Principles of Taxation - 1

CA Rajalakshmi B
Income [Definition : S. 2(24)]:
 Concept of revenue and capital receipts:

Revenue Receipts Capital Receipts

Revenue receipts are always taxable unless they are Capital receipts are exempt from tax unless they are
expressly exempt u/s 10. specifically taxable. (Taxable under the head CG)

Circulating Capital is revenue receipt. The circulating Fixed capital is capital receipt.
capital is one which is turned over and yields income Tangible and intangible assets which the owner keeps
or loss in the process. in his possession for making profits.

It is recurring receipt It is one time receipt.

Eg Business income, Sale of SIT Eg sale of a capital asset (Building,Plant and

M/C,Furniture etc)*
 Concept of revenue and capital receipts: Imp Points:
1. Transaction entered into the course of business.
➢ Transactions which are entered into in the course of the business regularly carried on by the assessee,
or are incidental to, or associated with the business of the assessee would be revenue receipts. ( Eg If
Business is to sell House prop or Plant and M/C then income derived will be revenue).Type of capital
whether Fixed or circulating will depend on the nature of business.

2. Profit arising from sale of shares and securities:

➢ If the shares were acquired as an investor or with a view to acquiring a controlling interest or for
obtaining a managing or selling agency or a directorship, the profit or loss on their sale would be of a
capital nature.

➢ If the shares were acquired in the ordinary course of business as a dealer in shares, it would
constitute his stock-in-trade.

3. Liquidated damages:
➢ Directly and intimately linked with the procurement of a capital asset, which lead to delay in coming
into existence of the profit-making apparatus, is a capital receipt.
4. Compensation on termination of agency:
➢ Compensation on termination of the agency business being the only source of income, the receipt is of capital nature,
but taxable under section 28(ii)(c).
➢ Where the assessee has a number of agencies and one of them is terminated and compensation is received therefor, the
receipt would be of a revenue nature since taking up an agency and exploiting the same for earning income is in the
ordinary course of business.

5. A single transaction - Can it constitute business?

➢ Even a single transaction may constitute a business or an adventure in the nature of trade even if it is outside the normal
course of the assessee’s business.

6. Gifts:
➢ Normally, gifts constitute a capital receipt in the hands of the recipient. However, certain gifts are brought within the
purview of income-tax, for example, receipt of property without consideration is brought to tax under section 56(2)(x)
(We will cover this in IOS)
Definition:
❖ Assessee :
“Assessee” means a person by whom any tax or any other sum of money is payable under this Act. In addition, it includes:
➢ Every person in respect of whom any proceeding under this Act has been taken for the assessment of
• his income; or
• the income of any other person in respect of which he is assessable; or
• the loss sustained by him or by such other person; or
• 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.

❖ Assessment:
This is the procedure by which the income of an assessee is determined. It may be by way of a normal assessment or
by way of reassessment of an income previously assessed.
Assessment year
The term has been defined under section 2(9). This means a period of 12 months commencing on 1st April every year. The
year in which income is earned is the previous year and such income is taxable in the immediately following year which is
the assessment year. Income earned in the previous year 2020-21 is taxable in the assessment year 2022-23.
Assessment year always starts from 1st April and it is always a period of 12 months.
Previous year
The term has been defined under section 3. It means the financial year immediately preceding the assessment year. As
mentioned earlier, the income earned during the previous year is taxable in the assessment year.
Business or profession newly set up during the financial year - In such a case, the previous year shall be the period beginning
on the date of setting up of the business or profession and ending with 31st March of the said financial year.
If a source of income comes into existence in the said financial year, then, the previous year will commence from the date on
which the source of income newly comes into existence and will end with 31st March of the financial year.
Q A is running a business from 1993 onwards. Determine the previous year for the assessment year 2023-24.
Ans. The previous year will be 1.4.2022 to 31.3.2023

Q A chartered accountant sets up his profession on 1st July, 2022. Determine the previous year for the assessment year
2023-24.
Ans. The previous year will be from 1.7.2022 to 31.3.2023.
Person includes
1) Individual:
‘Individual’ means only a natural person, i.e. human being.
It includes both males and females.
It also includes a minor or a person of unsound mind. In such a case assessment is made on the guardian or the
manager of the minor or the lunatic person.
2) HUF:
Under the income-tax Act, 1961, a Hindu undivided family (HUF) is treated as a separate entity.
Therefore, income-tax is payable by a HUF.
HUF has not been defined under the Income-tax Act.
It means a family, which consist of all males lineally descended from a common ancestor and includes their wives and
daughter.
Some members of the HUF are called co-parceners.
Earlier, only male descendants were considered as coparceners. With effect from 6th September, 2005, daughters have
also been accorded coparcenary status. It may be noted that only the coparceners have a right to partition.
Under the Income-tax Act, 1961, Jain undivided families and Sikh undivided families would also be assessed as a HUF
 SCHOOLS OF HINDU LAW

Dayabaga school Mitakshara school

The basic difference between the two schools of Hindu law with regard to succession
is as follows:
Dayabaga school of Hindu law Mitakshara school of Hindu law
Prevalent in West Bengal and Assam Prevalent in rest of India
Nobody acquires the right, share in the property by birth as One acquires the right to the family property by his
long as the head of family is living. birth and not by succession irrespective of the fact
that his elders are living.

Thus, the children do not acquire any right, share in the Thus, every child born in the family acquires a
family property, as long as his father is alive and only on right/share in the family property.
death of the father, the children will acquire right/share in
the property.

Hence, the father and his brothers would be the

coparceners of the HUF.
Company (Definition)
1. Company means, any Indian company as defined in section 2(26);

2. Anybody corporate incorporated by or under the laws of country outside India, i.e., any Foreign company; or

3. Any institution, association or body, whether incorporated or not and whether Indian or non- Indian; which is declared
by a general or special order of the CBDT to be a company for such assessment years as may be specified in the CBDT’s
order.

Classes of Companies and their Definition

Domestic Company Indian company or any company which has made arrangements for payments
of dividends

Indian Company A company registered under Indian Companies Act and having
the registered office in India

Foreign company It means a company which is not a domestic company

❖ Firm:
A firm means a firm as defined in the Indian Partnership Act 1932 and also includes LLP.

❖ Association of Persons (AOP):

• When persons combine together for promotion of joint enterprise they are assessable as an AOP, if they do
not in law constitute a partnership.

• In order to constitute an association, persons must join for a common purpose or action and their object
must be to produce income; it is not enough that the persons receive the income jointly.

• Co-heirs, co-legatees or co-donees joining together for a common purpose or action would be chargeable as
an AOP.

• For e.g., Mr. Yash, AB & Co. (Firm) and X (P) Ltd. join together to carry on construction activity otherwise than
as a partnership firm, such an association will be recognized as an association of persons.
Body of Individuals (BOI): (Formed by operation of law)
• It denotes the status of persons like executors or trustees who merely receive the income jointly and who may
be assessable in like manner and to the same extent as the beneficiaries individually.

• Thus, co-executors or co-trustees are assessable as a BOI as their title and interest are indivisible.

• Income-tax shall not be payable by an assessee in respect of the receipt of share of income by him from BOI
and on which the tax has already been paid by such BOI. For e.g., mutual trade associations, members club,
etc.
Difference between AOP and BOI:

In case of a BOI, only individuals can be the members, In case of an AOP, members voluntarily come together
whereas in case of AOP, any person can be its member with a common will for a common intention or
i.e. entities like company, firm etc. can be the member purpose, whereas in case of BOI, such common will
of AOP but not of BOI may or may not be present
 ❖ Local Authority
The term means a municipal committee, district board, body of port commissioners or other authority legally entitled
to or entrusted by the Government with the control or management of a municipal or local fund

❖ Artificial Juridical Persons

Artificial Juridical Persons are the entities which are not natural persons but are separate entities in the eyes of law.
This is a residual category could cover all artificial persons with a juristic personality not falling under any other
category of persons. Deities, Bar Council, Universities are some important examples of Artificial Juridical Persons

•PREVIOUS YEAR AND ASSESSMENT YEAR

PreviousYear Assessment Year

2022-23 2023-24
❖CHARGE OF INCOME TAX
Section 4 of the Income-tax Act, 1961 is the charging section which provides that:
(i) Tax shall be charged at the rates prescribed for the year by the Annual Finance Act or the Income-
tax Act, 1961 or both.
(ii) The charge is on every person specified under section 2(31);
(iii) Tax is chargeable on the total income earned during the previous year and not the assessment
year. (There are certain exceptions provided by sections 172, 174, 174A, 175 and 176);
(iv) Tax shall be levied in accordance with and subject to the various provisions contained in the Act.
This section is the back bone of the law of income-tax in so far as it serves as the most operative
provision of the Act. The tax liability of a person springs from this section.

Section 5 of the Income-tax Act, 1961 Scope of Total Income : Will be covered in Residential Status Unit 6 & 7.
Procedure for computation of total income of an individual for the purpose of levy of
income-tax –

Step 1 – Determination of residential status

Step 2 – Classification of income under different heads

Step 3– Computation of income under each head

Step 4 – Clubbing of income of spouse, minor child etc.

Step 5 – Set-off or carry forward and set-off of losses

Step 6 – Computation of Gross Total Income

Procedure for computation of total income of an individual for the purpose of levy of
income-tax –

Step 7 – Deductions from Gross Total Income

Step 8 – Total income

Step 9 – Application of the rates of tax on the total income

Step 10 - Surcharge / Rebate under section 87A

Step 11 – Health and education cess on income-tax

Step 12 – Advance tax and tax deducted at source

Step 13: Tax Payable/Tax Refundable

 Total Income As Per Income Tax Act
COMPUTATION OF TOTAL INCOME

Determine The Residential Status

Classify Income Under Five Heads

Profits And Gains

Income From House Income From Other
Salaries From Business Or Capital Gains
Property Sources
Profession
Compute income under each head applying the charging & deeming provisions and providing for permissible deductions/exemptions
there under Apply clubbing provisions
Apply Clubbing Provisions

Apply Set-off/Carry Forward And Set-off Of Losses As Per The Provisions Of The Act TOTAL
Compute Gross Total Income
INCOME

Less: Deductions From GTI

Total Income As Per Income Tax Act
After Calculation of total Income, we apply:

Various rates of tax on total Income

Surcharge or Rebate under Section 87A

Health and education cess

Advance Tax and Tax deducted at source

Tax Payable / Tax Refundable