Basic Concepts Residential Status

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Basic Concept Basic Concept

&&Residential StatusResidential Status

Prepared By Deepak C Dama Prepared By Deepak C Dama


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Index Index Introduction Introduction Definitions Definitions

Tax & Its Types Tax & Its Types Charge of Income Tax Charge of Income Tax Year (Assessment & Previous ) Year (Assessment & Previous ) Person Person Assessee Assessee Assessment Assessment Income Income Receipt ( Capital & Revenue) Receipt ( Capital & Revenue) Diversion & Application of Income Diversion & Application of Income Accounting Standard Accounting Standard

Residential Status Residential Status Scope of income in respect of residential status Scope of income in respect of residential status Tax Structure of India Tax Structure of India


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IntroductionIntroduction

Before Present Act, Income Tax Act, 1922 was Before Present Act, Income Tax Act, 1922 was prevailing prevailing

Income Tax Act came in to force w.e.f. 1st April Income Tax Act came in to force w.e.f. 1st April 1962 1962

Scope extends to whole of India Scope extends to whole of India Act enacted by Parliament in the Twelfth year of Act enacted by Parliament in the Twelfth year of

the Republic of India the Republic of India The Act contains 298 sections and XIV schedules.The Act contains 298 sections and XIV schedules.


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Tax meansTax means Fees charged by a governmentFees charged by a governmenton a product, income or activity.on a product, income or activity.Which constitute basic source of revenue toWhich constitute basic source of revenue to

Government.Government.

Direct TaxesDirect Taxes1.1. Income TaxIncome Tax

2.2. Wealth TaxWealth Tax

Indirect TaxesIndirect Taxes

1.1. Excise DutyExcise Duty

2.2. Custom DutyCustom Duty3.3. Service TaxService Tax4.4. Sales Tax /Sales Tax /

Value Added TaxValue Added Tax

Direct Tax: In Direct Tax, Person who pays and bears tax issame. It is directly paid by the person really bearing the tax.Indirect Tax : In Indirect Tax, Person who pays and bears tax isdifferent. It is not directly paid by the person really bearing the tax


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Charge Of Income TaxCharge Of Income Tax

Tax Shall be charged on income of every Tax Shall be charged on income of everyperson defined under section 2(31)person defined under section 2(31)which is earned during the previouswhich is earned during the previous

year at rate prescribed by annualyear at rate prescribed by annualFinance Act.Finance Act.


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Year (Assessment & Previous) Year (Assessment & Previous)Assessment Year : As Per Section 2(9), AssessmentYear means a period of 12months commencing on 1

st

April every year & ending on 31 st March of year in whichtax is paid .Previous Year: As Per Section 3, Previous Year means the financial year immediately preceding theassessment year, in which income is earned. The rule of chargeability of income of previous year taxed in next year is not applicable to certain cases : -

U/s. 172 Shipping business of non-residentU/s. 174 Persons leaving IndiaU/s. 174A AOP / BOI / Artificial Juridical Person formed fora particular event or purposeU/s. 175 Persons likely to alienate property to avoid tax

U/s. 176 Discontinued business


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Person Defined by section 2(31) Person Defined by section 2(31) Includes : - Includes : -

Individual :Individual : In The term individual means only aIn The term individual means only anatural person, i.e., a human being. In the case of natural person, i.e., a human being. In the case of deceased person, assessment would be made ondeceased person, assessment would be made on

the legal representative.the legal representative.

HUF :HUF : The expression is however defined under the The expression is however defined under theHindu Law as a family, which consists of all malesHindu Law as a family, which consists of all maleslineally descendant from a common ancestor andlineally descendant from a common ancestor andincludes their wives and unmarried daughters.includes their wives and unmarried daughters.

Contd


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Firm :Firm : As Per Partnership Act 1932, RelationshipAs Per Partnership Act 1932, Relationshipbetween person who have agreed to share profit of between person who have agreed to share profit of business carried on by all any of them acting for all whichbusiness carried on by all any of them acting for all which

should evidenced by instrument.should evidenced by instrument.

Company :Company :

-- any Indian company,any Indian company,Private Company orPrivate Company orPublic CompanyPublic Company

any body corporate incorporated by or under the laws of any body corporate incorporated by or under the laws of

aa country outside India, orcountry outside India, or- any institution, association or body, whether- any institution, association or body, whetherincorporated or not and whether Indian or non-Indian,incorporated or not and whether Indian or non-Indian,which is declared by general or special order of thewhich is declared by general or special order of the

Central Board of Direct Taxes to be a company.Central Board of Direct Taxes to be a company. Contd


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Association of Person : An association of personsmeans one in which two or more persons i.e. individualas well as non-individual voluntarily join for a commonpurpose or common action i.e. for producing income.

Body of individual : Body of individual means one inwhich two or more persons i.e. only human beingvoluntarily join for a common purpose or commonaction i.e. for producing income.

Local authority : The term means a municipalcommittee, district board, body of port commissionersor other authority legally entitled to or entrusted by theGovernment with the control or management of amunicipal or local fund


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Artificial Juridical Persons :This category couldcover every artificial juridical person not falling under other heads. An idol, or deity would be assessable inthe status of an artificial juridical person.

Can the female blend her property with joint family?

Can an individual of unsound mind be includedin the definition of person ?


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No, The right to blending is limited toCoparceners. The Female member of jointfamily cannot blend separate property with

joint family property.

Yes


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Can a minor be a member of an association ofpersons ?


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Yes, if his lawful guardian gives his consent .


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Assessee :Assessee : Person by whom any tax or anyPerson by whom any tax or anyother sum payable under the Act. can beother sum payable under the Act. can beclassified in four ways : -classified in four ways : -

First : A Person who is normally liable to pay tax under Act e.g. Individual, HUF , Firm etc.

Second : A Person in respect of whom any proceeding istaken e.g. Assessment of amount of personsincome

Third : Every person who is deemed to be assesseee.g. Representative of any assessee Fourth : Person who is deemed to be an assessee in

default under any provision of the Act. e.g. Personwho has not deducted Tax at Source requiredunder provisions of Act.


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Under Income Tax Act There are certain types of assessment which are

1. Summary Assessment (Section 143(1)2. Scrutiny Assessment (Section 143(3)3. Best Judgment Assessment (Section 144)4. Income Escaping Assessment (Section 147)

Assessment : : Entire process of computation of Entire process of computation of income & levy of tax on it.income & levy of tax on it.


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Income : Generally Income means Periodically monetaryreturn coming from definite sources.

It Consider :

Business GiftIllegal IncomeTax free IncomeApplication of Income

Negative Income (Loss)Awards As Professional CapacityNot Consider :

Pin MoneyPersonal Gift (Up to some extent)Dharmada receipt Diversion of incomeCapital receipt otherwise than taxable Contd


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Act says ,Income is inclusive and not exhaustive.Covers 82 List in I of 7 th Schedule of ConstitutionFor Example : -

1. Income from Salaries (Section 15)2. Income from House Property (Section 22)3. Income from Business / Profession (Section 28)

4. Income from Capital Gains (Section 45)5. Income from Other Sources (Section 56)

Income-tax Act levies tax on income , a term which is nowhere defined.


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Capital Receipt Revenue Receipt

A receipt referable to

fixed capital would be acapital receipt.E.g. Receipt on sale of fixedasset,Receipt in lieu of sourceof income

A receipt referable tocirculating capital wouldbe a revenue receipt.E.g. Sales of goods inordinary course of business,Compensation on terminationof an agreement

Golden Rule For Taxation of ReceiptsCapital receipts are exempt from tax unless they are

expressly taxable

Revenue receipts are taxable unless they areexpressly exempt from tax.

Fixed capital is one which the owner keeps in his possession for makingprofit

Circulating Capital is one which turnedover, yields income or loss


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Diversion Of Income Application Of Income

Income is received by personother than the personwho is actually entitled for it

Income is received by personPersonwho is actually entitled for it

Income which is diverted beforeIt reaches to assessee it isnot taxable

e.g. Amount towards certainfund for the purpose of returning to it

Income which is required to appliedto discharge of obligation after suchreaches to assessee it is taxable

e.g. Portion of salary retained byemployer for compulsory depositfund


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Accounting Standard under Income Tax ActGiven Accounting Standard are relevant only

for Person who has income U/s. 28 & U/s.

56

In respect of above mentioned standard oneshould keep following points mind :

(i) Prudence - Provisions should be made for allknown liabilities and losses even though theamount cannot be determined with certainty andrepresents only a best estimate in the light of available information;

(ii) Substance over form - The accounting treatmentand presentation in financial statements of transactions and events should be governed by

. Disclosure of Accounting Polices

Contd


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Accounting Standard under Income Tax Act

Prior Period items means income or expense whicharise in the current period as result of errors oromission in preparation of financial statement of one or more prior periods.

Extraordinary Items means income or expensesthat arise from events or transactions that areclearly distinct from the ordinary activities of theenterprise and, therefore, are not expected to

2. Disclosure of Prior period and Extraordinaryitems and changes in accounting policies :

iii) Materiality - Financial statements shoulddisclose all material items, the knowledge of which might influence the decisions of theuser of the financial statements .


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Accounting Standard under Income Tax Act

Change in Accounting Polices means change in an

accounting estimate that has a material effect in previousyear shall be disclosed and quantified. Any change in anaccounting estimate, which is reasonably expected to havea material effect in year subsequent to previous year, shall

also be disclosed.


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Can different Methods of Accounting beadopted for different BUSINESSES?


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If an assessee is carrying on more than one busineshe can follow Cash System for one business and

Mercantile (Accrual) System for the other business.

Yes


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Residential Status (Section 6)Chargeability of Income Tax depends uponResidential Status of Person

Persons included for the determination of residential statusare

IndividualHindu Undivided FamilyFirmAssociation of Persons or Body of IndividualCompanyLocal AuthorityArtificial Juridical Person

f d d l


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Status of Individual

Resident Non Residenti) He has been in India during the previous year for a totalperiod of 182 days or more, Or

ii) He has been in India during the 4 years immediatelypreceding the previous year for a total period of 365 days or more and has been in India for at least 60 days in the previousyear.

Resident and ordinarilyResident

Resident but not ordinarilyresident

He is a resident in any 2 out of the

last 10 years preceding the anyrelevant previous year

His total stay in India in the last 7

years preceding the relevantprevious year is730 days or more.

If any of the conditions are not satisfied

& AnyOne


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Exception to Basic Condition : -

(1) Indian citizens, who leave India in any previousyear as a member of the crew of an Indian ship orfor purposes of employment outside India, or(2) Indian citizen or person of Indian originengaged outside India in an employment or abusiness or profession or in any other vocation,who comes on a visit to India in any previous year

A person is said to be of Indianorigin if he or either of his parents oreither of his grandparents were bornin undivided India.

S f HUF


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Status of HUF

Resident Non Resident

Control & Management of affairs of HUF is wholly or partly inIndia.

Resident and ordinarilyResident &

He is a resident in any 2 outof the last 10 yearspreceding the relevant

(ii) His total stay in India inthe last 7 years precedingthe relevant previous year

Control & Management of affairs of HUF is wholly out side India.

Karta Satisfies bothcondition

St t f Fi AOP


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Status of Firm ,AOPLocal Authority & Artificial

Juridical Person


Control & Management of affairs of Firm/AOP orother person is wholly orpartly in India.

Control & Management of affairs of Firm/AOP orother person is whollyoutside India.

Firm , Association of Person & Other Personcan not be ordinarily resident or not

ordinarily resident


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Status of Company


IndianCompany

Control & Managementof affairs of Company iswholly outside India.

Company can not be ordinarily residentor not ordinarily resident

ForeignCompanyControl & Managementof affairs of Company iswholly in India.

Scope of Income In respect of Residential


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Scope of Income In respect of ResidentialStatus

For Chargeability of Tax Incidence

ParticularsResident &Ordinarily

Resident

Resident butOrdinarilyResident

NonResident

Income received in India

Deemed to be received in India

Accrued or Arisen in India

Deemed to accrueor arise in India

Income which accrues or arises

outside India from a businesscontrolled from or profession setup in India.

X

Other than Above X X

Mere Remittance (Not Income) X X X

d


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1) What Are You Doing?

Ans.: Business. (Pay Professional Tax)2) What Are You Doing In Business?

Ans.: Selling The Goods (Pay Sales Tax/VAT)

3) Where Are You Getting Goods?Ans.: From Other State/Abroad (Pay Central SalesTax, Custom Duty & Octroi

4) What Are You Getting In Selling Goods?Ans.: Profit (Pay Income Tax

5) Where You Manufacturing The Goods?Ans.: Factory ( Pay Excise Duty)

Tax Structure In India

T S I I di


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6) Do You Have Office / Warehouse/ Factory?

Ans.: Yes (Pay Municipal & Fire Tax)7) Where Are You Taking Your Client For Lunch &

Dinner?

Ans.: Hotel (Pay Food & Entertainment Tax)8) Have You Taken Or Given Any Service/S?

Ans.: Yes (Pay Service Tax)9) Do You Have Any Wealth?

Ans.: Yes (Pay Wealth Tax)10) Have You Purchased House?

Ans.: Yes (Pay Stamp Duty & Registration Fee)

T S I I di


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11) Any Additional Tax?

Ans.: Yes (Pay Educational, Additional Educational& Surcharge On All The Central Govt.'S Tax )

12) Delayed Any Time Paying Any Tax?

Ans.: Yes (Pay Interest & Penalty)


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Thank YouThank You

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Basic Concepts Residential Status