DIRECT TAXATION 2019

Unit 1: (4 Hours)

Income Tax Act, 1961, Basic Concepts and definitions, Capital and revenue – receipts,
expenditures, Basis of charge and scope of total income , Residential Status and Incidence of
Tax, Incomes which do not form part of Total Income (Sec.10), Tax Planning, Tax Evasion and
Tax Management. (Problems on residential Status of Individual assessee).

Income Tax Act, 1961 is an act to levy, administrate, collect & recover Income-tax in India. It
came into force from 1st April 1962.

it is the tax that is collected by Central Government for each financial year levied on total taxable
income of an assessee during the previous year.

Type of Taxes:

Income Tax holds its importance for it is the money which tends to support the running of our
government. It is one of the major sources of revenue for the government and thus is inevitable
to not to impose it on the income earned or utilized in the country. It helps meet the funds
required to develop the country and other defense related needs of a nation.

There are basically two kinds of taxes –

Direct Tax and
Indirect Tax.

Direct Tax is tax that is paid by an individual or any other person on the basis of his Income. It is
a form of tax that is directly paid by the person to the government, i.e., the liability to pay the tax
and the burden of tax falls on the same person.

Indirect taxes are the types of taxes where the person depositing the tax with government and
the person actually having been burdened by the tax are different. Generally these taxes are
included in the prices of the goods or services which are provided to the people and then such
taxes are deposited by the person collecting the same from their customers. GST is one of the
most popular types of indirect tax.

Various Heads for Income under Income Tax Act 1961:

Every income arising to any person will always be classified under one of the following headers
provided by the Act: -
1. Salaries
2. Income from house property
3. Profit and gains of business or profession
4. Capital gains
5. Income from other sources

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Basic Concepts and definitions

 Assessee:
an assessee is a person who is liable to pay the taxes under any provision of Income Tax Act
1961. Assessee can also be a person with respect of whom any proceedings have been initiated or
whose income has been assessed under the Income Tax Act 1961 Assessee is any person who is
deemed assessee under any of the provisions of this act or an assessee in default under any
provisions of this Act.

As per Income Tax Act 1961 section 2(7):

"assessee" means 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 proceeding under this Act has been taken for the
assessment of his income or assessment of fringe benefits 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 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 ;

 Person:
As per section 2(31) of Income-Tax Act 1961, a Person would be any one who is-
 An Individual
 A HUF (Hindu Undivided Family)
 A Company
 A Firm
 An association of person or body of individuals whether incorporated or not
 A local Authority
 Every artificial and juridical person who is not included in any of the above mentioned
category.

 Assessment:
Assessment is primarily a process of determining the correctness of income declared by the
assessee and calculating the amount of tax payable by him and further procedure of imposing
that tax liability on that person.

 Assessment Year; As per Income Tax Act 1961 section 2(9)

Assessment year is the 12 months’ period commencing on 1st of April till 31st March of next
year. It is the year in which the income of previous year is assessed.
The assessment year 2019-20 will commence on 1 April 2019 to 31 march 2020.

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 Previous Year: As per Income Tax Act 1961 section 3

Previous year is a period in respect of which a person has to pay tax. In income tax act the
previous year is a period of 12 months beginning from April 1 to March 31.
Present previous year is 2018-19. (1-04-2018 to 31-03-2019).

 Income:
The definition of Income as per section 2 (24) is inclusive but not exhaustive of below mentioned
items:
 Any illegal income arising to the assessee
 Any income that is received at irregular intervals
 Any Taxable income that have been received from asource outside India
 Any benefit that can be measured in money
 Any subsidy or relief or reimbursement
 Gift the value of which exceed INR 50,000 without any consideration by an individual or
HUF.
 Any prize
 Causal incomes like winning from lotteries or horse race gambling etc.

 Gross total Income : As per Income Tax Act 1961 section 14

Gross Total Income is a cumulative income which is computed under the five heads of income,
i. salary
ii. house property
iii. business or profession
iv. capital gain and
v. Income from other sources.
The aggregate income under these heads is termed as “Gross Total Income “
In other words: Gross total Income means total income computed in accordance with the
provisions of the Act before making any deduction under Section 80C to 80 U.

 Agricultural income ; under section 2(1A) of the Income Tax Act, 1961.
Refers to income earned or revenue derived from sources that include farming land, buildings on
or identified with an agricultural land and commercial produce from a horticultural land
According to this Section, agricultural income generally means:
(a) Any rent or revenue derived from land which is situated in India and is used for agricultural
purposes.
(b) Any income derived from such land by agriculture operations including processing of
agricultural produce so as to render it fit for the market or sale of such produce.
(c) Any income attributable to a farm house subject to satisfaction of certain conditions specified
in this regard in section 2(1A).

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(d) Any income derived from saplings or seedlings grown in a nursery shall be deemed to be
agricultural income.
 Rounding-off of income [sec.288A]
The taxable income shall be rounded off to the nearest multiple of ten rupees and for this purpose
any part of a rupee consisting of paise shall be ignored and thereafter if such amount is not a
multiple of ten, then, if the last figure in that amount is five or more, the amount shall be
increased to the next higher amount which is a multiple of ten and if the last figure is less than
five, the amount shall be reduced to the next lower amount which is multiple of ten.

 Agricultural income
Agriculture income is not taxable.
agricultural income”means
[(a) any rent or revenue derived from land which is situated in India and is used for
agricultural purposes;]
(b) any income derived from such land by—
(i) agriculture; or
(ii) the performance by a cultivator or receiver of rent-in-kind of any process
ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or
received by him fit to be taken to market; or
(iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or
received by him, in respect of which no process has been performed other than a process of the
nature described in paragraph (ii) of this sub-clause ;
(c) any income derived from any building owned and occupied by the receiver of the
rent or revenue of any such land, or occupied by the cultivator or the receiver of rent-in-kind, of
any land with respect to which, or the produce of which, any process mentioned in paragraphs
(ii) and (iii) of sub-clause (b) is carried

 Difference between exemption and deduction

Deduction means the amount that will be subtracted from the gross amount. As per Income Tax
Act, deductions are the payments or investments made by the assessee through which a specific
amount or percentage is reduced from their gross total income to arrive at total taxable income.

If GTI is nil, then no deduction is allowable, or the amount of deduction cannot exceed GTI i.e.
deduction is allowable only to the extent of gross total income.
(80C to 80U) of the Income Tax Act, 1961 deals with deductions.
Example: Life insurance premium paid, medical insurance premium paid, donations to charitable
institutions, etc.

The exemption is derived from the word exempt which means an amount which is not liable to
something. In income tax, exemption refers to those incomes which are not considered while

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calculating the total income. Hence, such source of incomes excluded from taxable incomes or
not chargeable to tax.
In the list of exempted incomes, certain incomes are completely exempt from tax like
agricultural income. But certain incomes are partly exempt from tax, in which exemption is
given up to the specified limit. The exceeding part of partly exempted income will be subject to
tax and considered while computing the gross total income.
Exemptions are provided in Section 10.

Comparison Chart
BASIS FOR
DEDUCTION EXEMPTION
COMPARISON

Meaning Deduction means subtraction i.e. Exemption means exclusion, i.e. if

an amount that is eligible to certain income is exempt from tax
reduce taxable income. then it will not contribute to the total
income of a person.

What is it? Concession Relaxation

Concept The amount of deduction is first The exempted income is not

included in the gross income and considered as a part of total income,
then deducted from it to arrive at the whole amount is an exemption
the net income. for the taxpayer.

Income is Tax deductible Tax free

Objective To promote savings and To boost that particular section in

investments of the general public. which tax is exempted.

Sections Section 80 C to 80 U deals with Section 10 deals with exemptions

deduction

Allowable to Specific persons All the persons

Conditional Yes No

Deduction is mainly used by the government to promote savings to increase investments in

certain areas, for which the income of the assessee is reduced to that extent. Likewise,
exemptions are used to help the weaker sections of the society to grow and prosper. By
providing exemptions, the government is trying to give an equal opportunity to boost that
segment.

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 Capital Receipts
Capital receipts are those receipts which either create a liability or reduce an asset. Capital
Receipts, as mentioned above, are non-recurring in nature. And these sorts of receipts are also
not received every now and then.

Types of Capital Receipts

1. Borrowing funds
When a company takes loans from banks or financial institutions, then it would be called
borrowing funds. Borrowing funds from a financial institution is one of three forms of capital
receipts.
2. Recovery of loans
To recover loans, often company needs to set aside one part of assets which reduces the value of
assets. This is the second type of capital receipts.
3. Other Capital Receipts
There’s a third type of receipts which we call “other capital receipts”. Under this, we include
disinvestment and small savings. Disinvestment means selling off one part of the business.
Disinvestment is called capital receipt because it reduced the asset of the company. Small
savings are called capital receipts because they create a liability for the business.

Examples of Capital Receipts

a. The money received from the shareholders
b. The money received from the debenture holders
c. Loans taken from banks or financial institutions
d. Sale of Investments
e. Sale of Equipment
f. Insurance claim for damaged plant & machinery

 Revenue receipts,
Revenue Receipts are those receipts which neither reduce the assets of the company nor they
create any liability. They are always recurring in nature and they are earned during the normal
course of business.
Examples of Revenue Receipts
a. Revenue earned by selling off waste/scrap material
b. Discount received from vendors
c. Services provided (When a firm provides services to its clients or customers, they earn
revenues.)
d. Interest received (If a firm has put their money in any bank or financial institution)
e. Rent received
f. Dividend received

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 Capital Expenditure
Capital expenditures represent major investments of capital that a company makes to maintain or,
more often, to expand its business and generate additional profits. Capital expenses are for the
acquisition of long-term assets, such as facilities or manufacturing equipment.

Because such assets provide income-generating value for a company for a period of years,
companies are not allowed to deduct the full cost of the asset in the year the expense is incurred;
they must recover the cost through year-by-year depreciation over the useful life of the asset.
Companies often use debt financing or equity financing to cover the substantial costs involved in
acquiring major assets for expanding their business.

 Revenue expenditures,
Revenue expenses are shorter-term expenses that are broken down into two categories:
 Expenditures for generating revenue include expenses required to meet the ongoing
operational costs of running a business, and thus are essentially the same as operating
expenses. Unlike capital expenditures, revenue expenses can be fully tax-deducted in the
same year the expenses occur.
 Expenditures for maintenance of revenue-generating assets include the ordinary
repair and maintenance costs that are necessary to keep the asset in working order
without substantially improving or extending the useful life of the asset. Revenue
expenses related to existing assets include repairs and regular maintenance as well as
repainting and renewal expenses. Revenue expenditures can be considered to be recurring
expenses in contrast to the one-off nature of most capital expenditures.

 Basis of charge and scope of total income,

Section -5 of Income Tax Act, 1961 provides Scope of total Income in case of of person who is
a resident, in the case of a person not ordinarily resident in India and person who is a non-
resident which includes.
Income can be Income from any source which
(a) is received or is deemed to be received in India in such year by or on behalf of such person ;
or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year ; or
(c) accrues or arises to him outside India during such year .
Explanation 1 & 2:-
Income accruing or arising outside India shall not be deemed to be received in India within the
meaning of this section by reason only of the fact that it is taken into account in a balance sheet
prepared in India.
Income which has been included in the total income of a person on the basis that it has accrued
or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis
that it is received or deemed to be received by him in India.

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Table explaining Scope of total Income under section 5 of Income Tax Act, 1961
Particulars Tax Incidence in case of ----
Residen Resident Non-
t But Not Residen
Ordinaril t of
y Resident India
a. Income received in India weather accrued in India or Yes Yes Yes
outside India.
b. Income deemed to be received in India whether Yes Yes Yes
accrued in India or outside India.
c. Income accrued or arising in India whether received Yes Yes Yes
in India or outside India.
d. Income deemed to be accrued or arising in India Yes Yes Yes
whether received in India or outside India.
e. Income received and accrued outside India from a Yes Yes NO
business controlled in profession set up in India
f. Income received and accrued outside India from a Yes NO NO
business controlled from outside India or a
profession set up out India
g. Income Received or accrued outside India form any Yes NO NO
other sources
h. Income earned and received outside India but later NO NO NO
on remitted to India.
Total a to g a to g a to g

Residential Status ;
The taxability of an individual in India depends upon his residential status in India for any
particular financial year. The term residential status has been coined under the income tax laws
of India and must not be confused with an individual’s citizenship in India. An individual may be
a citizen of India but may end up being a non-resident for a particular year. Similarly, a foreign
citizen may end up being a resident of India for income tax purposes for a particular year.

Also to note that the residential status of different types of persons viz an individual, a firm, a
company etc is determined differently. In this article, we have discussed about how the
residential status of an individual taxpayer can be determined for any particular financial year

For the purpose of income tax in India, the income tax laws in India classifies taxable persons as:
a. A resident
b. A resident not ordinarily resident (RNOR)
c. A non-resident (NR)

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The taxability differs for each of the above categories of taxpayers. Before we get into taxability,
let us first understand how a taxpayer becomes a resident, an RNOR or an NR.

Reside
RESIDENTIAL
STATUS

NON
NON RESIDENT
RESIDENT OF
OF
RESIDENT
RESIDENT OF
OF INDIA
INDIA INDIA
INDIA (NRI)
(NRI)

RESIDENT BUT NOT

RESIDENT BUT NOT
ORDINERY
ORDINERY RESIDENT
RESIDENT ORDINERY RESIDENT
OF INDIA
OF INDIA
OF INDIA
ntial Status of an individual [u/sec. 6]
Basic condition [U/sec. 6 (1)]
a. He is in India in previous year for a period of 182 days or more.
b. He is in India for a period of 60 days or more during the previous year and for a period of 365
days or more during the 4 years immediately preceding the previous year.

Additional Conditions [U/sec. 6 (6)]

a. He has been a resident of India in at least 2 out of 10 preceding the relevant previous years.
b. He has been in India for a period of 730 days or more during 7 years immediately preceding the
relevant previous years.

EXAMPTIONs; Basic condition (b) is not taken into consideration in two special cases given
below.
Special case 1; it covers an Indian citizen who leaves India during the previous year for the
purpose of employment outside India or an Indian citizen who leaves India during the previous
year as a member of the crew of an Indian ship. For this purpose, the requirement is not leaving
India for taking employment outside India but leaving India for the purpose of employment (the
employment may be in India or may be outside India). To put it differently, the individual need
not be an unemployed person. He may be employed in India and Leave India during the previous
year on a foreign assignment of his employer company. Alternatively, he may be an unemployed
person who goes outside India to take an employment outside India.
Special case 2; it covers an Indian citizen or a person of Indian origin who comes on a visit to
India during the previous year. A person is deemed to be of Indian Origin if he, or either of his
parents or any of his grandparents, was born in undivided India. It may be noted that grand-
parents include both maternal and paternal grandparents.

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In these two special cases, an individual will be resident in India only if he is in India during the
relevant previous year for at least 182days.

 Incomes which do not form part of Total Income (Sec.10),

Incomes which do not form part of total income are exempt income. Thus income, to the extent
they are exempt, are not included in the total income for computation of his total income. As
per section 10 to 13A. Certain incomes are totally exempt from tax or exempt upto a certain
amount.

a. Agriculture Income [Section 10(1)]

As per section 10(1), agricultural income earned by the taxpayer in India is exempt from tax.
Agricultural income is defined under section 2(1A) of the Income-tax Act. As per section 2(1A),
agricultural income generally means:
 Any rent or revenue derived from land which is situated in India and is used for
agricultural purposes.
 Any income derived from such land by agriculture operations including processing of
agricultural produce so as to render it fit for the market or sale of such produce.
 Any income attributable to a farm house subject to satisfaction of certain conditions
specified in this regard in section 2(1A). Any income derived from saplings or seedlings
grown in a nursery shall be deemed to be agricultural income.

b. Any sum received by a Co-parcener from Hindu Undivided Family (H.U.F.) [Section
10(2)]
As per section 10(2), amount received out of family income, or in case of impartible estate,
amount received out of income of family estate by any member of such HUF is exempt from tax.

c. Share of Income from the Firm [Section 10(2A)]

As per section 10(2A), share of profit received by a partner from a firm is exempt from tax in the
hands of the partner. Further, share of profit received by a partner of LLP from the LLP will be
exempt from tax in the hands of such partner. This exemption is limited only to share of profit
and does not apply to interest on capital and remuneration received by the partner from the
firm/LLP.

(Refer Study Material for full Concepts)

 Tax Planning,

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Logical analysis of a financial situation or plan from a tax perspective, to align financial goals
with tax efficiency planning. The purpose of tax planning is to discover how to accomplish all of
the other elements of a financial plan in the most tax-efficient manner possible. Tax planning
thus allows the other elements of a financial plan to interact more effectively by minimizing tax
liability.

 Tax Evasion
It is the general term for efforts by individuals, corporations, trusts and other entities to evade
taxes by illegal means. Tax evasion usually entails taxpayers deliberately misrepresenting or
concealing the true state of their affairs to the tax authorities to reduce their tax liability, and
includes, in particular, dishonest tax reporting (such as declaring less income, profits or gains
than actually earned; or overstating deductions).

 Tax Management.
Every assessee liable to pay tax needs to manage his/her taxes. Tax management relates to
management of finances for payment of tax, assessing the advance tax liability to pay tax in time.

Tax management has nothing to do with planning to save tax it is just related with operational
aspect of payment of tax i.e. while managing his taxes a person ensures that he/she is making
timely payment of taxes without running out of the money and he is complying with all the
provisions of the law.

Tax management means, the management of finances, for the purpose of paying tax.
 The objective of Tax Management is to comply with the provisions of Income Tax Law
and its allied rules
 Tax Management deals with filing of Return in time, getting the accounts audited,
deducting tax at source etc.
 Tax Management relates to Past ,. Present, Future.
Past – Assessment Proceedings, Appeals, Revisions etc.
Present – Filing of Return, payment of advance tax etc.
Future – To take corrective action
 Tax Management helps in avoiding payment of interest, penalty, prosecution .
 Tax Management is essential for every assessee.

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