LESSON 1

BASIC CONCEPTS

STRUCTURE OF THE CHAPTER

1.1 Objectives
1.2 Basics
1.3 Meaning of tax planning, tax avoidance, tax evasion and tax management
1.4 Definitions
1.5 Charge of income tax
1.6 Basic principles of income tax
1.7 Computation of total income
1.8 Computation of tax
1.9 Tax rates, rebate, surcharge and cess for the assessment year 2018-19
1.10 Special rates of tax on certain incomes
1.11 Rounded off of income and tax
1.12 Miscellaneous provisions
1.13 Summary

1.1 OBJECTIVES

The objective of this chapter is to make the students familiar with some basic
concepts of taxation. After studying this chapter, students will be able to
understand Finance Acts, Income-tax Act, Income-tax Rules, Notifications,
Circulars, etc. Further, students will understand the concepts of tax planning,
tax evasion, tax avoidance and tax management.

1.2 BASICS

Income tax in India is levied by the Central Government on the total income of a person
earned during the relevant previous year at a prescribed rate passed in the Finance Bills. The
provisions of computation of income are given in Income Tax Act, 1961. Rules to assist the
provisions of the Act are given in Income Tax Rules 1962. To make changes in the Act or
Rules, CBDT (Central Board of Direct Taxes) issues notifications time to time. Notifications
are binding. Apart from notifications, CBDT issues circulars also. Circulars are basically for
providing information to officers of Income Tax Department. Circulars are not compulsorily
to be followed by people but notifications are compulsorily to be followed by people.
Different court rulings on different provisions of the Act are also given by Income Tax
Tribunals, High Courts and Supreme Court. All relevant information related to Income Tax
Act is available on the following website of the Government of India:

www.incometaxindia.gov.in

In case of any clarification related to Income Tax Act, readers should always refer the
website:

www.incometaxindia.gov.in
1.3 MEANING OF TAX PLANNING, TAX AVOIDANCE, TAX EVASION AND
TAX MANAGEMENT

Some of the important concepts of taxation are tax planning, tax avoidance, tax
evasion and tax management which are explained below –

Tax Planning

Tax planning can be defined as an arrangement of one’s financial and economic

affairs by taking complete legitimate benefit of all deductions, exemptions,
allowances and rebates and relief so that tax liability reduces to minimum. The
benefits arising from tax planning are substantial particularly in the long run.

Tax Avoidance

Tax avoidance is reducing or negating tax liability of an assessee in legally

permissible Ways and has legal sanction. Tax avoidance is sound law and
certainly not bad morality for anybody to so arrange his affairs in such a way
that the brunt of taxation is the Minimum. This can be done within the legal
framework even by taking help of loopholes in the law. Tax avoidance is
intentional tax planning before the actual tax liability arises.

Property of the assessee cannot be confiscated in tax avoidance as it is legal

and not Punishable.

Tax Evasion

All methods by which tax liability is illegally avoided are termed as tax evasion.
Tax Evasion may involve concealment of any earned income, an untrue
statement knowingly, Submitting misleading documents, suppression of facts,
not maintaining proper accounts of income earned (if required under law),
omission of material facts on assessment. Tax Evasion is illegal and punishable
offence. Property of the assesses can be confiscated.

Tax Management

Tax management refers to the comply with the provision of law and relates to
past (i.e., assessment proceedings, rectification, revision, appeals etc.), present
(filing of return of income on time on the basis of updated records) and future
(corrective action). As a result of effective tax management, penalty, penal
interest, prosecutions etc can be avoided.
1.4 DEFINITIONS

Section 2 of the Income-tax Act gives definitions. Some of the relevant

definitions are given below –

Income [Sec. 2(24)]

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:

1. Profits and gains;

2. Dividend;
3. The value of any perquisite or profits in lieu of salary taxable under the head
4. 'Salaries';
5. Any special allowance or benefit, other than granted to the assessee to meet his
6. Expenses;
7. Any allowance granted to the assessee either to meet his personal expenses,
e.g.,
8. City Compensatory Allowance;
9. The value of any benefit or perquisite;
10. Any sum paid by any such company in respect of any obligation;
11. Any profits on sale of import license;
12. Cash assistance received or receivable under exports;
13. Any refundable custom duty or excise the value of any benefit or perquisite
arising
14. From business or exercise of profession;
15. Any capital gains.

Note: Income-tax does not make any distinction between income accrued or arisen
from a legal source and income tainted with illegality.

WHAT IS ACCRUAL OF INCOME

Income accrued in India is chargeable to tax in all cases irrespective of residential

status of an assessee. The words “accrue” and “arise” are used in contradistinction to
the word “receive”. Income is said to be received when it reaches the assessee; when
the right to receive the income becomes vested in the assessee, it is said to accrue or
arise.

WHAT IS INCOME DEEMED TO ACCRUE OR ARISE IN INDIA

(i) Income of an individual which falls under the head “Salaries” is deemed to accrue
or arise in India if service is rendered in India
(ii) Salary received by Indian nationals from the Indian Government, out of India, is
deemed to accrue or arise in India. By virtue of section 10(7), any allowance or
perquisite paid abroad is, however, fully exempt from tax.

(iii) Dividend received by a shareholder from an Indian company is always deemed to

accrue or arise in India.

(iv)Income by way of interest, royalty and technical fees - These are deemed to accrue
or arise in India in the following cases –

Rule 1 - When received from Government - Interest, royalty or technical fees received
from the Central Government/any State Government is deemed to accrue or arise in
India.

Rule 2 - When received from a person resident in India - Interest, royalty or technical
fees received from a resident person, is deemed to accrue or arise in India in the hands
of recipient. However, this rule is not applicable in the following cases – a. if
borrowed money is utilised by the payer for carrying on a business/profession outside
India or for earning any income outside India; or b. payment of royalty/technical fees
pertains to a business/profession carried on by the payer outside India or earning any
income outside India.

Rule 3 - When received from a non-resident - Interest, royalty or technical fees

received from a non-resident, is deemed to accrue or arise in India in the hands of
recipient, in the following cases –

a. borrowed money is utilised by the payer for carrying on a business/profession in

India; or

b. payment of royalty/technical fees pertains to a business/profession carried on by the

payer in India or earning any income in India.

(v) Interest received outside India by a foreign bank from its branch in India – In the
hands of recipient, income shall be deemed to accrue or arise in India.

Person [Sec. 2(31)]

The term “person” includes:

1. An individual;
2. A Hindu undivided family;
3. A firm;
4. A company;
5. An association of persons or a body of individuals, whether incorporated or
not;
6. A local authority; and
 7. Every artificial juridical person not falling within any of the preceding
categories e.g., University of Delhi.

Assessee [Sec. 2(7)]

An assessee means a person:

1. Act. Who is liable to pay any tax; or

2. Who is liable to pay any other sum of money under this Act (e.g., interest,
penalty, etc.); or

3. In respect of whom any proceeding under this Act has been taken for the
4. Assessment of his income; or
5. In respect of whom any proceeding under this Act has been taken for the
amount
6. Of refund due to him or to such other person; or

7. Who is deemed to be an assessee under any provision of this Act; or

8. Who is deemed to be an assessee in default under any provision of this

Casual Income

Any receipt which is of a casual and non-recurring nature is casual income. It is an

income the receipt of which is accidental and without a stipulation. It is in nature of an
unexpected windfall.

Examples of casual income:

1. Winnings form lottery, crossword puzzles, card games and other games of any sort
or form, gambling or betting of any form or nature;

2. Receipts even from habitual betting are non-recurring receipts and assessable as
casual income.

3. Prize awarded for coin collection or stamp collection may be a casual income.

This income is due to hobby.

Casual income does not include:

1. Capital gains;

2. Receipts arising from business or the exercise of a profession or occupation;

3. Receipts by way of addition to remuneration of an employee;

4. Voluntary payment received in exercise of an occupation, e.g., tips given in the

ordinary way to taxi-drivers.

Note –
- Expenses are not deductible from casual incomes.
- Set-off of losses is not permitted against casual income.

Previous Year [Sec. 3]

Previous year is not defined under section 2 of the Income-tax Act. It is defined
separately under section 3 of the Income-tax Act. Previous year means the financial
year immediately preceding the assessment year. In simple words, it can be said that
the year in which income is earned is known as previous year and the next year in
which this income is taxable is known as assessment year. It will be the uniform
previous year for all the assessees and for all sources of income. For newly set-up
business or profession first previous year may be of less than 12 months.

Exceptions to the general rule (i.e., when income of previous year is not taxable in
the immediately following assessment year):

The rule says the income of previous year is assessable as the income of the
immediately following assessment year or in other words, it can be said that income of
previous year is chargeable to tax in the next following assessment year.

The above rule, however, has certain exceptions which are given below:

1. Income of non-resident from shipping:

Conditions to be satisfied:

1. The assessee is a non-resident who owns a ship or ship is chartered by a non-

resident.

2. The ship carries passengers, livestock, mail or goods shipped at a port in India.

3. The non-resident may (or may not) have an agent/ representative in India.
2. Income of persons leaving India either permanently or for a long period of
time;

3. Income of association of persons or a body of individuals or artificial juridical

persons formed for short duration;

4. Income of a person trying to alienate his assets with a view to avoiding payment
of tax; and

5. Income of a discontinued business.

In these cases, income of a previous year may be taxed as the income of the
assessment year immediately proceeding the normal assessment year.

These exceptions have been incorporated in order to ensure smooth collection of

income tax from the aforesaid taxpayers who may not be traceable if tax assessment
procedure is postponed till the commencement of the normal assessment.

Assessment year [Sec. 2(9)]

“Assessment year" means the period of twelve months commencing on the 1st day of
April every year. The income earned during any year is taxable in the next year which
starts from April 1. For example, income is earned during the year April 1, 2023 to
March 31, 2024. It will be taxable in the next year which starts from April 1, 2023 and
ends on March 31, 2024. Thus, the assessment year for the income in which income
has been earned during the year previous year i.e., 2019-20 is 2020-21. Therefore,
year 2021-22 is known as previous year and year 2022-23 is known as assessment
year for the previous year 2021-22. In simple words, it can be said that the year in
which assessment procedure of income is started and taxable is known as assessment
year.

Maximum marginal rate [Sec. 2(29C)]

Maximum marginal rate means the rate of income-tax (including surcharge on income
tax, if any) applicable in relation to the highest slab of income in the case of an
individual, association of persons or body of individuals, as specified in the Finance
Act of the relevant year. For instance, for the assessment year 2022-23, the maximum
marginal rate of tax for an individual assessee is 34.32% (tax rate @ 30% + surcharge
@ 10% + cess @ 4%).

1.5 CHARGE OF INCOME TAX

Where any Central Act enacts that income-tax shall be charged for any assessment
year a any rate (or rates), income-tax at that rate (or those rates) shall be charged for
that year in accordance with, and subject to the provisions of, this Act in respect of the
total income of the previous year of every person.

Finance Act gives the tax rates every year and all the amendments in the Income Tax
Act. Finance Act becomes an Act from the Finance Bill. Finance bill is a Money bill
and is presented in the Lok Sabha on February 1 of every year by the Finance
Minister. For some days, discussion on Finance bill takes place in Lok Sabha and
Rajya Sabha. After the Finance bill is passed by both Lok Sabha and Rajya Sabha and
after the assent of the President, the Finance bill becomes Finance Act.

Every Finance Act shows the proposals for the coming financial year. For instance,
Finance Act 2019 shows the proposals for 2022-23 (i.e., April 1, 2022 to March 31,
2023). As far as tax rates are concerned, Part I of The First Schedule of the Finance
Act 2022 shows the tax rates for the financial year 2020-21 and Part III of The First
Schedule of the Finance Act 2017 shows the tax rates for the financial year 2021-22.
Similarly, Finance Act 2020 shows the proposals for 2023-24 (i.e., April 1, 2020 to
March 31, 2021). As far as tax rates are concerned, Part I of The First Schedule of the
Finance Act 2019 shows the tax rates for the financial year 2019-20 and Part III of
The First Schedule of the Finance Act 2020 shows the tax rates for the financial year
2020-21. Part III of The First Schedule of current year’s Finance Act becomes Part I
of The First Schedule of next year’s Finance Act. For instance, Part III of The First
Schedule of the Finance Act 2019 becomes Part I of The First Schedule of the Finance
Act 2020.

1.6 BASIC PRINCIPLES OF INCOME-TAX

Following are some basic principles of income-tax:

1. Income tax is an annual tax on Total income.

2. Tax rates are fixed by the annual Finance Act.
3. Tax is charged on the total income of every person computed in accordance with
the provisions of this Act.
4. Income tax is to be deducted at source or paid in advance as provided under
provisions of the Act.
5. Total income is computed on the basis of residential status of the assessee.
1.7 COMPUTATION OF TOTAL INCOME

Taxable income of any assessee is computed as per the format given below –
Computation of net taxable income/ total income of an assessee for the assessment
year 2022-23:

Particular Amount
(Rs.)

1. Income under the head “Salaries” X

2. Income under the head “House Property” X

3. Income under the head “Profits and gains of business or Profession” X

4. Income under the head “Capital Gains” X
5. Income under the head “Income from other sources” X
Gross total income (GTI) [sum of 1 to 5] XXXXX
Less: Deductions under chapter VIA [Sec. 80] XX
Net taxable income or Total income (NTI) XXX

Rounding off of income [Sec. 288A]

The taxable income shall be rounded off to the nearest multiple of ten rupees and for
this purpose any part of a rupee consisting of paise shall be ignored and thereafter, if
such amount is not a multiple of ten, then, if the last figure in that amount is five or
more, the amount shall be increased to the next higher amount which is a multiple of
ten and if the last figure is less than five, the amount shall be reduced to the next lower
amount which is a multiple of ten.

1.8 COMPUTATION OF TAX LIABILITY

Tax to be paid by any assessee is computed as per the format given below –

Computation of tax liability of an assessee for the assessment year 2022-23:

Particulars Amount
(Rs.)
A- Income taxable at Special Rate: XX
B- Income taxable at Normal Rate XX
Income-tax on net taxable income XXXX
Less: Rebate under section 87A (if any) XXXX
XX
Add: Surcharge (% of income-tax) XX
Total (a) XX
Add: Education Cess (EC) @ 2% on (a) XX
Add: Secondary and Higher Education Cess (SHEC) @ 1% on (a) XX
Add: Health cess @1% on (a) X
Total XX
Less: Relief under section 89 XX
Tax Liability XX
Add: Interest/ Penalty etc. XX
Less: Pre-paid taxes
[i.e., advance tax, self-assessment tax, TDS, TCS, MAT credit] XX
Tax Payable XXX

1.9 TAX RATES, REBATE, SURCHARGE AND CESS FOR THE ASSESSMENT
YEAR 2023-24

Tax Rates for “Individuals”

If net income exceeds Rs. 1 Crore, the amount payable as income tax and surcharge
shall not exceed the total amount payable as income-tax on total income of Rs. 1 crore
by more than the amount of income that exceeds Rs. 1 Crore. - In case of a company
assessee, if net income exceeds Rs. 10 Crore, the amount payable as income tax and
surcharge shall not exceed the total amount payable as income-tax on total income.
Health and Education Cess:

Amount of income-tax and surcharge shall be increased by health and education cess which is
4 per cent of (income-tax + surcharge) which are as under:
i. Education Cess (EC)
2% of (income tax after deducting rebate under section 87A and after adding surcharge)
ii. Secondary and Higher Education Cess (SHEC) 1% of (income tax after deducting rebate
under section 87A and after adding surcharge)
iii. Health Cess: 1% of (income tax after deducting rebate under section 87A and after adding
surcharge)

Marginal relief

Surcharge is subject to marginal relief.

1. In case of an individual assessee, if net income exceeds Rs. 50 lakhs, the
amount Payable as income tax and surcharge shall not exceed the total amount
payable as Income-tax on total income of Rs. 50 lakhs by more than the
amount of income that exceeds Rs. 50 lakhs.
2. In case of any assessee, of Rs. 10 Crore by more than the amount of income
that exceeds Rs. 10 Crore.

1.10 SPECIAL RATES OF TAX ON CERTAIN INCOMES

Some incomes under the Income Tax Act are taxable at special rates. While applying
tax on these incomes, exemption slab applicable for an assessee is of no use. It means
even if income of an individual assessee is less than Rs. 2,50000 (i.e., exempted slab
of an individual assessee who is less than 60 years of age) or Rs. 300000 (i.e.,
exempted slab of a resident senior citizen who is less than 80 years of age but more
than 60 years of age) or Rs. 500000 (i.e., exempted slab of a resident super senior
citizen who is 80 years or more of age), these incomes are taxable at flat rate given below –

1. Long term capital gain is taxable at a flat rate of 20%.

2. Short term capital gain covered under section 111A is taxable at a flat rate of
15%.

3. Casual incomes (viz., Gambling, Lottery, Betting, etc.) is Taxable at a Flat rate of
30%.

1.11 ROUNDED OFF OF TAX

Rounding of tax (Sec. 288B)-

The amount payable by the assessee and the amount of refund due, under the
provisions of the Act shall be rounded off to the nearest ten rupees.

1.12 MISCELLANEOUS PROVISIONS

Exemption and Deduction – Difference

If an income is exempt from tax, it is not included in the computation of income.
Exemption can never exceed the amount of income. Deduction is generally given
from income chargeable to tax. Deduction can be less than or equal to more than the
amount of income. If the amount deductible is more than the amount of income, the
resulting amount will be taken as loss.
Method of Accounting

Mainly there are two types of accounting methods – mercantile system and cash
system. Under the mercantile system, income and expenditure are recorded at the time
of occurrence during the previous year. Under the cash system, revenue and expenses
are recorded only when received or paid.

Income chargeable under the head “Profits and gains of business or profession” or
“Income from other sources” is to be computed in accordance with the method of
accounting regularly employed by the assessee.

In case of income chargeable under the heads “Salaries”, “Income from house
property” and “Capital gains”, method of accounting adopted by the assessee is not
relevant in calculating taxable income. For calculating taxable income under these
heads, one has to follow the statutory provisions of the Income-tax Act which
expressly provide whether revenue (or expenditure) is taxable (or deductible) on
“accrual basis” or “cash basis”.