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MODULE - I
BASIC CONCEPTS
Assessee: Section 2(7)
Assessee means a person by whom any tax or any other sum of money is payable under the Income Tax Act and includes – i) every person in respect of whom any proceedings has been initiated under the Act for the assessment of his income or the income of any other person, ii) a person who is deemed to be an assessee under any provision of the Act, iii) a person who is deemed to be an assessee in default in any provision of the Act.
Assessment year: Section 2(9)
Assessment year means the period of 12 months commencing on the first day of April in every year.
Average rate of income tax: Section 2(10)
Average rate of income tax means the rate arrived at by dividing the amount of income tax calculated on the total income (including surcharge, if any, and educational cess) by such total income.
Income: Section 2(24)
Income tax Act does not define the term ‘income’ precisely. Section 2(24) gives an inclusive definition for the term income and lists out certain specific items as income. In practice it includes all such things, which the term signifies according to its general and natural meaning.
Maximum marginal rate: Section 2(29C)
MMR is the rate of income tax (including surcharge, if any and educational cess) applicable in relation to the highest slab of income in the case of an individual, AOP/BOI as the case may be as specified in the Finance Act of the relevant year. For A.Y 2011 - 12 the rate applicable to the highest slab of income is 30% plus educational cess
@3%. Thus the MMR is 30.9%.
Person: Section 2(31)
Person includes (i) an individual (ii) a Hindu undivided family (iii) a company (iv) a firm (v) an association of persons whether incorporated or not (vi) a local authority and (vii) every artificial juridical person.
Substantial interest: Section 2(32)
The term substantial interest is used in different contexts in income tax law. For example, in the context of deemed dividend, in the context of assessment of trusts, in the context of perquisites taxable in specified cases only, under
‘Salary’, in the context of disallowance of excessive or unreasonable expenditure and in the context of clubbing of income of spouse with that of an individual. The substantial interest may either in relation to a company or in relation to a non-company entity. As per section 2(32), a person has substantial interest in a company if he is the beneficial owner of equity shares carrying not less than 20% of the voting power. In relation to a non-company entity the person is considered to have substantial interest if he is entitled to 20% or more of share of profit.
Gross total income: Section 80B(5)
Gross total income is the total income computed in accordance with the provisions of the Income tax Act but before making any deduction under Chapter VI A.
Total income: Section 2(45)
Total income is the total amount of income computed in the manner laid down in the Income tax Act. It is the income after making permissible deductions under Chapter VI A.
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Previous year: Section 3
Previous year is the financial year immediately preceding the assessment year. In the case of newly set up business previous year will be the period between the date of setting up of the business and 31 st March.
The general rule is that the income earned during a previous year is assessed in its relevant assessment year. But there are certain exceptions to this general rule. In the following cases, the income is assessed in the same year in which it is earned. This is called Accelerated Assessment.
Section 172: Income of non-resident shipping companies:
7.5% of the amount received by the ship owners shall be deemed to be the income accruing in India and it is assessed to tax at current rates.
Section 174: Income of persons leaving India:
Section 174A: Income of AOP/BOI or artificial juridical persons formed for a particular purpose or event:
Section 175: Income of persons trying to alienate property:
Section 176: Income of discontinued business or profession:
Casual income:
Income of a casual and non-recurring nature is termed “casual income”. The word casual means ‘coming by chance’, ‘coming without regularity’, ‘occasional’ or ‘accidental’. Something that happens by accident or one that is brought about by unknown cause is casual. An income that is produced as a result of chance without any design, plan or foresight is a casual income. Winnings from lotteries, crossword puzzles, races, gambling, betting, card game and other games are casual incomes. All casual incomes are liable to income tax.
Rebateable income:
An income included in the total income of an assessee, which is eligible for rebate, is termed rebateable income. As per section 86 if the total income of an assessee includes share income from AOP, the same will be eligible for rebate at average rate of income tax. Rebate is allowed only when the AOP has paid tax on its total income at the normal rate applicable to individual, HUF AOP etc.
Tax evasion:
Tax evasion denotes the fraudulent acts of a tax payer to escape from tax liability. It includes misstatement of facts, suppression of income, understatement of income, malafide transfers, false claims regarding losses, deductions or exemptions, etc. Tax evasion is an offence punishable under the provisions of the Act. It is not only illegal, but also immoral, anti-social and anti-national.
Tax avoidance:
Tax avoidance denotes the act of reducing one’s tax liability using clever but legal means. It is neither unethical nor an offence. The loopholes in the tax statute may be converted to ones advantage. Similarly the provisions in the Act or lack of provisions in the Act can be made use of to reduce one’s tax liability. Tax avoidance, though not ignominious as tax evasion, is surely not a practice to be encouraged in the light of the larger social and financial interests of the country.
Tax planning
A prudent taxpayer may reduce his tax liability substantially by availing of the various deductions, exemptions, concessions, rebates and relieves offered by the tax statute. These deductions, exemptions, rebates etc. are designed with some good intentions like encourage savings, help development of backward areas, generation of employment, capital formation, export promotion, import substitution, propagation of indigenous technology etc. A person who plans his tax matters to the maximum advantage by availing of these rebates and exemption is actually extending a helping hand in the strivings to achieve these socio-economic objectives. At the same time he reduces his tax liability.
Permanent Account Number:
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PAN is a 10 character alpha-numeric number allotted to income tax assessees by the income tax department. Every person whose taxable income exceeds Rs.1,60,000 (Rs. 1,90,000 in the case of women assessees and Rs.
2,40,000 in the case of senior citizens) during an accounting year is required to obtain the PAN once for ever by making an application in Form 49A before 31 st May of the assessment year. Aside, the following assesses are compulsorily required to obtain the PAN.
1.
An assessee whose total sales turnover or gross receipts of the business or profession exceeds or is likely to exceed Rs.5 Lakhs during an accounting year.
2.
A trust, which is in receipt of income from property held for charitable or religious purpose and liable to file return of income.
3.
Exporters and importers.
4.
Assessees under the Central Excise Act.
5.
Service tax assessees.
6.
Persons required under the Central Sales tax Act or the general sales tax law of the state or union territory concerned.
7.
All existing assessees who have not been allotted a PAN under the new 10 digit alpha-numeric series.
A non-assessee shall also be required to obtain PAN in case he intends to enter into specified transactions for which furnishing of PAN are mandatory as per Rule 114B of the Income tax Act. Failure to apply for PAN or to quote
PAN in specified documents or transactions attracts a penalty of Rs. 10,000. The Income tax department issues laminated PAN cards displaying the permanent account number of the assessee.
Residential status
Incidence of tax depends upon the residential status of the assessee concerned. In other words, the extent of an assessee’s taxable income is decided by his residential status. It is determined for each previous year separately. A person may be a resident in one previous year and non-resident in next year. Sections 6 and 5 of the Income tax
Act respectively deal with residence and incidence of tax.
Sections 6(1) and 6(6) prescribe the tests for determining the residential status of an individual.
Sections 6(2) and 6(6) prescribe the tests for determining the residential status of a HUF.
Section 6(2) prescribes the test for determining the residential status of a firm / AOP.
Section 6(3) prescribes the test for determining the residential status of a company.
Section 6(4) prescribes the test for determining the residential status of every other person.
The prescribed tests are given below.
Individual: -
6(1) a – He is in India for a period/ periods aggregating to 182 days or more in the previous year, or
6(1) c - Having been in India for a period /periods aggregating to 365 days or more during the 4 years preceding the
previous year he has been in India for a period / periods aggregating to 60 days or more during the previous
year.
Explanation to 6(1) c above – (i) In the case of an individual who is a citizen of India, where he leaves India for
employment or as a member of the crew of an Indian ship, in the previous year, to satisfy condition 6(1)c, he must
have been in India during the previous year for a period / periods aggregating to 182 days or more instead of 60
days. (ii) In the case of an individual who is a citizen of India, if he comes on a visit to India in the previous year, to
satisfy the condition 6(1)c, he must have been in India during the previous year for a period /periods aggregating to
182 days or more instead of 60 days.
An individual who satisfies any one of the two conditions set out u/s 6(1) would be a resident. An individual who does not satisfy any one of these tests would be a non-resident. As per section 6(6), an individual who has been non-resident in India in 9 out of the 10 previous years preceding the relevant previous year or has been in India for a period / periods amounting in all to 729 days or less during the 7 years preceding the previous year, would be a not ordinarily resident. In other words, an individual who has been resident (as per conditions of 6(1)) in India in at
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Hindu undivided family:
As per section 6(2) if the whole or any part of the control and management of the affairs of a HUF is situated in
India, the family would be a resident. If the whole of the control and management of the family is situated outside
India, it would be a non-resident.
As per section 6(6) if the Karta of the family has been non-resident in India in at least 9 out of the 10 years preceding the previous year or he has been in India for a period /periods amounting in all to 729 days or less during the 7 years preceding the previous year, the HUF would be a not ordinarily resident.
Firm/AOP: -
As per section 6(2) if the whole or any part of the control and management of the affairs of the firm/AOP is situated in India it would be a resident and otherwise it would be a non-resident.
Company:-
As per section 6(3),
(i) if the company is an Indian company OR
(ii) (ii) if the control and management of the affairs of the company is situated wholly in India,it would be a resident and otherwise it would be a non-resident.
Other person: -
According to 6(4) if the whole or any part of control and management of its affairs is situated in India, an assessee belonging to this category would be a resident and otherwise it would be a non-resident.
Incidence of tax
Section 5(1) deals with incidence of tax of a resident assessee. Accordingly, the total income of any previous year of a person who is a resident includes all incomes from whatever source derived which -
(a) is received or deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year; or
(c) accrues or arises to him outside India during such year.
Section 5(2) deals with incidence of tax of a not-ordinarily resident assessee. Accordingly, the total income of any previous year of a person who is a not ordinarily resident includes all income from whatever source derived which
(a) is received or deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year; or
(c) accrues or arises to him outside India from a business controlled in or profession set up in India.
Section 5(3) deals with incidence of tax of a non-resident assessee. Accordingly, the total income of any previous year of a person who is a non-resident includes all incomes from whatever source derived which –
(a) is received or deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year.
Agricultural income:
As per section 2(IA) of the Income tax Act, agricultural income means-
(a) Any rent or revenue derived from land which is situated in India and is used for agricultural purposes,
(b) Any income derived from such land by agriculture or by the process employed to render the produce fit for market or by sale of such produce by a cultivator or receiver of rent in kind.
(c) Any income derived from any building owned and occupied by the receiver of rent or revenue of such land with respect to which a process of cultivation is carried on.
Note: - The land must be either assessed to land revenue or local rates or not situated within the municipal limits or within the notified distance (not more than 8 k.ms.) from such municipal limits.
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The building must be on or in the immediate vicinity of the land and is required as a dwelling house or as a storehouse or as other out-building. Capital gain arising on transfer of any agricultural land situated within the municipal limits or within the notified distance from such municipal limits, shall not be deemed to be derived from agricultural land, i.e., it shall not be treated as agricultural income.
There are two preconditions for terming an income as agricultural income.
1.
The revenue or income should be derived from land. There should be a nexus between income, land and agricultural operations, by which is meant, something done to the land by human or mechanical agency to produce out of the land, any crop, tree plantation or other produce.
2.
The land should be situated in India. Agricultural income from land situated in a foreign country will be taxable in
India, depending on the residential status of the assessee.
Agricultural income is of five types.
1.
Any rent or revenue derived from land situated in India and used for agricultural purposes. Rent may be received in cash or in kind, i.e., in the form of a share of crops. Both constitute agricultural income if the requisite conditions regarding location and use of land are fulfilled. The recipient of rent may or may not be the owner of the agricultural land. The term revenue is used in a broad sense of return, yield or income. It covers income other than rent. For example, mutation fees exacted from tenants upon their succeeding to occupancy holdings or fees exacted for the grant of a renewal of the lease are revenue derived from land.
2.
Income derived from agriculture. When standing crop or raw produce after harvest is sold by the cultivator
(without performing marketing process) it is income from agriculture. Besides, if the crop is used by the cultivator or receiver of rent in kind for his consumption or is used as raw material in his business, the market value of such produce is agricultural income.
3.
Income derived from marketing process performed by cultivator or receiver of rent in kind. In order to make the harvested produce a saleable commodity, it may be sometime necessary to perform some kind of process on the produce. This may increase the value of the produce. Any income by performing such process to make raw produce fit for marketing is also agricultural income. If a produce, which can be sold in its raw form, has subjected to any kind of marketing process, the income derived from the sale of such produce is partly agricultural and partly business.
4.
Income derived from sale of produce. When the cultivator or receiver of rent in kind sells the produce from land it is agricultural income.
5.
Income from farm building. The farm building must be owned and occupied by the cultivator or receiver of rental income. If any of these conditions is not satisfied, the income from farm building is not agricultural income.
Partly agricultural income
An income is decided as partly agricultural income as per the following rules.
1.
60% of the income derived from the sale of tea grown and manufactured by the seller, in India, is deemed to be agricultural income and the remaining 40% is taken as business income.
2.
65% of the income derived from the sale of centrifuged latex or cenex or latex based crepes or brown crepes manufactured or processed by the seller, in India, is deemed to be agricultural income and the remaining 35% is taken as business income.
3.
75% of the income derived from the sale of coffee grown and cured by the seller, in India, is deemed to be agricultural income and the remaining 25% is taken as business income.
4.
60% of the income derived form the sale of coffee grown, cured, roasted and grounded by the seller in India, with or without mixing of chicory or other flavouring ingredients is deemed to be agricultural income and the remaining 40% is taken as business income.
Non-agricultural income
Non-agricultural income means an income other than that specified under section 2 (IA). Though the following incomes though related to land, are not agricultural incomes.
1.
Income from markets.
2.
Income from stone quarries.
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Income from mining royalties.
4.
Income from land used for storing agricultural produce
5.
Income from the supply of water for irrigation purposes.
6.
Income from self-grown grass, trees or bamboos
7.
Income from fisheries
8.
Income from the sale of earth for brick making.
9.
Remuneration received as manager of an agricultural farm.
10.
Dividend from company engaged in agriculture.
11.
Income from cold storage of agricultural produce.
Rules for computation of agricultural income
1.
Rent or revenue derived form land used for agricultural purpose is computed in accordance with section 57 to
59, as if it were income from other sources.
2.
Income from any building required as a dwelling house by the cultivator, is computed in accordance with sections 23 to 27 as if it were income from house property.
3.
Other agricultural income except income from sale of tea grown is computed as if it were income from profits and gains of business or profession.
4.
60% of the income from sale of tea or coffee grown and manufactured in India or 65% of the income from sale is taken as agricultural income.
5.
Share of agricultural income from an AOP/BOI is computed as usual.
6.
Loss from any source of agricultural income (other than share of loss from AOP/BOI) can be set off against income from any other source of agricultural income in that previous year.
7.
Any unadjusted agricultural loss carried forward from last 8 assessment years shall be set off against agricultural income for the year.
8.
Aggregate of the agricultural incomes as stated above and after set-off of losses is called gross agricultural income.
9.
From the gross agricultural income, agricultural income tax payable to the State Govt in respect of that previous year may be deducted and the balance is net agricultural income. The net agricultural income is rounded off to the nearest multiple of rupees ten.
10.
Where the net result of computation of net agricultural income is a loss it shall be ignored and the net agricultural income is deemed to be nil.
Tax treatment of agricultural income
Agricultural income is exempted from income tax u/s 10(1). Parliament has no power under the Constitution to levy tax on agricultural income. Only State Governments are empowered to tax agricultural income. However, agricultural income is a factor in determining the tax on non-agricultural income of an assessee. Agricultural income is partially integrated with the non-agricultural income to determine the tax liability. Integration of agricultural income with non-agricultural income is operative only in the case of individual assesses, HUFs, AOPs, BOIs and artificial juridical persons whose total non-agricultural income exceeds the basic exemption in a year and net agricultural income exceeds Rs.5000. The steps involved in the integration process are explained below.
1.
Aggregate the total non-agricultural income and net agricultural income of the year and compute tax on that as if such aggregate were the total income.
2.
Increase the net agricultural income of the assessee by the amount of basic exemption and compute tax on that as if such total were the total income of the assessee.
3.
Deduct the amount of income tax computed under step 2 from the amount of tax computed under step 1.
Balance will be the tax of the assessee on the amount of non-agricultural income. rupak.manikath@yahoo.com
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