CITY COLLEGE OF COMMMERCE AND BUSINESS ADMINISTRATION

STUDY MATERIAL

SUBJECT : TAXATION - I

PAPER-CC4.1CH

B.COM (HONOURS )

SEMSTER : IV

TOPIC: BASIC CONCEPTS AND DEFINITIONS UNDER INCOME TAX ACT.

NAME OF TEACHER: DR. BARUN KUMAR DAS(BKD)

ASSISTANT PROFESSOR

ASSESSMENT YEAR : 2022-2023

BASIC CONCEPTS AND DEFINITIONSUNDER INCOME TAX ACT.

Tax:
Tax is the compulsory payment to the government without expecting any return. The payment collected
by the government may be in direct way or indirect way from the public.

REMEMBER:
(i) Tax is the source of revenue for the government.
(ii) Tax is the price of services given to public by the government.

Direct Tax:
When burden of tax and payment of tax both fall on a single person is called Direct Tax. That is, impact of
tax and incidence of tax both fall on the same person.

Example: Income Tax is a Direct Tax i.e. the person will be liable to pay tax on the income they
earnfromany source. Say, Mr. X employed in ITC, draws salary from there every month. Then the
government will impose tax on Mr. X and he will be liable to pay tax on his salary, the burden cannot be
shifted to ITC.

Indirect Tax:
When burden of tax and payment of tax both fall on different persons is called Indirect Tax. That is, the
impact of tax and incidence of tax both fall on two different persons.

Example: Goods and Services Tax, Customs Duty are Indirect Taxes. In case of Goods and Service Tax,
the burden of tax falls on the Supplier of Goods or Services or both, but it is shifted to the customer and
finally the customer will be liable to pay tax.

DISTINGUISH BETWEEN DIRECT TAX & INDIRECT TAX:

TAX

Direct Tax Indirect Tax

1. Burden of tax cannot be 1. Burden of tax can be shifted to

shifted to another person another person.
2. The person liable to pay tax on 2. The person receiving the benefits
whom the government-imposed tax. liable to pay tax not the person on
whom government-imposed tax.
3. It is governed by the Central 3. It is governed by the Central Board
Board of Direct Taxes (CBDT) of Indirect Taxes and Customs (CBIC)
4. Example: Income Tax 4. Example: GST, Customs Duty.
Definition of Different Terms under Income Tax Act,1961:

Assessee [Sec.2(7)]:
“Assessee” means –
(i) A person who is liable to pay tax on his or, her own income.
(ii) A person who is liable to pay any other sum of money under Income Tax Act, 1961.
Example: Interest, Penalty etc.
(iii) A person in respect of whom any proceedings under Income Tax Act, 1961 has been taken –
(a) For the assessment of his or her income or fringe benefits or loss.
(b) For the assessment of income or loss of any other person in respect of which he orshe is
assessable.
Example:Income or loss of the minor child is assessable in the hands of either parent as per
Sec.64(1A).
(c) For determination of the amount of refund due to him orher orsuch other person.

(iv) A person who is deemed to be an assessee under any provisions of the I.T.Act 1961.
Example: Legal heirs or legal representative of a deceased person or the agent of non-resident
or the trustee of a trust, guardian of an infant and lunatic.
(v) A person who is deemed to be an assessee in default under any provisions of the I.T.Act, 1961.
Example: A person or institution who fails to deduct tax at source (TDS) before payment or after
deduction of tax fails to deposit the same in the Government Treasury within the specified time
is deemed to be an assessee in default under Sec.201(1).

Previous Year [Sec.3]:

(i) Previous year refers to that financial year when the assessee will earn income.
(ii) Previous year is the financial year which starts from 1 st April of a year and ends on 31st March
of the next year i.e. for the financial year 2021-2022, it starts from 1.4.2021 and ends on
31.03.2022.
(iii) Previous year is the financial year immediately preceding the assessment year i.e. if the
assessment year is 2022-2023, then previous year will be 2021-2022.

(iv) Exceptions:

(A)Exception to the rule that duration of previous year is less than 12 months.

Generally previous year consists of a period of 12 months but previous year may be less than 12 months in
some exceptional situations:

(a) New establishment of a business or profession during first financial year.

Example: A Chartered Accountant has started his profession on 1.6.2021. Therefore, the previous
year 2021-2022 consists of 10 months (i.e.1.6.2021 to 31.3.2022) which is less than 12 months.

(b) Newly arising a source of income during a first financial year.

Example:For an employee employed in a company on 1.9.2021, his previous year shall be from
1.9.2021 to 31.3.2022. Therefore, the income from the salary of the employee shall be computed for
7 months not for 12 months.
(B)Exception to the rule that income of previous year is taxed in assessment year.

Generally the previous year is just preceding year of the assessment year i.e. the income of the previous
year is charged to tax in the assessment year. But income of the previous year may be taxed in the same
financial year in some exceptional situations –

1. Shipping business of non-residents (Sec.172):

The non-resident is taxable in the same year in which freight, fare etc. are collected and not in the
immediately following assessment year if the following conditions are fulfilled:
(a) Assessee owns a ship or chartered a ship and
(b) Ship carries passengers, livestock, mail or goods shipped at a port in India.

2. Persons leaving India (Sec.174):

The total income of such individual up to the probable date of his departure from India shall be
chargeable to tax in that assessment year if the following conditions are fulfilled:
(a) Any individual may leave India during the current assessment year or shortly after its expiry.
(b) He has no present intention of returning to India.

3. Association of persons (AOP)/body of individuals (BOI) formed for a particular purpose

(Sec.174A):
If an AOP or, BOI or, Artificial Juridicial person which was formed for a particular purpose or, event,
is likely to be dissolved in the assessment year in which it is formed or immediately after such
assessment year, then total income of such entity can be assessed for the period commencing from
the date of formation up to the date of dissolution in the same assessment year.

4. Persons likely to transfer property to avoid tax (Sec.175):

The total income of such persons from the 1 st day of the assessment year to the date when
proceeding is started under this section shall be chargeable to tax in that assessment year if the
following conditions are fulfilled:
(a) During any current assessment year that any person is likely to charge, sell, transfer, dispose off
or otherwise part with any of his movable or immovable assets.
(b) The assessee is likely to part with assets to avoid payment of any liability under this act.

5. Discontinued Business (Sec.176):

If any business or profession is discontinued in any assessment year, then the income of the
business from April 1st of the assessment year to the date of discontinuation may, at the discretion
of the Assessing Officer, be charged to tax in that assessment year.

Assessment year [Sec.2(9)]:

(i) Assessment year refers to that year when the income of the previous year of an assessee is
assessed or determined.
(ii) Assessment year refers to that year when the income of the previous year of an assessee is
taxable.
(iii) Assessment year is a period of 12 months which starts from 1 st April of each year and ends on
31st March of the next year. The period of 12 months is fixed by statute.
Example: For the assessment year 2022-2023, it starts from 1.4.2022 and ends on 31.3.2023.
 (iv) Assessment year is the forward year of previous year i.e. after one year forward from previous
year.
Example: If the previous year is 2021-22, then the assessment year shall be 2022-2023 and so
on.

Person [Sec.2(31)]:
“Person” includes the following –
(i) An Individual: A natural person i.e. human being and includes a minor or a person of unsound
mind.
Example: Mr. Roy an employee of ITC Ltd, Mr. Sen a partner of a firm.

(ii) A Hindu Undivided Family (HUF):A separate unit of assessment (i.e. distinct and separate from
its members) and consists of all persons lineally descended from a common ancestor and
includes their wives and unmarried daughter.
Example: Joint family of Mr. Saha, Mrs. Saha and their children.

(iii) A Company: A separate taxable entity from its shareholders. It may be public or private
limited company incorporated in India or outside India.
Example:ITC Ltd, Life Insurance Corporation of India.

(iv) A Firm: A separate taxable entity from its partners.

Example:Ray & Ray, a partnership firm.

(v) An AOP: A group of persons (i.e. group of individuals, HUF, Company, firm, etc.) who join
together for a common purpose (s) which is related with income producing activity.
Example: Rajarhat Co-operative Society.

(vi) A BOI: A group of individuals only who join together for common purpose(s) whether or not
with income producing activity.
Example: Nabadal sangha.

(vii) A Local Authority: According to Sec.3(31) of General Clause Act, it means Municipal Committee,
district board, body of port commissioner or other authorities legally entitled to or entrusted by
the government with the control and management of a municipal or local fund.
Example: Kolkata Municipal Corporation.

(viii) Artificial Juridical Person: Not a natural person but it has separate entity in the eye of law
but not be directly sued in the Court of law.
It also includes all the persons with a juristic personality i.e.,an idol or deity, charitable
institution or endowment for religious purpose, statutory corporation, Bar Council.
Example:Puri Temple, Institute of Chartered Accountants of India, Calcutta University.

ILLUSTRATION 1:
Determine the legal status of the following assessee –
(i) Kolkata Bar Council
(ii) Yubak Sangha
(iii) Bidhannagar Housing Co-operative Society
(iv) Lord Krishna Temple, Iskon.
 (v) Durgapur Municipality
(vi) Max Life Insurance Pvt. Ltd.
(vii) Das & Mallik, a chartered Accountant firm registered under Partnership Act.
(viii) Vidyasagar University.
(ix) Videsh Sanchar Nigam Ltd.

Solution:

Name of Assessee Legal Status

(i) Kolkata Bar Council Artificial Juridical Person
(ii) Yubak Sangha BOI
(iii) Bidhan Nagar Housing Co-operative Society AOP
(iv) Lord Krishna Temple, Iskon Artificial Juridical person
(v) Durgapur Municipality Local Authority
(vi) Max Life Insurance Pvt. Ltd. Company
(vii) Das & Mallik, a CA firm registered under Partnership Act. Firm
(viii) Vidyasagar University Artificial Juridical person
(ix) Videsh Sanchar Nigam Ltd. Company

Income [Section 2(24)]:

As per Section 2(24) of the Income Tax Act, income includes:
(a) Profits or gains of business or profession
(b) Dividend from companies.
(c) Voluntary contribution received by a charitable or religious trust or university oreducational
institution or hospital.
(d) Value of perquisites u/s 17(2) or profits in lieu of salary u/s 17(3).
(e) Special allowance or benefit specifically granted either to meet personal expenses or for
performance of duties of an office or an employment.
(f) Export incentives such as Duty Drawback, Cash Compensatory Support, subsidy, grant received
from Central government or State government or any other authority.
(g) Interest (on Capital or Loan), Remuneration(i.e. salary, bonus, commission) earned by a partner of
a firm from such firm.
(h) Capital gains chargeable u/s 45.
(i) Profits and gains from the business of banking carried on by a co-operative society with its
members.
(j) Casual Income, i.e.Winnings from lotteries, crossword puzzles, races including horse races, card
games and other games of any sort or from gambling or betting of any form or nature whatsoever.
(k) Deemed income u/s 41 or 59.
(l) Sums received by an assessee from his employees towards welfare fund contributions such as
Provident Fund(Recognized Provident Fund or Statutory Provident Fund or Unrecognized
Provident Fund) and Superannuation Fund.
(m) Amount received under Keyman Insurance Policy including bonus thereon.
(n) Amount received under agreement for not carrying out activity in relation to any business or not
sharing any know how, patent, copyright etc.
 (o) Benefit or perquisite received from a company by a director or a person holding substantial interest
or a relative of the director or such person.
(p) Gift received by individual or HUF without consideration as defined u/s 56(2)(vi).

Sources of Income:
‘Source of Income’ means the origin of income where from the income arises or accrues. For examples,
dividend from foreign company, interest on bank deposits, rent from let out property, salary drawn from
a company, etc.
Income from different sources may be assembled together in a head for assessment purpose. For
example, dividend from foreign company and interest on bank deposits are assembled in a particular head
‘Income from other sources’ for assessment.

Heads of Income:
‘Heads of Income’ means the statutory classification of income for the purpose of assessment, i.e., it is the
destination of different sources of income. As per Sec. 14 of the Income Tax Act 1961, there are five heads
of income of an assessee. Different sources of income can be classified under these five heads of income for
the purpose of computation of Total Income and Calculation of Tax liability.
The different heads of Income are –
1. Income from salaries [Sec.15 to 17]
2. Income from house property [Sec.22 to 27]
3. Profits and gains of business or profession [Sec.28 to 44]
4. Capital gains [Sec.45 to 55]
5. Income from other sources [Sec.56 to 59]

DISTINGUISH BETWEEN SOURCES OF INCOME AND HEADS OF INCOME

Sources of Income Heads of Income

1. It is the origin of income from where it is 1. It is the destination of classifying different
generated. sources of income.
2. There can be any number of sources of 2. There are only five heads of income.
income.
3. Concept of ‘Sources of income’ is not as such 3. The concept of ‘Heads of income’ is legally
defined by the Income Tax Act. defined as per Sec.14.
4. Each head is to be computed after taking 4. Gross Total Income is to be computed after
into consideration the specific sources of aggregating the income assessed under each
income to be assessed under the relevant head.
head.
5. Example: Winning from lottery, Bank 5. Example: Winning from lottery, bank
interest, Agricultural income from foreign interest, agricultural income from foreign land
land, short-term capital gain, long-term will be classified under the head ‘Income from
capital gain. Other Sources’ but short-term capital gain &
long-term capital gain are classified under the
head ‘Capital gains”.
ILLUSTRATION 2:
State the specific head of income under which the following incomes are to be taxed under I.T.Act.
(i) Remuneration received for checking the answerscripts of different Institutions – Rs.10,000.
(ii) Rent received from Vacant land in India – Rs.9,000
(iii) Fees received by a Managing Director of ITC Ltd. for attending Board meeting – Rs.20,000
(iv) Rent of a warehouse attached to assessee’s farm house in a remote village in India – Rs.30,000.
(v) Family pension received by the widow on death of her husband who was employed in LTC Ltd.
– Rs.40,000.
(vi) Rent received from subletting a property – Rs.5000 p.m.
(vii) Income received from winning horse races – Rs.50,000.
(viii) Interest from PostOffice Savings Bank Account in the name of the assessee – Rs.5,000
(ix) A person bought a piece of land with trees and he sold the timbers of those trees for Rs.40,000.
(x) Dividend received by a dealer in shares of domestic company held by the assessee as Stock-in-
trade for his business.
(xi) Gain from sale of jewellery – Rs.1,00,000.
(xii) Rent received from house property which was taken on lease for 15 years –Rs.9000 p.m.

Computation for determination of different heads of income:

Particulars Head of Income Reasons

(i) Remuneration received for Income from other sources(O/S) Employer-employee relation
checking answer scripts of does not exist.
different institutions.
(ii) Rent received from vacant Income from O/S Not from any structure
land. appurtenant to land.
(iii) Fees received by the Income from O/S Not discharging duties as
Managing Director of ITC employee
Ltd. for attending Board
meeting
(iv) Rent of a warehouse Exempted from tax [Sec.10(1)] Income from Agricultural
attached to assessee’s land in India.
farm house in a remote
village in India
(v) Family pension received by Income from O/S Employer - Employee
the widow on death of her relation does not exist.
husband who was
employed in LTC Ltd.
(vi) Rent received from Income from O/S Not the actual owner of the
subletting a property property.
(vii) Income received from Income from O/S Not a business
winning race-horses.
(viii) Interest from Post-Office Income from O/S (after getting Extra income on deposit
Savings Bank Account exemption as per Sec.10(15)
(ix) A person bought a piece of Income from O/S Income from trees of
land with trees and he sold spontaneous growth without
the timbers of those trees. agricultural operation.
 (x) Dividend received by a Income from other sources Dividend paid by Indian
dealer in shares of company not taxable in the
domestic company held by hand of Co.
the assessee as Stock-in-
trade for his business.
(xi) Gain from sale of Capital Gains Transfer of Capital Asset
jewellery.
(xii) Rent received from house Income from House Property Lease taken for more than 12
property which was taken years as deemed owner.
on lease for 15 years.

Gross Total Income [Sec.80B (5)]:

Gross total income refers to the aggregation of income under the fire heads of income as specified in section
14 of I.T.Act 1961, i.e., the summation of ‘Income from Salaries’, ‘Income from House Property’, ‘Profits and
Gains of Business or Profession’, ‘Capital Gains and Income from other Sources’.
It is computed after considering the provisions of set off and carry forward of losses (In Sec. 70 to 79) and
Provisions of Clubbing of Income (in Sec.60 to 64) but before allowing deductions as per Chapter VIA.

Remember:
Exempted income (Sec.10) not a part of Gross Total Income.

Total Income [Sec.2(45)]:

Total income refers to the difference between Gross Total Income and Deduction as per Chapter VIA i.e.
Gross Total Income as reduced by the deduction under Chapter VIA. The total income also known as taxable
income.

Particulars Amount

Salaries (Sec.15 to 17)

*
Income from House Property (Sec.22 to 27)
*
Profits and Gains from Business or Profession (Sec.28 to 44) *
Capital Gains (Sec.45 to 55) *
Income from Other Sources (Sec.56 to 59) *
GROSS TOTAL INCOME **
Less: Deduction as per Chapter VIA
*
TOTAL INCOME /TAXABLE INCOME
***
 Exemptions Vs. Deductions:

EXEMPTIONS: Those items of income which do not form part of total income are known as
Exemptions.
Example: Agricultural Income is exempted from tax U/s 10(1).

DEDUCTIONS: Incomes from which deductions are allowed are first included in Gross Total
Income and then the deductions are allowed to arrive at total Income. Thus, if there is no Gross
Total Income, no deductions will be permissible. The provisions relating to Deductions are
covered under Chapter VIA.
Example: Interest on NSC is first taxable under the head ‘Income from Other Sources’ and then
it is allowed as deduction from Gross Total Income u/s 80C.

Exemptions Deductions
1.It means the income which is not taxable. 1.It means the item which is to be reduced
from Total income.
2.It is not taken into computation. 2.It is first computed as a part of Gross Total
Income and then reduced from Gross Total
income to determine Total Income.
3.It cannot exceed income. 3. Certain deduction can exceed income.

Maximum Marginal Tax Rate [Sec.2(29c)]:

As per Sec. 2(29C) of Income Tax Act 1961, Maximum Marginal Tax (MMT) Rate refers to the rate of Income
Tax (including Surcharge on Income tax) applicable in relation to the highest slab of Income in the case of
an individual, associations of persons, BOI as specified in the finance act of the relevant year. The MMT
rates for the assessment year 2021-22 are given below ---

Persons MMT Rate(%)

Individual/BOI/AOP/HUF/ArtificialJuridical person 42.744

Firm (including limited liability partnership) 34.944

Co-operative Society 34.944

Domestic Company 29.12, 34.944

Foreign Company 43.68

Tax Planning:

▪ Tax planning is the application of tax knowledge to reduce the burden of an assessee .
▪ Tax planning is the arrangement of financial activities in such a way that maximum tax benefits can
be enjoyed by making use of all beneficial provisions in the tax laws.
 ▪ Tax planning aims at deriving the full benefit of the exemptions, deductions, rebates and reliefs
as provided in the Income Tax Act.
▪ This is an attempt of optimize the tax benefits.
▪ It is legal and ethical both and so permissible.

The objectives behind the tax planning are given as under:

(1) Reduction of tax liability
(2) Minimization of litigation
(3) Productive investment
(4) Healthy growth of economy
(5) Economic stability

Therefore, tax planning is the part of tax management through which an assessee is largely
benefited in respect of income tax.

Tax Evasion:
▪ When an assessee reduces his tax liability by dishonest means, it is called tax evasion.
▪ It is both unethical and illegal.
▪ It is treated as a criminal offense and liable to fine and imprisonment both.
According to the version of income tax laws, only the unscrupulous citizens evade their tax liability
by adopting the following dishonest means:
(i) By concealing an income
(ii) By showing inflated expenses to minimize the actual income
(iii) By making falsification in the accounts and
(iv) By conscious and willful violation of rules

Therefore, tax evasion is an unethical and illegal device to reduce one’s tax liability and hence it is
condemned by law. Tax evasion, once proved, attracts not only heavy penalty but also prosecution.

Tax Avoidance:

▪ When an assessee reduces his tax liability by taking the advantages of the loopholes or lacuna of the
income tax laws, it is called Tax Avoidance.
▪ Its position is somewhat in between the tax evasion and tax planning.
▪ It is considered unethical but not illegal. That means that although tax avoidance does not
contravene the rules of income tax laws, still it is unwanted because it takes advantage of the
loopholes of the income tax laws.
▪ Tax avoidance always works within the four corners of the taxation laws.

Therefore, tax avoidance is art of dodging tax without breaking the law. In such a case, the tax payer
apparently abides by the law and uses devices of complex nature with a view to defer, reduce or
completely avoid the tax payable under the taxation law.

Illustration: Tom deposited Rs.10,000 into PPF account and purchased NSC for Rs.5,000 to
reduce his tax liability. On the other hand, Jerry did not show his interest on bank
deposit amounting to Rs.8,000 and thereby reduced his tax liability.
 Comment on the nature of tax saving policies adopted by Tom and Jerry.
Solution:
Tom’s actions amount to tax planning. Tax planning is the act of making use the scope given by the
various provisions of the Income Tax Act. It is quite legal and desirable on the part of the law abiding
citizens.
Jerry’s action, on the other hand, amounts to tax evasion. Suppression of income is unlawful,
therefore, undesirable.

REMEMBER:
Difference between tax planning and tax evasion

Tax planning Tax evasion

1. Tax planning is an act within the permissible range of Tax evasion is an attempt to avoid tax by
the Income Tax Act conducted to achieve social and misrepresentation of facts and falsification of
economic benefits. accounts.
2. Tax planning is a legal right which enables the Tax evasion is a legal offence which may lead
taxpayer to achieve social and economic objective. to penalty and prosecution.
3. Tax planning accelerates development of the Tax evasion retards the development of
economy of a country by generating funds for economic of a country by generating black
investment in desired sectors. money which works as a parallel economy.
4. Tax planning promotes professionalism and Tax evasion encourages bribery and weakens
strengthens economic and political situation of the economic and political situation of the
country. country.

Difference between tax avoidance and tax evasion

Tax avoidance Tax evasion

1. Tax avoidance means planning for minimization of tax Tax evasion means avoiding of tax liability
according to legal requirement, but it defeats the basic illegally.
intention of the legislature.
2. Tax avoidance takes into accounts various lacunas of Tax evasion involves use of unfair means.
law.
3. Tax avoidance is lawful but involves the element of Tax evasion is unlawful
mala fide intention
4. Tax avoidance is planning before the actual liability for Tax evasion involves avoidance of payment
tax comes into existence. of tax after the liability of tax has arisen.