income, all deductions permissible under Chapter VIA of the Income-tax Act i.e., deductions
under sections 80C to 80U.
To Compute Total Taxable Income;

The steps in which the Total Income, for any assessment year, is determined are as
follows:
1. Determine the residential status of the assessee to find out which income is
to be included in the computation of his Total Income.
2. Classify the income under each of the following five heads. Compute the
income under each head after allowing the deductions prescribed for each
head of income.
Residential status:
It is important for the Income Tax Department to determine the residential
status of a tax paying individual or company. It becomes particularly relevant during the
tax filing season. In fact, this is one of the factors based on which a person’s taxability is
decided.

Meaning and importance of residential status:

The taxability of an individual in India depends upon his residential status in India
for any particular financial year. The term residential status has been coined under the
income tax laws of India and must not be confused with an individual’s citizenship in India.
An individual may be a citizen of India but may end up being a non-resident for a particular
year. Similarly, a foreign citizen may end up being a resident of India for income tax
purposes for a particular year. Also to note that the residential status of different types of
persons viz an individual, a firm, a company etc is determined differently. In this article, we
have discussed about how the residential status of an individual taxpayer can be
determined for any particular financial year

To determine residential status;

For the purpose of income tax in India, the income tax laws in India classifies taxable
persons as:

1. A resident
2. A resident not ordinarily resident (RNOR)
3. A non-resident (NR)

The taxability differs for each of the above categories of taxpayers. Before we get into
taxability, let us first understand how a taxpayer becomes a resident, an RNOR or an NR.

1. Resident:
A taxpayer would qualify as a resident of India if he satisfies one of the following 2
conditions :

1. Stay in India for a year is 182 days or more or

2. Stay in India for the immediately 4 preceding years is 365 days or more and 60 days or
more in the relevant financial year

In the event an individual who is a citizen of India or person of Indian origin leaves India
for employment during an FY, he will qualify as a resident of India only if he stays in India
for 182 days or more. Such individuals are allowed a longer time greater than 60 days and
less than 182 days to stay in India. However, from the financial year 2020-21, the period is
reduced to 120 days or more for such an individual whose total income (other than foreign
sources) exceeds Rs 15 lakh.

In another significant amendment from FY 2020-21, an individual who is a citizen of India

who is not liable to tax in any other country will be deemed to be a resident in India. The
condition for deemed residential status applies only if the total income (other than foreign
sources) exceeds Rs 15 lakh and nil tax liability in other countries or territories by reason
of his domicile or residence or any other criteria of similar nature.

The amendment can be further simplified as below-

2. Resident Not Ordinarily Resident:

If an individual qualifies as a resident, the next step is to determine if he/she is a
Resident ordinarily resident (ROR) or an RNOR. He will be a ROR if he meets both of the
following conditions:

1. Has been a resident of India in at least 2 out of 10 years immediately previous years and

2. Has stayed in India for at least 730 days in 7 immediately preceding years

Therefore, if any individual fails to satisfy even one of the above conditions, he would be an
RNOR.
From FY 2020-21, a citizen of India or a person of Indian origin who leaves India for
employment outside India during the year will be a resident and ordinarily resident if he
stays in India for an aggregate period of 182 days or more. However, this condition will
apply only if his total income (other than foreign sources) exceeds Rs 15 lakh. Also, a
citizen of India who is deemed to be a resident in India (w.e.f FY 2020-21) will be a resident
and ordinarily resident in India.

3. Non-resident:
An individual satisfying neither of the conditions stated in (a) or (b) above would be an NR
for the year.

Taxability:
Resident: A resident will be charged to tax in India on his global income i.e. income earned
in India as well as income earned outside India.

NR and RNOR: Their tax liability in India is restricted to the income they earn in India.
They need not pay any tax in India on their foreign income. Also note that in a case of
double taxation of income where the same income is getting taxed in India as well as
abroad, one may resort to the Double Taxation Avoidance Agreement (DTAA) that India
would have entered into with the other country in order to eliminate the possibility of
paying taxes twice.

Agricultural Income:
Agricultural income is not subject to income tax. The Income-tax Act has, however,
specified how such income is to be indirectly taxed. This is called the partial integration of
agricultural and non-agricultural income.

Agricultural income is not taxable under Section 10 (1) of the Income Tax Act as it is
not counted as a part of an individual's total income. However, the state government can
levy tax on agricultural income if the amount exceeds Rs.5,000 per year. It is categorised as
a valid source of income and basically includes income from sources that comprise
agricultural land, buildings on or related to an agricultural land and commercial produce
from an agricultural land. This income is considered for rate purposes while calculating
the income tax liability of an individual.

What is considered as Agricultural Income?

Section 2 (1A) of the Income tax Act details out the conditions wherein sources can be
considered to be generating agricultural income. The section’s definitions basically point
out the following as the sources for agricultural income –
 1. Renting/leasing agricultural land for agriculture, storeroom, residential place and
outhouse.
2. Money earned from trees growing in nurseries as seedlings or saplings.
3. Renting/leasing agricultural land for by cultivator or farmer.
4. Any income due to commercial use of agricultural land
5. The agricultural land or the land where the building is located, is being assessed for
land revenue or subject to a local rate assessed .

A few exclusions to this income will be as follows:

 Revenue from sale of processed produce of agricultural nature without actual

agricultural activity
 Revenue from extremely processed produce
 Revenue from trees that have been sold as timber

Key points to remember while considering if an income is actually a valid

agricultural income:

1. Income should be from an existent piece of land

2. Income should be from a piece of land that is used for agricultural operations
3. Income should stem from produce achieved after cultivation of the land
4. Income can be from a land that is not under the assessee’s ownership

Agricultural Income examples Non-agricultural income examples

Income from seed sales Income from raising poultry

Agricultural land income is held as

Sales of trees that have been planted again
stock-in-trade

Interest on funds received by a partner from a Any dividend received from a

business operating in agriculture. company's agricultural earnings

Earnings from growing creepers and flowers Income from the dairy industry.

Rent earned from agricultural land Earnings from bee hives.

Gains a partner receives from a company that

Income from selling and cutting trees
engages in agricultural activities or
for lumber.
production
 Income from producing cheese and
-
butter

Receipts from the farmhouse's use as

-
the set for a TV series

Is Agricultural Income Taxable?

By default, agricultural income is exempted from taxation and not included under total
income. The Central Government can’t impose or levy tax on agricultural income. The
exemption clause is mentioned under Section 10 (1) of the Income Tax Act of India.

Central Government

The Central Government can’t impose or levy tax on agricultural income. The exemption
clause is mentioned under Section 10 (1) of the Income Tax Act of India.

State Government

State Governments can charge agricultural tax. As of the latest amendment, income from
agriculture, if within INR 5000 in a financial year, will not be accounted for tax purposes.
Anything above that will be taxable as per the applicable rates. As per the finance act, the
total tax liability for a person would include the agriculture income added to the non-
agricultural portion.

 Income above Rs.5,000: Though exempted from tax through Section 10 (1), tax on
agricultural income persists at the state level if the mentioned income exceeds INR
5000 per year and if the total income excluding agricultural income is more than the
basic exemption limit.

 Basic threshold: In addition to net agricultural income, total income is higher than
the basic exemption threshold.

Age Basic exemption limit for non-agricultural income

Under 60 years Rs.2,50,000

60- 80 years Rs.3,00,000

Above 80 years Rs.5,00,000

 For firms, non-individuals and companies: They can pay the associated tax as
the tax is charged at a flat rate on the chargeable income.

 For salaried individuals: Agricultural tax might increase the tax they need to pay
because of the aggregation of income.

Calculation of Tax taking Agricultural Income into Account

In case the agricultural land is not falling under the scope of the aforementioned section,
one would need to do a separate evaluation just for that aspect of tax. If the agricultural
income is well within INR 5000, the returns need to be filed through ITR 1, else ITR 2 needs
to be used wherein there is a separate column for declaring the details of the income.

The tax calculation done here is in accordance with the fact that the income from
agricultural sources is falling under Section 2 (1A) of the IT Act.

Formula for calculating tax Total amount of tax due

Agricultural income + Non-agricultural income = X

Net agricultural income + basic exemption limit = Y

Total amount of tax due = Y-X

For all other normal purposes, the tax calculation will involve the following steps:

 Including the Agricultural Income – Considering B is the base income of the

individual and A is the agricultural income, tax first needs to be computed on the
amount of B+A. Let’s call this tax as T(B+A)

 Adding the basic tax slab benefit – Depending upon changes in the Income Tax
rules, the basic tax slab might change, but for clarity’s sake, let’s consider that as S.
That needs to be added to the agricultural income and another tax is be calculated
on the amount. Let’s call this tax as T(S+A)

 Income Tax liability – This is the tax that is subject to deductions. Thus IT = T(B+A)
– T(S+A)

One should always remember to aggregate the agricultural income while calculating tax
since that can allow one to avoid unnecessary extra taxes or interest on taxes.
Tax Benefit Under Section 54B ITA, 1961

Under section 54, any individual or HUF may claim a tax benefit (B). The benefit is for
taxpayers who sell their agricultural property and then purchase an additional agricultural
property. The following criteria must be met for this tax benefit:

 Applicable to individuals

 The land must be used for agricultural purposes (either by the applicant or their
parents) for at least 2 years before the land was sold.

 Applicable to HUFs

 The land must be used for agricultural purposes for at least 2 years prior to the sale
of the land. Any member of the HUF must use the land in the case of the HUF.

 Within two years of the sale of the prior land, the taxpayer is required to buy new
agricultural land.