Basics of Income Tax
Introduction
Income tax is a very important direct tax. it is an important and most significant source of revenue of the government. the government deeds money to maintain law and order in the country; safeguard the security of the country from foreign powers and promote the welfare of the people.
Who is liable to pay income tax
Every person, whose taxable income for the previous financial year exceeds the minimum taxable limit is liable to pay to the central government income tax during the current financial year on the income of the previous financial year at the rates in force during the current financial year.
Income Tax Act, 1961 has been brought into force with effect from 1st April, 1962. It applies to the whole of India. Since 1962 several amendments of far-reaching nature have been made in the Income Tax Act by the Union Budget every year, which also contains Finance Bill. After it is passed by both the Houses of Parliament, and receives the assent of the President of India, it becomes the Finance Act.
Definitions
ASSESSEE [Sec. 2(7)]: An Assessee means a person
(i) Who is liable to pay any tax; or
(ii) who is liable to pay any other sum of money under this Act (e.g., interest, penalty, etc.); or
(iii) in respect of whom any proceeding under this Act has been taken for the assessment of his income or assessment of fringe benefits; or
(iv) in respect of whom any proceeding under this Act has been taken for the assessment of the income of any other person in respect of which he is assessable; or
(v) in respect of whom any proceeding under this Act has been taken for the assessment of the loss sustained by him or by such other person; or
(vi) 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
(vii) who is deemed to be an assessee under any provision of this Act; or
(viii) who is deemed to be an assessee in default under any provision of this Act.
DEEMED ASSESSEE
A person who is deemed to be an assessee for some other person is called 'Deemed Assessee'.
E.g:
(i) After the death of a person, his legal representative will be treated as an assesseee for that income of the deceased on ehich tax has not been paid by the deceased before his death;
(ii) A person representing a foreigner or a minor or a lunatic is treated as an assessee for the income of such foreigner or minor or lunatic.
ASSESSEE IN DEFAULT
When a person is responsible for doing any work under the Act and he fails to do it, he is called an 'Assessee in Default'.
E.g:
If a person while making any payment to another person, is liable to deduct income tax thereon at source, does not deduct income tax therefrom, or having deducted, does not deposit it in the Government Treasury, he will be treated as an assessee in default for that income tax.
ASSESSMMENT YEAR [Sec. 2(9)]:
Assessment year means the period of twelve months commencing on the first day of April every year and ending on 31st March of the next year, An assessee is liable to pay tax on the income of the pervious year during the following financial year (assessment year).
PREVIOUS YEAR [Sec. 3]
The year in which income is earned is known as the previous year and the next year in which this income is taxable is known as the assessment year. Income tax is charged on the total income of the previous year at the rates prescribed by the relevant Finance Act for the assessment year.
In the case of a newly set-up business or profession or any
other new source of income during the financial year, the previous year will
begin from the date of setting up of the new business or profession or from the
date of coming into existence of the new source of income and will end with the
said financial year. In this case, the first previous year may be of less than
12 months.
Exceptions to the general rule i.e., Taxation of previous
year during the same year
Income tax is charged on the income of the previous year
during the assessment year. However, there are certain exceptions to this rule.
In the following cases the assessee is liable to be assessed to tax in the same
year in which he earns the income :
(i) Income of non-resident from shipping business.
In the ease of a non-resident shipping company, which has no
representative in India, any income derived from carrying passengers, livestock,
mail or goods shipped at a port in India, will be taxed in the year of its
earning. 7 1/2% of the amount paid or payable on account of such carriage will
be deemed to be the income. In fact, such ship will not be allowed to leave the
port till the tax on such income has been paid or alternative arrangements to pay
tax are made [Sec. 172]
(ii) Income of persons leaving India.
When it appears to the Assessing Officer that an individual
may leave India during the current assessment year or shortly after its expiry,
and that he has no present intention of returning to India, the total income of
such individual for the period from the expiry of the previous year for that
assessment year up to the probable date of his departure from India shall be
charged to tax in the same assessment year. [Sec. 174]
(iii) Income of an association of persons or a body of individuals or an artificial juridical person formed for a particular event or purpose.
Where it appears to the Assessing Officer that any A.O.P. or
B.O.I. or an artificial juridical person is formed or established or
incorporated for a particular event or purpose and is likely to be dissolved in
the assessment year in which it is formed or established or incorporated or
immediately after such assessment year, the total income of such assessee for
the period from the expiry of the previous year for that assessment year upto
the date of its dissolution, shall be chargeable to tax in that assessment
year. [Sec. 174A]
(iv) Transfer of property to avoid tax.
If, in the opinion of
the Assessing Officer, an assessee is likely to transfer his property to avoid
tax the total income of such person for the period from the expiry of the
previous year for the assessment year to the date when the Assessing Officer
commences proceeding under Section 175 shall be chargeable to tax in the same
assessment year. [Sec. 175]
(v) On discontinuance of a business or profession.
In the case of discontinuance of a business or profession,
the income of the period from the expiry of the previous year for the
assessment year in which the business or profession is discontinued upto the
date of such discontinuance may at the discretion of the Assessing Officer be
charged to tax in the same assessment year. [Sec. 176]
"Person" includes the following:
(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 juridical person, not
falling within any of the preceding sub-clauses.
An individual means a natural person or a human being, who
may be male, female, minor child or a lunatic.
A Hindu Undivided Family means a Hindu family which consists
of all persons lineally descended from a common ancestor including their wives
and unmarried daughters.
A company may be defined as an artificial person created by
law with perpetual succession, a common seal and shares carrying limited liability.
A firm means a partnership firm; which is defined under the
Partnership Act.
An Association of persons means two or more persons joining for a common
purpose for the purpose of earning income. The A.O.P. may consist two or more
individuals or any other person, i.e., an individual and a company or two or
more companies
Body of individuals means a conglomeration of individuals who come together by
chance, eg. by birth or testamentary dispositions. The Supreme Court has held
that where after death of an individual, the business continued by the widow on
her behalf and on behalf of minor children, the profit is assessable in status
of BOI.
Local authority includes Municipality, Municipal
Corporation, District Board, etc.
A public corporation is one which is established under special Act of
legislature. An idol or deity is assessable as an artificial juridical person,
but through persons managing them. Similarly, all other artificial persons,
with a juristic personality of its own, are artificial persons, like,
universities.
Explanation. For the purpose of Sec. 2(31), an AOP or BOI or
a local authority or an artificial juridical person shall be deemed to be a
person, whether or not it was formed or established or incorporated with the
object of deriving income, profits or gains.
Income' is one of the important terms of the Income Tax Act as income tax is
charged on the income of a person. This term has not been defined in the Income
Tax Act, except that it states as to what is included in income.
Under this section income includes:
(i) profits and gains,
(ii) dividend;
(iii) voluntary contributions received by (a) a trust created for charitable or
religious purposes, or (b) by a scientific research association, or (c) by a
games or sports association or institution, or (d) any university or other
educational institution, or (e) any hospital or other institution, or (f) an
electoral trust;
(iv) the value of any perquisite or profits in lieu of
salary taxable under the head 'salaries';
(v) any special allowance or benefit specifically granted to
the assessee to meet his expenses wholly, necessarily and exclusively for the
performance of his duties;
(vi) any allowance granted to the assessee either to meet his personal expenses
at the place where he performs his duties or compensate him for the increased
cost of living, for example, City Compensatory Allowance;
(vii) the value of any benefit or perquisite which is
obtained by any representative assessee;
(viii) any sum chargeable to income tax under the head
business' or 'profession":
(ix) any capital gains;
(x) the profits and gains of any business of insurance
carried on by a mutual insurance company or by a co-operative society;
(xi) any 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;
Explanation :
(a) Lottery' includes winnings from prizes awarded to any person by draw of lots or by chance or in any other manner whatsoever;
(b)"Card game and other game of any sort" includes any game show, an entertainment programme on television or electronic mode, in which people compete to win prizes or any other similar game;
(xii) any sum received by the assessee from his employees as
contributions to any provident fund or superannuation fund or any fund set-up
under the Employees' State Insurance Act or any other fund for the welfare of
such employees;
(xiii) any sum received under a Keyman Insurance Policy including the sum received by way of bonus on such policy. Keyman insurance policy means a life insurance policy taken by a person on the life of another person who is or was (a) an employee of the first person, or (b) connected in any manner with the business.
The sum of keyman insurance policy is assessable as following:
(a) When the sum is received by the organisation, who has taken the policy, it is assessable under the head profits and gains of business or profession.
(b) When the amount is received by the employee, it is assessable as profits in lieu of salary.
(c) When the amount is received by a person, where an employer-employee relationship does not subsist (Chairman or Director etc. of a company), it is assessable under the head income from other sources.
(xiv) the profits and gains of any business of banking (including providing
credit facilities) carried on by a co-operative society with its members;
(xv) any consideration received for issuing shares as exceeds the fair market
value of the shares.
(xvi) any sum of money received as an advance in the course of negotiations for
the transfer of a capital asset and such negotiation fails, the amount so
forfeited;
(xvii) if the assessee receives (in cash or kind) the following from the
Central Government or the State Government or any authority or body or agency
it will be treated as income:
Subsidy or grant or cash incentive or duty drawback, or waiver or concession or reimbursement.
However, if such subsidy or grant or reimbursement is taken into account for determination of the actual cost of the asset, it will not be treated as income. The subsidy or grant by the Central Government for the purpose of the corpus of a trust or institution established by the Central Government or the State Government, will not be treated as income.
(xviii) Any sum of money or value of property received without consideration or for inadequate consideration by any person from any person or persons on or after 1.4.2017.
(xix) Compensation or other payment, due or received by any person in connection with the termination of his employment or modification of the terms and conditions relating thereto.
(xx) The fair market value of inventory as on the date on which it is converted
into, or treated as, a capital asset (w.e.f. the Assessment Year 2019-20).
IMPORTANT RULES REGARDING INCOME
(1) There should be a definite source of income.
(2) An income earned, whether legally or illegally, is taxable
under the Income Tax Act. The Income Tax Act does not make any distinction
between legal and illegal income. However, any expenditure incurred to earn an
illegal income is allowed to be deducted out of such income only.
(3) it is not necessary that the income should be received
regularly and periodically, say, weekly, monthly or quarterly. Lump-sum
receipts can also be income, provided it is income in view of other factors and
considerations.
(4) Income should be received from outside. In an institution, if
the income from subscription from its members exceeds its expenditure on its
members the excess cannot be treated as taxable income, because the
subscription was received from amongst the members themselves and the excess
represents the excess of income over expenditure incurred for their own benefit
or well-being, hence this excess is not received from outside, and will not be
income.
(5) It is not essential that the income must be received in the form of
money. Receipts in kind or service having money equivalent can also be
income.
(6) Temporary or Permanent Income: Whether the income is
temporary or permanent, it is immaterial from the tax point of view.
(7) If an assessee has earned an income but
has not actually received it, it will be treated as the income of the assessee,
because he is entitled to receive it.
(8) Reimbursement of expenses is not income. Reimbursement of
actual travelling expenses to an employee is not his income.
(9) Where under a legal obligation a charge is created on the income of a
person, then to the extent of such charge it will be deducted from his income.
(10) Receipt on account of dharmada, gaushala, etc. is not income.
(11) Pin Money received by wife for her personal expenses and
small savings made by a woman out of money received from her husband for
meeting household expenses is not her income.
(12) Disputed Income : Any dispute regarding
the title of income will not postpone or held up the assessment of such income.
It will be taxed in the hands of the recipient of such income.
(13) Diversion of income vs. the application of income :
Diversion of income means that the income is diverted to some other person
under some legal obligation. If after receiving the income it is given to
someone else it is the application of income. Similarly, if an income is
diverted to some other person voluntarily it is an application of income. Where
by an obligation, income is diverted before it reaches the assessee, it is
diversion of income and not taxable; but where the income is required to be
applied to discharge an obligation after such income reaches the assessee, the
same is merely an application of income and tax liability cannot be avoided.
(14) Income may be in plus or minus. Minus income means loss,
hence losses are also included in the term 'Income'.
The aggregate of the income under the following heads is known as gross total
income:
(i) Income from salaries;
(ii) Income from house property;
(iii) Profit and gains of business or profession;
(iv) Capital gains; and
(v) Income from other sources.
The income under each head is computed after making deductions permissible
under that head. Further, the brought forward losses shall be deducted (as
provided in the Act) to arrive at the assessable income.
TOTAL INCOME [Sec. 2(45)]
Total income means the amount left after making the deductions under sections 80C to 80U from the gross total income. The amount so arrived is rounded off to the nearest multiple of ten rupees. It is also known as Taxable Income, refers to the income on which income tax is levied as per the provisions of Income Tax Act.
AGRICULTURAL INCOME [Sec. 2(1)]
According to Sec. 2(1) of the Act, Agricultural Income means:
1. Any rent or revenue derived from land which is situated in India and is used for agricultural purposes.
2. Any income derived from such land by (i) agriculture, or (ii) the performance by the cultivator or receiver of rent in kind, of any process ordinarily employed to render the produce fit to be taken to market, or (iii) the sale by the cultivator or receiver of rent in kind of the produce in respect of which only the process mentioned in (ii) has been performed.
3. Any income derived from any building owned and occupied by the cultivator or receiver of rent-in-kind, provided -
(a) The building is on or in the immediate vicinity of the agricultural land and is used by the cultivator or receiver of rent-in-kind as dwelling house, store house or out building.
(b) The land is either assessed to land revenue or local rate. Where the land is not assessed to land revenue or local rate, it is situated outside urban areas, i.e. any area comprised within the jurisdiction of municipality or cantonment board with a population of 10,000 or more; or in any area within a distance of 8 Kms. from the local limits of such municipality or cantonment board. This area of 8 kms. may be reduced by the Central Government considering the need of urbanisation.
When we go through the above definition three important conditions emerge in order to treat a particular item as Agricultural Income. They are
1. The rent or revenue must be derived from the land.
2. The land must be situated in India.3. The land must be used for agricultural purposes.
(1) Rent or revenue derived from land:
When one person grants to another a right to use his land for agricultural purposes, the former receives from the latter rent or revenue (in cash or kind) in consideration of such use. Such rent or revenue is treated as agricultural income.
(2) Income from agricultural operations :
An income is agricultural when some agricultural operations are performed. Agricultural operations means cultivation of a field, tilling of the land, watering it, sowing of the seeds, planting and similar operations on the land.
Products which grow wild on the land or are of spontaneous growth not involving any human labour or skill upon the land are not products of agriculture. The income derived therefrom is not agricultural income.
(3) Income from making the produce fit for market :
If there is no market of the produce of the field and the cultivator or receiver of rent-in-kind performs any activity to make the produce fit for market, any income from such activity is also agricultural income. The process employed in curing of coffee, flue curing of tobacco, ginning of cotton, etc., is such a process.
(4) Income from the sale of produce :
Income derived by a cultivator or receiver of rent-in-kind from the sale of produce raised or received by him is treated as agricultural income even if he keeps a shop for the sale of such produce.
(5) Income from a farmhouse :
The income from a farmhouse is treated as agricultural income if the following conditions are satisfied:
(i) the building is owned and occupied by the cultivator or receiver of the rent or revenue of any such land;
(ii) it is situated on or in the immediate vicinity of the agricultural land:
(iii) the building is, by reason of his connection with the land, used as a dwelling house or a store house or an out-house by the cultivator or receiver of rent-in-kind;
(iv) the land is situated in an urban area and is either assessed to land revenue in India or is subject to a local tax assessed and collected by the officers of the government.
If the land revenue or local tax is not payable on such land :
(i) The land is situated in the 'non-urban' area; or
(ii) The land is situated within municipality or cantonment board jurisdiction, has a population of less than 10,000; or
(iii) The farm building is not situated within the area specified below, the income derived from such building shall be agricultural income.
The land is not situated in any area within the distance, measured aerially:
(a) not being more than two kilometres from the local limits and which has a population more than ten thousand but not exceeding one lakh; or
(b) not being more than six kilometres from the local limits and which has a population of more than one lakh but not exceeding ten lakh; or
(e) not being more than eight kilometres from the local limits and which has a population more than ten lakh.
(6) Income from saplings or seedlings:
The income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income.
The following incomes are not derived from land used for agricultural purposes, hence they
are non-agricultural incomes :
(i) Income from markets;
(ii) Income from stone quarries;
(iii) Income from mining royalties;
(iv) Income from land used for storing agricultural produce;
(v) Income from the supply of water for irrigation purposes (e.g., income from the supply of water for irrigation from a tube-well or well, as it does not involve any agricultural operation);
(vi) Income from self-grown grass, trees or bamboos;
(vii) Income from fisheries;
(viii) Income from the sale of the earth for brick-making;
(ix) Remuneration received as manager of an agricultural farm;
(x) Dividend from a company engaged in agriculture;
(xi) Income of the buyer of a ripe crop;
(xii) Income from dairy farming, poultry farming, etc.; and(xiii) Income from interest on arrears of rent of agricultural land.
Sometimes there is composite income, which is partially agricultural and partially non agricultural. For determining the non-agricultural income chargeable to tax, the market value of any agricultural produce which has been raised by the assessee and which has been utilized aa n raw material in which business shall be deducted. No further deduction shall be made in respect of the cost of cultivation incurred by the assessee as a cultivator.
For this purpose, market value shall be deemed to be:
(a) where the agricultural produce is ordinarily sold in the market, the value calculated according to the average price at which it has been so sold, during the relevant previous year, or(b) where the agricultural produce is not ordinarily sold in the market the aggregate of the following shall be its market value:
(i) the expenses of cultivation,(ii) the land revenue or rent paid for the land on which it was grown, and(iii) the profit which in the opinion of the Assessing Officer is reasonable.
Examples
(1) Profits of such Sugar Factories which produce sugar from cane grown on their own farms are treated as partly agricultural income Sugarcane is generally sold in the market. Hence, in order to separate the agricultural income from the business income, the average market price of sugarcane during the relevant previous year shall be charged as an expenditure and no note will be taken of the expenses of cultivating the sugarcane. The income thus determined will be the business income
(2) Income from growing and manufacturing of Tea: Sixty percent of the income derived from the sale of ten grown and manufactured by the seller in India is deemed to be agricultural income and the remaining forty per cent is taken a business income.
(3) Income from growing and manufacturing of centrifuged later or cenex: Sixty five per cent of the income derived from the sale of centrifuged latex or cenex manufactured or processed by him from rubber grown by him in India is deemed to be agricultural income and the remaining thirty five per cent is taken as business income.
(4) Income from growing and manufacturing of Coffee:
(a) Seventy five per cent of the income derived from the sale of coffee grown and cured by the seller in India is deemed to be agricultural income and twenty-five per cent is taken as business income.(b) Sixty per cent of the income derived from the sale of coffee grown, cured, roasted and grounded by the seller in India, with or without mixing of chicory or other flavouring ingredients are deemed to be agricultural income and the remaining forty percent is taken as business income.
Do Not Write below this note
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Redrafted for Educational Purpose.
Deekshith Kumar,
Assistant Professor of Commerce
Book Reference:
1. Income Tax Law and Accounts, by Dr. H. C. Mehrotra and Dr. S. P. Goyal
2. Business Taxation by Sadashiva Rao
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