The document discusses the key aspects of direct taxes in India such as income tax, corporation tax, wealth tax, and capital gains tax. It provides definitions and explanations of direct taxes, income tax, and compares direct taxes with indirect taxes. Some of the key points made in the document include:
- Direct taxes are taxes that are directly paid to the government by the taxpayer. They include income tax, corporation tax, and wealth tax.
- Income tax is paid based on an individual's taxable income in a given financial year after deductions and exemptions. Corporation tax is paid by companies on worldwide income.
- Direct taxes cannot be shifted to another entity while indirect taxes can be shifted from one taxpayer to another.
1. 1
INTRODUCTION
The taxes are the basic source of revenue for the Government. Revenue raised from the taxes
are utilized for meeting the expense of Government like, provision of education,
infrastructure facilities such as roads, dams etc.
Tax is the financial charge imposed by the Government on income, commodity or activity.
Government imposes two types of taxes namely Direct taxes and Indirect taxes. Under direct
taxes, person who pays the tax bears the burden of it example: Income tax, Wealth Tax etc.
while in Indirect Taxes the person who consumes the goods or services example: Service
Tax, Value Added Tax, Excise Duty etc.
The first Income Tax Act in India was introduced in 1860. The present law of income tax is
contained in Income Tax Act, 1961. This Act is the charging Statute of Income Tax in India.
It provides for levy, administration, collection and recovery of Income Tax. The Income Tax
Law comprises The Income Tax Act 1961, Income Tax Rules 1962, Notifications and
Circulars issued by Central Board of Direct Taxes (CBDT), Annual Finance Acts and Judicial
pronouncements by Supreme Court and High Courts.
Direct Taxes, as the name suggests, are taxes that are directly paid to the government by the
taxpayer. It is a tax applied on individuals and organizations directly by the government e.g.
income tax, corporation tax, wealth tax etc.
DIRECT TAXES
Income Tax
Income Tax is paid by an individual based on his/her taxable income in a given financial
year. Under the Income Tax Act, the term ‘individual’ also includes Hindu Undivided
Families (HUFs), Co-operative Societies, Trusts and any artificial judicial person. Taxable
income refers to total income minus applicable deductions and exemptions.
Tax is payable if the taxable income is above the minimum taxable limit and is paid as per the
differing rates announced for each tax slab for the financial year.
2. 2
CorporationTax
Corporation Tax is paid by Companies and Businesses operating in India on the income
earned worldwide in a given financial year. The rates of taxation vary based on whether the
company is incorporated in India or abroad.
Wealth Tax
Wealth tax is applicable on individuals, HUFs or companies on the value of their assets in a
given financial year on the date of valuation. It is taxed at the rate of 1% of the net wealth of
any assesse exceeding Rs 30,00,000.
‘Net wealth’ here includes, unproductive assets like cash in hand above Rs 50,000, second
residential property not rented out, cars, gold jewellery or bullion, boats, yachts, aircrafts or
urban land. It does not include productive assets like commercial property, stocks, bonds,
fixed deposits, mutual funds etc.
Capital Gains Tax
The profits made on sale of property are taxable under Capital Gains Tax. Property here
includes stocks, bonds, residential property, precious metals etc. It is taxed at two different
rates based on how long the property was owned by the taxpayer – Short Term Capital Gains
Tax and Long Term Capital Gains Tax. This deciding period of ownership varies greatly for
different classes of property.
3. 3
DEFINITION
DEFINITION of'Direct Tax’
A tax that is paid directly by an individual or organization to the imposing entity. A taxpayer
pays a direct tax to a government for different purposes, including real property tax, personal
property tax, income tax or taxes on assets. Direct taxes are different from indirect taxes,
where the tax is levied on one entity, such as a seller, and paid by another, such a sales tax
paid by the buyer in a retail setting.
BREAKING DOWN 'Direct Tax’
A direct tax cannot be shifted to another individual or entity. The individual or organization
upon which the tax is levied is responsible for the fulfillment of the tax payment. Indirect
taxes, on the other hand, can be shifted from one taxpayer to another.
DEFINITION of'Income Tax'
A tax that governments impose on financial income generated by all entities within their
jurisdiction. By law, businesses and individuals must file an income tax return every year to
determine whether they owe any taxes or are eligible for a tax refund. Income tax is a key
source of funds that the government uses to fund its activities and serve the public
BREAKING DOWN 'Income Tax'
Most countries employ a progressive income tax system in which higher income earners pay
a higher tax rate compared to their lower earning counterparts.
The first income tax imposed in America was during the War of 1812. Its original purpose
was to fund the repayment of a $100 million debt that was incurred through war-related
expenses. After the war, the tax was repealed, but income tax became permanent during the
early 20th century.
4. 4
DIFFERENCE BETWEEN DIRECT TAX AND
INDIRECT TAX
Basis of
Comparison
Direct Tax Indirect Tax
Meaning
Direct tax is referred to as the tax,
which is paid by the person to the
government to whom it is levied and
charged on the income and wealth of
persons.
Indirect Tax is referred to as the
tax, which is paid by the taxpayer
to the government indirectly,
charged on goods and services.
Burden
The person on whom it is levied bears
its burden.
The burden of tax can be shifted
to another person.
Types
Wealth Tax, Income Tax, Property
Tax, Corporate Tax, Import and Export
Duties.
Central Sales tax, VAT (Value
Added Tax), Service Tax, STT
(Security Transaction Tax),
Excise Duty, Custom Duty.
Evasion Tax evasion is possible.
Tax evasion is hardly possible
because it is included in the price
of goods and services.
Inflation Direct tax helps in reducing inflation. Indirect taxes promotes inflation.
Levied on
Persons, i.e. Individual, HUF (Hindu
Undivided Family), Company, Firm
etc.
Consumers of goods and services.
Nature Progressive Regressive
5. 5
MERITS OF DIRECT TAX
Following are the important advantages or merits of Direct Taxes:-
Equity
There is social justice in the allocation of tax burden in case of direct taxes as they are
based on the principle of ability to pay. Persons in a similar economic situation are taxed
at the same rate. Persons with different economic standing are taxed at a different rate.
Hence, there is both horizontal and vertical equity under direct taxation. Progressive
direct taxation can reduce income inequalities and bring about adequate social &
economic justice.
Certainty
As far as direct taxes are concerned, the tax payer is certain as to how much he is
expected to pay, as the tax rates are decided in advance. The Government can also
estimate the tax revenue from direct taxes with a fair accuracy. Accordingly, the
Government can make adjustments in its income and expenditure.
Relatively Elastic
The direct taxes are relatively elastic. With an increase in income and wealth of
individuals and companies, the yield from direct taxes will also increase. Elasticity also
implies that the government's revenue can be increased by raising the rates of taxation.
An increase in tax rates would increase the tax revenue.
Creates Public Consciousness
They have educative value. In the case of direct taxes, the taxpayers are made to feel
directly the burden of taxes and hence take keen interest in how public funds are spent.
The taxpayers are likely to be more aware about their rights and responsibilities as
citizens of the state.
6. 6
Economical
Direct taxes are generally economical to collect. For instances, in the case of personal
income tax, the tax can be deducted at source from the income or salaries of the
individuals. Therefore, the government does not have to spend much in tax collection as
far as personal income tax is concerned. However, in the case of indirect taxes, the
government has to set up an elaborate machinery to collect taxes.
Anti-inflationary
The direct taxes can help to control inflation. During inflationary periods, the government
may increase the tax rate. With an increase in tax rate, the consumption demand may
decline, which in turn may reduce inflation.
7. 7
DEMERITS OF DIRECT TAX
Though direct taxes possess above mentioned merits, the economist have criticised them on
the following grounds:-
Tax Evasion
In India, there is good amount of tax evasion. The tax evasion is due to High tax rates,
Documentation and formalities, Poor and corrupt tax administration. It is easier for the
businessmen to evade direct taxes. They invariable suppress correct information about
their incomes by manipulating their accounts and evade tax on it.
In less developed countries like India, due to high rate of progressive tax evasion &
avoidance are extensive and led to rise in black money.
Arbitrary Rates
The direct taxes tend to be arbitrary. Critics point out that there cannot be any objective
basis for determining tax rates of direct taxes. Also, the exemption limits in the case of
personal income tax, wealth tax, etc., are determined in an arbitrary manner. A precise
degree of progression in taxation is also difficult to achieve. Therefore direct taxes may
not always fulfill the canon of equity.
Inconvenient
Direct taxes are inconvenient in the sense that they involve several procedures and
formalities in filing of returns. For most people payment of direct tax is not only
inconvenient, it is psychological painful also. When people are required to pay a sizeable
part of their income as a tax to the state, they feel very much hurt and their propensity to
evade tax remains high. Further everyone who is required to pay a direct tax has to
furnish appropriate evidence in support of the statement of his income & wealth & for
this he has to maintain his accounts in proper form. Direct tax is considered inconvenient
by some people because they have to make few lump sum payments to the governments,
whereas their income receipts are distributed over the whole year.
8. 8
Narrow Coverage
In India, there is a narrow coverage of direct taxes. It is estimated that only three percent
of the population pay personal income tax. Due to low coverage, the government does not
get enough funds for public expenditure. Estate duty & wealth tax are equally narrow
based and thus revenue proceeds from these taxes are invariably small.
Affects CapitalFormation
The direct taxes can affect savings and investment. Due to taxes, the net income of the
people gets reduced. This in turn reduces savings. Reduction in savings results in low
investment. The low investment affects capital formation in the country.
Effecton Willingness and Ability to Work
Highly progressive direct taxes reduce people's ability and willingness to work and save.
This in turn may have a negative impact on investment and productive capacity in the
economy. If tax burden is high, people's consumption level gets adversely affected and
this has an impact on their ability to work and save. High taxes also discourage people
from working harder in order to earn and save more.
SectoralImbalance
In India, there is Sectoral imbalance as far as direct taxes are concerned. Certain sectors
like the corporate sector is heavily taxed, whereas, the agriculture sector is 100% tax free.
Even the large rich farmers are exempted from payment of personal income tax.
9. 9
SCOPE OF TOTAL INCOME
The following points should be noted in regard to scope of income:
While S. 4 makes the total income of the previous year chargeable to tax, S. 5 defines the
scope of the total income so chargeable to tax. It determines the extent and scope of income
which is chargeable to tax. The term “scope of income” means which items of income are
included and which are excluded while computing tax liability.
The scope of income depends upon the residential status of the person. There are three broad
categories of persons:
a) Resident and ordinary resident
b) Non- resident and
c) Resident but not ordinarily resident.
Section 5 lays down what types of income would be taxable in the case of assessees
belonging to each of these categories.
It should be noted that section 5 specifically states that the income is to be computed “subject
to the provisions of this act”. Thus, if any item of income is exempt under the provisions of
the act, it is to be excluded from the scope of income.
RESIDENT AND ORDINARY RESIDENT
A resident and ordinary resident is taxable in respect of any income, from whatever source
derived, which:
(a) Is received, or deemed to be received in India, in the previous 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 the previous
year; or
(c) Accrues or arises to him outside India, during the previous year.
Thus, in the case of a ‘resident and ordinary resident’, his total income includes any income
received, or accruing or arising in India, and any income accruing or arising outside India (or
10. 10
deemed to be so received, or accruing or arising, as the case may be). In short, the entire
‘World Income’ (Indian Income+ Foreign Income) of an ordinary resident is to be included in
his total income.
RESIDENT BUT NOT ORDINARY RESIDENT
A person not ordinary resident in India, is taxable in respect of any income, from whatever
source derived, which-
(a) Is received, or deemed to be received, in India, in the previous 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 the previous
year; or
(c) Accrues or arises to him, outside India, from a business controlled from or a profession set
up in India.
Thus, in the case of a not ordinary resident, while the Indian Income is to be included in the
total income, the foreign income is to be included only if it is derived from a business
controlled in or a profession set up in India. So, the liability of a ‘Not-Ordinary Resident’ in
respect of the Foreign Income is much less as compared with that of the ‘Ordinary Resident’.
NON-RESIDENT
A resident who is a non-resident, is taxable in respect of any income, from whatever source
derived, which-
(a) Is received in India, or is deemed to be received in India, in the previous 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 the previous
year.
Thus, in the case of a ‘non-resident’ his taxable income includes only his Indian income
during that year. The Foreign Income of a non-resident is not taxable under The Indian
Income-Tax Act. So, the liability of a non-resident is the lowest among all the types of
residents under The Income Tax Act.
11. 11
RESIDENTIAL STATUS AND TAXABILITY OF INCOME
NATURE OF
INCOME
RESIDENT &
ORDINARY
RESIDENT
RESIDENT BUT
NOT ORDINARY
RESIDENT
NON RESIDENT
Income received in
India
Taxable Taxable Taxable
Income which
accrues or arises in
India
Taxable Taxable Taxable
Income deemed to
be received in India
Taxable Taxable Taxable
Income deemed to
accrue in India
Taxable Taxable Taxable
Income which
accrues and arises
outside India from a
business controlled
from India/
profession set up in
India.
Taxable Taxable Not Taxable
Any other income
which accrues or
arises outside India
Taxable Not Taxable Not Taxable
12. 12
NOTE:
1) Indian income is taxable in all cases, whether of an ordinary resident, or a not-ordinary
resident, or a non-resident. Indian income includes income received or accruing or arising
in India, or deemed to be received in India.
2) Foreign income of an ordinary resident is wholly taxable.
3) Foreign income of a not-ordinary resident is taxable only if derived from a business
controlled or profession set up in India.
4) Foreign income of a non-resident is not taxable at all.
[As per S.1, the Act extends to whole of India i.e. it applies to all residents of India and to all
income arising in India. hence all income earned by a resident (whether arising in or outside
India), while all income arising in India is taxable (whether earned by a resident or a non-
resident).]
13. 13
Illustration
From the following income of Mr. Rohit for the previous year 2014-15, compute his gross
total income for the assessment year 2015-16 if he is-
(a) Resident and ordinary resident
(b) Resident but not ordinary resident
(c) Non-resident
Income
1. Dividend received from Mac-Donalds Ltd. a USA Company in USA 18000
2. Rent received from house in Kolkata 60000
3. Income from agriculture in Sri Lanka 50000
4. Income from business in Dhaka, controlled from Mumbai 60000
5. Rent from office property in UK credited to bank account in Switzerland 20000
6. Income from profession in Nairobi received in Nairobi which was set up
in India
30000
7. Past untaxed foreign income brought to India, during the previous year 10000
8. Royalties from Indian Companies 40000
14. 14
Solution:
Name: Mr. Rohit
Previous Year: 2014-15 Assessment Year: 2015-16
Computation Of Total
Income Income R&OR
R but
NOR NR
1.Dividend received from Mac-
Donalds Ltd. USA Company in
USA
2.Rent received from house in
Kolkata
3.Income from Agriculture in Sri
Lanka
4.Income from business in Dhaka
controlled from Mumbai
5.Rent from office property in UK
credited to bank account in
Switzerland
6.Income from profession in
Nairobi received in Nairobi
which was set up in India
7.Past untaxed foreign income
brought to India during the
previous year
8.Royalties from Indian
Companies
Gross Total Income
Foreign
Indian
Foreign
Foreign
Foreign
Foreign
Remittance
(Not Income)
Indian
18000
60000
50000
60000
20000
30000
-
40000
278000
-
60000
-
60000
-
30000
-
40000
190000
-
60000
-
-
-
-
-
40000
100000
15. 15
INCOME FROM SALARY
MEANING
The meaning of the term ‘salary’ for purposes of income tax is much wider than what is
normally understood. Every payment made by an employer to his employee for service
rendered would be chargeable to tax as income from salaries. The term ‘salary’ for the
purposes of Income-tax Act, 1961 will include both monetary payments (e.g. basic salary,
bonus, commission, allowances etc.) as well as non-monetary facilities (e.g. housing
accommodation, medical facility, interest free loans etc).
(1) Employer-employee relationship:
Before an income can become chargeable under the head ‘salaries’, it is vital that there
should exist between the payer and the payee, the relationship of an employer and an
employee. Consider the following examples:
(a) Sujatha, an actress, is employed in Chopra Films, where she is paid a monthly
remuneration of `2 lakh. She acts in various films produced by various producers. The
remuneration for acting in such films is directly paid to Chopra Films by the different
producers. In this case, `2 lakh will constitute salary in the hands of Sujatha, since the
relationship of employer and employee exists between Chopra Films and Sujatha.
(b) In the above example, if Sujatha acts in various films and gets fees from different
producers, the same income will be chargeable as income from profession since the
relationship of employer and employee does not exist between Sujatha and the film
producers.
(c) Commission received by a Director from a company is salary if the Director is an
employee of the company. If, however, the Director is not an employee of the company,
the said commission cannot be charged as salary but has to be charged either as income
from business or as income from other sources depending upon the facts.
(d) Salary paid to a partner by a firm is nothing but an appropriation of profits. Any salary,
bonus, commission or remuneration by whatever name called due to or received by
16. 16
partner of a firm shall not be regarded as salary. The same is to be charged as income
from profits and gains of business or profession. This is primarily because the
relationship between the firm and its partners is not that of an employer and employee.
(2) Full-time or part-time employment:
It does not matter whether the employee is a full-time employee or a part-time one. Once the
relationship of employer and employee exists, the income is to be charged under the head
“salaries”. If, for example, an employee works with more than one employer, salaries
received from all the employers should be clubbed and brought to charge for the relevant
previous years.
(3) Foregoing ofsalary:
Once salary accrues, the subsequent waiver by the employee does not absolve him from
liability to income-tax. Such waiver is only an application and hence, chargeable to tax.
Example: Mr. A, an employee instructs his employer that he is not interested in receiving the
salary for April 2013 and the same might be donated to a charitable institution. In this case,
Mr. A cannot claim that he cannot be charged in respect of the salary for April 2013. It is
only due to his instruction that the donation was made to a charitable institution by his
employer. It is only an application of income. Hence, the salary for the month of April 2013
will be taxable in the hands of Mr. A. He is however, entitled to claim a deduction under
section 80G for the amount donated to the institution.
(4) Surrender of salary:
However, if an employee surrenders his salary to the Central Government under section 2 of
the Voluntary Surrender of Salaries (Exemption from Taxation) Act, 1961, the salary so
surrendered would be exempt while computing his taxable income.
(5) Salary paid tax-free:
This, in other words, means that the employer bears the burden of the tax on the salary of the
employee. In such a case, the income from salaries in the hands of the employee will consist
of his salary income and also the tax on this salary paid by the employer.
17. 17
DEFINITION OF SALARY
The term ‘salary’ has been defined differently for different purposes in the Act. The
definition as to what constitutes salary is very wide. As already discussed earlier, it is an
inclusive definition and includes monetary as well as non-monetary items. There are different
definitions of ‘salary’ say for calculating exemption in respect of gratuity, house rent
allowance etc.
‘Salary’ under section 17(1), includes the following:
(i) Wages,
(ii) Any annuity or pension,
(iii) Any gratuity,
(iv) Any fees, commission, perquisite or profits in lieu of or in addition to any salary or
wages,
(v) Any advance of salary,
(vi) Any payment received in respect of any period of leave not availed by him i.e. leave
salary or leave encashment,
(vii) The portion of the annual accretion in any previous year to the balance at the credit of an
employee participating in a recognised provident fund to the extent it is taxable and
(viii) Transferred balance in recognized provident fund to the extent it is taxable,
(ix) The contribution made by the Central Government or any other employer in the previous
year to the account of an employee under a pension scheme referred to in section
80CCD.
BASIS OF CHARGE
1. Section 15 deals with the basis of charge. Salary is chargeable to tax either on ‘due’ basis
or on ‘receipt’ basis, whichever is earlier.
2. However, where any salary, paid in advance, is assessed in the year of payment, it cannot
be subsequently brought to tax in the year in which it becomes due.
18. 18
3. If the salary paid in arrears has already been assessed on due basis, the same cannot be
taxed again when it is paid.
Examples:
i. If A draws his salary in advance for the month of April 2014 in the month of March 2014
itself, the same becomes chargeable on receipt basis and is to be assessed as income of the
P.Y.2013-14 i.e., A.Y.2014-15. However, the salary for the A.Y.2015-16 will not include
that of April 2014.
ii. If the salary due for March 2014 is received by A later in the month of April 2014, it is still
chargeable as income of the P.Y.2013-14 i.e. A.Y.2014-15 on due basis. Obviously, salary
for the A.Y.2015-16 will not include that of March 2014.
ADVANCE SALARY
Advance salary is taxable when it is received by the employee irrespective of the fact whether
it is due or not. It may so happen that when advance salary is included and charged in a
particular previous year, the rate of tax at which the employee is assessed may be higher than
the normal rate of tax to which he would have been assessed. Section 89(1) provides for relief
in these types of cases.
LOAN OR ADVANCE AGAINST SALARY
Loan is different from salary. When an employee takes a loan from his employer, which is
repayable in certain specified installments, the loan amount cannot be brought to tax as salary
of the employee.
Similarly, advance against salary is different from advance salary. It is an advance taken by
the employee from his employer. This advance is generally adjusted with his salary over a
specified time period. It cannot be taxed as salary.
ARREARS OF SALARY
Normally speaking, salary arrears must be charged on due basis. However, there are
circumstances when it may not be possible to bring the same to charge on due basis. For
example if the Pay Commission is appointed by the Central Government and it recommends
19. 19
revision of salaries of employees, the arrears received in that connection will be charged on
receipt basis. Here, also relief under section 89(1) is available.
PROVIDENT FUND
Provident fund scheme is a scheme intended to give substantial benefits to an employee at the
time of his retirement. Under this scheme, a specified sum is deducted from the salary of the
employee as his contribution towards the fund. The employer also generally contributes the
same amount out of his pocket, to the fund. The contribution of the employer and the
employee are invested in approved securities. Interest earned thereon is also credited to the
account of the employee. Thus, the credit balance in a provident fund account of an employee
consists of the following:
(i) Employee’s contribution
(ii) Interest on employee’s contribution
(iii) Employer’s contribution
(iv) Interest on employer’s contribution.
The accumulated balance is paid to the employee at the time of his retirement or resignation.
In the case of death of the employee, the same is paid to his legal heirs. The provident fund
represents an important source of small savings available to the Government. Hence, the
Income-tax Act, 1961 gives certain deductions on savings in a provident fund account. The
following are the types of provident funds:
(i) Statutory Provident Fund (SPF)
(ii) Recognised Provident Fund (RPF)
(iii) Unrecognised Provident Fund (URPF)
20. 20
The tax treatment is given below:
PARTICLUARS
STATUTORY
PF
RECOGNOSED
PF
UNRECOGNISED
PF
EMPLOYEE’S
CONTRIBUTION
Ignore Ignore Ignore
EMPLOYER’S
CONTRIBUTION
Fully Exempt
Exempt Upto
12% [Basic
Salary+ DA (In
Terms)+
Turnover
Commission]
Fully Exempt
INTEREST
CREDITED
Fully Exempt
Exempt Upto
9.5%
Fully Exempt
LUMPSUM
RECEIVED
Exempt u/s
10(11)
Exempt u/s
10(12)
Taxable
(Divided In 4 Parts)
21. 21
LUMPSUM RECEIVED FROM UNRECOGNISED PF
CONTRIBUTION INTEREST
Employee’s Employer’s On On
Contribution Contribution Employer’s Employee’s
Contribution Contribution
IGNORE TAXABLE AS IFS TAXABLE
AS IFOS
LUMPSUM RECEIVED FROM RECOGNISED PROVIDENT
FUND
AFTER 5 YEARS WITHIN 5 YEARS
EXEMPT DUE TO: OTHERWISE
Ill health of employee
Discontinuation of business
by employer TAXABLE
Any other reason beyond
control of employee
22. 22
GRATUITY
Gratuity is a voluntary payment made by an employer in appreciation of services rendered by
the employee. Now-a-days gratuity has become a normal payment applicable to all
employees. In fact, Payment of Gratuity Act, 1972 is a statutory recognition of the concept of
gratuity. Almost all employers enter into an agreement with employees to pay gratuity
GRATUITY
Government POGA Other
Employees Employees Employees
Fully Exempt 15
26⁄ X Last Salary X Completed 1
2⁄ X Average X completed
pm. years of salary years of
service service
Actual Received Actual received
Maximum Rs. 1000000 Maximum Rs. 1000000
(WHICHEVER IS LESS) (WHICHEVER IS LESS)
Last Salary pm. Average Salary
= Basic salary = Average basic salary
+ +
DA (all) Average DA (in terms)
+
Average Turnover
Commission
Average of last 10 months
preceding the month
of retirement
23. 23
DEDUCTIONS FROM SALARY
The income chargeable under the head ‘Salaries’ is computed after making the following
deductions:
1) Entertainment allowance [Section 16(ii)]
2) Professional tax [Section 16(iii)]
(1) Entertainment allowance –
Entertainment allowance received is fully taxable and is first to be included in the salary and
thereafter the following deduction is to be made: However deduction in respect of
entertainment allowance is available in case of Government employees. The amount of
deduction will be lower of:
i. One-fifth of his basic salary or
ii. 5,000 or
iii. Entertainment allowance received.
Deduction is permissible even if the amount received as entertainment allowance is not
proved to have been spent.
(2) Professionaltax on employment –
Professional tax or taxes on employment levied by a State under Article 276 of the
Constitution is allowed as deduction only when it is actually paid by the employee during the
previous year. If professional tax is reimbursed or directly paid by the employer on behalf of
the employee, the amount so paid is first included as salary income and then allowed as a
deduction under section 16.
24. 24
INCOME FROM BUSINESS AND PROFESSION
MEANING OF ‘BUSINESS’, ‘PROFESSION’ AND ‘PROFITS’
(i) The tax payable by an assessee on his income under this head is in respect of the profits
and gains of any business or profession, carried on by him or on his behalf during the
previous year. The term “business” has been defined in section 2(13) to “include any trade,
commerce or manufacture or any adventure or concern in the nature of trade, commerce or
manufacture”. But the term “profession” has not been defined in the Act. It means an
occupation requiring some degree of learning. Thus, a painter, a sculptor, an author, an
auditor, a lawyer, a doctor, an architect and, even an astrologer are persons who can be said
to be carrying on a profession but not business. The term ‘profession’ includes vocation as
well [Section 2(36)]. However, it is not material whether a person is carrying on a ‘business’
or ‘profession’ or ‘vocation’ since for purposes of assessment, profits from all these sources
are treated and taxed alike.
(ii) Business necessarily means a continuous exercise of an activity; nevertheless, profit from
a single venture in the nature of trade would also be assessable under this head if the venture
had come to an end or after the entire cost had been recouped. For example, where a person
had purchased a piece of land, got it surveyed, laid down a scheme of development, divided it
into a number of building plots and sold some of the plots from time to time, though he
would not be charged tax on a notional profit made on the individual sale of plots, he would
be liable to pay tax on the surplus after all the plots have been sold and the venture has come
to an end or after he has recovered the cost of all the plots and expenditure incidental thereto
and has a surplus left.
(iii) Profits may be realised in money or in money’s worth, i.e., in cash or in kind. Where
profit is realised in any form other than cash, the cash equivalent of the receipt on the date of
receipt must be taken as the value of the income received in kind. Capital receipts are not
generally to be taken into account while computing profits under this head. Payment
voluntarily made by persons who were under no obligation to pay anything at all would be
income in the hands of the recipient, if they were received in the course of a business or by
the exercise of a profession or vocation. Thus, any amount paid to a lawyer by a person who
25. 25
was not a client, but who has been benefited by the lawyer’s professional service to another
would be assessable as the lawyer’s income.
(iv) Application of the gains of trade is immaterial. Gains made even for the benefit of the
community by a public body would be liable to tax. To attract the provisions of section 28, it
is necessary that the business, profession or vocation should be carried on at least for some
time during the accounting year but not necessarily throughout that year and not necessarily
by the assessee-owner personally, but it should be under his direction and control.
(v) The charge is not on the gross receipts but on the profits and gains in their natural and
proper sense. Profits are ascertained on ordinary principles of commercial trading and
commercial accounting. According to section 145, income has to be computed in accordance
with the method of accounting regularly and consistently employed by the assessee. The
assessee may account for his receipts on the cash basis or mercantile basis.
(vi) The Act, however, contains certain provisions for determining how the income is to be
assessed. These must be followed in every case of business or profession. The illegality of a
business, profession or vocation does not exempt its profits from tax: the revenue is not
concerned with the taint of illegality in the income or its source. Income is taxable even if the
assessee is carrying on the business, profession or vocation without any profit motive. The
liability to tax arises once income arises to the assessee; the motive or purpose of earning the
income is immaterial. Thus, profit motive is not essential for describing the income from that
activity as income from business or profession.
(vii) The profits of each distinct business must be computed separately but the tax chargeable
under this section is not on the separate income of every distinct business but on the
aggregate profits of all the business carried on by the assessee. Profits should be computed
after deducting the losses and expenses incurred for earning the income in the regular course
of the business, profession, or vocation unless the loss or expenses is expressly or by
necessary implication, disallowed by the Act.
(viii) Income arising from business assets which are temporarily let out e.g., an oil mill,
cinema theatre, hotel, ginning or textile factory, rice mill or jute press would be assessable as
business income. But if the commercial asset is permanently let the income is taxable as
income from house property or income from other sources, depending on the facts and
circumstances of the case.
26. 26
INCOME CHARGEABLE UNDER THIS HEAD [SECTION 28]
The various items of income chargeable to tax as income under the head ‘profits and gains of
business or profession’ are as under:
(i) Income arising to any person by way of profits and gains from the business, profession or
vocation carried on by him at any time during the previous year.
(ii) Any compensation or other payment due to or received by:
(a) Any person, by whatever name called, managing the whole or substantially the whole of
(i) The affairs of an Indian company or
(ii) The affairs in India of any other company at or in connection with the termination of his
management or office or the modification of any of the terms and conditions relating thereto;
(b) any person, by whatever name called, holding an agency in India for any part of the
activities relating to the business of any other person at or in connection with the termination
of the agency or the modification of any of the terms and conditions relating thereto ;
(c) any person, for or in connection with the vesting in the Government or any corporation
owned or controlled by the Government under any law for the time being in force, of the
management of any property or business; By taxing compensation received on termination of
agency or on the takeover of management (which is a capital receipt) as income from
business, section 28(ii) provides exception to the general rule that capital receipts are not
income taxable in the hands of the recipient.
(iii) Income derived by any trade, professional or similar associations from specific services
rendered by them to their members. It may be noted that this forms an exception to the
general principle governing the assessment of income of mutual associations such as
chambers of commerce, stock brokers’ associations etc. As a result a trade, professional or
similar association performing specific services for its members is to be deemed as carrying
on business in respect of these services and on that assumption the income arising there from
is to be subjected to tax. For this purpose, it is not necessary that the income received by the
association should be definitely or directly related to these services.
27. 27
(iv) Profits on sale of a licence granted under the Imports (Control) Order, 1955 made under
the Imports and Exports (Control) Act, 1947.
(v) Cash assistance (by whatever name called) received or receivable by any person against
exports under any scheme of the Government of India.
(vi) Any Customs duty or Excise duty drawback repaid or repayable to any person against
export under the Customs and Central Excise Duties Drawback Rules, 1971.
(vii) Any profit on the transfer of the Duty Entitlement Pass Book Scheme, being Duty
Remission Scheme, under the export and import policy formulated and announced under
section 5 of the Foreign Trade (Development and Regulation) Act, 1992.
(viii) Any profit on the transfer of Duty Free Replenishment Certificate, being Duty
Remission Scheme, under the export and import policy formulated and announced under
section 5 of the Foreign Trade (Development and Regulation) Act, 1992.
(ix) The value of any benefit or perquisite whether convertible into money or not, arising
from business or the exercise of any profession.
(x) Any interest, salary, bonus, commission or remuneration, by whatever name called, due to
or received by a partner of a firm from such firm will be deemed to be income from business.
However, where any interest, salary, bonus, commission or remuneration by whatever name
called, or any part thereof has not been allowed to be deducted under section 40(b), in the
computation of the income of the firm the income to be taxed shall be adjusted to the extent
of the amount disallowed. In other words, suppose a firm pays interest to a partner at 20%
simple interest p.a. The allowable rate of interest is 12% p.a. Hence the excess 8% paid will
be disallowed in the hands of the firm. Since the excess interest has suffered tax in the hands
of the firm, the same will not be taxed in the hands of the partner.
(xi) Any sum received under a Keyman insurance policy including the sum allocated by way
of bonus on such policy will be taxable as income from business. “Keyman insurance policy”
means a life insurance policy taken by a person on the life of another person who is or was
the employee of the first mentioned person or is or was connected in any manner whatsoever
with the business of the first mentioned person.
28. 28
(xii) Any sum received or receivable, in cash or kind, on account of any capital asset (in
respect of which deduction has been allowed under section 35AD) being demolished
destroyed, discarded or transferred.
ADMISSIBLE DEDUCTIONS
RENT, RATES, REPAIRS AND INSURANCE FOR BUILDINGS [SECTION 30]
RENT, RATES,
REPAIRS AND
INSURANCE
FOR BUILDINGS
USED FOR
BUSINESS
ALLOWED
NOT USED FOR
BUSINESS
NOT ALLOWED
29. 29
REPAIRS AND INSURANCE OF MACHINERY, PLANT AND FURNITURE
[SECTION 31]
DEPRECIATION [SECTION 32]
REPAIRS AND
INSURANCE OF
MACHINERY,
PLANT AND
FURNITURE
USED FOR
BUSINESS
ALLOWED
NOT USED
FOR
BUSINESS
NOT
ALLOWED
ASSET
ELLIGIBLE
TANGIBLE
BUILDING
FURNITURE
& FIXTURES
PLANT &
MACHINERY
INTANGIBLE
KNOWHOW
PATENTS
COPYRIGHTS
TRADEMARKS
LICENSE
FRANCHISE
30. 30
PLANT & MACHINERY
Plant & Machinery includes Motor Vehicle, Ship, Aircraft, Surgical Equipment, Scientific
Apparatus but does not include Livestock, Tea Bushes, Building, Furniture & Fixtures
RATE OF DEPRICIATION
A.
B. FURNITURE& FIXTURES = 10%
C. PLANT & MACHINERY
i.
BUILDING
TEMPORARY
STRUCTURE
100%
RESIDENTIAL
BUILDING
5%
NORMAL
10%
MOTOR
CAR
HIRING
BUSINESS
30%
NORMAL
15%
31. 31
ii. SHIP = 20%
iii. AIRCRAFT = 40%
iv. GLASS CONTAINER = 50%
v. COMPUTER & SOFTWARE = 60%
vi.
vii. ENERGY SAVING DEVICES = 80%
viii. POLLUTION CONTROL EQUIPMENT = 100%
ix. GENERAL RATE = 15%
D. INTANGIBLE ASSET = 25%
BOOKS
ANNUAL
PUBLICATION
100%
LIBRARY
BUSINESS
100%
NORMALLY
60%
33. 33
(VIII) EXPENDITURE ON SCIENTIFIC RESEARCH [SECTION 35]
DONATION/
CONTIBUTION
FOR SCIENTIFIC
RESEARCH
TO A
COMPANY
APPROVED
FOR
SCIENTIFIC
RESEARCH
125%
TO NATIONAL
LABORATORY
FOR
SCIENTIFIC
RESEARCH
200%
TO
SCIENTIFIC
RESEARCH
UNIVERSITY
SCIENTIFIC
REASEARCH
COLLEGE
175%
FOR SOCIAL AND
STATISTICAL
REASEARCH
125%
34. 34
ILLUTRATION
Mr. More gives following P & L A/c for the year ending 31-3-2015:
Particulars Rs. Particulars Rs.
To Rent: By Gross Profit 4,38,000
Factory 45,000 By Dividend On Shares 6,000
Godown 18,000 By Sale Of Import License 30,000
Showroom 25,000
By Cash Compensatory Subsidy
For Export
15,000
Proprietor House 36,000 By Custom Duty Drawback 8,000
To Insurance:
By Gifts & Presents From
Business Associates
7,000
Factory 5,000 By Gifts From Father- In- Law 2,000
Godown 8,000
By Interest From Customers For
Late Payment
15,000
Showroom 1,00,000
By Amount Received Under
Endowment Life Insurance
Policy (Including Bonus Rs.
60,000)
1,00,000
To Municipal Tax: By Salary From Partnership Firm 2,00,000
Godown 41,000
By Interest On Capital From
Partnership Firm
85,000
Proprietor House 6,000 By Salary From ABC Ltd. 50,000
To Repairs: By Gift From ABC Ltd. 40,000
Factory 8,000 By Rent From Subletting 4,000
35. 35
Proprietor House 30,000 By Income From Lottery Prize 20,000
To Insurance Of P&M 7,000 40,000
To Insurance Of Furniture 1,000
To Repairs Of P&M 3,000
To Depreciation 35,000
To Scientific Research Expense 20,000
To Sundry Expenses 20,000
To Salary 1,30,000
To Net Profit 5,22,000
Total 10,60,000 Total 10,60,000
Additional information:
1. Depreciation allowed according to income tax amounted to Rs. 40000
2. Salary to son reasonable Rs. 100000
You are required to prepare statement of income from business for the AY 2015-16
36. 36
SOLUTION:
Name of Assessee: Mr. More
Previous Year: 2014-15
Assessment year 2015-16
Statement of income from business
PARTICULARS Rs. Rs.
Net Profit As Per P& L 5,22,000
Add: Non- Business Expenses
1. Rent: Proprietor’s House 36000
2. Municipal Tax: Proprietor House 6000
3. Repairs: Proprietor House 30000
4. Depreciation 35000
5. Salary To Son 30000 137000
657000
Less: Non- Business Income
1. Dividend On Shares 6000
2. Gift From Father In Law 2000
3. Endowment Life Insurance Policy 100000
4. Share In Net Profit From Partnership Firm 50000
5. Salary From ABC Ltd. 40000
6. Gift From ABC Ltd. 4000
7. Rent From Sub-Letting 20000
8. Income From Lottery Prize 40000 (262000)
395000
Less: Unrecorded Business Expenses
1. Depreciation As Per IT (40000)
Taxable Income From Business 355000
37. 37
CONCLUSION
The taxes are the basic source of revenue for the Government. Revenue raised from the taxes
are utilized for meeting the expense of Government like, provision of education,
infrastructure facilities such as roads, dams etc.
Direct Taxes are taxes that are directly paid to the government by the taxpayer. It is a tax
applied on individuals and organizations directly by the government e.g. income tax,
corporation tax, wealth tax etc.
The term scope of income means which items of income are included and which are excluded
while computing tax liability.
Every payment made by an employer to his employee for service rendered would be
chargeable to tax as income from salaries. The term salary for the purposes of tax will include
both monetary payments (e.g. basic salary, bonus, commission, allowances etc.) as well as
non-monetary facilities (e.g. housing accommodation, medical facility, interest free loans
etc). The tax payable by an assessee on his income under the head of income from business
and profession is in respect of the profits and gains of any business or profession, carried on
by him or on his behalf during the previous year.
