Basic Principles of Income-tax

BY
BOMMARAJU RAMAKOTAIAH.
M Sc, LLB, IRS.

1
■ Income-tax and Death are the only two inevitable things in
life
■ In India, taxes were levied even in ancient times – refer to
Manu Smriti & Arthashastra
■ Why to Pay Tax ?
“It was only for the good of his subjects that he collected
taxes from them, just as the Sun draws moisture from the
Earth to give it back a thousand fold“.
--Kalidas in Raghuvansh eulogizing KING DALIP.
■ Income-tax Act, 1922
■ Income-tax Act, 1961
■ Income-tax Rules, 1962
2
■ In the past we had very high tax rates.

■ Now, the rates are quite moderate and comparable with

several other countries.

■ We also had very high wealth-tax rates, estate duty, gift

tax.
Now there is a sea-change.

3
■ Came into force w.e.f. 1st April, 1962

■ Extends to whole of India

■ Consists of more than 400 sections, 23 Chapters and

14 schedules. The number of sub-sections, provisos
and Explanations runs into several hundreds

4
■ The Act determines which persons are liable to pay tax and in
respect of which income.

■ The sections lay down the law of income tax and the
schedules lay down certain procedures and give certain lists,
which are referred to in the sections.

■ However, the Act does not prescribe the rates of Income Tax

5
■ The rates of Income-tax are prescribed every year by the
Finance Act (popularly known as “The Budget”)

■ At present, the tax rates are same for all corporate assessees
and partnership firms (30%) and there are different slabs for
Individual tax payers

■ We also have surcharge for corporate assessees and

education cess for all assessees

6
■ The Act empowers the CBDT to formulate rules for
implementing the provisions of the Act. Rules can be
amended more easily than the Act - by merely publishing a
notification in the Official Gazette of the GOI and placing
before parliament.

■ To amend the Act, an amendment Bill has to be passed in the

Parliament.

■ In case of a conflict between the Act and the Rules, the

provisions of the Act shall prevail.
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■ CBDT issues circulars on certain matters for the guidance of
the Tax Officers and the general public

■ Circulars are binding only on the Income Tax Officers

■ Circulars cannot change the provisions of law; they can

merely clarify the law or relax certain provisions in favour of
the taxpayers

■ In event of a dispute, the Courts are not bound by the

circulars

8
■ Case Laws are the decisions of the various Income-tax
Appellate Tribunals (ITAT) and the High Courts (HC) and the
Supreme Court (SC)
■ Decisions of the SC are binding on all lower Courts and tax
authorities in India
■ HC decisions are binding only in the states which are within the
jurisdiction of that particular High Court
■ Decisions of one HC has persuasive powers over other HCs
when deciding similar issues
■ ITAT can be a single member bench (SMC) or a two
bench
memberor a Special Bench or a Third Member Bench 9
■ Section 2 gives definitions of various terms referred to in the
Act

■ Definitions can be inclusive definitions or exclusive

definitions

■ Definition of other Acts also referred in interpreting the

statute

10
■ Some of the important definitions contained in the
Act are of:

• Person
• Assessee
• Assessment Year
• Previous Year
• Assessment
• Income
• Dividend
11
■ Assessee
■ Assessment Year (A.Y. 2014-15)
■ Previous Year (F.Y. 2013-14)
■ Residential Status
■ Gross Total Income
■ Deductions
■ Total Income

12
■ Means a person by whom any tax or any other sum
of money is payable under this Act, and includes –
▪ Person in respect of whom any proceedings under
this Act has been taken for assessment of his income
▪ Deemed assessee under provisions of this Act
▪ Any person deemed to be an assessee in default under
any provisions of this Act
■ Assessment year means the period starting from
April 1 and ending on March 31 of the next year.

■ E.g. - Assessment year 2014-15 which commenced on

April 1, 2014 and will end on March 31, 2015.
■ The financial year immediately preceding the
assessment year
 E.g.: For the assessment year 2018-19, the previous year is F.Y. 2017-18

■ In case of a business or source of income, the

previous year commences from the date of set up of
business or the date on which the source of income
comes into existence in the first year of business or
source
■ Residential status of an assessee is important in determining the
scope of income on which income tax has to be paid in India.

■ The different types of Residential Status are:-

▪ Resident (R)
▪ An individual or HUF assessee who is resident in India may be
further classified into
▪ resident and ordinarily resident (ROR) and
▪ resident but not ordinarily resident (NOR).
▪ Non Resident (NR)

■ To be determined in each previous year (1 April to 31 March next)

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Importance of Residential Status:

■ Resident – World income is taxable in India

■ Non Resident – Only income arising or accruing
in India is taxable in India
■ Resident but Not Ordinarily Resident –
Income accruing or arising outside India may also be
taxable in India
An individual is said to be resident in India in
any previous year, if he satisfies any of the 2
basic conditions –

a. Physical presence in India for 182 days or more in a

previous year
OR
a. Physical presence in India for 60* days or more in the
previous year and 365 days or more during the 4 years
preceding the previous year
Section 6 -Resident

* the above is subject to the following

i. Citizen leaves for employment or as member of crew

of an Indian ship – instead of 60 days, it is 182 days

ii. Citizen or Person of Indian Origin already abroad

comes on a visit - instead of 60 days, it is 182 days
Individual - Resident but Not
Ordinarily Resident

Satisfies any one Basic condition and

two Additional conditions –
a. Such person has been a non resident in India in at least
9 out of 10 previous years preceding the relevant
previous year; or

b. The person has been in India for a period of 729 days

or less during 7 years preceding the relevant previous
year
 Assessee Basic Condition Additional Condition

Must NOT satisfy both the

Resident and He must satisfy at least one of
additional conditions
Ordinarily Resident the basic conditions.

Not Ordinarily Must satisfy at least one of the Must satisfy either of the
Resident basic conditions. additional conditions

Non- Should not satisfy any of the Not applicable

Resident basic conditions.
■ Hindu Undivided Family
▪ Resident unless Control and Management of affairs
wholly outside India
▪ R-NOR if Manager (Karta) is a non resident in India in 9
out of 10 preceding previous years or is in India for 729
days or less in 7 preceding previous years
■ Company
▪ Resident in India
▪ If an Indian Company – Section 2(26)
▪ If Control and Management of its affairs is situated
wholly in India
■ Firm, Association of Persons and Any other person

▪ Resident unless control and management of its

affairs is situated wholly outside India
Basic principles
of Income-tax
• What is income?
• Distinction between Taxable Income and Tax-
free Income
• Heads of Income
• Sources of Income
• Gross Total Income
• Deductions
• Total Income
• Tax on Total Income
The scope of Total Income depends on the
Residential Status of the tax payer. The incidence
of tax under different circumstances is given in the
following table

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Scope of income
ROR RNOR NR
Income received in India Yes Yes Yes

Income deemed to be received in India Yes Yes Yes

Income accruing or arising in India Yes Yes Yes

Income deemed to accrue or arise in Yes Yes Yes
India
Income received/ accrued outside India Yes No
Yes from a business in India
Income received/ accrued outside India No No
Yes from a business controlled outside India
 Income:

• Income is defined to “include” several items

• It is not an exhaustive definition

• Any income which is not specifically exempt is taxable

■ Agricultural income
■ Receipts by a member from a HUF
■ Gratuity received on retirement, termination or death
■ Commuted Pension
■ Exemption of amount received by way of encashment of
unutilized earned leave on retirement.
■ Dividend Income
■ Any allowance to the extent not taxable
■ Amount received from insurance policies on maturity of LIC
policies (subject to conditions prescribed)
■ Income from provident funds
■ Voluntary Retirement Receipts to the Maximum limit of Rs.
5,00,000 (subject to conditions)
■ Payments from Superannuation Fund
■ House Rent Allowance (subject to conditions)
■ Educational Scholarships
■ Exemption in respect of clubbed income of minor
 Exemptions for specified incomes

Section Details Sunset Clause

from
10A Special provision in respect of newly established 01-04-2012
undertakings in free trade zone, etc.

10AA Special provision in respect of newly established Available upto

units in Special Economic Zones. 01-04-21

10B Special provision in respect of newly established 01-04-2012

hundred per cent export-oriented undertakings

10BA Special provision in respect of export of certain 01-04-2010

articles or things

10C Special Provision in respect of certain industrial 01-04-2010

undertaking in North- Eastern Region
■ Five main Heads of Income:
▪ Salaries
▪ Income from House Property
▪ Profits and Gains of Business or Profession
▪ Capital Gains
▪ Income from Other Sources

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■ Under each Head of Income, there could be
multiple Sources of Income

■ For example, a person could be employed with more

than one employer. In such a case, each employment is
a different Source of Income under the Head of Salaries

32
Income is taxable under head “Salaries”, only if there
exists Employer - Employee Relationship between the payer
and the payee. The following incomes shall be chargeable to
income-tax under the head “Salaries”:-
1.Salary Due
2.Advance Salary [u/s 17(1)(v)]
3.Arrears of Salary

Note:
(i)Salary is chargeable on due basis or basis, whichever
receipt earlier. is
(ii)Advance salary and Arrears of salary are chargeable to tax
on receipt basis only.
Properties can be broadly classified into:

■ Let out property

■ Self occupied property
■ Deemed to be let out
■ The annual value of property consisting of any
buildings or lands appurtenant thereto of which
the assessee is the owner

■ other than such portions of such property as he

may occupy for the purposes of any business or
profession carried on by him
Determination of Annual Value

This involves three steps:

Step 1 – Determination of Gross Annual Value (GAV)

Step 2 – GAV minus municipal tax paid by the owner
during the previous year
Step 3 – Balance = Net Annual Value (NAV)
Step 4 – Reduce 30% of NAV as an ad-hoc Standard
Deduction
Step 5 – Reduce Interest, if any, paid on a loan taken to
buy/construct the property
Business :
“Business” simply means any economic activity carried on
for earning profits. Sec. 2(3) has defined the term as “ any
trade, commerce, manufacturing activity or any adventure or
concern in the nature of trade, commerce and manufacture”.
Profession
:
“Profession” may be defined as a vocation, or a job
requiring some thought, skill and special knowledge like
that of C.A., Lawyer, Doctor, Engineer, Architect etc. So
profession refers to those activities where the livelihood is
earned by the persons through their intellectual or manual
skill.
Profit & Gains of Business or Profession

Section – 28 is the charging section which specifies that the Profit &
Gains of Business or Profession, which was carried on by the assessee at
any time during the previous year shall be chargeable.
There are many other incomes specified in section – 28.

Section – 29 specifies the mode of computation.

Profit & Gains of Business or Profession

Allowable Expenditure :
Section – 30 & 31 : on Rent, Rates, Taxes & Repairs on
Buildings, Plant & Machinery and
Furniture.

Section – 32 : Depreciation & Addl. Depreciation as

applicable
related sections:
Section – 43(1) : Actual cost
43(6) : Written Down Value
Profit & Gains of Business or Profession

Section – 36 : Various specified deductions for example

Section 36(1)(iii) : interest on borrowed capital
Section 36(1)(vii) : Bad debts
Section 36(1)(vii a) : Provision for bad debts in the case of
Banks.

Section – 37 : Any Revenue Expenditure – wholly & exclusively for the purpose of
business.
- But Not Allowable : - Penalties for infraction of law
- CSR Expenditure of company
- Capital / Personal Expenses
Profit & Gains of Business or Profession

Deductions allowed with conditions:

Section – 40 : Amounts on which TDS is deductible or payable

only on deduction of tax

Section – 40A (2) : Amounts paid to specified persons

Section – 40A(3) : Expenditure paid in cash in excess of Rs.10,000/-

Exceptions in Rule 6DD
Profit & Gains of Business or Profession

Deemed profit – Section – 41 (1)

Balancing Charge – Section – 41(2)

 Profit & Gains of Business or Profession

Deduction allowed on actual payment :

Section 43B - certain statutory payments

- interest to scheduled Banks , Public financial Institutions etc.
- only in the year of payment, irrespective of year of liability.
Profit & Gains of Business or Profession

Maintenance of accounts , Audit

Section – 44AA : Maintenance of accounts

Section – 44AB : Audit

 Profit & Gains of Business or Profession

Presumptive Taxation :-

Section – 44AD : small eligible business

Section – 44 ADA : Professional Receipts less than 20lakhs

Section – 44 AE : Goods carriage business

Section – 44 AF : Retail business

Section – 44B to : Applicable to Non-Residents who do

44DA : business in India.
Capital Gain’s tax liability only when the
arises following conditions are
satisfied:
There should be a capital asset.
The capital asset is transferred by the assessee
Such transfer takes place during the previous year.
Any profit or gains arises as a result of transfer.
Such profit or gains is not exempt from tax
under section 54, 54B, 54D, 54EC, 54F, 54G, 54GA and
54GB
Capital Gains :

Section – 45 : is charging section

Section – 47 : Transactions not regarded as ‘Transfer’

Section – 48 : Mode of computation

--- cost of acquisition
--- cost of improvement
--- indexed cost / improvement

Section – 49 : Cost with reference to certain modes

 Capital Gains :

Special Provisions :

Section – 50 & 50A : Computation of capital gain in case of depreciable asset

Section – 50B : Slump Sale

Section – 50C : Full value of consideration in special cases

 Capital Gains :

Important Exemptions :-

Section – 54 : Profit on sale of Residential property

Section – 54B : Agricultural land in urban area which is treated as ‘Capital Asset’

Section – 54EC : Investment in Bonds up to Rs. 50lakhs

Section – 54F : Investment in Residential property

Income of every kind, which is not to be excluded from the
total income and not chargeable to tax under any other
head, shall be chargeable under the head “Income from
Other Sources”.

List of items chargeable under this head:-

Dividends from Co-op societies/Foreign companies

Winning from lotteries, crossword puzzles, races,
gambling, betting of any form
Interest on securities
Income from plant, machinery or furniture on hire
■ Any sum received under a Keyman insurance policy
■ Any gift exceeding Rs. 50,000 received from non
relatives
■ Interest on foreign government securities
■ Agriculture income received outside India
■ Director’s Sitting Fees
■ Any Individual whose total income exceeds the
threshold limit is chargeable to tax in India and has
to file return of income
■ All corporate tax payers and all partnership firms
have to file the return irrespective of the level of
income
■ Different forms and due dates prescribed for the
returns
■ The total income of an assessee is to be computed
after making deductions permissible u/s 80C to 80U.
However, the aggregate amount of deductions
cannot exceed the Gross Total Income.

■ Deductions are allowed under chapter VI-A of

Income Tax Act.
Section 80C of the Income Tax Act allows certain
investments and expenditure to be deducted from
total income up to the maximum of 1.5 lac. The total
limit under this section is Rs. One lac fifty th.) which
can be any combination of the below:
 Contribution to Provident Fund or Public Provident fund
 Payment of Life Insurance Premium
 Investment in Pension Plans
 Investment in Equity Linked Savings Scheme of Mutual Funds.
 Investment in NSC
■ Tax Saving Deposits provided by Banks
■ Payment towards principal repayment of housing loans
■ Payment of Tuition fees of Children
■ Post Office Term Deposit
 Deduction is available in respect of the amount paid to effect or
to keep in force health insurance under a scheme –
 made by General Insurance Corporation of India (GIC) and approved
by Central Government; or
 made by any other insurer and approved by IRDA
 Deduction shall be to the extent of lower of –
 Actual Health insurance premium paid by any mode other than cash,
or
 Rs. 15,000 (Rs. 20,000 if the insured is a senior citizen).
 Deduction on account of expenditure on preventive health check-
up (for self, spouse, dependent children and parents) shall not
exceed in the aggregate Rs.5,000. This payment can be made in cash.
 The deduction for preventive health-checkup is included in the overall
limit of Rs. 15,000 / Rs. 20,000 as the case may be
■ This section has been inserted into the Income-tax Act
with effect from Assessment Year 2013-14 i.e. F.Y. 2012-
13.
■ This section provides deduction to an individual or a
Hindu undivided family in respect of interest received on
deposits (not being time deposits) in a savings account
held with banks, cooperative banks and post office.
■ The deduction is restricted to Rs.10,000 or actual
interest whichever is lower.
Exemptions and Deductions

Exemptions Deductions Incomes

Incomes which are from which
exempt u/s 10 deductions are
will not be allowable under
included while Chapter VI-A will
computing total first be included in
income the gross total income
and then the
deductions will be
allowed
■ Scrutiny assessments
■ Appeals to CIT(A)
■ Appeals to ITAT
■ Appeals to HC
■ Appeals to SC

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 Assessment of Individuals
Sections Particulars Remarks

5A Special provisions for persons covered under Portuguese

Civil Law

10(2) Share of Income from HUF Exempt

10(2A) Share of Partner from a firm Exempt

28(v) Remuneration from a firm and interest on capital Taxable to the extent
allowed as deduction
to firm u/s. 40(b)
60 to 65 Income of other persons included in income of individual Clubbed Income of
minor exempt up to
Rs.1,500/-
80C to 80U Deductions from Gross Total Income

87A Rebate of maximum Rs.2,500/- for resident individuals

having total income up to Rs.3,50,000/-
 Assessment of Individuals
Sections Particulars Remarks

115ACA Tax on Income from GDR or Capital gain arising from

their transfer

115BBF Tax on Income from “Patents”

115JC to 115 JF Alternate Minimum Tax (AMT) on all persons other than
companies
 Assessment of Hindu Undivided Family
Sections Particulars Remarks

10(2) Share from HUF Exempt

64(2) Conversion of self acquired property into joint family Clubbed in the income
property of transferor.

80C to 80TTA Deduction from gross total income

171 Assessment after partition of a HUF

115JC to 115JF Alternate Minimum Tax (AMT) on all persons other

Chapter XII-BA than companies
 Assessment
Sections
of Firms (including
Particulars
LLP)
2(23) “Firm”, “partner” and “Partnership”, meaning of

40(b) Restriction on remuneration/ interest of partners

78(1) Carry forward and set off of losses in case of change in constitution of firm

80G to 80-JJAA Deductions from Gross Total Income

115JC to 115JF Alternate Minimum Tax (AMT) on all persons other than Companies
Chapter XII-BA

184 Essential conditions to be satisfied by a firm to be assessed as Firm

187 Change in constitution of a firm
188 Succession of one firm by another firm
188A Joint and several liability of partners for tax payable by firm
189 Firm dissolved or business discontinued
 Assessment of Association of Persons
Sections Particulars

67A Method of computing member’s share in AOP/BOI where shares are

determinate

167B(1) & (2) Assessment of AOP/BOI firm assessed as AOP

115JC to 115JF Alternate Minimum Tax (AMT) on all persons other than companies
Chapter XII-BA
 Assessment of Co-operative Societies
Sections Particulars

2(19) Definition of co-operative society

80G to 80P Deductions from Gross Total Income

80P Special deduction for co-operative societies

115JC to 115JF Alternate Minimum Tax (AMT) on all persons other than companies
Chapter XIIBA
 Assessment of Trusts
Sections Particulars

2(15) Meaning of charitable purpose

10(23C) Income of certain funds of national importance, educational institutions

and medical institutions

11/ Rule 17C Income from property held for charitable or religious purposes

11(2)/ Rule 17 Accumulation of income in excess of 15% of the total income earned

12A/ Rule 17A Registration of trusts

12AA Procedure for registration

13 Section 11 not to apply in certain cases

115BC Anonymous donations

 Assessment of Trusts
Sections Particulars

115TD to 115TF Levy of tax where the charitable institution ceases to exist or convert into
a non-charitable organization

139(4A) Return of income of charitable trust and institutions

160, Expln. 2 Oral trust

161 Liability of representative assessee

164 Assessment where shares of beneficiaries are indeterminate or unknown

164(2) Taxability of the income of the trust

164A Charge of income-tax in case of oral trust

165 Case where a part of trust income is chargeable

 Assessment of Companies
Sections Particulars

2(17) Company
2(18) Company in which the public are substantially interested
2(22A) Domestic company
2(23A) Foreign company
2(26) Indian company

6(3) Residence of a company

79 Carry forward and set off of losses in case of certain companies

80G to 80JJAA Deduction from Gross Total Income

115BBD Tax on certain dividends received from foreign companies

 Assessment of Companies
Sections Particulars

115JB Minimum Alternate Tax on Companies

115O to 115Q Special provisions relating to tax on distributed profit of domestic

companies
115QA to 115QC Special provisions relating to tax on distributed income of domestic
company for buy back of shares
115R to 115T Special provisions relating to tax on distributed income to unit holders by
UTI or Mutual Funds
115TA to 115TC Special provisions relating to tax on distributed income by Securitisation
Trust
115TCA New Taxation Regime for securitization trust and its investors

115U Special provisions relation to tax on the income received

271C Failure to pay tax required under section 115-O(2)

276B Failure to pay to the credit of Central Government tax payable u/s115-O(2)
 ASSESSMENTS :

• Regular Assessments – Section 143(3)

• Best Judgement Assessments – Section 144

• Assessment/ Reassessment – Section 147

• Search Assessment
• Block Assessment – Section 158BC
Upto31-05-2003
• New Procedure – Section 153A
Powers of Authorities :

a) Verification – Section 143

Section 142(1)
Section 131
Section 133(6)

b) Inspection – Section 131

Section 133A

c) Search & Secure – Section 132

Section 132A
Taxes Collection :

1) Tax Deducted at Source

2) Advance Tax

3) Tax Collected at Source

4) Self Assessment Tax

5) Tax Demand (156)

■ In simple terms, TDS is the tax getting deducted from
the person (Employee/ Deductee) by the person paying
such amount (Employer/Deductor)

■ Different sections and rates of tax for different type of

payments.

■ A tax deductor is require to pay to the Central

Government the amount so deducted and issue TDS
certificate to the deductee within specified time and in a
specific format. 73
■ 192 – Salaries
■ 194A – Interest
■ 194C – Contracts
■ 194H – Commission
■ 194I – Rent
■ 194IA – Purchase of Certain Immovable Property
■ 194J – Professional Fees
■ 195 – Payment to Non-Residents (other
than salaries)
74