Unit 1 Introduction to Income Tax act 1961

Dnyansagar Arts and Commerce College, Balewadi Pune.45

Subject- Business Taxation 2019 pattern Sub.code- 405 Class: S.Y.BBA

NOTES

Prof. Shinde.P.S. www.dacc.edu.in

Unit 1 Introduction to Income Tax act 1961.

• Income

• Person

• Assessee

• Assessment year

• Pervious year

• Agricultural Income

• Exempted Income

• Residential Status of an Assessee

• Fringe benefit Tax

• Tax deducted at Source

• Capital and Revenue Income and expenditure.

Income [sec.2(24)]

Income is a periodically monetary return with some sort of regularity. It may be

recurring in nature. It may be broadly defined as the true increase in the amount of

income which comes to a person during a fixed period of time. Income includes all the

receipts in the form of cash /any kind.

Profits & Gains, Dividends,

Voluntary contributions received by a trust,

Perquisites in the hand of employee

special allowance or benefit

City compensatory allowance/dearness allowance

Any benefits or perquisites to a Director

Capital Gains



NOTES


Any benefits or perquisite to a representative assessee

Any sum chargeable Insurance profit Winnings from lottery

Employees contribution towards provident fund

As per definition the given list is not exhaustive. All sorts of receipts other than above

mentioned comes under the meaning of income.

Person

• The term “Person” Includes

• An individual

• A Hindu Undivided family(HUF)

• A company

• A firm

• An association of persons (AOP) or

• a body of individuals (BOI), whether incorporated or not

• A local authority; and

• Every artificial juridical person not felling within any of the preceding sub-

clauses are - An individual includes a natural person. I.e. a human being. It includes a

male, female, child or lunatic or idiot person also. However income of a minor child is

taxed in the hands of his parents, while income of a lunatic or idiot person is taxable in

the hands of a representative assessee in accordance with the law.

A Hindu undivided family is the normal condition of Hindu Society. The members of

Hindu Undivided Family are living in a state of union unless the contrary is stated. A

Hindu Undivided Family (H.U.F.) is a unit of assessment under the Income-Tax Act. It



NOTES


consists of all the persons lineally descended from a common ancestor. Hindu

Undivided Family consists of males and females.

A company is an artificial person.

Assessee

“Assessee” means a person by whom income tax or any other sum of money is payable

under the Act. It includes every person in respect of whom any proceeding under the

Act has been taken for the assessment of his income or loss or the amount of refund

due to him or a person who Is assessable in respect of income or loss of another

person or who it deemed to an assessee, or an assessee in default under any provision

of the Act. This term includes the following persons : Every person in respect of whom

any proceeding under this act has been taken for the assessment of his income or of

the income of any other person in respect of which he is assessable, or of the loss

sustained by him or by such other person, or of the amount of refund due to is or to

such other person. Every person who is deemed to be an assessee under any provision

this Act. Every person who is deemed to be an assessee in default under any provision

of this Act. According to the above definition, it is not necessary that the assessee

must pay tax on his own income. He may also be liable to pay tax on the income of

others,

e.g. the legal representative will be treated as an assessee for assessing the income of

the deceased person. A person, who is under a legal obligation to deduct tax at source

on payment of salary, dividend, interest etc. does not deduct tax or after deducting tax,

fails to deposit the same in the Govemment’s treasury, is treated as an assessee in

default. A person representing a non resident minor or lunatic Is treated as an assessee

for computing the income of that person.

Assessment year

Assessment Year means the period of 12 months commencing on the 1®* of April

immediately after the previous year [P.Y] Assessment is the year in which the income



NOTES


of the previous year is assessed to tax. The Income earned during a particular year is

assessed to tax in the following year

Previous year

Previous Year means the Financial Year immediately preceding the Assessment Year.

But in some cases Previous Year may not be of 12 months period as in the case of

business or profession, newly setup or source of income newly coming into existence.

The Previous Year shall be the year beginning the date of setting up of the business of

quotation or the date on which the new source of income comes into existence.

Residential Status of an Assesses

The Indian Income Tax is a tax on a person in relation to his income. Assessee i.e.,

persons by whom the tax is payable, are classified as: individual, Hindu Undivided

family; companies; Local Authorities; Firms and Other Association of Person.

They are further divided in to three categories with reference to their residence viz.

Residents and Ordinarily Residents;

(ii) Residents but not Ordinarily Residents; and

(iii) Non-residents in India.

The incidence of taxation varies with the residential status of an Assesses, while the

classification according to the legal status of assesses is necessary for the following

reasons : There are different rates of income tax for assesses of different legal status.

There are different maximum exemption limits in the case of different classes of

assesses, e.g. individuals. Hindu undivided families, companies, co-operative societies

etc. There are different provisions for allowances and investment. There are different

tests for residence. Basic conditions determining an individual is Resident: u/s 6(1) an

individual is said to be resident in India in any Previous Year, if he satisfies at least one

of the following basic conditions:



NOTES


He is in India in the Previous Year for a period if182 days or more or He is in India for a

period of 60 days or more during the Previous Year and 365 days or more during 4

years immediately preceding the Previous Year. Basic conditions to test as to when a

Resident

Individual is ordinarily resident in India

a resident individual is treated as “Resident and ordinarily resident” in India if he

satisfies the following 2 additional conditions:

He has been resident in India in at least 2 out of 10 Previous Year [according to basic

conditions noted above] immediately preceding the relevant Previous Year; and

He has been in India for a period of 730 days or more during 7 years immediately

preceding the relevant Previous Year. Resident but not ordinarily resident.

An individual becomes resident but not ordinarily resident in India in any of the

following circumstance:

If he satisfies at least one of the basic conditions but none of the additional conditions;

ii) If he satisfies at least one of the basic conditions and one of the two additional

conditions



NOTES


UNIT- II Heads of Income and computation of total income as per Income Tax 1961.

Synopsis

Income from Salary – Salient features, meaning of salary, Allowances and tax

Liability, Perquisites and their Valuation, Deductions from salary.

Income from House Property -Basis of Chargeability, Annual Value, Self occupied

and let out property, Deductions allowed

Income from Salary

Profits and Gains of Business and Professions-Definitions, Deductions expressly

allowed and disallowed.

Capital Gains-Chargeability-definitions-Cost of Improvement Short term and long

term gains-deductions.

Income from other sources-Chargeability - deductions - Amounts not deductible.

Income from Salary

1. Salary as defined u/s 17(1) of the Income Tax Act, 1961, which includes wages

any annuity or pension any gratuity, any fees, commission, perquisites or profits in lieu

of or in addition to any salary or wages any advance of salary, any payment received

by an employee in respect of any period of leave not availed by him

The portion of the annual accretion in any previous year to the balance of the credit of

an employee participating in a recognized provident fund to the extent it is taxable,

and transferred balance in a recognized provident fund to the extent it is taxable. Basis

of charge of salary income : Basis of charge u/s 15. As per Section 15 salary consists if

any salary due from on employer (or a former employer) to on assessee in the previous



NOTES


year, whether actually received or not . Any salary paid or allowed to him in the

previous year by or on behalf of an employer (or a former employer), though not due

or before it became due; and Any arrears of salary paid or allowed to him in the

previous year by or

on behalf of an employer (or a former employer), if not charged to income tax for an

earlier previous year.

ALLOWANCES:

Allowances is defined as a fixed quantity of money or other substance given regularly

in addition to salary for the purpose of meeting some particular requirement

connected with the services rendered by the employee or as compensation for

unusual conditions of that service. Under the Act, it is taxable under Section 15 on

‘due’ or ‘receipt’ basis, irrespective of the fact that it is paid in addition to or in lieu of

salary.

PERQUISITIES

The word ‘Perquisites’ in the ordinary sense means any casual emolument attached to

an office. Or position in addition to salary or wages. It may take various forms. It is a

gain or profit which incidentally arises from employment in addition to regular salary

or wages.

S.

No. Section Particulars Taxability/Exemption

1 17 Basic salary Fully taxable

2 17 Dearness

Allowance Fully taxable

3 17 Bonus

fees or commission

Fully taxable



NOTES


Taxability of various components of salary

Section Particulars Taxability/Exemption 10(14) Children education allowance Up to Rs. 100 per month per

child up to a maximum of 2 children is exempt

10(14) Hostel expenditure allowance Up to Rs. 300 per month per child up to a maximum of 2

children is Exempt

10(14) Transport Allowance granted to an employee to meet

expenditure for the purpose of commuting between place of residence and place of duty

Rs. 3,200 per month granted to an employee, who is blind

or deaf and dumb or orthopedically

handicapped with disability of lower

extremities

House rent allowance

10 (13A) read

with Rule 2A

Least of the following is exempt:

a) Actual HRA Received

House rent

allowance

b) 40 % of Salary (50%, if house situated in Mumbai, Calcutta,

Delhi or Chennai)

c) Rent paid minus 10% of salary

* Salary = Basic + DA (if part of retirement benefit) + Turnover based

Commission



NOTES


LEAVE SALARY ENCASHMENT

As per service contract and discipline, normally, every employee is allowed certain

period of leave (with pay) every year. Such leave may be availed during the year or

accumulated by the employee. The accumulated leave lying to the credit of an

employee may be availed subsequently or encashed. When an employee receives an

amount for waiving leave lying to his credit, such amount is known as leave salary

encashment.

Case A: Leave salary received during continuation of service Leave salary during

continuation of service is fully taxable in the case of the Government employee as well

as other employees [Sec. 17(1)(va)].

Case B: Leave salary received by Government employee on termination of service At

the time of termination of service, leave salary received by the Central or State

Government employee is fully exempted u/s 10(10AA)(i).

Tax point: Government employee here does not include employee of local authority or

public sector undertaking or foreign Government employee.

Case C: Leave salary received by non-Government employee on termination of service

At the time of termination of service, leave salary received by a non-Government

employee (including employee of foreign Government, local authority, public sector

undertaking) is exempted to the minimum of the following u/s10(10AA)(ii):

a) Actual amount received as leave salary

b) ` 3,00,000/-

c) 10 × Average salary p.m.

d) To the maximum of 30 days (normally taken as 1 month) average salary1 for every

completed year of service2, subject to deduction for actual leave availed during the

tenure of service.



NOTES


Academically: [{(1 × completed year of service) – leave actually taken in terms of

month} × average salary p.m.]

1. Average salary means Basic + DA+ Commission (as a fixed percentage on turnover)

being last 10 months average salary ending on the date of retirement or

superannuation. (e.g. if an employee retires on 18/11/2018 then 10 months average

salary shall be a period starting from 19th Jan’ 2018 and ending on 18th Nov’ 2018).

2. If DA is not forming a part of retirement benefit then the same shall not be included

in salary for the above purpose. However, DA itself shall be fully taxable.

While calculating completed year of service, ignore any fraction of the year. E.g. 10

years 9 months shall be taken as 10 years.

Notes

a) Leave encashment received from more than one employer: Where leave

encashment is received from more than one employer in the same previous year, the

aggregate amount exempt from tax shall not exceed the statutory deduction i.e. `

3,00,000.

b) Earlier deduction claimed for leave encashment: While claiming the statutory

amount (i.e. `3,00,000) any deduction claimed earlier as leave encashment shall be

reduced from ` 3,00,000.

Section Particulars Taxability/Exemption

10(14) City Compensatory Allowance Fully Taxable

10(14) Fixed Medical Allowance Fully Taxable

10(14) Tiffin, Lunch, Dinner or

Refreshment Allowance

Fully Taxable

10(14) Servant Allowance Fully Taxable



NOTES


10(14) Project Allowance Fully Taxable

10(14) Overtime Allowance Fully Taxable

10(14) Telephone Allowance Fully Taxable

10(14) Holiday Allowance Fully Taxable

10(14) Any Other Cash Allowance Fully Taxable

PERQUISITES

Section Particulars Taxability/Exemption 17(2)(i)/(ii) read with Rule 3(1) Rent free unfurnished

accommodation provided to Central and State Government employees

License fees determined in accordance with rules framed by Government for allotment of houses shall be deemed to be the taxable value of perquisites.

17(2)(i)/(ii) read with Rule 3(1) Unfurnished rent free accommodation provided to other employees

Taxable value of perquisites

i. If house property is owned by the employer, the taxable value of perquisite shall be:

A. 15% of salary, if population of city where accommodation is provided exceeds 25 lakhs

B. 10% of salary, if population of city where accommodation is provided exceeds 10 lakhs but does not exceed 25 lakhs

ii. If house property is taken on lease or rent by the employer, the taxable value of perquisite shall be:



NOTES


i. Lease rent paid or payable by the employer or 15% of the salary, whichever is lower

DECUCTIONS FROM SALARY

S. No.

Section Particulars Taxability/Exemption

1 16(ia) Standard Deduction Rs. 50,000 or the amount of salary, whichever is lower (Any salaried person & pensioners)

2 16 (ii) Entertainment Allowance received by the Government employees (Fully taxable in case of other employees)

Least of the following is exempt from tax:

a) Rs 5,000 b) 1/5th of salary (excluding any

allowance, benefits or other perquisite) c) Actual entertainment allowance

received 3 16(iii) Employment Tax/Professional Tax. Amount actually paid during the year.

However, if professional tax is paid by the employer on behalf of its employee than it is first included in the salary of the employee as a perquisite and then same amount is allowed as deduction.

Income from House Property

Income chargeable to tax under the head “house property” Rental income from a

property being building or land appurtenant thereto of which the taxpayer is owner is

charged to tax under the head “Income from house property”.

Rental income from sub-letting Rental income in the hands of owner is charged to tax

under the head “Income from house property”.

Rental income from a shop Rental income from a property, being building or land

appurtenant thereto, of which the taxpayer is the owner is charged to tax under the

head “Income from house property”.



NOTES


Computation of gross annual value of a let out property

Gross annual value of a property which is let-out throughout the year is determined in

the following manner:

Step 1: Compute reasonable expected rent of the property (manner of computation is

discussed in later part)

Step 2: Compute actual rent of the property (manner of computation is discussed in

later part). Step 3: Compute gross annual value.

Profits and Gains of Business and Professions

Business is an activity of purchase and sell of goods with the intention of making profit.

Profession is an occupation requiring intellectual skill. E.g. Doctor, Lawyer etc. Vocation

is an activity, which requires a special skill, which is used to earn income. e.g. Painter,

Singer etc. For income tax purpose there is no difference between business income,

profession income and vocation income.

Section 2(13): Business includes any trade, commerce or manufacture or any

adventure or concern in the nature of trade, commerce or manufacture.

Explanation: ‐ Thus business is any activity carried out with the intention to earn profit,

whether such an activity is continuous or temporary is immaterial. In determining

whether a particular transaction is an adventure in the nature of trade or not, total

impression and effect of all relevant facts and circumstances of the transaction have to

be seen. To bring a transaction within the term “business”, the transaction must be a

“trade” or in the nature of “trade”. Hence everything depends upon the facts and

circumstances of the case. E.g. A person making investment of surplus funds in shares

or debentures cannot be deemed to be carrying on the business of trading in shares

although occasionally he may be selling “some” shares or debentures and making gains

thereon.



NOTES


METHODS OF COMPUTING TAXABLE INCOME

1.Gross Sales or Gross fees as the case may be are to be taken as the base if Receipt

and Payment A/c or cash Book is given. From this Gross income expenses which are

specifically allowed by the income tax act are deducted to arrive at taxable income.

2.If profit & loss a/c or income & expenditure a/c is given Net Profit or (Surplus) is

taken as the base and then following adjustments are made: ‐

1) Expenses, which are debited, to profit & loss a/c, but disallowed by the Income Tax

Act and either fully or partially are added back.

2) Expenses, which are not debited, to profit & loss a/c but which are allowed by the

Income Tax Act are deducted.

3) Income that is credited to profit & loss a/c but not taxable at all or taxable under

some different head is to be deducted.

4) Income that is not credited to profit & loss a/c, but which is chargeable to tax as

business income is to be added.

Under Section 28 following are the income chargeable to tax under the head Profits

or Gains from Business or profession: ‐

1) Profits and Gains of any business or profession that is carried on by the assessee at

any time during the previous year.

2) Any compensation or other payment due to or received by an assessee for loss of

agency due to termination or modification of terms.

3) Income derived by a trade, professional or a similar association for specific services

performed for its members.

4) Any profit on sale of a license granted under Imports (controls) Order 1955 made

under Imports & Exports (control) Act of 1947.



NOTES


5) Any cash assistance (by whatever name called) received or receivable against

exports under any scheme of Government of India.

6) Any duty of customs or excise repaid or repayable as drawback to any person

against exports under the Customs and Central Excise Duty’s Drawback Rules 1971.

7) Any profit on the transfer of the Duty entitlement pass book scheme under export

import policy.

8) Any profit on the transfer of the Duty free replenishment certificate under export

import policy.

9) The value of any benefit or perquisite whether convertible into money or not arising

from business or exercise of a profession e.g. A gift received by the lawyer from his

client.

10) Any interest, salary, bonus, commission or remuneration due to or received by

partner of a firm from such firm.

11) Sum received or receivable in cash or in kind under an agreement for not carrying

out any activity in relation to any business or not sharing any know how, patent,

copyright, trade mark, license franchise or any other business or commercial right of

similar nature or information or technique likely to assist the manufacture or

processing of goods or provision of services.

12) Any sum received including bonus under Keyman Insurance Policy.

13) Any sum received (or receivable) in cash or kind, on account of any capital asset

(other than land or goodwill or financial instrument) being demolished, destroyed,

discarded or transferred, if the whole of the expenditure on such capital asset has been

allowed as a deduction under section 35AD.

14) Income from a speculative business.



NOTES


DEDUCTIONS FOR EXPENSES SPECIFICALLY ALLOWED SECTION 30 TO SECTION 43D

1. Rent, rates, taxes, repairs and insurance of building (Section 30):

1) If assessee has occupied the premises as a tenant, rent of the premises and if he has

agreed to bear cost of repairs, such cost is allowed as deduction, provided it is not of

capital nature.

2) If assessee has occupied premises as the owner; repairs, land revenue, local taxes,

insurance premium etc. are allowed as deduction. However, no expenditure in form of

capital expenditure is allowed

2. Repairs & Insurance of machinery, Plant & Furniture (Sec.31): Amount paid on

account of repairs and insurance premium against risk of damage in respect of

machinery, plant & furniture are allowed as deduction provided they are not of capital

nature.

3. Depreciation u/s 32: Under Section 32 depreciation on assets is allowed as

deduction while computing income from business or profession. To claim this

deduction following conditions should be satisfied:

1) Assessee should be owner of the asset.

2) Asset must be used for the business.

3) Such use must be in the previous year. Depreciation is allowed not on individual

asset items, but on block of assets under following categories: ‐

1) Buildings

2) Plant & Machinery

3) Furniture

4) Intangible Assets acquired after March 31, 1998 such as know‐ how, Patents,

Trademarks, licenses, franchises or any other business or commercial rights of similar



NOTES


nature. The term plant includes ships, vehicles, books, scientific apparatus and surgical

equipment used for the business but excludes tea bushes or live stock. If any asset

falling in block of assets is acquired during the year and put to use during the previous

year for less than 180 days depreciation on such asset shall be restricted to 50% of the

normal depreciation. No depreciation is allowed on motor car which is manufactured

outside India and acquired on or after 1st March 1975 but before 1st April 2001

CAPITAL GAIN (Sec. 45 to 55 A)

1.1 Meaning: Any profit or gain arising from transfer/sale of a capital asset is a

capital gain. This gain or profit is shall be charged to tax in the year in which transfer of

capital assets takes place.

No capital gain is applicable when an asset is inherited because there is no 'sale', only a

transfer. However, if this asset is sold by the person who inherits it, capital gains tax

will be applicable. The Income Tax Act has specifically exempted assets received as gifts

by way of an inheritance or will.

1.2 Conditions:

• There must be a capital asset

• The transfer must be of capital asset

• The transfer must have been taken place during the previous year.

• The transfer of such capital asset must give rise to profit or gain

1.3 Transfer Sec. 2 (47): It includes a sale, exchange or relinquishment of the asset

or extinguishment if any right or the compulsory acquisition under the law or

conversion of the asset in to stock in trade

The following are not consider as transfer (Sec 49(1))

• Transfer of asset in a scheme of amalgamation



NOTES


• Transfer of agricultural land before 1/4/1970

• Transfer of debenture or bonds into shares

• Transfer of assets in kind at the time of liquidation

• Transfer of asset by a parent company to the own subsidiary company

• Transfer of asset under the gift or will

• Transfer of capital asset at the time of partition of HUF

1.4 Capital Assets Sec. 2(14): property any kind held be assessee whether connected

or not with his business or profession. It includes all kinds of property, movable or

immovable, tangible or intangible. For examples land, building, house property,

vehicles, patents, trademarks, leasehold rights, machinery, jewellery, shares,

debentures, units, mutual funds, securities held by FII as per SEBI etc.

The following are not considered capital assets:

• Stock in trade: Any stocks or consumables or raw material held for the purpose

of Business or Profession

• Personal effect: Personal goods such as wearing apparel, car, scooter, TV,

refrigerator, musical instruments, generator, furniture etc held for personal use.

• 6½% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or National Defence Gold Bonds,

1980 issued by the Central Government

• Special Bearer Bonds 1991

• Gold Deposit Bond issued under the Gold Deposit Scheme, 1999



NOTES


• Agricultural land in a rural in India area: definition of rural area (from AY14-15)

Any area which is within the jurisdiction of a municipality or

cantonment or board

having a population of less than 10,000 is considered Rural Area,

If situated outside the limit of municipality etc distance measured..

Being more than two kilometres from the local limits of any municipality, having

population more than 10000 but not exceeding 1,00,000 or

Being than six kilometres from the local limit of any municipality, having

population more than 1,00,000 but not exceeding 10,00,000

Being than Eight kilometres from the local limit of any municipality, having

population more than 10,00,000

1.5 Types of Capital Asset

For determining the nature of

capital assets, the period of

holding shall be counted from the

date of purchase to the date of

sale of capital asset by the

assessee.

Short Term:

1. Financial Asset: It is held for

less than 12 months or 1 year like

securities, bonds, shares mutual

funds

2. Other Asset: It is held for less

than 36 months or 3 year like

Jewellery etc. & Less than 24

months for immovable properties

like land ,building,

house property



NOTES


Long Term:

1. Financial Asset: It is held for

more than 12 months or 1 year

2. Other Asset: It is held for more

than 36 months or 3 year & more

than 24 months for immovable

properties like land

,building, house property

Terms used:

1) Full value consideration/Sales: The consideration received or to be received

by the seller in exchange of his assets, which he has transferred. Capital

gains are chargeable to tax in the year of transfer, even if no consideration

has been received.

2) Cost of acquisition: The value for which the capital asset was acquired by

the seller.

3) Cost of improvement: Expenses incurred to make improvements to the

capital asset by the seller. Eg. Alteration, repairs etc. Note that

improvements made before April 1, 2001 is never taken into consideration.

4) Selling/realization /expenditure in connection with such transfer: Eg.

Brokerage, commission, cost of stamp paper, registration, travelling, legal

expenses etc incurred for transferring the capital assets.



NOTES


Calculation of Capital Gains

Particulars Rs Rs

Value Consideration/Sale

• Less: Selling Expenses/expenditure in connection with such

transfer

Net sales consideration

• Less: Indexed Cost of Acquisition

• Less: Index cost of improvement

Long term capital Gain Less: Exemption U/S 54, 54B, 54D, 54EC,

54F, 54G, 54GA

Xx xx

Xx

X

Xx

Xx xx xx

Taxable Long term Capital Gain Xx

Calculation of Capital Gains for Depreciable Assets

Particulars Rs Rs



transfer


• Less: Written Down Value as on 01/04/20

• Less: cost of new assets purchased during the year

Xx

xx

Xx

X

Xx

Xx



NOTES


Taxable Capital Gain Xx

Calculation of Capital Gains for Self generated Assets

Particulars Rs Rs



transfer


capital Gain

Xx

X

Xx xx

Note: in case self generated assets e.g. goodwill cost of acquisition is nil

1.12 Indexed cost of acquisition/improvement

a. Indexed cost of acquisition (ICOA) / Cost inflation index (CII): Means inflating the

cost of an asset acquired to the present value. i.e. the year in which the asset is

transferred. Indexation benefits are available only long term capital assets. However

the Indexation benefit is not available in case of debentures even though it is long term

asset.

Calculation

If the assessee acquired the property before 1/4/2001

ICOA= ×CII of the year in which asset sold

If the assessee acquired the property After 1/4/2001

ICOA= ×CII the year in which asset sold



NOTES


b. Indexed cost of improvement: the year in which the improvement took place

and cost inflation index for the year in which the asset is transferred. For short term

capital asset the actual cost of improvement is allowed as deduction, where in case of

long term capital asset it will be indexed and allowed as deduction

If the improvement incurred before 1/4/2001 should be ignored

If the improvement incurred After 1/4/2001

×CII the year in which asset sold

c. Why is cost of acquisition and improvement indexed? Indexation, done by

applying CII (cost inflation index), is made to adjust for inflation over the years. This

increases one's cost base and lowers the capital gains.

1.14 Capital Gains exempt from Tax

Capital gain on transfer of units of US64 ( sec. 10(33)

Capital gain on compulsory acquisition of agricultural land of an Individual or

Hindu undivided family which is not situated in rural area and the land was used for

agricultural purpose by the assessee at least two years immediately preceding

compulsory acquisition (sec. 10(37)



NOTES


U/S Allowed Assessee

Conditions to be satisfied Quantum of exemption

54

Individual HUF

1. Transfer/sale of a “residential house Property” (RHP) (i) Income of which is chargeable under House Property. (ii) It must be a long-term capital asset.

2. Investment/Purchase of another “RHP”

(i) The seller (Assessee) should purchase another residential house either one (1) year before the date of transfer

(ii) Two (2) years after the date of sale/transfer.

(iii) In case constructing a new house within three (3) years from the date of sale/transfer.

(iv) In case of compulsory acquisition, the period of acquisition or construction will be determined from the date of receipt of compensation.

3. The new residential house should be in India. Assessee cannot buy a residential house abroad for claim exempt.

The above conditions are cumulative. Hence, even if one condition is not fulfilled, then the seller cannot avail the benefit of the exemption under Section 54

Actual amount invested in new asset + deposited in CG a/c in Bank

or The capital gains whichever

is less is exempt

54 B

INDIVIDUAL

1 Transfer should be of “agricultural land”. (i) It must have been used in the 2 years immediately preceding the date of transfer for agricultural purposes either by the assessee or his parent.

2 Investment in another “agricultural land” Another agricultural land should be

purchased within 2 years after the date of transfer.

Actual amount invested in new asset+ deposited in CG a/c

or The capital gains

whichever is less

Any 1. Transfer/ compulsory acquisition of an



NOTES


54D

Any aassessee

“industrial undertaking”, (i) The property should be land and

building forming part of an industrial undertaking.

(ii) The assessee must have been used the property for the purpose of the business in the 2 years immediately preceding the date of transfer

2. Investment in “new industrial undertaking” Within a period of 3 years from the date

acquisition should be purchased or constructed or set up new industries


or The capital gains Whi whichever is less

54EC

Any assessee

1. Transfer of any long term capital assets (i) Transfer of any long- term capital asset

2. Investment in long term bonds issued by NBARD or NHAl or RECL (i) Within a period of 6 months from the

date of transfer, the CG must invest in specified assets i.e. bonds redeemable after 3 years issued by NBARD or NHAl or RECL.

Maximum amount which can be invested in any FY cannot exceed Rs. 50,00,000


or The c capitals gain or maximum

50 lakhs whichever is less

then exemption would be available as

computed in Sec. 54F

54F Individual HUF

1. Transfer of Long term capital assets “other than a residential house ”(RHP) (i) the asset transferred is a long term

capital asset other than a residential HP

2. Invested in residential house property (RHP) (ii) within a period of one (1) year before

the date of transfer or (iii) Two (2) years after the date of transfer

or (iv) Constructed within a period of 3

years from the date of transfer.

If the cost of the new residential house is greater than the net consideration received then the whole of the capital gain is



NOTES


(v) this exemption is not available, on the date of transfer, the assessee owns any HP other

than the new RHP (asset)

exempted Otherwise,

Exemption = ×CG

54 G

Any assessee

1. Transfer/Shifting of industrial undertaking from urban area to Rural area (i) Transfer of Machinery, plant,

building, or land used for the business of an industrial undertaking situated in an urban area

2. Investment in another Industrial undertaking in Rural area (i) Within a period of 1 year before the

date of transfer or 3 years after the date of transfer construct building and completed shifting to any new rural area

The cost of the new assets and expenses incurred for shifting are greater. i.e

Amount invested or

capital gain whichever is less

54 GA Any assesse

e

1. Transfer/Shifting of industrial undertaking from urban area to Special Economic Zone (i) Machinery, plant, building, or land

used for the business of an industrial undertaking situated in an urban area should have been transferred.

2. Invested to Special economic Zone (SEZ) (i) Shifting to any Special Economic

Zone whether developed in any urban area or any other area.

(ii) Within a period of 1 year before the date of transfer or

3 years after the date of transferor to the new SEZ area

The cost of the new assets and expenses incurred for shifting are greater. i.e Amount invested or

capital gain whichever is less



NOTES




NOTES


UNIT-III Computation of Total Taxable Income & Filing of Online ITR.

Synopsis

Gross total Income

Deductions u/s- 80C, 80ccc to 80 U

Income Tax calculation

Rates applicable for respective Assessment year

Education cess.

Gross total Income

During a specified period. According to Section 14 of the Income Tax Act 1961, the

income of a person or an assessee can be categorised under these five heads.

Gross income for an individual consists of income from wages and salary plus other

forms of income, including pensions, alimony, interest, dividends, and rental income.

Gross income for a business, also known as gross profit or gross margin, includes the

gross revenue of the firm less cost of goods sold, but it does not include all of the other

costs involved in running the business.

Individual gross income is part of an income tax return and—after certain deductions

and exemptions—becomes adjusted gross income and then taxable income.

DEDUCTIONS/EXEMPTIONS

Deductions available to senior citizens in respect of health insurance premium and

medical treatment [80D & 80DDB]



NOTES


Section 80D, inter-alia, provides that a deduction upto Rs 30,000/- shall be allowed to

an assessee, being an individual or a Hindu undivided family, in respect of payments

towards annual premium on health insurance policy, or preventive health check-up, of

a senior citizen, or medical expenditure in respect of very senior citizen. It is proposed

to amend section 80D so as to raise this monetary limit of deduction from Rs 30,000/-

to Rs 50,000/.

Section 80DDB of the Act, inter-alia, provide that a deduction is available to an

individual and Hindu undivided family with regard to amount paid for medical

treatment of specified diseases in respect of very senior citizen up to Rs 80,000/- and in

case of senior citizens up to Rs 60,000/- subject to

specified conditions. It is proposed to amend the provisions of section 80DDB of the

Act so as to raise this monetary limit of deduction to Rs 1,00,000/- for both senior

citizens and very senior citizens. Further, it is proposed to omit the word very senior

citizen.

Further, u/s 80D, in case of single premium health insurance policies having cover of

more than one year, it is proposed that the deduction shall be allowed on

proportionate basis for the number of years for which health insurance cover is

provided, subject to the specified monetary limit.

These amendments will take effect, from 1st April, 2019.

Deduction u/s 80TTB for interest income

is proposed to insert a new section 80TTB so as to allow a deduction upto Rs. 50,000/-

in respect of interest come from deposits held by senior citizens. However, no

deduction under section 80TTA shall be allowed in these cases.

This amendment will take effect from 1st April, 2019.

Deduction in respect of income of Farm Producer Companies [Sec.80P]



NOTES


100% deduction u/s 80Pis proposed to be extended to Farm Producer Companies

(FPC), having a total turnover upto Rs 100 Crore, whose gross total income includes any

income from-

i. the marketing of agricultural produce grown by its members, or

ii. the purchase of agricultural implements, seeds, livestock or other articles intended

for agriculture for the purpose of supplying them to its members, or

iii. the processing of the agricultural produce of its members

The benefit shall be available for a period of five years from the financial year 2018-19.

This amendment will take effect from 1st April, 2019.

Measures to promote start-ups [Sec.80-IAC]

i. The benefit of deduction u/s 80-IAC would also be available to start ups incorporated

on or after the 1stday of April 2019 but before the1stday of April, 2021;

ii. The requirement of the turnover not exceeding Rs 25 Crore would apply to seven

previous years commencing from the date of incorporation;

iii. The definition of eligible business has been expanded to provide that the benefit

would be available if it is engaged in innovation, development or improvement of

products or processes or services, or a scalable business model with a high potential of

employment generation or wealth creation.

The amendment will take effect from 1st April, 2018.

Incentive for employment generation [Sec. 80-JJAA]

- At present, a deduction of 30% is allowed u/s 80-JJAA in addition to normal deduction

of 100% in respect of emoluments paid to eligible new employees who have been

employed for a minimum period of 240 days during the year. However, the minimum

period of employment is relaxed to 150 days in the case of apparel industry. In order to



NOTES


encourage creation of new employment, it is proposed to extend this relaxation to

footwear and leather industry.

Further, it is also proposed to rationalize this deduction of 30% by allowing the benefit

for a new employee who is employed for less than the minimum period during the first

year but continues to remain employed for the minimum period in subsequent year.

This amendment will take effect, from 1st April, 2019.

Extending the benefit of tax-free withdrawal from NPS to non-employee subscribers

[Sec.10(12A)]

Under Sec 10(12A), an employee contributing to the NPS is allowed an exemption in

respect of 40% of the total amount payable to him on closure of his account or on his

opting out. However, this option is not available to non-employee subscribers. In order

to provide a level playing field, it is proposed to amend Sec 10(12A) to extend the said

benefit to all subscribers w.e.f. AY 2019-20.

Deductions in respect of certain incomes not to be allowed unless return is filed by the

due date [Sec.80AC]

- Sec 80AC currently provides that no deduction would be admissible u/s 80IA,

80IB, 80IC, 80ID or 80IE unless the return of income by the assessee is furnished on or

before the due date specified u/s 139(1). This burden is not cast upon assesses

claiming deductions under several other similar provisions.

- Accordingly, it is proposed to extend scope of Sec 80AC to provide that the

benefit of deduction under the entire class of deductions under the heading “C.—

Deductions in respect of certain incomes”

like Sec 80P [Deduction in respect of income of Co-operative Societies], Sec 80RRB

[Deduction in respect of royalty on patents]etc. shall not be allowed unless the return

of income is filed by the due date.



NOTES


Amendment to take effect from AY 2018-19

Income Tax Slab Rate for AY 2020-21 for Individuals

Individual (resident or non-resident), who is of the age of less than 60 years on the last

day of the relevant previous year:

Net income range Income-Tax rate

Up to Rs. 2,50,000 Nil

Rs. 2,50,000- Rs. 5,00,000 5%

Rs. 5,00,000- Rs. 10,00,000 20%

Above Rs. 10,00,000 30%

Resident senior citizen, i.e., every individual, being a resident in India, who is of the age

of 60 years or more but less than 80 years at any time during the previous year:



Rs. 3,00,000 – Rs. 5,00,000 5%

Rs. 5,00,000- Rs. 10,00,000 20%

Above Rs. 10,00,000 30%





NOTES


Rs. 5,00,000- Rs. 10,00,000 20%

Above Rs. 10,00,000 30%

Resident super senior citizen, i.e., every individual, being a resident in India, who is of

the age of 80 years or more at any time during the previous year:

Surcharge: - 10% of income tax where total income exceeds Rs. 50,00,000.

15% of income tax where total income exceeds Rs. 1,00,00,000.

Health and Education cess : - 4% of income tax and surcharge.

Note: - A resident individual is entitled for rebate under section 87A if his total income

does not exceed Rs. 5,00,000. The amount of rebate shall be 100% of income-tax or Rs.

12,500, whichever is less.



NOTES


UNIT-IV Other important aspects of Income tax act 1961

Synopsis

Tax deducted at source

Return of Income

Advance payment of Tax

Methods of payment of tax

Forms of Return

Refund of Tax (Theory)

Tax deducted at source

Deduction in respect of interest income to senior citizen [Sec.194A]

It is proposed to amend section 194A so as to raise the threshold for deduction of tax

at source on interest income for senior citizens from Rs 10,000/- to Rs 50,000/-. This

amendment will take effect, from 1st April, 2018.

TDS on 7.75% GOI Savings (Taxable) Bonds, 2018 [Sec.193]

Government has decided to discontinue the existing 8% Savings (Taxable) Bonds, 2003

with a new 7.75% GOI Savings (Taxable) Bonds, 2018.The interest received under the

new bonds will continue to be taxable like in the case of the 2003 bonds.



NOTES


Return of Income

ITR are forms that are mandatorily filled by individuals whose annual income greater

than a pre-set threshold limit set by the Finance Department.

These forms provides the details of individual’s gross income from various sources and

the tax paid by the individual taxpayer on the gross income. It also provides the details

of refund claims by the assesses as per the rules set by the Finance and IT Department.

In simple terms, ITR forms are taxpayers statement detailing his/her earnings Salary ,

interest, dividends, capital gains, or other profits, the total tax paid on earnings and the

appropriate refunds to be repaid to him/her by the Government.

Form ITR-1

Also known as the Sahaj Form, ITR-1 has to be filed by individual taxpayers alone. ITR- 1

is filed by taxpayer’s having income up to Rs 50,00,000 from below mentioned

sources:-

If the source of Income is Salary or Pension .

If the source of income is from one housing property(the case where losses of previous

years are carried forward are not included in this ITR).

Individuals with income sources like fixed Deposits, Investments, Shares etc ITR-1 can

not be filed if taxpayer is a joint owner in House Property.

Individuals whose net agriculture income is less than Rs 5,000.

Income from other sources (excluding winning from lottery and income from race

horses, income tax under section 115BBDA or Income of nature referred to in section

115BBE)

If the clubbed income of minor or wife is shown, then ITR-1 can be filed only in case

their source of income as mentioned in the above points.



NOTES


ITR-1 is not valid for assessee who has deposited more than Rs 1 Crore in Bank Account

or has incurred Rs 2 Lakh/ Rs 1 Lakh in foreign travel/ electricity expenses.

Form ITR-2

This form was introduced during the assessment year 2015-16 for use by Hindu

Undivided Family (HUF) or any individual. The following individuals/taxpayers can f ile I

TR-2 Form.

Those individuals who is not eligible to file ITR-1 and

Those taxpayer having no income under the head “profits or gains of business or

profession”.

Form ITR-3

ITR 3 Form is for use by a Hindu Undivided Family or an individual

Who claims income under the head “profits or gains of business or profession”

Who work as a partner in a firm.

claims income under the head “profits or gains of business or profession”. Who has

presumptive income of greater than Rs 50,00,000

Form ITR-4

Also known as Sugam, ITR 4 Form is for use by HUF/ individual / Partnership Firm

whose total income consist of :-

Business income evaluated in reference with special provisions mentioned in section

44AD and section 44AE of the Act for computation of business income; or

Professional income evaluated in reference to special provisions of sections 44ADA; or

ITR-4 can not be filed if taxpayer is a joint owner in House Property.

Salary/ Pension; or



NOTES


Income from One House Property (excluding cases where a loss is brought forward

from previous years); or

Income from other sources (excluding windfalls like lotteries or horse racing)

Form ITR-5

ITR-5 is for firms, LLPs, AOPs (Association of persons) and BOIs (Body of Individuals).

Further, it is also meant for an artificial juridical person referred to in section 2(31)(vii),

cooperative society and local authority.

Advance payment of Tax

What is Advance Tax?

Advance tax means income tax should be paid in advance instead of lump sum

Who should pay Advance Tax?

Salaried, freelancers and businesses– If your total tax liability is Rs 10,000 or more in a

financial year you have to pay advance tax. Advance tax applies to all taxpayers,

Due Date Advance Tax Payable

On or before 15th June 15% of advance tax

On or before 15th September 45% of advance tax less advance tax already paid

On or before 15th December 75% of advance tax less advance tax already paid

On or before 15th March 100% of advance tax less advance tax already paid

salaried, freelancers, and businesses. Senior citizens, who are 60 years or older, and do

not run a business, are exempt from paying advance tax.

Presumptive income for Businesses–The taxpayers who have opted for presumptive

taxation scheme under section 44AD have to pay the whole amount of their advance



NOTES


tax in one instalment on or before 15 March. They also have an option to pay all of

their tax dues by 31 March.

Presumptive income for Professionals– Independent professionals such as doctors,

lawyers, architects etc. come under the presumptive scheme under section 44ADA.

They have to pay the whole of their advance tax liability in one instalment on or before

15 March. They can also pay the entire amount by 31 March.

Due Dates for payment of Advance Tax

For taxpayers who have opted for Presumptive Taxation Scheme under section 44AD &

44ADA – Business Income

Due Date Advance Tax Payable

On or before 15th March 100% of advance tax

Refund of Tax

A tax refund is a reimbursement to a taxpayer of any excess amount paid to the federal

government or a state government. Taxpayers tend to look at a refund as a bonus or a

stroke of luck, but it really represents an interest-free loan that a taxpayer makes to

the government.

Income Tax Authorities

There are seven income tax authorities, namely,

(1) Central Board of Direct Tax

(2) Directors of Inspection

(3) Commissioners and Additional Commissioners

(4) Appellate Assistant Commissioners

(5) Inspecting Assistant Commissioners



NOTES


(6) Income-tax Officers (7) Income-tax Inspectors

Organization structure of Income Tax Authorities

Administrative [ Income Tax Authorities] [ Sec. 116]

The Central Board of Direct Taxes constituted under the Central Boards of Revenue

Act, 1963 (54 of 1963), Directors-General of Income-tax or Chief Commissioners of

Income-tax,

Directors of Income-tax or Commissioners of Income-tax or Commissioners of Income-

tax (Appeals),

(cc) Additional Directors of Income-tax or Additional Commissioners of Income-tax or

Additional Commissioners of Income-tax (Appeals),

(cca) Joint Directors of Income-tax or Joint Commissioners of Income-tax.

Deputy Directors of Income-tax or Deputy Commissioners of Income-tax or Deputy

Commissioners of Income-tax (Appeals),

Assistant Directors of Income-tax or Assistant Commissioners of Income-tax, Income-

tax Officers, Tax Recovery Officers, Inspectors of Income-tax.

(ii) Assessing Officer [ Sec. 2(7A)]

"Assessing Officer" means the Assistant Commissioner or Deputy Commissioner or

Assistant Director or Deputy Director or the Income-tax Officer who is vested with the

relevant jurisdiction by virtue of directions or orders issued under sub-section (1) or

sub- section (2) of section 120 or any other provision of this Act, and the Joint

Commissioner or Joint Director who is directed under clause (b) of sub-section (4) of

that section to exercise or perform all or any of the powers and functions conferred on,

or assigned to, an Assessing Officer under this Act;

(iii) Appointment of Income-Tax Authorities [ Sec. 117]



NOTES


Power of Central Government: The Central Government may appoint such persons as it

thinks fit to be income-tax authorities. It kept with itself the powers to appoint

authorities upto and above rank of an Assistant Commissioner of Income-Tax [ Sec. 117

(1)]

Power of the Board and Other Higher Authorities : Subject to the rules and orders of

the Central Government regulating the conditions of service of persons in public

services and posts, the Central Government may authorize the Board, or a Director-

General, a Chief Commissioner or a Director or a Commissioner to appoint income-tax

authorities below the rank of an Assistant Commissioner or Deputy Commissioner.

[ Sec. 117 (2)]

Power to appoint Executive and Ministerial Staff : Subject to the rules and orders of the

Central Government regulating the conditions of service of persons in public services

and posts, an income-tax authority authorized in this behalf by the Board may appoint

such executive or ministerial staff as may be necessary to assist it in the execution of its

functions.

(iv) Control of Income-Tax Authorities [ Sec. 118]

The Board may, by notification in the Official Gazette, direct that any income-tax

authority or authorities specified in the notification shall be subordinate to such other

income-tax authority or authorities as may be specified in such notification.

Central board of direct tax.

The Central Board of Direct Taxes is a statutory authority functioning under the Central

Board of Revenue Act, 1963. The officials of the Board in their ex-officio capacity also

function as a Division of the Ministry dealing with matters relating to levy and

collection of direct taxes.

Functions and Organisation



NOTES


The Central Board of Direct Taxes is a statutory authority functioning under the Central

Board of Revenue Act, 1963. The officials of the Board in their ex-officio capacity also

function as a Division of the Ministry dealing with matters relating to levy and

collection of direct taxes.

Historical Background of C.B.D.T.

The Central Board of Revenue as the apex body of the Department, charged with the

administration of taxes, came into existence as a result of the Central Board of

Revenue Act, 1924. Initially the Board was in charge of both direct and indirect taxes.

However, when the administration of taxes became too unwieldy for one Board to

handle, the Board was split up into two, namely the Central Board of Direct Taxes and

Central Board of Excise and Customs with effect from 1.1.1964. This bifurcation was

brought about by constitution of two Boards u/s 3 of the Central Board of Revenue Act,

1963.

Composition and Functions of CBDT

The Central Board of Direct Taxes consists of a Chairman and following six Members:

Chairman Member (Income-tax)

Member (Legislation & Computerization)

Member (Personnel & Vigilance)

Member (Investigation)

Member (Revenue)

Member (Audit & Judicial)

Functions and powers various Income Tax Authorities



NOTES


An Assessing Officer is a person who has the jurisdiction (rights) to make assessment of

an Assessee, who is liable under the Income-tax Act. An Assessing Officer is an

individual person appointed by the Income-tax department. He performs all powers

and functions as assigned to him under the Income-tax Act.

• Collection of information.

• Power of survey.

• Power to call for information.

• Power to possess book of accounts.

• Power of search and seizure.

• Power related to discover and produce evidences.

REFERENCE’S

WEBSITE : • http://www.mastermindsindia.com/

• www.caclubindia.com

• http://newhorizonindia.edu/

• http://www.svtuition.org/

BOOKS Indian Income Tax -: Dr. Vinod Singhania.

Income Tax -: Manoharem.

Practical Auditing -: Spicer and Peglar.

http://www.mastermindsindia.com/

http://www.caclubindia.com/

http://newhorizonindia.edu/

http://www.svtuition.org/



NOTES


Documents

Unit 1 Introduction to Income Tax act 1961