TAXATION

Q1. Define Tax and explain the important characteristics of tax.

Introduction ;- The term tax to a common man means money paid to the government out of
compulsion without deriving any benefits directly by himself or his family members.

Tax means statutory payment to the nearby the public and imposed by the government. The
word tax is derived from latin word” taxore” It means estimate or value.

Tax is compulsory payment by a person to the government. The constitution of India does not
define the word tax by according to article 366 (28) of Indian constitution tax includes the
imposition of any tax general or special and tax shall be construed accordingly.

Pro.Adams.” define tax as from the stand point of the state, tax is a source of derivative revenue
from the angle citizen, a tax is coerced payment from the administrative point of you it is
demand for money by state in conformity to established rules from the point of view of theory a
tax is contribution of individuals for common expenditure.

CHARATERISTICS : The following important characteristics of tax.

• Taxes can be / shall be imposed by government only.

• Taxes are paid in form of cash.

• The aims of levying tax into promote the welfare of people Living in the country.

• The objects of the tax are to raise revenue to the government.

• Tax is legal collection.

• Payment of tax involves an element of sacrifice.

• It is levied by the government by virtue of its power conferred under constitution

• Tax is not a payment for specific service rendered by the government tax payer.
 Q2 Discuss the objectives of Taxation?

Every government has to discharge its statutory, administrative and social functions. To
discharge the duties money is required by the governments. So every government has to levy
and collect taxes from the public. The objectives of taxes can be studied from two angles. They
are :

i. Traditional approach
ii. Modern approach.
i. Traditional approach: Under this approach the objectives of taxation can be studied
as
a) Main objectives
b) Subsidiary objectives.

a) Main objectives :

1. To generate income to meet day-to-day expenditure of the government.

2. To make fulfill the basic needs of the people.
3. Taxation policy is a key instrument to bring socio and economic changes of the people.
4. Tax is levied to protect the home trade and domestic industry from to foreign
businessmen.
5. Prevention and control of concentration of economic power that is income and wealth in
the hands of few persons.

b) Subsidiary Objectives:

1. One of the economic objectives of imposing taxes is for formation of public capital for
the rapid development of the economy.
2. In times of scarcity of a commodity heavy taxation or high tax rate reduces the domestic
consumption.
3. To encourage savings and channelize such savings into investments in the form of shares
of limited companies/units of mutual funds etc.

ii) Modern Approach:

In the modern days the taxation policy in an important tool to reduce inequalities of income
and wealth and to promote accelerated economic development. The objects of modern
approach are listed below.

1) Ensuring accelerated economic development.

2) Increasing employment opportunities.
3) Reducing regional imbalances.
4) Regulation of consumption of undesirable commodities.
5) Protection of domestic industries from the competition of foreign industries.
 Q3. Explain the different types of taxes?

The term tax a common man means money paid to the government out of compulsion
without deriving any benefit directly by himself or his family members. ”Tax” means
statutory payment to be made by the public and imposed by the government.

The word tax is derived from a Latin word ‘taxore’ it means to estimate or value.

Tax is compulsory payment by a person to the government .The constitution of India

d0oes not define the word tax but includes the imposition of any tax, general or special and
tax shall be constructed accordingly.

TYPES OF TAXES:

• Duty: Imposition of tax to regulate industrial production and to control export and
import of the goods is known as Duty. For example on goods manufactured in the
factory within the country excise duty is levied on the goods imported into or
exported from a country customs duty in levied.

• cess: If the tax is levied for a specific purpose then it is known as “cess “.For
example education less it is levied for promoting education in country.

• Surcharge: Tax on Tax is surcharge. If the object of levying higher tax in for short
period of time, the government resorts to have surcharge. For example, Income Tax
assesses whose status in company, if their total income exceeds Rs.1 crore the
surcharge is levied at 10%.

• Octroi : If tax is levied by municipal corporation or grams brought from other parts
of the country by traders of sale into their jurisdiction limits, then it is known as
Octroi. This tax is also known as entry tax.

• Terminal Tax: It is the Tax levied by local bodies or municipalities on the goods
levying for the sale from their boundaries into other parts of country.

• Toll Tax: This tax is paid by vehicular travelers. The persons who are travelling in car,
bus, jeep etc for using the road or bridge to reach their destination have to pay tax.

Q4.What are the merits and demerits of Direct Taxes?

Direct Taxes:
A direct tax is one in which the immediate and ultimate burden will be on the same
person. Direct taxes are those taxes which are imposed on a person wither on his
income or wealth and the tax liability cannot be transferred to other person’s i.e., if tax
in levied directly on a person’s income or wealth then it is known as direct tax. A direct
tax is paid to the government by the person on whom it is imposed. Income tax, wealth
tax and professional tax are the examples for direct taxes.

The person on whom the tax is imposed is personally liable to pay the tax. In other
words he cannot shift or transfer the burden to others and hence they are also called
known as ‘personal taxes’.

Merits of direct taxes;

• Economy: The cost of collecting direct taxes is low as compared to indirect taxes.
The payment of these taxes is made directly to the government.

• Certainty: The tax payer knows how much and when he has to pay tax and the
government also knows equally about the tax revenue likely to be received.

• Elasticity: Direct taxes are elastic in nature government can increase its revenue
just by increasing the tax rate and by withdrawing the deductions and exemptions.

• Equity; Direct taxes are equitable because rich has to pay more tax and the poor
man has to pay either low tax or no tax.

• Convenience: most of the direct taxes are collected at to source of income itself as
such it is convenient to the payers.

• Civic consciousness: it is believed that direct taxes create consciousness among the
tax payer about their contribution to the revenues of the government.

Demerits of Direct Tax

• Unpopular: Direct taxes are not popular when compared to indirect taxes. No
person is willing to forego his art of income or wealth towards payment direct taxes
i.e., people will oppose imposition the direct taxes.

• Complex laws: Generally the provisions of direct taxes contain deductions,

exemptions and chargeability of income etc, to a common man it becomes a
problem to understand the provisions of the Act and in compelled to take the help
of ‘tax consultant’
• Arbitary tax rates: Tax rates are fixed by the minister in charge with the help of tax
department official whole may not possess the knowledge to assess the tax
payment capacity of the people.

• Possibility of Evasion: it is observed throughout the year world that tax evasion is
there in high degree in the payment of direct taxes when compared with indirect
taxes.

Q5. Explain the merits and demerits of indirect tax? (or) Explain the concept of
indirect tax ad illustration how they are superior to direct taxes?

If the tax is leived on the prices of goods or service then it is known as Indirect tax.
Indirect tax is collected by middle men in the channels of distribution of goods and it is
remitted to the government treasury Indirect taxes are the taxes charged to a
businessman, first he pays the tax and later on he shifts the tax burden to ultimate
consumer by charging a higher price, sale tax, excise duty and customs duty, service tax
are the examples of indirect tax.

Merits of indirect taxes

1. Convenience: Indirect taxes are included is the price of the goods and services as
such tax payer is not aware of tax payment tax payer in aware of the payment of tax,
but does not feel it as a burden.

2. Productivity : Indirect tax are highly productive by imposing few taxes. Government
can get huge revenues. Government can impose tax on selected goods and services
whose demand is inelastic.

3.Maximum Evasion:

Generally indirect taxes are levied and collected at the time of production or purchase
of the goods by the business man and the scope for tax evasion is minimum.

4. Wide Coverage

Indirect taxes cover most of the people irrespective of rich or poor will make to
contribute to the government that is indirectly it is helping one and all to participate for
the development of the nation.
Demerits of Indirect taxes

1. Uncertainty

Revenue to be collected through indirect taxes contains uncertainty because it is easy

to estimate the demand for goods, which is influenced by a number of factors.

2. Violation of ability to pay principle

Both rich and poor have to pay the same price for the goods that is both have to pay
same amount of tax, and this is against to the cannon of taxation.

3. Inflationary in nature

Indirect taxes lead to a rise in prices. The increase in the prices of raw materials,
finished goods etc. creates inflationary trends in the economy.

4. High cost of collection

Administrative cost of colleting indirect taxes may be high because they have to be
collected from large number persons that too in small amounts.

Q6. Explain differences between Direct and Indirect taxes?

Direct Taxes

A direct tax is one in which the immediate and ultimate burden will be on the same
taxes which are imposed on a person either on his income or wealth and the tax
liability cannot be transferred to other person that is if tax is levied directly on a
person’s income or wealth then it is known as Direct tax. A direct tax is paid to the
Government by the person on whom it is imposed. Income tax, wealth tax and
professional tax are the examples for direct taxes.

The person on whom the tax is imposed in personally liable to pay the tax. In other
words he cannot shift or transfer the burden to others and hence they are also known
as 'personal taxes'.

Indirect taxes

If the tax is levied on the price of goods services then it is known as indirect tax.
Indirect tax is collected by middle men in the channels of distribution of goods and it is
remitted to the government treasury. Indirect taxes are the taxes charged to a business
 man, first he pays the tax and later he shifts the tax burden to ultimate consumer by
charging a higher price, sales tax, excise duty and customs duty, service tax are the
examples of indirect tax.

DIRECT TAXES INDIRECT TAXES

Direct taxes are4 lived on income or wealth of Indirect taxes are levied on manufacturer or
a person as such it affects rich person i.e , low
seller of the goods of both. They shift the tax
income people need not play any tax or they burden to the next purchaser &finally to the
are required to pay at low rate at the molt. consumer by charging a higher price. In other
words if affects substantially on the poor section
of the people.
The tax bearer knows the tax liability, time Businessman may charge much higher price
and amount of tax to be paid. than the tax amount and the same is included in
the price as such the consumer is not aware
about the tax effect.
Increase in tax rate may reduce savings and Increase in tax is bound to reduce consumption
investment by the public. Increasing in the and it helps in intensifying the inflationary
rate will help to control the inflation. position in the economy.
There is a scope for tax evasion, either by not The scope for tax evasion by the ultimate
paying the tax or taxpayer may understate the consumer is not there, but right from the
state fee income or wealth by suppressing manufacturer to the retailer, the scope for tax
the actual facts. evasion is possible by slowing less production or
sales.
The government has to establish link with Government collects tax directly from the
every tax payer as such the cost of collecting producers of the goods& the businessman and
to the government .will be higher. t5here is no need to maintain a lists with the
consumer who ultimately is the bearer of this
tax.
Ability of tax payer is taken into account and Ability of the tax payer is ignored. Both rich &
this is satisfies the principle of equity. poor have to pay the same amount of tax.
Tax payer is having civic consciousness. Tax payer may not possess civic consciousness.

Q7. Explain constitutional provision of taxation in India?

Federal system is a political form of government in which many layers of government will exist.
Our country follows parliamentary form of government at federal level that at the top it in
known as central government and the next layer towards down is provincial government or the
state government and at the bottom of ground level, local governments are known as
Municipalities in urban area and panchayat in the rural areas. The constitution of India defined
very Cleary about the role and function of

1) Central Government.

2) State Government.

3) Local Authorities.

The subject of Administration central and State Governments do govern known as “Concurrent
List”.

I. Union List :
1. Taxes on income other than agricultural income .
2. Duties of customs including export duties.
3. Duties of excise on tobacco and other goods manufactured or produced in India except.
a) Alcoholic liquors for human consumption, and
b) Opium, Indian hemp and other narcotic, drugs and narcotics but including medicinal and
tablet preparations containing alcohol or any substance included in such paragraph of
this entry.
4. Corporation tax.
5. Taxes on capital of assets, exclusive of agricultural land of individuals and companies,
taxes on the capital of companies.
6. Estate duty in respect of properly other than agricultural land.
7. Duties in respect of succession to properly other then agricultural land.
8. Terminal taxes on goods or passengers, carried by railway, seas air, taxes on railway fares
and freights.
9. Taxes other than stamp duties on transactions in stock exchanges and futures markets.
10. Rates of stamp duty in respect of bills of exchange promissory notes, bill of landing,
letters of credit, policies of insurance, transfer of shares, debentures, proxies and
receipts.
II. State List
1. Taxes on agricultural income.
2. Duties in respect of succession to agricultural land’
3. Estate duty in respect of agricultural land.
4. Taxes on lands and buildings.
5. Taxes on mineral rights subject to any limitations imposed by parliament of law relating
to mineral development.
6. Taxes on the goods into a local area for human consumption, is or sale therein.
7. Taxes on Consumption or sale of electricity.
8. Taxes on the sale or purchase of goods other than newspapers subject to the provision
of entry 92 A of list.
9. Taxes on advertisements other than advertisements published in newspapers.
10. Taxes on goods and passengers by road or inland water ways.
11. Taxes on animals and birds.
12. Tolls.
13. Taxes on profession, trades and employments.
14. Capitation taxes.
15. Taxes on luxuries, including taxes on entertainments betting and gambling.
iii. Concurrent list
1. Stamp duties other than duties or fees collected by means of judicial stamps, but not
including the rates of stamp duty.
2. Fees but not included fees in any court.

Q8. Explain tax structure in India.

Tax structure in India.

According to the Indian constitution the subjects of administration governance in the

country is vested with

a) Union Government.
b) State Government.
c) Local authorities

Based upon this structure the tax structure is based on three fold.

I. Direct Taxes at Central Government:

1. Income Tax:

Income tax in a tax on annual income of a person, presently Income Tax Act, 1961 is in force
in our country. The important features of income tax are:

a) Income tax is levied every year on the annual income of a person.

b) Income tax is computed on the total income of a person covered under five heads of
income.
c) The scope of total income of a person depends upon his residential status.

II. Wealth Tax

Wealth tax is a tax on net wealth of a person on the valuation date. While income tax is
based upon the earning of a persons. The following are the important features of wealth
tax.

1. Wealth tax is payable by an individual, H>U>F and companies.

2. Upto Rs.30 lakhs net wealth is allowed as exemption and the excess net wealth over 30
lakhs is taxable at a flat rate of 1%.
3. To determine the incidence of tax residential status of an assessee is considered.
III. Dividend Tax

Companies are required to pay dividend tax on the dividend paid by them to the share
holders. This tax is in addition to that company pays income tax on its income.

IV. Estate duty

The tax is levied upon the entire estate left by a deceased person. Presently the estate duty
is abolished in the country.

V. Inheritance Tax

This tax is levied on transferring the property or estate to the beneficiaries. At present this
type of tax is inoperative.

VI. Gift Tax

If a person gifts property or any other asset, he has to pay gift tax. Some of the estate
owners used to prefer gifting the property during their life time to avoid estate duty. To plug
this loop hole government introduced gift tax in the year 1953 but it was abolished in the
year 1985 due to low revenue and higher cost in collecting the tax.

III. Direct taxes at state level.

The following direct taxes can be levied by the state governments.

The following direct taxes can be levied by the state governments.

a) Agricultural Income Tax.

b) Land Revenue.
c) Professional tax.
a) Agricultural Income Tax

According to the provisions of constitution tax on agricultural income is a state government

subject. As on today no state government has passed any legislation to tax agricultural
income that is on agricultural income there is no tax. But according to Income Tax act. 1961
agricultural income is considered to tax non-agricultural income.

b) Land Revenue:
 Land Revenue is taxed on the output from the agricultural land. This is one of the oldest tax
levied by the government. Presently in our country almost all the states this tax is
abolished.

c) Professional Tax

State government fixes a specified amount to be paid on each type of occupation viz.,
salaried persons, business and professional like Doctors, Advocates, Charted Accountants
etc.

IV. Direct Taxes at Local Government level.

1. Property Tax

Local governments, like municipal corporations, municipalities and gram panchayats etc levy
property tax on house property, based upon rental capital of the house.

Before the Goods and Services Tax (g.s.t) implementation the following Indirect taxes
levied by the Central Government:

i. Exise duty:

It is one of the indirect taxes levied by the Central government. Excise duty is levied on the
goods manufactured produced in the country. Firstly the manufacturer has to pay the tax to
the government. Manufacturer transfers the tax burden by charging a higher price to the
distributor of goods. There after the distributor transfer the tax burden to whole seller and
from whole seller to retailer and finally retailer shifts the tax burden to consumer through
price mechanism.

ii. Customs Duty

Customs duty is taxed on the imported and exported goods. The main object of imposing
customs duty is to prevent illegal import and export of goods to and from India. The duty is
charged based upon the value of the goods imported/exported.

iii. Service tax is a tax on the services rendered by a business or by professional persons,
organization. The tax reforms committee 1991 headed by Sri.Raja chelliah has
recommended the tax on services on par with tax on goods. The government of
India has accepted this recommendation. The levy service tax came in to effect from
the financial year 1993-94 on selected services.
iv. Sales tax

Sales tax is tax on the sale of goods. Sales tax is payable by the seller, which he
recovers from the purchaser. Sales tax is of two types.
 i) Central Sales tax

When the seller of goods and purchaser are situated in different status that is when
the goods physically more from one state to another central sales tax is applicable.
The tax is levied by the central government, but the tax is collected and utilized by
the state government where the goods were sold.

ii) State sales tax

When seller of the goods and purchaser are situated in the same state that is the
movement of goods taxes place within a state, state sales tax is applicable.

Before the implementation of Goods and Services Tax (G.S.T) Indirect Taxes levied by
the State Government:

i. State Sales tax:

When seller of the goods and purchaser are situated in the same sate that is the
movement of goods takes place within a state sales tax is applicable. Sales tax is one
of the top revenue earnings of State Government.

ii) Value Added tax (V.A.T)

VAT is tax on final consumption of goods and services. VAT works on the principle
that when raw material passes through various manufacturing stages and
manufactured product passes through various distribution stages, tax will be levied
on the value added at each stage but not on the gross sale price. The basic
differences between V.A.T and Sales Tax is that sales tax is payable on total value of
goods, while V.A.T is payable on value addition at each stage.

ii. Entertainment Tax:

The state governments levy entertainment tax on cinemas, trade fairs, exhibitions. Etc. of all
entertainment tax on cinema is more popular. Levy by of tax is of two types, firstly, it is on
the use sale price of the ticket. Second type is slab system, under this method the exhibition
of cinema has to pay tax on the seating capacity of the hall instead of collections made by
them by sale of tickets.

4) State Excise Duty:

 According to the constitution state government can levy excise duty on

a) Alcoholic liquors for human consumption’s.

b) Opium and Inelia hemp. For the remaining goods central government is
empowered to levy excise duty.
5) Moto Vehicle Tax: State governments collect tax on the use of two/three
wheelers, cars heavy and light vehicles earlier it was collected annually. To
minimize to cost of collection of the tax and to eliomate tax evasion, presently
tax evasion, presently tax is collected for life time of the vehicle, known as life
tax. It is collected at the time of purchase of vehicle.

Indirect taxes at local government level

Octroi or entry tax: This tax is levied on the goods crossing boundaries of the local
government. The tax is levied as certain percentage (%) on the value of the goods
recorded in the purchase invoice. Presently most of the state government have
advised the local bodies not to levy this tax and to compensate the revenue loss
some special grants are given.

Q 10. Explain the following:

1. Proportional taxes

2. Progressive taxes

3. Regressive taxes

1. Proportion Taxes: Tax payable shall be increased in proportion to increase in the income.
The income is charged at a flat rate.

For example: Winnings from lotteries are charged at flat rate of 30% . If income in Rs. 1000,
tax is Rs. 300. Similarly if income is Rs. 10,000 tax is Rs 3,000.

2. Progressive taxes: Tax payable shall be increased along with the increased income in
income but not in the same proportion. Those who have higher income are taxed at
higher rate of and those who have lower income are taxed at lower rate. The money
collected may e used for the benefit of public at large which will led to raise in economic
welfare. The present slab system of tax rate which is raising from 0% to 30% on the basis
of increase in income is called progressive tax.
3. Regressive taxes: Tax payable shall be decreased with the increase is income which is
not the use today. Now-a-days government prefers regressive tax.
11.Breifly explain about Income tax Act 1961?
Income Tax was introduced in Indian for the first by sir James Wilson in the year 1922 a new
Income Act was passed and at present Income tax Act 1961, remains in force from the
assessment year 1962-63 onwards.

The government mobilizes the funds from various sources. One of the popular source are in
through taxes both direct and indirect. To removes the inequalities of income and to establish a
socialistic pattern of society. Direct taxes are resorted to. The examples for direct taxes are
Income Tax, Wealth Tax, etc.

The administration of the Act is looked after by a board, constituted by the Central government
known as central board of direct taxes (C.B.D.T). The Board functions under the supervision of
ministry of finance, and the income tax department functions under the guidance and
supervision of the central board of direct taxes.

Filing the Returns:

A person who is liable to pay tax as to compute his income advance tax is to be pay during the
previous year and has to furnish the particulars of his income and expenditure related to the
earn these incomes and other related particulars like qualified savings etc. In the assessment
year a specified forms sending through internet, which is known as “filing the return”.

If the advance tax paid and tax deducted at source if less than the tax liability then the assessee
is asked to pay balance of tax within the stipulated time.

If advanced tax paid and the tax deducted at source is more than the tax liability then the excess
amount will be refunded to the assessee.

The finance act, specified, the limit of the tax-free income. The total income of a person is,
aggregate of income computed under different heads of income each head of income has a
method of computing the income under it. All sources of income have been classified into fire
heads of income.

They are:

1. Income from Salary

2. Income from house property
3. Profits and Gains from business and profession
4. Capital Gains
5. Income from other sources.

Rate of Taxes – For an individual:

From the income tax point of view, the incomes can be a classified as under
 Incomes are divided into types:

1. Income exempted from tax

2. Taxable income.

Income exempted from tax are divided into three types:

1.Casual Incomes

2.Special Incomes

3.Normal incomes

Flat Rate:

i) Casual incomes are taxed at a flat rate of 30%.

ii) Ii)Short term capital gain araising on account of transfer of equity shared and units of
equity oriented funds is taxed at flat rate of 15%.

Slab Rate:

All other hands of income are taxed on slab Rate.

1. Tax for Casual income:

Income from horse races, wining from lotteries, gross word puzzles, car games or gambling
or betting, winning from T.V programmes or lucky dips conducted by business establishment
are few examples of casual incomes. These incomes are taxed at a flat rate of 30.9%
including education cess [(30% income tax (+) 2% education Cess (+) 1% secondary and
higher education cess = 30.9%]

Note: For Casual income no basic exemption is given.

iii) Tax for Special incomes

Special incomes are taxed are taxed at concessional or lower rate of tax. These incomes are
taxed at a flat rate. While calculating tax the assessee is allowed basic exemption of income
from tax. These incomes are.

a) Short term capital gain or transfer of securities.

b) Long term capital gain.

Short term capital gain:

From the tax point of view short term capital gain can be such classified into two:
 i) Short term capital gain on transfer of securities.
ii) Short term capital gain on other assets.

Long term capital gain:

Long term capital gains on equity shares and units of mutual benefit fund. It is
fully exempted from tax.

Long terms capital gains are taxed at a flat rate of 20%. But in some cases it taxed
at a flat rate of 10%.

iii. Tax for normal income:

An income which cannot be treated as casual income or special incomes in

considered as normal income. For income basic exemption is given.

The aggregates of all heads of incomes (except/excluding long term capital gain,
short term capital gain on shares or unit of mutual benefit funds and casual
incomes, to taxed on ‘slab basis’.

The tax rates applicable to anassesse whose status in an “Individual” and residential
status in ‘Resident’ for the assessment year 2019-20 are as follows.

Here are the latest income tax slabs for the FY2019-20

Income tax slabs for resident Individual below 60 years of age

Taxable income slabs Income tax rates and cess
Up to Rs 2.5 lakh Nil
5% of (Total income minus Rs 2,50,000) + 4%
Rs 2,50,001 to Rs 5,00,000 cess

Rs 12,500 + 20% of (Total income minus Rs

Rs 5,00,001 to Rs 10,00,000 5,00,000) + 4% cess

Rs 1,12,500 + 30% of (Total income minus Rs

Rs 10,00,001 and above 10,00,000) + 4% cess

Income tax slabs for resident individual between 60 and 80 years of age (Senior Citizen)
Taxable income slabs Income tax rates and cess
Up to Rs 3 lakh Nil
5% of (Total income minus Rs 3,00,000) + 4%
Rs 3,00,001 to Rs 5,00,000 cess
 Rs 10,000 + 20% of (Total income minus Rs
Rs 5,00,001 to Rs 10,00,000 5,00,000) + 4% cess

Rs 1,10,000 + 30% of (Total income minus Rs

Rs 10,00,001 and above 10,00,000) + 4% cess

Income tax slabs for resident individual above 80 years of age (Super Senior Citizen)
Taxable income slabs Income tax rates and cess
Up to Rs 5 lakh Nil
20% of (Total income minus Rs 5,00,000) +
Rs 5,00,001 to Rs 10,00,000 4% cess

Rs 1,00,000 + 30% of (Total income minus Rs

Rs 10,00,001 and above 10,00,000) + 4% cess

12.Define person and Assessee?

Person: [Sec2(31) Person included:

i) An individual

ii) A Hindu Undivided Family

iii) A Company.

iv) A Firm

v) An Association of persons or a body of individuals. Weather incorporated or not.

vi) A Local Authority and

vii) Every Artificial Juridical Person not falling within any of the preceding sub-clauses.

The word person is very wide term and embraces in itself the following.

I. Individual: It refers to a natural being whether male female, minor or major.

2. Hindu Un-divided Family: It is a relationship created due to operation of Hindu Law. The
manager of the H.U.F is called ‘Karta’ and its members are called ‘Co-partners’.

3. Company: It is an artificial person registered under Indian Companies Act 1965 or any
other law.
 4. Firm: It is an entity which comes into existence as result of partnership agreement. The
Income Tax Act accepts only these entitles as firms which are assessed as firms under
section 184 of the Act.

5. Association of Persons or Body of Individuals: Co-Operative Societies, MARKFED, NAFED

etc., are the examples of such persons. When persons combine together to carry on
joint eEnterprise and they do not constitute partnership under the ambit of law, they are
assessable as an association of persons.

A Body of Individual (B.O.I) cannot have non individuals as its members. Only natural
human beings can be members of body individuals.

Whether a particular group is (A.O.P) or (B.O.I) is question of fact to be decided in each case
separately.

6. Local Authority: Municipality, Panchayat, Cantonment Board, Port Trust etc., are called
Local Authorities.

7. Artificial Juridical Person: Statutory Corporation like Life Insurance Corporation, A

University etc., are called Artificial Judicial Person.

Assessee: [Section 2(7)]

It means a person by a person by whom any tax or any other sum of money is payable under
this Act and includes:

a) Every person in respect of whom any proceedings under this Act have been taken up for
the assessment of his income or of the income of any other person in respect of which
he is assessable or loss sustained by him or by such other person or of the amount of
refund due to him or to such other person.

b) Every person who is deemed to be an assessee under any provision of this

Act.

c) Every person who is deemed to be an assessee-in-default under any provision of this act.

From the above definition we find that an assessee can be divided into following categories:

A) Ordinary assessee:

i) Any person against whom some proceedings under this act are going on.

ii) Any person by whom some amount of tax, interest or penalty is payable under this
act is called assessee.
iii) Any person who has deposited tax under advance tax or tax has been deducted at
source and amount of tax deposited exceeds the tax determined at the time of
regular assessment the person is entitled to claim refund. He is also called an
assessee.

iv) In case a person is carrying on business and has incurred loss, he can carry forward
such loss to succeeding previous years only if he has filed return of, loss. He
becomes assessee as soon as he files such return of loss.

B) Representative or deemed assessee:

A person may not be liable only for his own income or loss but also on the income or loss of
other persons, e.g., guardian of a minor or lunatic, agent of a non-resident etc. In such case
the person responsible for the assessment of income of such persons are called
representative assessee.

Following types of persons are called as deemed to be an assesses.

1) In case of a deceased person who dies after writing his will, the executors of the
property of deceased are deemed as assessee.

2) In case a person dies intestate (without writing his will) his eldest son or other legal heirs
are deemed as assessee.

3) In case of a minor, lunatic, or idiot having income taxable under income tax act, their
guardian is deemed as assessee.

4) In case of a non-resident having income in India, any person acting on his behalf is
deemed as assessee.

C) Assessee-in-default:

A person is deemed to be a assessee in default if he fails to fulfill his statutory obligations;.

In case an employer paying salary or a person who is paying interest it is their duty to
deduct tax at source and deposit the about of tax so deducted or collected in government
treasury. If he fails to deduct tax at source or deduct tax at source or deducts tax but not
deposit the same in the treasury, he is known as assessee in-default.

13. Define the term previous year and Assessment year?

Assessment year [section 2(9):

 Assessment year means the period of 12 months starting from 1st April every year and
ending on 31st of March of the next year.

For example, the assessment year 2019-20 will starts on 1-4-20119 and will end on 31-3-
2020.

This is fined by the act. Income of previous year of an assessee is taxed during the following
assessment year at the rates prescribed in the relevant finance act.

Every person who is liable to pay tax under this Act, files return of income by prescribed
dates. The officers of the income tax department process the returns. This processing is
called ASSESSMENT. Under this, income returned by the assessee is checked and verified.
Tax is calculated and compared with the amount paid and assessment order is issued. The
year in which whole of this process is undertaken is called Assesment Year. At present the
assessment year 3019-20 is going on.

Previous Year [section3]

The term previous year is very important because it is the income earned during previous
year which is to be assessed to tax in the assessment year As the word ‘Previous’ means

‘coming before’, hence it can simply said that the previous year is the financial year
preceding the assessment year e.g. for assessment year 2019-20 the previous year should
be the financial year ending on 31st March 2019.

In simple words, it may be said that the year in which income is earned is called previous
year and the next year in which such income is computed and put to tax is known as
assessment year.

For example, income earned by an assessee in the previous year 2019-20 is taxable in the
assessment year relevant to the previous year 2019-20 and so it is taxable in the assessment
year 2020-21. The simple rule is that the income of a previous year is taxed in its relevant
assessment year subject to certain exception.

a) Previous year in case of a continuing business: It is the financial year preceding the
assessment year. As such for the assessment year 2019-20, the previous year for a
continuing business is 2018-19 i.e, 1-4-2018 to 31-3-2019.

b) Newly set up business or profession: The assessee is set up a new business or start a
new

Q14. What is DEEMED INCOME? Explain it briefly.

Generally an assessee has to explain about each income and asset. It the explanation given by
the assessee not satisfactory to income tax officer, then it shall be treated as income for tax
purpose.

1. Cash Credit Sec-68.

2. Unexplained investment Sec-69.

3. Unexplained money etc. Sec-69A.

4. Amount of investments etc., not fully disclosed in books of accounts Sec69B.

5. Un-explained expenditure Sec-69C.

6. Amount borrowed or repaired on hundi Sec.69D.

UNEXPLAINED CASH CREDIT [Sec-68]

If the credit is there in the books of accounts and the asssessee is not in a position to give
satisfactory explanation to the (A.O) (Assessing Officer) then the same will be treated as the
income of the previous year in which it was found in the books.

For example in the books of an assessee Sri Dayakar’s account is having a credit of Rs.
50,000, assessee is not in a position to explain the reason for such credit in the account and
about Sri Dyaskar’s then s. 50,000 shall be treated as income.

Unexplaind Investment [sec-69]

If an assessee is an possession some investment like investment in Chitfunds, Real Estates

etc. the same were not recored in the books of accounts and the assessee is not in a
position to give the satisfactory explanation with regard to the sources of funds to acquire
these investments or the explanation given by the assessee is not satisfactory to the A.O
then such amount invested will be deemed to be the income of the assessee for the
previous year in which they are made.

Unexplained Money or Jewellery or Any other Asset [Sec-69A]

When the assessee is found with excess cash balance from the balance according to the
books of asccounts or holding the jewelley or valuable articles which are not recorded in the
books and the assessee is not in a position to explain how he has acquired these, in such a
case they will be deemed to be the income of the financial year in which they have been
found in his possession.

Investment Not Fully Disclosed[Sec-69B]

If the assessee has understated the amount of investments in the books, the understated the
amount of investments in the books, the understated amount of investments shall be deemed
to be the income of the assessee for the year in which such investments have been made.

For E.g. purchase of property and registration for lesser amount. If an assessee purchased a
building for Rs. 2,00,000 and shown in the registration records as Rs.40,000 worth building,
then Rs.1,60,000 shall be treasted as income.

Unexplained Expenditure [Sec69C]

If an expenditure remains unexplained to the satisfaction of the I.T.O such expenditure shall be
deemed to be income of the previous year in which such expenditure has been incurred.

For E.g: If an assessee has spent Rs.2,00,000 for the dauther’s marriage and Rs. 1,00,000 for
son’s admission, in a private college for M.B.A course and does not give satisfactory explanation
low he pooled the money in such a case Rs. 3,00,000 will be treated as the income of the
previous year in which if was detected. Unexplained

Amount Paid or Borrowed or Hundi [Se-69D]

If hundi transactions are not dealt through amount payee cheques then the same will be
treated as the income of the previous year in which such transactions have taken place.

Q15.What is P.A.N ? Explain it briefly.

Permanent Account Number means the number which is allotted by the tax assessing officer
to the assessee for easy identification. In case of need, the number is useful to trae out the
previous returns submitted by the assessee and assessment order passed on by the
Department.

Under section 139 AS and Rule 114, the number is allotted by the Assessing Officer when
the assessee applies for the same.

Every person, whose income exceeds the exempted income limit, has to apply to the
concerned I.T.O for allotment of the number.

In case of business or profession if the sales of gross receipts exceeds Rs. 5,00,000 one has
to apply for the same through the person may not have the taxable income.

The Central Board of Direct Taxes [C.B.D.T] has introduced a new scheme of allotment of
computerized 10 digit permanent Account Number. According to the new guidelines
everyone is required to apply for a permanent account number.
The assessee shall intimate the Assessing Officer any change in his address or in the name
and nature of his business on the basis of which the permanent account number was
allotted to him.

The assessee has to quote the P.A.N in all future correspondence with the department like
on “Return forms”. Challan and on the documents which are prescribed by the Board.

1. From 1-11-1998 onwards quoting P.A.N is compulsory in the following transitions.

i) Sale/Purchase of any immovable property valued at Rs.5, 00,000.

ii) Sale/Purchase of motor Vehicle (other than two wheeled vehicles) which required
registration under motor vehicles Act, 1988.

iii) Time deposit ( fixed deposit) exceeding Rs.5,00,000 with a bank.

iv) Deposit exceeding Rs. 50,000 in post office savings bank.

v) Sale/Purchase of Securities exceeding Rs.1, 00,000.

vi) Opening of an account with a bank (The ministry of finance has instructions the
banks not to insist this condition.

vii) Payment in cash for purchase bank draft/pay order/ Banker Cheque of Rs. 50,000 or
more.

viii) Cash deposit of Rs. 50,000 in a bank in one day.

ix) Application for installation of a telephone connection including cellular connection.

x) Payment of hotel/restaurant bills of exceeding Rs. 25,000 at any time.

xi) Payment in cash in connection with travel to a foreign country of an amount

exceeding, Rs. 25,000 at any one time.

Travel to any foreign country shall not include travel to the neighboring countries and laces
of pilgrimage as notifies by C.B.D.T

Like Bangldesh, Bhutan, Maldhives, Nepal, Pakistan and Srilanka Similarly, travel to Saudi
Arabia on Haj Pilgrimage to kilash manasasarovar organized by Ministry of External Affairs,
Government of India.

xii) A person whose, income, tax at source is likely to be deducted.

xiii) A person who has deducted the tax at source.

xiv) Buyer/Seller of alcoholic/liquor/timber/or any other forest products.

xv) Penalty: If any person fails to comply with the provisions of Sec.139A a penalty of
Rs. 10,000 .

Note: AS person has to quote General u/s 272 Index register number (G.I.R) till the
permanent Account Number is allotted.

Quoting P.A.N is not required to the following persons.

1) If the person is Non-Resident.

2) Persons who do not have any taxable income but do have agricultural income.

Q16. Explain the following.

a) Gross Total Income

Gross Total Income is the aggregate of income computed under different heads of income of
an assessee viz., Income from salary, Income from House Property, Profits from business or
profession, Capital gains and income from other sources plus the income of souse or minor
child minus set off current year loss minus carried forward losses and without any
deductions which are allowed from gross total income under Sec-80 C to 80 U.

b)Total Income: Gross Total Income minus deductions which an assessee is entitled under
Sec-80-C to 80 U is the total income for e.g under Sec. 80-D Medical insurance premium
under Sec-80-G donations given will be allowed as deduction similarly under Sec- 80-C
qualified savings is allowed as deductions.

Hint: GTI (-) deductions u/s to 80U =Total Income.

c)Tax Avoidance: Tax avoidance is the ways and means by which as assessee is legally taking
advantages of different loopholes in the Income Tax Act, and thereby reducing his tax
liability. No legal action can be taken against him for reduced payment of tax. It an assessee
enters into a contract to receive a lesser amount of income to decrease his tax liability. It
cannot be called as a case of tax avoidance. Tax avoidance implies that, the asessee is
receiving the benefits of income but it is artificially made as the income of the other person

For eg., A sole trader making all the members of his family as partners in his self-styled
partnership business.

d)Tax-Evasion:
If the taxable incomes are not revealed fully to the income tax department then such act is
known as tax evasion. In other words tax evasion is the illegal way reducing tax liability by
suppressing income. The un-accounted income is known as “Black money” i.e., Black
money is the undeclared income on which income tax has not been paid. If the Income Tax
department taxes the black money then the assessee will be asked to pay 60% tax on such
income.

e)Tax Planning:

Tax planning means working out a plan to take maximum benefits of exemptions,
deductions and rebates etc., allowed by law and reducing the tax liability i.e., Tax planning is
the technique of avoidance of tax or higher rate of tax planned in advance before the
income is earned.

f)Average Rate of Income:

To find the average rate of income tax first total tax will be calculated on total income and
then the tax calculated is divided with total income and multiplied by 100. The resultant will
be average rate of income tax.

Average Rate of Tax= Total Tax/Total Income *100.

With the help of average rate of tax, a person can assess his tax liability on the total income.

If the assessee is entitled for a rebate in tax, average rate of tax is useful to determine the
net tax liability i.e., Total Tax (-) Rebate= Net tax payable.

g) Casual Income:

The incomes windfall, non-recurring, uncertain and have no definite source are called casual
income. |Tax is deductable at source @30.9% provided if winnings from lotteries cross word
puzzles, card games, TV games etc.

Q17. How do you determine the Residential Status of an Individual.

(or)

How do you the Residential Status of the following .

I) Individual.
II) Hindu Un-divided family.

III) Firm.

IV) Company.

i) Individual:

Income Tax is chargeable in respect total income of a person earned during the previous
year. The scope of the total income i.e., what incomes are to be included and excluded in
the total income depends upon the residential states of a person i.e., the income earned
and received in India only is to be taxed or the income earned and received outside India is
also to be taxed depends upon the residential states of the assessee with reference to the
relevant previous year.

Citizenship of a person is nothing to do in determining the residential status i.e., the

citizenship of a person is determined according to the provisions of the constitution, while
the residential status of as person is determined according to the provision of the Income
Tax Act 1961.

Sec.6 contains the provision for determining the residential status of different types of
persons.

For determining the residential status, the ‘PERSON’ have been classified follows:

1) Individuals.

2) Hindu Un-divided family.

3) Firms or Association of persons.

4) Companies.

5) Every other person.

Residential Status in the case of an ‘Individual’

The residential status of a person whose status in an ‘ individual’ can be of three types.

1.Resident and Ordinary Resident.

2. Resident but not Ordinary Resident.

3. Non Resident.
Methodology to determine the residential Status of ‘Individual’.

For determining the residential status of an individual’s there are two sets of conditions.

I. Basic Conditions:

1. He is in India, in the relevant previous year for a minimum period of 182 days.

2. He is in India for a period of 60 days or more during the current previous year and 365
days or more during the four years preceding to the relevant previous year.

II) Additional Conditions:

For all types of individuals the additional conditions are same.

1. He has been resident in India for 2 out of 10 previous year preceding to the relevant
previous year.

2. He has been in India for a period of 730 days or more during the 7 years preceding to the
relevant previous year.

i) Resident and Ordinary Resident:

If a person satisfies one or both of the two basic conditions and both of additional
conditions then he will be considered as “Resident and Ordinary Resident Assessment year
2011-2012.

i) Resident but not Ordinary Resident:

ii) If a person satisfies one or both of the two basic conditions and one condition of the
additional conditions then he will be treated as “ Resident but not Ordinary
Resident” for the assessment year 2011-2012 [if he fails to both of additional
conditions also]

iii) Nonresident:

iv) If a person fails to satisfy both of the basic conditions then he will be treated as “Non
Resident” Assessment year 2011-12. ( Need not consider additional conditions)

Residential Status of Hindu Undivided Family:

The Head of the Hindu Un-divided family is known as Kara. Kara is assessed for the family

Income and as such he is liable to pay tax on it. The other members of the family, who are

Known as coparcener is not liable to pay tax on the family income, however, they are
liable to pay tax on their individual incomes only. If the karta for any reason relinquishes

His Responsibility, one of the other coparcener has to manage the affairs, then the member

Will be designatating as the manager.

.For determining the residential status of H.U.F there are two sets of conditions

i) Basic conditions

ii) Additional conditions.

i) Basic Conditions:

A Hindu undivided family is said to be “resident” in India, if control and management of its
affairs is wholly or partly situated in India.

If control and management of its affairs are wholly satiated outside India then H.U.F is
heated as Non-Resident.

ii) Additional Conditions:

i) The Karta or the Manager of the H.U.F has been resident in India for at least 2
years out of 10 years preceding the current previous year and

ii) He has been present in India for a period of 730 days or more during 7 years
proceeding to the current previous year.

Resident and Ordinary Resident:

If Kartha or manager satisfies basic conditions and two additional conditions then H.U.F is
considered as Ordinary resident i.e., Resident and Ordinary Resident.

Resident but Not Ordinary Resident:

If karta or manager satisfies the basic conditions one or none of the additional conditions
then H.U.F will be considered as not ordinary resident i.e., Resident but not Ordinary
Resident.

Non-Resident:

If karta or manager does not satisfy the basic conditions then H.U.F will be considered as
Non-Resident.
 Residential Status of the Firm:

From the residential point of view the firm may be resident or non-resident. A partnership
firm said to be resident in India if control and management are partly or wholly situated
within India during the current previous year.

If control and management are situated out of India then the firm will b tad as Nonresident.

Residential Status of Association of Person (A.O.P)

The example for an association of person can be co-operative society. Club, charitable
institutions etc.,

Like firm, the residential status of an association of persons may be a) Resident b) Non-
Resident. To determine the residential status of an assessee the place of control and
management are considered. If the place of control is partly or fully with in India then it is
considered as resident. In other words if the place or control and management is out of India
then the association of persons will be considered as “ Non- Resident”..

Resident Status of the Company:

A company is which is incorporated under the companies Act, 1956 is known as India Company.
From the Resident point of view a company may be a) Resident b) Non-Resident.

A company is considered as ‘Resident’ if it is an Indian company i.e., incorporated or registered

under Indian companies Act or the control and management of it affairs is wholly situated in
India.

A company whose control and management is a situated wholly or partially outside India then
it is considered as non-Resident” company, control and management means the place where
the meeting of Board of Directors is held and not the place where paid employees, personal
managers will carry on their jobs.

Residential Status of Every Other Person:

Every other person includes a local authority and an artificial judicial person etc. The residential
status of these persons is determined by applying the test of situation of place of control and
management.

If the control and management is wholly or partially situated in India then it will be considered
as Resident.

If the place of control is wholly out of India then it is Non-Resident.

 Q18.What is Agricultural income and how it is treated for tax purpose? (or) What are the conditions to
be satisfied for an income to be treated as on agricultural income?

Sec.10(i) of the Income Tax, 1961 has exempted agricultural income from tax, however the agricultural
income is included in the total income to determine the tax on the non-agricultural income one of the
reasons for exemption of agricultural income from tax ( under the I.T Act) is that the ( the subject of )
agricultural income recording to this section, If the following three conditions are satisfied, income
derived from land in treated as agricultural income.

1. Rent or Revenue derived from land.

2. The Land is used for agricultural purpose.

3. The Land is situated in India.

Rent Or Revenue Derived from the Land:

If the owner of the land gives agricultural land on lease i.e., granting the right of using the land for
agricultural purpose then the rent received by the land-lord from the tenant either in cash or in kind
or a share in the output of the produce of a grower, will be heated as agricultural income.

The Land used for Agricultural Purpose:

To consider on income as agricultural income it is necessary that the land is used for agricultural
purpose. The test to be applied for determining whether on income is agricultural or not, is
performance of basic operations by the assessee. In agricultural the activities are classified into two.

(i) Basic Operations ii) Subsequent Operations.

(i) Basic Operations: If an agricultural operation involves involvement of human skill and labour and the
land prior to Generation of plants, then these operations is known as Basic Operations. The
examples are for basic operations. The examples for basic operations are cultivation, seeding,
plantation, watering and souring etc.

iii) Subsequent Operations: Operations performed after the produce sprouts then these
operations are known as subsequent operations. Wedding cutting, harvesting etc., are
examples for subsequent operations. If an assessee has performed basic concepts
operations and subsequent operations or only subsequent operations then the income
received by him is not considered as agricultural income.

For eg. Income derived from the forest trees, profit made by a trader or purchasing the standing
crop.

Land Situated In India:

The agricultural land must be situated in India i.e., income from agricultural lands which are situated
in a foreign country is not considered as agricultural income.

Income from House used for Agricultural Purpose:

Income from house property used for agricultural purpose is an exempted income, if the following
conditions are satisfied.

(i) The house is situated near to agricultural lands.

(ii) The house in under the control of agriculturist.

(iii) The building is used for conducting agricultural activities i.e., the house is used as store room
or for personal residence.

(iv) The house is subject to land revenue tax.

(v) The house is situated in a rural area.

Note: The land/house is not situated within 8 k.m from the municipal area and population of that
place is less than Rs.1,000.

The following incomes though connected with land are not considered as agricultural incomes.

i) Income from land used as stone quarries.

ii) Income from fisheries.

iii) Income from ferries.

iv) Income from supply of water for irrigational purposes, even which it is by way of shared of
agricultural produce

v) Income from land used for potteries or as brick fields.

vi) Income from land let for storing crops or timber.

vii) Income from mining royalties.

viii) Compensation for acquisition of land for non-agricultural purposes.

ix) Income from dairy and poultry farming cattle breeding, butter and cheese making.

x) Income of many lenders either received in cash or in kind on the loans given for
agricultural purpose.

Partly Agricultural land partly non-agricultural Income.

 If an income comprises of both agricultural and non agricultural incomes in such a case t
becomes necessary on the part of the assessee to segregate the income into two
components i.e., agricultural income and non-agricultural income.

For e.g.., profits of the agricultural lands and the agricultural output ( sugar cane in this
example) is used as raw material in the factory, in such a case the value of raw material used
will be ducted from the total income and the expenses incurred is cultivating the land etc.,
will not be allowed as a deduction while computing the profits from the business.. The raw
material is valued by taking the market price prevailing during the relevant previous year as
the base profit from rate of sugar is a non-agricultural income ( income from the business)

Income from Manufacturing of Tea, Coffee etc.,

If the assessee’s is income is from tea plantations and tea/coffee/rubber industry the
treatment of income is a under.

Partly Agricultural income and partly business income

Agricultural Income Business Income

1.income from growing and 60% 40%

manufacturing tea in India

2. Income from growing, 75% 25%

curing of coffee in India.

3.Income from growing, 60% 40%

curing, roasting coffee in
India

4.Income from growing and 65% 35%

manufacturing of rubber in
India.

Q19. Give ten items of income which are totally exempt from income- tax.

The following incomes are absolutely exempt from tax under section 10 of Income-Tax Act-tax, 1961.

(1) Agriculture income:

Section 10(1) of the income-Tax Act, 1961 exempts agricultural income from income-tax. Because of
the exemption it enjoys, it is necessary to clearly understand the definition of the term ‘Agricultural
Income’ under section2 (1A ) of the Act, agricultural income includes:

(a) Any rent or revenue derived from land which is situated in India and is used for agricultural
purposes.

(b) Income derived from such land by agriculture or from manufacturing process.

(c) Income from agricultural house property or from buildings.

(2) Receipts by a member from a Hindu Undivided Family:

Section 10(2) of the Income-Tax Act, 1961 exempts any sum received by an individual as a member
of a Hindu Undivided Family either out of income of the family or out of income of estate belonging
to the family is exempt from tax.

(3) Share of profit from partnership firm:

Section 10(2A) of the Income-Tax, 1961 exempts a share of a partner including a minor admitted for
the benefit of the firm in the total income of the partnership firm as such (PFAS).

(4) Interest paid to Non-Resident [Section 10(4) (i)]:

The amount of interest payable to a non-resident on such securities or bonds as the Central Govt.
may, by notification in the Official Gazette, specify in this behalf, including income by way of
premium on the redemption of such bonds, shall be exempt from tax.

(5) Interest to Non-Resident on Non-Resident (External) Account [Section 10(4) (ii)]

Any income by way of interest on money standing to his credit in a Non-Resident (External) Account
in any bank in India shall be exempt from tax in case of an individual who is a person resident
outside India or is a person who has been permitted by the RBI to maintain the aforesaid account.

The person residing outside India shall have the same meaning as defined under Foreign Exchange
Regulation Act, 1973, section 2(q).

(6) Interest paid to a person of Indian Origin and who is Non-Resident [Section 10(4B)]

In case of an individual, being a citizen of India or a person of Indian origin, who is non-resident, any
income from interest on such savings certificates issued by the Central Government, as Government
may specify in this behalf by notification in the Official Gazette, shall be fully exempt.

This exemption shall be allowed only if the individual has subscribed to such certificates in Foreign
Currency or other foreign exchange remitted from a country outside India in accordance with the
provisions of the Foreign Exchange Act, 1973 and any rules made there under.

For this purpose, as person shall be deemed to be of Indian origin if he or either of parents or any of
his grandparents, was born in India.
(7) Gratuity [Sec.10(10)]

(i) Death-cum-retirement gratuity – any such amount received by the employees working in
civil or Defense services of Government of India or on any part of state Govt. or Local
authority covered under Revised Pension Rules of the central Govt. shall be fully exempted.

(ii) Gratuity received under payment of Gratuity Act – shall be exempted up to an amount as
calculated in accordance with the provisions of such Act. Exempted up to least of the
following (a) 15 days salary last drawn for each ear of service. (b) Rs. 10,00,000 (c) Gratuity
actually received.

(iii) For other employees -- exempted up to least of the following:

(a) Statutory Limit Rs. 10, 00,000 i.e.;

(b) ½ month’s average salary for every one completed year of service;

(c) Actual gratuity received.

(8) Commuted value of pension received [Section 10(10(10A)]:

(i) The full amount of commuted value of pension received is exempted if it is received from the
Government, as local authority or a statutory corporation.

(ii) Any payment in commutation of pension received under any scheme from any other employer to
the extent it does not exceed:

(a) In a case where the employee received any gratuity, the commuted value of 1/3 rd of pension
which he is normally; entitled to receive and

(b) (b) In any other case the commuted value of ½ of such pension.

(9)Amount received as leave encashment on retirement [Section 10 (10AA)]:

(a) Central and State Govt. Employees: Any payment received as the cash equivalent of the leave
salary in respect of the earned leave at his credit at the time of his retirement shall be fully exempt.

(b) Other employees: Any payment received as the cash equivalent of the leave salary at his credit at
the time of superannuation shall be exempt up to least of the following four amounts:

(i) Actual amount received: (ii) Amount calculated at average salary of 10 months (average salary
means average of salary drawn by employee during 10 months immediately preceding the month of
his retirement) ; (iii) Cash equivalent of leave salary due at the time of retirement ; (iv) Notified Limit:
Rs. 3,00,000.

Excess of amount received over the least of the above shall be taxable.

(10) Retrenchment compensation paid to workmen [section 10 (10B];

The Finance Act, 1975 has inserted a new clause 10 B in section 10 of Income-tax Act which provides
the retrenchment compensation received by a workman shall be exempted from Income-tax to the
 extent such compensation does not exceed;(i) Amount calculated in accordance with the provisions
of Section 25 F(b) of the Industrial Disputes |Act, 1947, or (ii) Rs. 5,00,000, whichever is less.

This exemption will be available only to workmen as defined in Industrial Disputes Act, 1947.

Q20 What is the scope of total income of a person under income Tax Act,1961.

The tax is levied on total income of a person. The total income is based upon the residential status
of an asessee. Section 5 provides the scope of total income which varies on the basis of status.

The provisions of Section 5 can be expressed in following manner:

(i) Scope of total income of ‘ a Resident’ [Section 5(1)]:

(a) Income received or deemed to be received in India during the relevant accounting year. The
place and date of accrual is immaterial.

(b) Income which accrue or arises or is deemed to accrue or arise in India during the relevant
accounting year irrespective of the date and place of its receipt.

(c) Income accruing during the relevant accounting year outside India whether it is brought or not
into India during the year.

(ii) Scope of total income of ‘Not ordinarily Resident’ [Section 5(1)]:

(a) Income received or deemed tube received in India during the relevant accounting year. The date
and place of accrual is immaterial.

(b) Income which accrues or arises or is deemed to accrue or arise in India during the relevant
accounting year irrespective of the date and place of its receipt.

(c) Income accruing or deemed to accrue or deemed to be received outside India during the
relevant accounting year from a business set up in and controlled from India.

(iii) Scope of total income of ‘Non-Resident’ [section 5(2)]:

(a) Income received or deemed to be received in India during the relevant accounting year.
The date and place of accrual is immaterial,

(b) Income which accrues or arises or is deemed to accrue or arise in India during the
relevant year irrespective of the date and place of its receipt.
Different kinds of Resident Status Not Ordinarily Resident Non- Resident Status
Incomes Status

Income received or Taxable Taxable Taxable

deemed to be received in
India. It is immaterial
whether it is earned in
India or in a foreign
country

Income earned in India Taxable Taxable Taxable

whether received, paid in
India or outside India

Income earned and Taxable Taxable Not

received outside India
from a business
controlled or profession
set up in India. Income
may or may not be
remitted to India.

Income earned and Taxable Not Not

received outside India-
from any other source
(Except income under
point 3).

Income earned and Not Not Not

received outside India in
the years preceding the
previous year in question
and if the same is
remitted to India during
the current previous year.