Course Name- DIRECT TAX LAW

Course Code- BCOM-502

Lecture No- 1
UNIT 1
Topic – INTRODUCTION TO DIRECT TAX

Model Institute of
Engineering & Technology
 Course Outcomes

Course Description Mapping with Program Outcomes

Outcomes and Program Specific Outcomes

CO1 Understand the basic terms of Income Tax. 2,3,6

CO2 Articulate the different components of Income. 3,6

CO3 Analyse the different heads of Income 3,6

CO4 Apply various deductions to compute taxable 3,6

income.
CO5 Assess the steps involved in filing Income Tax 2,3,6
return
Assessment and Evaluation Plan

◻ Assessment Tools ◻ Evaluation

✔ SNAP ✔ 5 Marks
✔ MST ✔ 5Marks
✔ Assignment ✔ 5 Marks
✔ Attendance ✔ 5 marks
Introduction
DIRECT AND INDIRECT
DIRECT VS INDIRECT TAX
INCOME TAX
◻ After studying this unit, you should be able to:
◻ explain agricultural income, and taxation thereof,
◻ explain Instances of Non-agricultural Income,
◻ Differentiate Agricultural and non agricultural income
Agricultural Income,

Agricultural income is not taxed under the Income Tax Act, 1961, because agriculture being a
State subject, it is the State Government alone which is competent to tax income therefrom.

The exemption to this income is provided under Section 10 (I) of the Act. Since, it is not taxed,
the definition thereof has assumed significance. The assessee would naturally be interested in
classifying his income as agricultural incomes; however, distantly it might have been related to
agriculture.

On the other hand, the tax authorities would like to interpret the term conservatively and thus
there is a possibility of some dispute between the parties as regards the meaning of the term.
The Income Tax Act, 1961, has defined the term ‘agricultural income’ under Section 2 (1A)
exhaustively
Definition of Agricultural Income

◻ Agricultural income as defined under Section 2(1A) means any rent or revenue derived from
land which is situated in India and is used for agricultural purposes.
◻ The definition makes it very clear that any rent or revenue (in cash or kind) will be
agricultural in nature only if the following conditions are fully satisfied:
◻ a) Rent or revenue is derived from land,
◻ b) The land is situated in India, and
◻ c) The land is used for agricultural purposes.
Kinds of Agricultural Income

◻ Agricultural Income is of five kinds:

◻ i) Any rent or revenue derived from land
◻ ii) Income derived from Agriculture
◻ iii) Any income derived from marketing process performed by cultivator or receiver of rent in
kind
◻ iv) Any income derived from the sale of product
◻ v) Income from farm building

(ii), (iii) and (iv) can be combined under one heading and explained
Instances of Non-agricultural Income

◻ The following incomes though connected with land are not agricultural in nature:
◻ 1) Annuity payable to vendor of agricultural land or to a person giving up his claim to a
piece of agricultural land.
◻ 2) Commission for selling agricultural produce.
◻ 3) Income from Dairy Farm.
◻ 4) Forest produce resulting from wild growth.
◻ 5) Fisheries 6) Ginning of cotton.
◻ 7) Harvesting of crop on purchased land.
◻ 8) Letting out of land for stocking timber or crops.
◻ 9) Dividend paid out of agricultural income.
◻ 10) Commission earned by the landlord for selling agricultural produce.
Instances of Non-agricultural Income

◻ 11) Profit earned on purchase of standing crop.

◻ 12) Rearing of silk worms.
◻ 13) Income from stone quarries.
◻ 14) Royalty income of mines.
◻ 15) Income from poultry farming.
◻ 16) Income from land used for brick making.
◻ 17) Income from producing water fruits in a tank.
◻ 18) Compensation for requisition of land for military use.
◻ 19) Remuneration of mutawalli or trustee out of agricultural income of Wakf.
◻ 20) Income from sale of tender forms by the assessee engaged in the cultivation of
sugarcane.
◻ 21) Income from maintaining or running nurseries.
◻ After studying this , you should be able to:
◻ explain the term Income and
◻ define Income and total income
◻ Identify the various sources / heads of income under the income tax Act
Basic concept-Income,

◻ CONCEPT OF INCOME

◻ Since income tax is levied on the “income” of an entity, it is important to know what income is
and how it is computed.
Definition of Income

◻ The subject matter of income tax is ‘Income’, but no definition of income has been given in the
Income tax act. Section 2(24), of the act only indicates about inclusion of certain items which
are given below:
◻ i) Profits and Gains,
◻ ii) Dividend,
◻ iii) Income from voluntary contributions received by followings:
◻ a) Any trust or institution which has been established for the purpose of charitable or
religious purposes,
◻ b) A scientific research association,
◻ c) A games or sports association,
◻ d) A charitable fund or a trust or institutions created for wholly public religion purposes,
◻ e) Any university or other educational institution,
◻ f) Any hospital or other institution,
◻ iv) Perquisites or profits in lieu of salary to employees,
◻ v) Any special allowance or benefit besides perquisites to employees to meet his expenses
for performing his duties,
◻ vi) Income from units of Unit Trust of India (taxfree W.e.f. A Y. 2004-05),
◻ vii) Income from units of Mutual Fund (tax free W.e.f. AY. 2004-05),
◻ viii) Income from Marketing Association (W.e.f. AY. 2003-04),
◻ ix) Any allowance granted to meet increased cost of living,
◻ x) Value of any benefit or perquisites received by any director of company or any person
having substantial interest in company or his relative,
◻ xi) Value of benefit or perquisite received by representative assessee,
◻ xii) Profits generated from any business or profession,
◻ xiii) Capital gain, xiv) Recovery of bad debts allowed in the past,
◻ xv) Refund of excise duty, xvi) Balancing charge,
◻ xvii) Any interest, salary, bonus, commission and other remuneration received by partner of a
firm,
◻ xviii) Amount received from winning of lottery, crossword puzzles, play cards and horse race
with effect from assessment year 2002-03, the term “lottery” shall include winnings through
draws or any other ways. Play cards and other games shall also include any game or any
other entertainment programme on televisions, for the purpose of winning the prize,

◻ xix) Amount received from employees for contribution in following funds: a) Any fund
established under Employees State Insurance Act, 1948, b) Any fund established for labour
welfare, c) Provident fund or superannuation fund for employees,

◻ xx) Profits from sale of license received under import control order, 1995,

◻ xxi) Cash subsidy in respect of export under any scheme of Government of India,
◻ xxii) Sum received exceeding Rs. 50,000 from non-relative without consideration,
◻ xxiii) Sum received under Keyman Insurance Policy. This sum also includes Basic Concepts-I
bonus,
◻ xxiv) Income shall include the profits and gain of any business of banking (including providing
credit facilities) carried on by a co-operative society with its members (W.e.f. A.Y. 2007-08),
◻ xxv) Maximum amount of casual income upto Rs 10,000 is exempted from income tax. Any
casual income exceeds Rs 10,000, will be taxable under head “Income from other source”.
◻ The above definitions of income are not comprehensive. Besides the above items, other
receipts and benefits are also treated incomes under Income-tax Act.
After studying this unit, you should be able to:
a. Understand the Basic concept of person,
b. Understand the Definition of person
c. Apply the concept of person.
Types of Individuals

◻
Meaning of HUF
Firms/Association of Person/Body of Individual

◻ Under income tax laws, firms/association of person/body of individual are taxable as a separate entity even if
such firms/AOP/BOI are registered or not, and even if such Firms/AOP/BOI are created for non-profit motives.
Artificial Juridicial Person

Artificial Juridical Person means units or entities which have separate existence in the
eyes of law but not included in any of the categories of person which are specified in
u/s 2(31).
◻ Examples are: Deity, unregistered charitable trusts, unregistered clubs, religious
bodies, universities etc.
After studying this unit, you should be able to:
a. Understand the Definition of assesses
b. Articulate the meaning and concept of assesses and its types,
c. Apply the concept of assesses and its types.
Definition of Assessee

◻ The term assessee is defined under Section 2(7) of Income Tax Act, 1961.
◻ According to this definition, “assessee” means a person by whom any tax or any other sum of
money is payable under this Act, and includes—

• every person in respect of whom any proceeding under this Act has been taken for the
assessment of his income or assessment of fringe benefits or of the income of any other person
in respect of which he is assessable, or of the loss sustained by him or by such other person, or
of the amount of refund due to him or to such other person ;

• every person who is deemed to be an assessee under any provision of this Act ;

• every person who is deemed to be an assessee in default under any provision of this Act ;
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
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.
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.
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
 ◻ After studying this unit, you should be able to:
a. Understand the Definition of assessment year, previous year
b. Apply the concept of assessment year and previous year.
ASSESSMENT YEAR

◻ Assessment Year (AY) is defined in Section 2(9) of the Income Tax Act, 1961. It means the
period of 12 months commencing on the April 1 of each year and ending on March 31 next.
◻ For example, the current assessment year is 2021-22 which commences on April 1,2021 and
will end on March 31, 2022. It is the financial year in which the assessment takes place an
assessee is required to pay tax in the AY on the income that was earned by him in the
previous year according to the rates of tax prescribed by Annual Finance Act.
◻ To illustrate, the current assessment year is 2021-22 and an assessee is required to pay tax
in this AY on the income that was earned by him in the previous year 2020-21.
◻ As a precaution, it should be pointed out here that there are a few exceptions to the general
rule that income earned in the previous year only is taxed in the assessment year
 PREVIOUS YEAR

◻ Income tax is levied on net taxable income of previous year. So, it is very important to make
clear the meaning of the term ‘Previous Year’. It is defined in section 3 of Income Tax Act.
In simple words, a previous year is that year in which the income is earned and received and
the year in which it is taxed is termed as Assessment Year.
◻ As the assessment year starts on 1st April of every year, it is essential to end previous year
prior to 1st April or till 31st March every year. Previous year is also called ‘Financial Year’
or ‘Accounting Year’.
◻ In other words, previous year is a period maximum twelve months which will certainly end
on 31st March every year (prior to assessment year). For example, the period of previous
year related to the assessment year 2021-22 ended on 31st March, 2021
Important point in reference of previous year.

◻ 1) Preceding Financial Year:

◻ 2) Previous year for every source of income:
◻ 3) Separate Account Year:
◻ 4) Previous Year for newly started business or profession:
◻ 5) Previous Year undisclosed money:
◻ 6) Previous Year for new source of income:
◻ 7) Previous Year for the share in firm’s profits: