Income Tax Law & Practice - Introduction

VIVEKANANDA COLLEGE
POST GRADUATE & RESEARCH DEPARTMENT OF
COMMERCE

Dr.K.CHELLAPANDIAN
M.Com., MBA., M.Sc (Psy)., M.Phil., B.Ed., PGDCA., DGT., Ph.D.,NET
Vivekananda College
Tiruvedakam WestAssistant Prof
in Commerce

Income Tax - Law & Practice - I

INCOME TAX - LAW & PRACTICE - I
OBJECTIVES:
➢To equip students with provisions of Income Tax Act, 1961 amended up-to-date.
➢To enable the students to identify exempted income.
➢To impart knowledge of residential status and Tax Liabilities.
➢To familiarize students to compute income from salary, house property and other sources.
Unit – I Introduction – Definitions: Assessee – Previous Year – Assessment Year –
Income – Concept of Income – Person – Agricultural Income – Gross Total Income –
Total Income. [15 Hours]
Unit – II Income which do not form part of total income. (Exempted Incomes)
[15 Hours]
Unit – III Determination of Residential Status and Tax Liabilities – Incidence of Tax.
[15 Hours]
Unit – IV Income From Salary. [15 Hours]
Unit – V Income From House Property – Income From Other Sources. [15 Hours]

TEXT BOOK: (Current Edition Relevant to the Assessment Year)
➢Dr. Mehrotra & Dr. Goyal., “Income-tax Law and Accounts”, Sahitya Bhavan Publication, Agra.
REFERENCE BOOKS: (Current Edition Relevant to the Assessment Year)
1. T.S. Reddy & Y.Hari Prasad Reddy., “Income Tax Theory, Law & Practice”, Margham
Publications, Chennai.
2. Dr. Vinod K. Singhania., “Direct Taxes – Law and Practice”, Taxman publication, New Delhi.
3. B.B. Lal., “Direct Taxes”, Konark Publisher (P) ltd, New Delhi.
4. Bhagwathi Prasad., “Direct Taxes – Law and Practice”, Wishwa Prakashana, New Delhi.
5. Gaur V.P., and Narang D.B., “Income Tax Law and Practice”, Kalyani Publishers, New Delhi.
Note:
➢ Questions shall be set as between theory and problems in the ratio of 40% and 60% respectively
➢ Amendments made upto 6 months prior to the date of examination is to be followed

TAX-MEANING
Tax is the financial charge imposed by the
Government on Income, Commodity or Activity.
Tax is a price which each citizen pays to the
state to cover his share of the cost of the
general public services which he will consume.

Classification of Tax
Government Imposes two types of taxes namely Direct Taxes and
Indirect Taxes.
❖ A direct tax is a form of tax is collected directly by the
government from the persons who bear the tax burden.
Examples of direct taxes are Income Tax
 An indirect tax is a form of tax collected by mediators who
transfer the taxes to the government, and also perform
functions associated with filing tax returns. The customers
bear the final tax burden.
Examples of indirect taxes are GST (Goods and Services
Tax) and Customs Duty.

WHAT IS LAW
Simply speaking, law is bundle of rules and
principles to be followed by the members of the
society. Theses rules and principles, which regulate
and control conduct of the people toward each other
and towards the society are made by the state.

HOW LAW IS MADE
The law is made by the state and its appropriate
authorities. In our country authority for making law lies
with State Govts and Central Govt. as per the items
with in their jurisdiction.

INCOME
Income is the consumption and savings
opportunity gained by an entity within a specified
timeframe, which is generally expressed in monetary
terms. However, for households and individuals,
"income is the sum of all the wages, salaries, profits,
interests payments, rents and other forms of
earnings received... in a given period of time."

INCOME TAX - Introduction
➢ The government needs money to maintain law and order in the country.
➢ Safeguard the security of the country from foreign powers
➢ Foremost duty of the government to bring out such welfare and
development programmes which will bright the gap between the rich and the
poor .
➢ All this requires mobilisation of funds from various sources.
➢ These sources may be direct tax or indirect tax.
➢ Income tax is very important direct tax.
➢ It is an important and most significant source of revenue of the
government.
➢ Income tax, being a direct tax, is an important tool to achieve balanced
socio-economic growth by providing concession and incentives in income tax
for various development purposes.

WHO IS LIABLE TO PAY INCOME TAX
Every person, whose taxable income for the
previous financial year exceeds the minimum taxable
limit is liable to pay to the Central Government income
tax during the current financial year on the income of
the previous financial year at the rates in force during
current financial year.

HISTORY OF INCOME TAX IN INDIA
❖ In India, this tax was introduced for the first time in 1860, by Sir James
Wilson – to meet the losses sustained by the govt on account of the
Military Mutiny of 1857.
❖ In 1886, a separate Income Tax Act was passed.
❖ This Act remained in force upto 1917-18.
❖ A new Income Tax Act was passed in 1922.
❖ To prevent the evasion of tax the govt of India had appoint the Direct
Taxes Administrative Enquiry Committee.
❖ This committee submitted its report in 1959, finally the Income Tax Act,
1961 was passed.
❖ It applies to the whole of India and Sikkim (including Jammu and
Kashmir)

HISTORY OF INCOME TAX IN INDIA
On the basis of the recommendations made by the
various committees, a new Act of Income-tax had been passed
during the year 1961 termed as the “Income - Tax Act, 1961”.
This Act came into force from 1st April, 1962.
This Act contains more than 400 sections and a number
of sub-sections and 10 schedules. The Income – Tax department
framed 121 rules for the effective application of this Act. These
rules are termed as “Income - Tax Rules of 1962”. It also
includes a number of sub - rules.

CHARACTERISTICS OF INCOME TAX
1. Direct Tax: Income is a Direct Tax. Direct Tax means
such tax which is paid by a person who bears tax burden.
2. Central Tax: Income Tax is imposed and recovered by
Central Government.
3. Tax on Total Income: Income Tax is calculated on total
income. Total income is also called taxable income.
Total income is calculated according to the provisions of
Income Tax Act.

4. Tax-Exempted Limit: If income exceeds prescribed limit of
income, then tax is imposed. Tax is not imposed upto the tax-
exempted limit of income. Tax-exempt limit of income for the
Assessment Year 2018-19, are as follows:
(A) Senor Citizen: Senior citizen (resident in India), who
is of the age of 60 years or more but less than 80 years
Rs. 3,00,000.
(B) Super Senior Citizen: Super senior citizen (resident in
India), who is of the age of 80 years or more Rs. 5,00,000.
(C) Others: Individuals, HUF, Association of persons.
Body of Individual, who is of the age of below 60 years Rs.
2,50,000.
(D) Firm, Company, Local Body: No Exemption.

5. Progressive Tax Rates:
Tax is not imposed at the same rate on the total
income of an individual HUF, AOP or BOI. Tax rates
increase with an increase in income. Minimum tax rate is
5% and maximum tax rate is 30%. Firms' and
companies' incomes are taxed at the rate of 30%.

6. Surcharge: Surcharge is imposed on the amount of income
tax. Surcharge rates are as follows for the Assessment Year
2018-19.
(i) For individuals, HUF, AOP or BO! : @ 10% if total
income exceeds 50 lakh rupees but does not exceed 1 crore
rupees. @ 15% if total income exceeds 1 crore rupees.
(ii) For Firms: @ 12% if total income exceeds 1 crore
rupees.
(iii) For Domestic Company: @ 7% if total income
exceeds 1 crore rupees but does not exceed 10 crore rupees.
@ 12% if total income exceeds 10 crore rupees.

7. Education Cess and Secondary and Higher Education
Cess: All assessees are liable to pay education cess @ 2%
and secondary and higher education cess @ 1% on the
total amount of income tax including surcharge.
8. Tax Burden: Tax is imposed at progressive rate on the
income of individual and HUF therefore rich person bear
more tax burden.

9. Administration: Tax is imposed and recovered by income tax
department. Income Tax Department works under the control
of Central Board of Direct Taxes (CBDT).
10. Allocation of Amount of Income Tax: The total amount of
income tax recovered by government is allocated among Central
Government and State Government according to the
recommendation of Finance Commission. State Government will
not be given any share of income tax revenue from the following
amounts:
(i) Income tax amount recovered from companies.
(ii) Amount of surcharge.
(iii) Amount of education cess and SHEC.

BASIS OF CHARGE OF INCOME TAX
(SEC. 4)
➢ Income tax is an annual tax on income.
➢ Income of Previous Year is taxable in the next following Assessment Year
at the rate or rates applicable to that assessment year.
➢ Tax rates are fixed by the Annual Financial Act.
➢ Tax is charged on every person as defined in section 2(31).
➢ It is charged on the Total Income of every person for the previous year.
➢ Total Income is to be computed as per the provisions of the Act.
➢ Income tax is to be deducted at source or paid in advance wherever
required under the provision of the Act.

FINANCE ACT:
Every year a Budget is presented before the parliament
by the Finance Minister. One of the important components of
the Budget is the Finance Bill. The Bill contains various
amendments in the Income-Tax Act and prescribes the rates of
taxes. When the Finance Bill is approved by both the houses of
parliament and receives the assent of President, it becomes the
Finance Act.

Heads of Income
1.Salaries
3.Business &
Profession
2.House
property
4.Capital Gains
5. Other Sources
Aggregate of all the 5 heads of income is
known as gross total income

COMPUTATION OF TOTAL INCOME
The total income is computed on the basis of the
residential status of the assessee. The income is
classified into the following five heads:
1. Income from Salaries Sec 15 to 17
2. Income from House Property Sec 22 to 27
3. Profits and Gains of Business or Profession Sec 28 to 44
4. Income from Capital Gains Sec 45 to 55
5. Income from Other Sources Sec 56 to 59

STEPS TO COMPUTING THE TOTAL INCOME
(1) Classify the income under each of the five heads and then deduct from the
income under each head the deductions permissible under the Act in
respect of that head of income. The balance of amount left under each
head of income is its assessable income.
(2) Total up the assessable income of each head and the aggregate of all
these assessable incomes is called the Gross Total Income.
(3) From the Gross Total Income, thus arrived at, deduct the deductions
permissible under sections 80C to 80U of the Act for computing the total
income. The balance left after subtracting the allowable deductions is
called the Total Income.
(4) The amount of income tax payable is then calculated on this total income
according to the rates prescribed by the Financial Act for the relevant
assessment year and the rates prescribed under different sections of the
Act.

RATES OF INCOME TAX FOR AN INDIVIDUAL, HUF, AOP OR BOI
(ASSESSMENT YEAR 2018-19)
(MALE OR FEMALE)
1. INDIVIDUAL - (Resident in India and below age of
60 years during the previous year.
2. INDIVIDUAL - SENIOR CITIZEN (Resident in
India , who is the age of 60 to 80 years during the
previous year )
3 INDIVIDUAL = SUPER SENIOR CITIZEN
(Resident in India , who is of the age of 80 years above
during the previous year )

1. INDIVIDUAL - (Resident in India and below age of 60
years during the previous year. Slab Rates
INCOME (`. ) RATE
0 - 2,50,000 NIL
2,50,001 - 5,00,000 5%
5,00,001 - 10,00,000 20%
Above 10,00,000 30%

2. INDIVIDUAL - SENIOR CITIZEN (Resident in India ,
who is of the age of 60 to 80 years during the previous year )
INCOME (`. ) RATE
0 - 3,00,000 NIL
3,00,001 - 5,00,000 5%
5,00,001 - 10,00,000 20%
Above 10,00,000 30%

3 INDIVIDUAL = super SENIOR CITIZEN (Resident in India , who is
of the age of 80 years above during the previous year )
INCOME (`. ) RATE
Upto 5,00,000 NIL
5,00,001 - 10,00,000 20%
Above 10,00,000 30%

Special Rates: On specified incomes the tax is
charged at a specified flat rates
(Assessment Year 2018-19)
Long Term Capital Gain 20%
Short Term Capital Gain 15%
Casual Income 30%
(Winning from Lottery, crossword puzzle, horse race, etc)

Rebate of income tax.
In case of an individual resident in India, whose total
income does not exceed ` 3,50,000 shall be entitled to a deduction
from the amount of income tax payable upto ` 2,500. (Sec. 87 A)

Surcharge: Tax on Tax
Surcharge is imposed on the amount of income tax. Surcharge
rates are as follows for the Assessment Year 2018-19.
(i) For individuals, HUF, AOP or BO! : @ 10% if total
income exceeds 50 lakh rupees but does not exceed 1 crore
rupees. @ 15% if total income exceeds 1 crore rupees.
(ii) For Firms: @ 12% if total income exceeds 1 crore
rupees.
(iii) For Domestic Company: @ 7% if total income
exceeds 1 crore rupees but does not exceed 10 crore rupees.
@ 12% if total income exceeds 10 crore rupees.

Marginal relief
(a) Where total income exceeds ` fifty lakh the total amount
payable as income-tax and surcharge on such income shall not
exceed the total amount payable as income tax on a total income off
fifty lakh by more than the amount of income that exceeds ` fifty
lakh.
(b) Where total income exceeds one crore rupees the total amount
payable as income-tax and surcharge on such income shall not
exceed the total amount payable as income tax on a total income of
one crore rupees by more than the amount of income that exceeds
one crore rupees.

EDUCATION CESS & TDS
Education cess @2% on the amount of income and
surcharge
SHEC @1% on the amount of income and surcharge
T.D.S (Tax Deducted at Source)
On listed non Govt. Securities 10%
On Unlisted non Govt. Securities 10%
Casual Income 30%

Firm:
A firm is liable to pay tax for the Assessment Year 2018-19 at
the following rates:
(i) On short-term capital gains specified in Sec. 111A---@ 15%;
(ii) On long-term capital gains---@ 10%/20% (Sec. 112);
(iii) On winning from lottery, crossword puzzle, horse race, etc.---@ 30%;
(iv) On other income---@ 30%.
Surcharge. If total income exceeds one crore rupees @ 12%. Marginal
Relief. As explained previous page no. 4.
Education cess & SHEC. On the amount of income tax and surcharge@ 3%
i.e., 2% + 1%.
Notes: (1) In computing the income of the firm, whatever deduction is
allowed to the firm as interest, salary or remuneration to partners, such
amount will be treated as income of the partners under the head 'Profits
and gains of business or profession'.
(2) Whatever share of profit (total income less tax paid by the firm) from
the firm is received by a partner, it is not included in the income of the
partner.
Important Note: On Deemed Income (under Section 68,69, 69A, 69B, 69C
or 69D) tax shall be charged under section 115BBE as under:
Income Tax @ 60%, Surcharge @ 25%, Education Cess & SHEC 3%.

PERSONS TAX RATE
DOMESTIC COMPANY 30%
FOREIGN COMPANY 40%
LOCAL AUTHORITIES 30%
CO-OPERATIVE SOCIETIES
Up to 10000
10000-20000
Above 20000
10%
20%
30%
OTHER PERSONS

Under Sections 2 and 3 of the Income Tax Act,
1961, Definitions of important terms used in the Act
have been given, some of which are as under:
1. Assessee – Section 2(7)
2. Assessment year – Section 2(9)
3. Previous year – Section 3
4. Income – Section 2 (24)
5. Concept of Income
6. Person – Section 2(31)
7. Agricultural Income – Section 2 (1A)
8. Gross Total Income – Section 80B (5)
9. Total Income – Section 2(45)

1. ASSESSEE - U/S 2(7)
Under Income Tax Act , an assessee means a person::
(i) who is liable to pay any tax; or
(ii) who is liable to pay any other sum of money under this Act and
includes, (interest, penalty, etc. );or
(iii) in respect of whom any proceedings under this Act has been taken for
the assessment of his income or assessment of fringe benefits; or
(iv) in respect of whom any proceedings under this Act has been taken for
the assessment of his loss sustained by him or by such other person;
or

(v) in respect of whom any proceedings under this act has
been taken for the amount of refund due to him or to such other
person; or
(vi) who is deemed to be an assessee under any provision of
this Act; or
(vii) who is deemed to be an assessee in default under any
provision of this act;
a. Ordinary Assessee
b. Deemed assessee or representative assessee
c. Assessee –in- default

DEEMED ASSESSEE
A person who is deemed to be an assessee for some other
person, is called 'Deemed Assessee'.
For example,
(i) after the death of a person, his legal representative will be
treated as an assessee for that income of the deceased on which
tax has not been paid by the deceased before his death;
(ii) a person representing a foreigner or a minor or a lunatic is treated
as an assessee for the income of such foreigner or minor or lunatic.

ASSESSEE IN DEFAULT
When a person is responsible for doing any work under the
Act and he fails to do it, he is called an 'Assessee in Default'.
For example,
if a person while making any payment to another person, is
liable to deduct income tax thereon at source, does not deduct
income tax therefrom, or having deducted it, does not deposit it in
the Government Treasury, he will be treated as an assessee in
default for that income tax.

2. ASSESSMENT YEAR - U/S 2(9)
Assessment Year means, the period of 12 months
commencing on the 1st April every year and ending on
31st march of the next year.
An assessee is liable to pay tax on the income of the
previous year during the next following assessment
year.
For example, during the Assessment Year 2018-19,
tax shall be paid for the Previous Year 2017-18.

3. PREVIOUS YEAR - U/S 3
The year in which income is earned is known as previous
year and the next year in which his income is taxable is
known as assessment year.
Income tax is charged on the total income of the
previous year at the rates prescribed by the relevant
Finance Act for the assessment year:

(1) Generally, previous year means the financial
year immediately preceding the Assessment Year.
Financial Year begins on 1st April and ends on 31st
March.
(2) The financial year (year ending on 31st
March) Will be the uniform previous year for all the
assessees and for all sources of income.

(3) In the case of newly set-up business or
profession or any other new source of income during
the financial year, the previous will begin from the
date of setting up of the new business or profession or
from the date of coming into existence of the new
source of income and will end with the said financial
year. In this case, the first previous year may be of
less than 12 months.

Exceptions to the general rule i.e., Taxation of
previous year’s income during the same year.
1. Income of non resident from Shipping business.
2. Income of Persons leaving India.
3. Business for a limited period
4. In case of discontinued business
5. Transfer of property to avoid tax

4. INCOME - U/S 2(24)
This is a very important term as income tax is charged on the
income of a person. This term has not been defined in the Income
Tax Act, except that it states as to what is included in income.
Under this section income includes:
(i) profits and gains;
(ii) dividend;
(iii) voluntary contributions received by
(a) a trust created for charitable or religious purposes, or
(b) by a scientific research association, or
(c) by a games or sports association or institution, or
(d) any university or other educational institution, or
(e) any hospital or other institution, or
(f) an electoral trust;

(iv) the value of any perquisite or profits in lieu of salary taxable
under the head 'salaries';
(v) any special allowance or benefit specifically granted to the
assessee to meet his expenses wholly, necessarily and exclusively for
the performance of his duties;
(vi) any allowance granted to the assessee either to meet his personal
expenses at the place where he performs his duties or compensate
him for the increased cost of living, for example, City Compensatory
Allowance;
(vii) the value of any benefit or perquisite which is obtained by any
representative assessee;
(viii) any sum chargeable to income tax under the head 'business' or
'profession';

(ix) any capital gains;
(x) the profits and gains of any business of insurance carried on by a
mutual insurance company or by co-operative society;
(xi) any winnings from lotteries, crossword puzzles, races including
horse races, card-games and other games of any sort or from
gambling or betting of any form or nature whatsoever;
(xii) any sum received by the assessee from his employees as
contributions to any provident fund or superannuation fund or any
fund set-up under the Employees' State Insurance Act or any other
fund for the welfare of such employees;
(xiii) any sum received under a keyman insurance policy including the
sum received by way of bonus on such policy.

(xiv) The profits and gains of any business of banking (including
providing credit facilities) carried on by a co-operative society with
its members;
(xv) Any consideration received for issuing shares as exceeds the
fair market value of the shares.
(xvi) Any sum of money received as an advance in the course of
negotiations for transfer of a capital asset and such negotiation
fails, the amount so forfeited;
(xvii) If the assessee receives (in cash or kind) the following from
the Central Government or a State Government or any authority or
body or agency it will be treated as income:
Subsidy or grant or cash incentive or duty drawback, or waiver or
concession or reimbursement.

(xix) Compensation or other payment, due or received by any person
in connection with the termination of his employment or
modification of the terms and conditions relating thereto.
(xx) The fair market value of inventory as on the date on which it is
converted into, or treated as, a capital asset

5. CONCEPT OF INCOME
1. The above definition of income is not conclusive. It
includes some other receipts also which are ordinarily
treated as income. In fact, income means a monetary income
which is derived from definite sources with some sort of
regularity or expected regularity. These definite sources of
incomes are: Income from Salaries ,Income from House
Property, Profits and Gains of Business or Profession, Income
from Capital Gains and Income from Other Sources.
Besides this, there are some other important rules regarding
income, which are as under

5. CONCEPT OF INCOME
1.
➢ Definite Source
➢ An income earned ,whether legally or illegally
➢ Income may be received regularly or periodically
➢ Lump-sum received can also be income
➢ Income must come from outside
➢ Receipt on account of dharmada – not income
➢ Temporary or permanent income
➢ Entitled to receive it
➢ Voluntary receipts
➢ Disputes regarding title
➢ Income is money or money’s worth
➢ Gift to constitute income
➢ Pin-money not a income

6. PERSON - U/S 2(31)
‘Person’ includes the following
i. An Individual,
ii. Hindu Undivided Family (HUF),
iii. A Company,
iv. A Firm,
v. An Association of Persons(AOP) or Body of
Individuals (BOI),
vi. A Local Authority,
vii. Every other Artificial Juridical Person.

AN ASSOCIATION OF PERSONS(AOP) UNREGISTERED
OR
BODY OF INDIVIDUALS (BOI) DEATH

ARTIFICIAL JURIDICAL PERSON
(JOINT VENTURE)

TYPES OF INCOMES
A 1. Taxable income
2. Exempted incomes
3. Rebateable incomes u/s 86
B 1. Gross total income
2. Taxable/Total income

“Agricultural Income” means:
1. Any rent or revenue derived from land which is situated in India
and used for agricultural purposes [sec. 2(1A) (a)].
2. Any income derived from such land by agricultural
operations including processing of the agricultural produce, raised
or received as rent-in-kind so as to render it fit for the market or sale
of such produce [sec. 2(1A)(b)].
3. Income attributable to a farm house subject to certain conditions.
4. With effect from the assessment year 2009-10, any income derived
from saplings or seedlings grown in a nursery shall be deemed
to be agricultural income.
7.Agricultural Income

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

➢ Any income derived from such land by agricultural operations including
processing of the agricultural produce, raised or received as rent-in-kind so as
to render it fit for the market or sale of such produce .

➢ Income attributable to a farm house

➢Income derived from saplings or seedlings grown in a nursery

Kinds of Agricultural Income
(1) Rent or revenue derived from land. When one
person grants to' another a right to use his land
for agricultural purposes, the former receives
from the latter rent or revenue (in cash or kind)
in consideration of such user. Such rent or
revenue is treated as agricultural income.

(2) Income from agricultural operations. It means
cultivation of a field, tilling of the land, watering it,
sowing of the seeds, planting and similar operations on
the land.
Products which grow wild on the land or are of
spontaneous growth not involving any human labour or
skill upon the land are not products of agriculture. The
income derived therefrom is not agricultural income.

(3) Income from making produce fit for market. If there
is no market of the produce of the field and the
cultivator or receiver of rent- in-kind performs any
activity to make the produce fit for market, any income
from such activity is also agricultural income. The
process employed in curing of coffee, flue curing of
tobacco, ginning of cotton, etc., is such a process.

(4) Income from sale of produce. Income derived by a
cultivator or receiver or rent-in-kind from the sale of
produce raised or received by him is treated as
agricultural income, even if he keeps a shop for the sale
of such produce.

(5) Income from a farm house. The income from a farm house is
treated as agricultural income if the following conditions are
satisfied:
(i) the building is owned and occupied by the cultivator or receiver of
the rent or revenue of any such land;
(ii) it is situated on or in the immediate vicinity of the agricultural
land;
(iii) the building is, by reason of his connection with the land, used as
dwelling house or a store-house or an out-house by the cultivator or
receiver of rent-in-kind;
(iv) the land is situated in urban area and is either assessed to land
revenue in India or is subject to a local tax assessed and collected by
the officers of the government.

If the land revenue or local tax is not payable on such land:
(i) The land is situated in 'non-urban' area; or
(ii) The land is situated within municipaiity or cantonment board jurisdiction,
has a population of less than 10,000; or
(iii) The farm building is not situated within the area specified below, the
income derived from such building shall be agricultural income :
The land is not situated in any area within the distance, measured aerially:
(a) not being more than two kilometres from the local limits and which has a
population more than ten thousand but not exceeding one lakh; or
(b) not being more than six kilometres from the local limits and which has a
population of more than one lakh but not exceeding ten lakh; or
(c) not being more than eight kilometres from the local limits and which has a
population more than ten lakh.

(6) Income from saplings or seedlings.
The income derived from saplings or seedlings
grown in a nursery shall be deemed to be agricultural
income.

PARTIALLY AGRICULTURAL & PARTIALLY BUSINESS INCOME
[RULES 7, 7A, 7B AND 8]
INCOME
BUSINESS
INCOME
AGRICULTURAL
INCOME
Growing and manufacturing tea in India 40% 60%
Sale of coffee grow and cured by seller
Income by sale of centrifuged latex or cenex
Manufactured By an assessee from rubber
grown in India.
Sale of coffee grown, cured, roasted and
grounded by seller in India with or without
mixing chicory or other flavoring ingredients
25%
35%
40%
75%
65%
60%

INCOME
BUSINESS
INCOME
AGRICULTURAL
INCOME
Growing and manufacturing tea in India 40% 60%

INCOME
BUSINESS
INCOME
AGRICULTURAL
INCOME
Income by sale of centrifuged latex or cenex
Manufactured By an assessee from rubber
grown in India.
35% 65%

INCOME
BUSINESS
INCOME
AGRICULTURAL
INCOME
Sale of coffee grow and cured by seller 25% 75%

INCOME
BUSINESS
INCOME
AGRICULTURAL
INCOME
Sale of coffee grown, cured, roasted and
grounded by seller in India with or without
mixing chicory or other flavoring
ingredients
40% 60%

Non-Agricultural Incomes from Land
The following incomes, are not derived from land used for agricultural
purposes, hence they are non-agricultural incomes:
(i) Income from markets;
(ii) Income from stone quarries; (iii) Income from mining royalties;
(iv) Income from land used for storing agricultural produce;
(v) Income from supply of water for irrigation purposes (e.g., income from
supply of water for irrigation from a tube-well or well, as it does not involve
any agricultural operation); (vi) Income from self-grown grass, trees or
bamboos;
(vii) Income from fisheries;
(viii) Income from the sale of earth for brick-making;
(ix) Remuneration received as manager of an agricultural farm; (x) Dividend
from a company engaged in agriculture;
(xi) Income of the buyer of a ripe crop;
(xii) Income from dairy farm, poultry farming, etc.; and
(xiii) Income from interest on arrears of rent of agricultural land.

8.GROSS TOTAL INCOME (G.T.I) – U/S 80B (5)
It means the total income computed in accordance
with the provision of the income tax Act, before
making any deduction under sections 80C to 80U.

9. TOTAL INCOME (T.I) – U/S 2 (45)
Total Income of assessee is gross total income
as reduced by the amount permissible as
deduction under sections 80C to 80U.

COMPUTATION OF GTI & TI
1. INCOME FROM SALARIES - Sec 15 to 17 XXXX
2. INCOME FROM HOUSE PROPERTY – Sec 22 to 27 XXXX
3. PROFITS AND GAINS OF BUSINESS OR PROFESSION- Sec 28 to 44 XXXX
4. INCOME FROM CAPITAL GAINS - Sec 45 to 55
(A) LONG TERM CAPITAL GAINS ****
(B) SHORT TERM CAPITAL GAIN **** XXXX
5. INCOME FROM OTHER SOURCES
(A) CASUAL INCOMES
(LOTTERY,CARD GAME, etc) **** - Sec 56 to 59
(B)OTHER INCOMES - CLUBBING**** - Sec 60 to 65 XXXX
LESS: SET OFF AND CARRY FORWARD LOSSES – Sec 70 to 79 XXXX
GROSS TOTAL INCOME (GTI) XXXXX
LESS: DEDUCTIONS U/S 80 C to 80 U XXX
TAXABLE INCOME (TI) XXXXX


MAXIMUM MARGINAL RATE [Sec. 2(29C)]
It means the rate of income tax (including surcharge on
income tax, if any) applicable in relation to the highest slab of
income in the case of an individual, association of persons or body of
individuals as specified in the Finance Act of the relevant year.
Note: The rate of income tax for the highest slab of income
for the assessment year 2018-19 is 30%. Surcharge @ 10% if total
income exceeds f fifty lakh but does not exceed f one crore. If
total income exceeds f one crore @ 15%. Further, on the amount of
income tax and surcharge education cess & SREC is leviable@3%.

PERMANENT ACCOUNT NUMBER (Sec. 139A)
➢ PAN means a number which the Assessing Officer may allot to
any person for the purpose of identification. .
➢ PAN has ten alphanumeric characters and it is issued in the
form of laminated card.
➢ Application for PAN. If an assessee has not been allotted a
Permanent Account Number he must apply for it in Form No.
49A within the prescribed time. The Assessing Officer has also
got power to allot to any other person a Permanent Account
Number if tax is payable by such person.

➢ Quoting PAN. Once a Permanent Account Number has been
allotted, such number must be quoted in all Returns,
correspondence with Income Tax Authorities, challans for
payment and in all documents prescribed by the Board.
➢ It helps in linking the aforesaid documents to his assessment
records to facilitate quick disposal of his assessment and
refund claim.
➢ The assessee must intimate to the Assessing Officer about any
change in the address, name or nature of business carried on by
him.

TAX DEDUCTION AND COLLECTION ACCOUNT NUMBER
(Sec. 203A)
Every person, deducting tax or collecting tax at source, who
has not been allotted a tax deduction account number or a tax
collection account number, shall apply in duplicate in Form No. 49B
within one month from the end of the month in which the tax was
deducted or collected to the A.O. for the allotment of a 'tax
deduction and collection account number'.
Where a "tax deduction and collection account number" has
been allotted to a person, he shall quote such number in the
prescribed documents.

TAX EVASION
When a person reduces his total income by making false claims or
by withholding the information regarding his real income, so that his tax
liability is reduced, is known as tax evasion. Tax evasion is not only illegal
but it is also immoral, anti-social and anti-national practice. Therefore,
under the direct tax laws provisions have been made for imposition of
heavy penalty and institution of prosecution proceedings against tax
evaders.

The tax evader reduces his taxable income by one or more of the following
steps :
(1) Unrecorded sales.
(2) Claiming bogus expenses, bad debts and losses.
(3) Charging personal expenses as business expenses, e.g., car expenses,
telephone expenses, travelling expenses, medical expenses incurred for self
or family may be shown in the account books as business expenses.
(4) Submission of bogus receipts for charitable donations for deduction U/S
80G.
(5) Non-disclosure of capital gains on asset.
(6) Non-disclosure of income from 'Benami transactions'.
(7) By showing excessive or bogus salary payments to near relatives.
(8) By not showing taxable incomes in return of income.

In brief to evade tax he suppresses or omits receipts, inflates expenses and
claims bogus deductions.
Now the question is why a person evades tax? The main reasons of tax
evasion are:
1. Deterioration of moral values.
2. Declaration of voluntary disclosure schemes by the Government time to
time. The tax evader knows that in such a scheme he can pay tax at a lower
rate and save interest and penalty.
3. The tax management is not accountable for increase in tax evasion.
4. The tax management and tax experts help in tax evasion.
5. Mis-utilisation of public funds by the Government and its employees.
6. Imparting no education regarding the advantages of tax payment and
disadvantages of tax evasion to the people.

TAX AVOIDANCE
Tax avoidance is an art of dodging tax without actually breaking
the law. It is a method of reducing tax incidence by availing of certain
loopholes in the law. The Royal Commission on' Taxation for Canada has
explained the concept of 'avoidance of tax' as under:
The expression 'Tax Avoidance' will be used to describe every
attempt by legal means to prevent or reduce tax liability which would
otherwise be incurred, by taking advantage of some provision or lack of
provision in the law. It excludes fraud, concealment or other illegal
measures.
In other words, 'tax avoidance' is a device which technically
satisfies the requirement of the law but in fact it is not in accordance with
the legislative intent.

TAX PLANNING
Tax planning may be defined as an arrangement of one's
financial affairs in such a way that without violating in any way the
legal provisions of an Act, full advantage is taken of all
exemptions, deductions, rebates and reliefs permitted under the
Act, so that the burden of the taxation on an assessee, as far as
possible, the least.

TAX MANAGEMENT
Tax planning is not possible without tax management. Tax
management refers to the compliance with the statutory provisions
of law. Tax management covers matters relating to :
(i) compliance with legal formalities;
(ii) taking steps to avail various tax incentives;
(iii) saving from consequences of non-compliance of statutory
duties, i.e., savings from penal interest, penalties and prosecutions;
(iv) review of department's orders and if need be apply for
rectification of mistake, filing appeal, request for revision or
settlement of a case.

Some important areas of tax management are discussed here in brief:
1. DEDUCTION OF TAX AT SOURCE (TDS) - On Payments
(A) The person making the prescribed payments should deduct tax at
source at the prescribed rates. .
(B) The tax deducted at source should be paid to the Central Government
within the time as prescribed in Rule 30 of the Income Tax Rules, 1962.
(C) He should furnish to the recipient of income a certificate regarding tax
deducted at source in the prescribed Form No. 16 or 16A as the case may
be, as under:
(i) TDS from salary (Form No. 16).
(ii) TDS from any other payment (Form No. 16A).
(D) He should furnish quarterly returns regarding tax deduction at source
and not deduction of tax at source in certain cases.

2. COLLECTION OF TAX AT SOURCE (TCS) (Form No. 16B).
(On Sale of Products or Services)
(i) Every seller should collect tax at source on profits and gains from
business of trading in alcoholic liquor or forest produce as provided in
section 206C.
(ii) Every person, who grants lease or a license or transfers any right or
interest in any parking lot or toll plaza or mine or quarry should collect tax at
source as provided in section 206C.
(iii) A seller, who receives any amount as consideration for sale of a motor
vehicle of the value exceeding ten lakh, shall, at the time of receipt of such
amount, collect from him one per cent of the sale consideration as income
tax.
He should also comply with the conditions laid down in section 206C
regarding payment of tax to the Central Government and issue a certificate
to the buyer regarding tax collected at source.

3. PAYMENT OF TAX
(1) Advance payment of tax. An assessee who is liable to pay tax during a
financial year 10,000 or more he has to pay advance tax in four instalments.
(2) Tax on self-assessment. Before furnishing the return of income an
assessee should compute the tax on his total income declared in the return or
interest payable under the provisions of this Act for delay in filing the return
or any default or delay in payment of advance tax and fee (for late filing of
return of income). If any tax or interest or fee is due, it should be paid
before furnishing the return and the proof of such payment must be
furnished along with the return. (Sec. 140A)
(3) Payment on demand. When a notice of demand is received from the
department, the amount should be paid within 30 days of the service of the
notice or within the specified period in the notice of demand, as the case may
be. (Sec. 220)

4. MAINTENANCE OF ACCOUNTS
Every businessman or a professional must maintain such
books and documents as may enable the A.O. to compute the total
income of the assessee. However, where it is compulsory to maintain
books of account and other documents as provided in section 44AA
and Rule 6F, it should be maintained as provided and retained to
avoid penalty under section 271A.

5. AUDIT OF ACCOUNTS
In all cases audit of accounts is not necessary. However,
where the turnover or gross receipts in business for the previous
year exceeds one crore and in profession it exceeds 50 lakh the
audit is compulsory. (Sec. 44AB and Rule 6G) Further to claim
deduction under certain sections the audit report is required in
prescribed form.

6. FURNISHING THE RETURN OF INCOME
The tax manager must ensure that the return of income is
furnished on or before the due date of furnishing the return [uls
139(1)] otherwise the assessee will lose the right to carry-forward
and set-off the losses and become liable to penal interest, penalty,
prosecution or fine or both.

7. DOCUMENTATION AND MAINTENANCE OF RECORDS
Documentation is an indispensable ingredient of tax
management. An assessee should keep reliable, complete and
updated documentation of all the relevant tax files so that the
documentary evidence can be made available at a short notice
whenever it is required. In absence, thereof, an assessee may lose
of case for want of proper documentary evidence.
Maintenance of account books, records, vouchers, bills,
correspondence and agreements, etc. is also a part of tax
management. Wherever separate accounts are required for claiming
tax benefit it should be maintained accordingly.

8. REVIEW OF ORDERS
It is an important function of tax management to review the
assessment order and other orders received from the tax
department. If there is an apparent mistake in the order, an
application for rectification should be made. If the order is
prejudicial to the interest of the assessee and it is advisable to file
an appeal, revision or an application for settlement of the case
steps should be taken in this direction. In such a case the opinion of
the experts may be sought or they may be engaged for the
purpose.

CAPITAL AND REVENUE RECEIPTS
Capital Receipts:
Receipts from fixed capital
Ex: Receipt from plant and machinery
Revenue Receipts:
Receipts from circulating capital

Income Tax Law & Practice - Introduction

Income Tax Law & Practice - Introduction

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