INCOME TAX (INTRODUCTION AND IMPORTANT DEFINTIONS) 2 PAN means a umn; PERMANENT ACCOUNT NUMBER (See. 199A) ofidentification, "Per Which the Assessing Officer may allot to any person for the purpose PAN has ten alphanumeri ‘Application for ranemerie characters. the sacstiapply far : If an assessee has not been allotted a Permanent Account Number pow Hoe Form No. 494 withi ing Officer has t power to . ‘in the prescribed time. The Assessing Officer arch person. allot to any other person a Permanent Account Number, if tax is payable by be era PAN : Once a Permanent Account Number has been allotted, such number must din all d urns, correspondence with Income Tax Authorities, challans for payment and in all document preseribed by the Board. It helps in linking the aforesaid documents to his assessment records to facilitate quick disposal of his assessment and refund claim. Fe of buisineee cantimate to the Assessi in the address, name pe mabe of Enis carted oe oie avons ict aban ney change in the Now an assessee ma; . y use his Ai " : Note Yor details soe One ue his Aadhnar number in liew of PAN TAX DEDUCTION AND COLLECTION ACCOUNT NUMBER (TAN) (See. 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. Note : For details see Chapter “Deduction and Collection of Tax at Source”. QUESTIONS > Long Answer Questions 1. Discuss the evolution of Income Tax Law in India. 2, What is Income tax? Describe the history of Income tax in India, What are the basis and procedure of charging Income tax? : 8. Explain the following terms : (i) Previous Year, (ii) Assessee, (v) Assessment Year. 4. “Income tax is a tax on income and not on receipts.” Discuss this statement and give the essential characteristics of the term ‘Income’. 5. “Income tax is charged on income but there is no definition of the term ‘income’ under the Income Tax Act; rather it only provides as to what is included in income.” Discuss. 6. Income tax is charged on the income of the ‘previous year’. Do you fully agree with this statement? If not, what are the exceptions? 7. Define the term Income. Distinguish between Gross Total Income and Total Income. > Short Answer Questions 1. Differentiate between Gross Total Income and Total Income. 2, What do you mean by an Assessee? 3. Define the term assessment year. 4. Define the term person. 5. What is gross total income? 6. What is Income Tax? 7. What is previous year? 8, What is total income? 9. Explain in brief “Deemed Assessee 10. In which previous year income of a person leaving India will be taxed? AL, Distinguish between the previous year and the assessment year. 12. Define the term “Ass iii) Income, (iv) Casual Income,6 INCOME TAX assessment year in which the business or profession is discontinued up to the date of such discontinuance may be charged to tax in the same assessment year. (Sec. 176) The tax on the incomes discussed under (i) to (v) shall be charged at the rates prescribed for payment of advance tax during the relevant financial year. For example, Mr. A is leaving India on 10th July, 2023. The tax on the income for the Previous Year 2022-23 shall be charged at the rates prescribed for the Assessment Year 2023-24 and tax on income from 1.4.2023 to 10.7.2023 shall be charged at the rates prescribed for payment of advance tax during the "Financial Year 2023-24. Sec. Previous Year. 3 ‘Previous Year means the financial year imme- ee Year a ie Seman of twelve |diately preceding the assessment year. months commencing on the ‘Aprilevery as year and ending on 31st March of the next year. Previous Year may be less than 12 months in| Assessment Year will always be for a period of case of newly set-up business or profession. _|12 months. ; : ‘The year in which income is earned is known as|The next year in which the previous year's in. the Previous Year. ‘come become taxable is known as the Assess- l ment Year. = Mustration 4 The total income of Mr. A for the Assessment Year 2023-24 is % 10,60,000. Mr. A got the appointment letter from a foreign country. He will leave India on 20th Sept., 2023. His estimated income from 1.4.2023 to 20th Sept., 2023 is 6,60,000. How much tax he has to pay before leaving India? Solution ‘Mr. Ahas to pay tax on his income as under, during the Financial Year 2023-24 : (i) Tax on % 10,60,000 ie., total income for the Assessment Year 2023-24 : z Tax on & 2,50,000 Nil} Tax on F 2,50,000 @ 5% 12,500 Tax on & 5,00,000 @ 20% 1,00,000 Tax on & 60,000 @ 30% 18,000| 7,30,500. Add : Health and Education Cess @ 4% __ 5,220 1,365,720 (ii) Tax on % 6,60,000 (Income up to the date of leaving India) at the rates a prescribed for payment of advance tax during the Financial Year 2023-24 : z ‘Tax on % 250,000 Nil Tax on % 2,50,000 @ 5% 12,500 Tax on % 1,60,000 @ 20% 32,000, 44,500 Add : Health and Education Cess @ 4% 1,780) 46,280 Note : The tax is payable in the same year (2023-24) in which the income is earned (2023-24), a MAXIMUM MARGINAL RATE [Sec. 2(290)] It means the rate of income tax (including a 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 2023-24 is 30%. Surcharge 10%, 15%, 25%, 37% as the case may be. Further, on the amount of income tax and surcharge health and education cess is leviable @ 4%.—INGOWE TAX INTRODUCTION AND iNPORTANT DEFINITIONS) + In each case, what will be his assessm ted as his : it d will be treat previous year for the concerned assessment peat lees aa Solution In every case his Assessment Year wil 5: ir ding period sell be is Preston aetssessment Year will be 2023-24 and in each ease, the preces (i) 1st July, 2022 to 31st March, 2023, (i) 1 3, (ii) Ist , it Or 31st March, 2023, January, 2023 to 31st March, 2023, nmaianenatt = Mustration 3 (2) Shri Ram Gopal was appointed on 1.7.2022 as a lecturer in a college on probation. He was confirmed on 30.6.2023. (2) Shri Amar Nath was appointed on 1.9.2022 as.a lecturer against leave vacancy of Shri : S 0 9: gainst leave Ram Nath. Shri Ram Nath joined the college on 1.2.2023. (3) M/s Ram Lal Bhajan Lal maintain the books of accounts of their business on the calendar year basis. They prepared their final accounts on 31.12.2022. Under the above mentioned cases what would be the duration of the previous year for the Assessment Year 2023-24? solution (1) The previous year for Shri Ram Gopal shall be from 1.7.2022 to 31.3.2023. (2) The previous year for Shri Amar Nath shall be from 1.9.2022 to 31.1.2023. (3) The previous year for M/s Ram Lal Bhajan Lal shall be from 1.4.2022 to 31.3.2023. They are required to make up their accounts up to 31.3.2023 for the purpose of submitting the return of income. EXCEPTIONS TO THE GENERAL RULE Cases where income of a previous year is assessed in the previous year itself Income tax is charged on the income of the previous year during the assessment year. However, there are certain exceptions to this rule. In the following cases, the assessee is liable tobe assessed to tax in the same year in which he earns the income : . (i) Income of non-resident from shipping business : In the case of a non-resident carrying shipping business, any income derived from carrying passengers, livestock, mail or goods shipped at a port in India, will be taxed in the year of its earning. 7.5% of the amount paid or payable on account of such carriage will be deemed to be the income. (Sec. 172) (ii) Income of persons leaving India : When an individual may leave India during the current assessment year or shortly after its expiry, and that he has no present intention of returning to India, the total income of such individual for the period from the expiry of the previous year for that assessment year up to the probable date of his departure from India shall be charged to tax in the same assessment year. (Sec. 174) (iii) Income of an Association of Persons or a Body of Individuals or an Artificial Juridical Person formed for a particular event or purpose : Where any A.0.P or B.O.I or an artificial juridical person is formed or established or incorporated for a particular event or purpose and is likely to be dissolved in the assessment year in which it is formed or established or incorporated or immediately after such assessment year, the total income of such assessee for the period from the expiry of the previous year for that assessment year up to the date of its dissolution, shall be chargeable to tax in that assessment year. (Sec. 174A) (iv) Transfer of property to avoid tax : Where an assessee is likely to transfer his property to avoid tax, the total income of such person for the period from the expiry of the previous year for the assessment year to the date when the Assessing Officer commences proceeding under section 175 shall be chargeable to tax in the same assessment year. (See. 175) (v) On discontinuance of a business or profession : In the case of discontinuance of a business or profession, the income of the period from the expiry of the previous year for the‘As per section 2(17) of the Income Tax . : pint tadien casorg ee Act, a company means : (ii) any body corporate incorporated under the law of a foreign country, or (ii) any institution, association or body, whether incorporated or not and whether Indi or non-Indian, which is declared by general or special order of the Central Board Direct Taxes to be a company. An Association of Persons means two or more persons joining for a common purpose the purpose of earning income. The A.0.P. may consist of two or more individuals or any person, i.e., an individual and a company or two or more companies. Body of Individuals means a conglomeration of individuals who come together by chance eg., by birth or testamentary dispositions. Local Authority means an authority legally entitled to or entrusted by the Governmen with the management or control of a municipal or local fund. Such authority includ Municipality, Municipal Corporation, District Board, etc. Artificial Juridical Person includes a public corporation which is established under speci: Act of legislature, an idol or deity, university, etc. PREVIOUS YEAR (Sec. 3 ‘The year in which income is earned is known as the previous year and the next year in this income is taxable is known as the assessment year. Income tax is charged on the total i of the previous year at the rates prescribed by the relevant Finance Act for the assessment year (1) Generally, the previous year means the financial year immediately preceding Assessment Year. The Financial Year begins on 1st April and ends on 31st March. (2) The financial year (year ending on 31st March) will be uniform for the previous year fa all the assessees and for all sources of income. (3) In the case of a newly set-up business or profession or any other new source of income durin the financial year, the previous year will begin from the date of setting up of the new business profession or from the date of coming into existence of the new source of income and will end witl the said financial year. In this case, the first previous year may be of less than 12 months. In other words, the financial year is both the previous year as well as the assessment year. is the previous year for the income earned during that financial year and the assessment year fa the income earned during the preceding financial year, e.g., the Financial Year 2023-24 is th previous year for current income and is the assessment year for the income earned during Financial Year 2022-23. Note : There is no compulsion on any assessee to close his accounts on 31st March only. If for any reason, perso religious or any other ground an assessee wants to close his accounts on a date different from 31st March, he do 80. However, he would be required to make up his accounts on 31st March also, for the purpose of submitis the Income Tax Return. ‘The meaning of the term the previous year can be better understood by the following illustrations: = Mustration 2 An assessee commences his business on : (i) 1st July, 2022; (ii) 1st October, 2022; and (ii) 1st January, 2023.INCOME TAX (INTRODUCTION AND IMPORTANT DEFINITIONS) 18 ASSESSEE [See, 2(7)] ‘An assessee means a person : @) who is liable to pay any tax; or (ii) who is liable to pay any other sum of money under this Act (e.g., interest, penalty, etc.); or (ii) in respect of whom any proceeding under this Act has been taken for the assessment of his income or assessment of fringe benefits; or (iv) in respect of whom any proceeding under this Act has been taken for the assessment of the income of any other person in respect of which he is assessable; or (9) in respect of whom any proceeding under this Act has been taken for the assessment of the loss sustained by him or by such other person; or (vi) in respect of whom any proceeding under this Act has been taken for the amount of refund due to him or to such other person; or (vii) who is deemed to be an assessee under any provision of this Act; or (viii) who is deemed to be an assessee in default under any provision of this Act. > DEEMED ASSESSEE Aperson who is deemed to be an assessee for some other person is called ‘Deemed Assessee’. Forexample, i) after the death ofa 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; Gi) 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, does not deposit it in the Government Treasury, he will be treated as an assessee in default for that income tax. ASSESSMENT YEAR [See. 2(9)] Assessment year means the period of twelve months commencing on the first day of 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 following financial year (the assessment year). LIABLE TO TAX [Sec. 2(29A)] “Liable to tax,” in relation to a person and with reference to a country, means that there is an income tax liability on such person under the law of that country for the time being in force and shall include a person who has subsequently been exempted from such liability under the law of that country. PERSON (Sec. 2(31)] ‘Person’ includes the following (i) an individual; ii) a Hindu Undivided Family; (iii) a company; (iv) a firm (Including Limited Liability Partnership); (¥) an Association of Persons or a Body of Individuals whether incorporated or not: (vi) a local authority; and (vii) every artificial juridical person, not falling within any of the preceding sub-clauses, | ‘An individual means a natural person or a human being, who may be male, female, minor | child or a lunatic.2 eed INCOME TAX (b) receipts arising from business or the exercise of a profession or occupation; or (c) receipts, by way of addition to remuneration ofan employee, such as bonus, gratuity perquisites, ete, (ii) Voluntary payment received in exercise of occupation are not treated as casual income, ¢.g., Lips given in an ordinary way to taxi-drivers in the employ of taxi-owners are income arising from the exercise of an occupation. Similarly, gratuities to waiters in a hotel are taxable. A recei may be taxable as income arising from the legal exercise of the profession even if the amount received as a gift from the third party to whom the legal services were not rendered and wh was under no obligation to pay anything at all Ifan architect submitted a plan in a competition for the construction of a building, the pri won by him, is income from profession. Gii) A gift from a relative is not income at all. Birthday and wedding gifts are the simplest instances in point. A gift from a relative does not become income merely because it is repeated year after year. Aregular allowance is given year after year purely as a voluntary gift by a parent to a child or by a husband to his wife, or by one relation to another, is merely a fresh gift every time it is paid and does not amount to income. (iv) Payment by the husband to his wife under an agreement to live apart as maintenance, allowance is neither casual income nor a personal gift. Hence, it is taxable. > OTHER PROVISIONS RELATING TO CASUAL INCOME (i) Expenses are not deductible : If expenses are incurred to receive casual income, suc! expenses are not deductible from any income. For example, an individual purchases lottery tickets, the cost of lottery tickets is not deductible from any income whatsoever. Similarly, i postal charges have been paid for sending crossword puzzles, such charges (expenses) are not deductible from any income. UD Set-off of losses not permitted : If instead of casual income there is a casual loss, oe loss cannot be set-off from any income. For example, if person wins in a card game on the first day and loses the next day, he cannot set-off the loss against any income. (iit) Tax deduction at source : If the winnings from any lottery, horse race, crossword puzzle, card game and other game of any sort exceed ? 10,000, the tax will be deducted at source at th prescribed rate. (iv) Rate of tax : On winnings from lotteries, crossword puzzles, races, gambling, betting, ete. tax is chargeable @ 30% = Illustration 1 ‘State whether the following receipts are casual incomes : (i) Mr. X received % 5,000 for acting once as an arbitrator without any stipulation as to remuneration. (ii) Mr. Y received % 5,000 for acting as an arbitrator with a clear and definite stipulation for the said remuneration. (iii) Mr. X, a decree-holder, received interest of ¥ 500 under an order of the court granting} a stay of execution of the decree on judgment-debtor Mr. Y. (iv) Mr. X is in the service of Mr. Y. Mr. Y’s son was lost and Mr. X. traced him out without any stipulation of reward but Mr. Y gave him a reward of € 500. Solution (i) The receipt is of a casual and non-recurring nature as there was no stipulation for| remuneration. Gi) Mr. Y was offered a definite remuneration for acting as an arbitrator and he accepted) the work of the remuneration, hence, the receipt is not of a casual nature. ii) Interest of € 500 received by the decree-holder is not a casual income. (iv) It is of casual and non-recurring nature as there no stipulation for the reward.—_— INCOME TAX (INTRODUCTION AN IPORTANT DEFINITIONS) 1 The income under cach head is computed after making deductions permiseible under that head. Further, the brought forward losses shall be deducted (as provided in the Act) to arrive at the assessable income, a TOTAL INCOME (Sec. 245) Total income means the amount left after making the deductions under sections 80C to 80U from the gross total income. ‘The amount so arrived is rounded off to the nearest multiple of ten rupees. Ditference between Gross Total Income and Total Income —T_ _Gross Total Income Total Income 1. |Ageregate of various heads of income is called| After deductions under sections 80C to BOU, the Gross Total Income, | balance is called Total Income. 9. |Gross Total Income is not rounded off. ‘Total Income is rounded off to the nearest multi- - ple of ten rupees. 3, |Tax is not levied on Gross Total Income. Tax is levied on the ‘Total Income at the prescribed rates. 4, |Gross Total Income cannot be less than Total Income. ‘Total Income can be equal to GTT or less than GTI. 5, Agricultural income is not included in GTI. _Ifagricultural income exceeds ? 5,000, it is included | {in the Total income of an individual or HUF to l | determine the tax payable by the aasessee. VIRTUAL DIGITAL ASSET {Sec, 2(47A)] Virtual digital asset means : {a) any information or code or number or token (not being Indian currency or any foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value which is exchanged with or without consideration, with the promise or representation of having inherent value, or func- tions as a store of value or a unit of account and includes its use in any financial transaction or investment, but not limited to, investment schemes and can be trans- ferred, stored or traded electronically; (b) a non fungible token or any other token of similar nature by whatever name called; (c) any other digital asset, as the Central Government may specify : ‘The Central Government may exclude any digital asset from the definition of virtual digital asset subject to certain conditions. Explanation : (a) “non-fungible token” means such digital asset as the Central Government specify; (b) the expressions “currency”, “foreign currency” and “Indian currency” shall have the same meanings as respectively assigned to them in clauses (h), (m) and (q) of section 2 of the Foreign Exchange Management Act, 1999. AGRICULTURAL INCOME (Sec. 2(1)] See chapter on “Agricultural Income”. CASUAL INCOME Any receipt which is of a casual and nqn-recurring nature is casual income. In other words, casual income is that income, the receipt of which is accidental and without any stipulation. It is in nature of an unexpected wind-fall. Winnings from lotteries, crossword puzzles, card games and other games of any sort or from gambling or betting of any form or nature, whatsoever are casual incomes. Receipts even from habitual betting are non-recurring receipts and assessable as casual income. The casual income does not include : @® (@) capital gains; orINCOME TAX of income are ; Salaries, Income from House Property, Profits and Gains of Business or Profession, Capital Gains and Income from Other Sources. Bosides this, there are some other important rules regarding income, which are as under ; (1) There should be a definite source of income j (2) An income earned, whether legally or illegally, is taxable under the Income Tax Act. The Income Tax Act does not make any distinction between legal and illegal income. However, any expenditure incurred to earn an illegal income ia allowed to be deducted out of such income only, (3) It is not nocessary that the income should he received regularly and periodically, aay, weekly, monthly or quarterly. Lump-sum receipts can also be income, provided it is income in view of other factors and considerations (4) Income should be received from ontride. In an institution, ifthe income from subscription from its members exceeds its expenditure on ite members the excess cannot be treated as taxable income, because the subscription was received from amongst the members themselves and the excess represents the excess of income over expenditure incurred for their own benefit or well-being, hence this excess is not received from outside, and will not be income, Similarly. exceas over expenditure, received by a club from facilities provided to members as part of advantages attached to such membership, is not taxable income. | ICIT va, Bankipur Club Ltd. (1997) 226 ITR 97 (SC) (5) It is not essential that the income must be received in the form of money. Receipts in kind or service having money equivalent can also be income. | (6) Temporary or Permanent Income ; Whether the income is temporary or permanent, itis immaterial from the tax point of view. (7) If-an assessee has earned an income but has not actually received it, it will be treated as the income of the assessce, because he is entitled to receive it (8) Reimbursement of expenses : Reimbursement of actual travelling expenses to an employee is not his income. (9) Where under a legal obligation a charge is created on the income of a person, then to the extent of such charge it will be deducted from his income. (10) Receipt on account of dharmada, gaushala, etc. is not income. (11) Pin Money received by wife for her personal expenses and small savings made by a woman out of money received from her husband for meeting household expenses is not her income. (12) Disputed Income : Any dispute regarding the title of income will not postpone or held up the assessment of such income. It will be taxed in the hands of the recipient of such income. __ (13) Diversion of income vs. the application of income : Diversion of income means that the income is diverted to some other person under some legal obligation. If after receiving the income it is given to someone else it is the application of income. Similarly, if an income is diverted to some other person voluntarily, it is an application of income. Where by an obligation, income is diverted before it reaches the assessee, it is diversion of income and not taxable; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same is merely an application of income and tax liability cannot be avoided. , (14) Income may be in plus or minus. Minus income means loss, hence losses are also included in the term ‘Income’. GROSS TOTAL INCOME [Sec. 80B(5)] The aggregate of the income under the following heads is known as gross total income : (i) Income from salaries; (ii) Income from house property; (iii) Profit and gains of business or profession; (iv) Capital gains; and (v) Income from other sources.__INCOME TAX (INTRODUCTION AND IMPORTANT DEFINITIONS) = (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 whatever, Explanation : (a) ‘Lottery’ includes winnings from prizes awarded to any person by draw of lots or by chance or in any other manner whatsoever; (b) “Card game and other game of any sort” includes any game show, an entertainment programme on television or electronic mode, in which people compete to win prizes or any other similar game; | (xii) any sum received by the asscasee from his employees as contribution 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, Keyman insurance policy means a life insurance policy taken by a person on the life of another person who is or was (a) an employce of the first person, or (b) connected in any manner with the business. | The sum of keyman insurance policy is assessable as following (a) When the sum is received by the organisation, who has taken t) under the head ‘profits and gains of business or profession’. (b) When the amount is received by the employee, it is assessable as profit in lieu of salary, (c) When the amount is received by a person, where an employ does not subsist (Chairman or Director etc. of a company head income from other sources. (xiv) the profits and gains of any business of banking (including cr 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 the transfer of a capital asset and such negotiation fails, the amount so forfeited; (xvii) ifthe assessee receives (in cash or kind) the following from the Central Government or the 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. However, if such subsidy or grant or reimbursement is taken into account for deter- mination of the actual cost of the asset, it will not be treated as income. The subsidy or grant by the Central Government for the purpose of the corpus of a trust or institution established by the Central Government or the State Government. will not be treated as income ‘The LPG subsidy and other welfare subsidies received by individuals shall not be included in income. (xviii) Any sum of money or value of property received without consideration or for inadequate consideration by any person, from any person or persons on or after 1.4.2017 (For details see chapter 12). (xix) Compensation or other payment, due or received by any person in connection with the termination ofhis 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. > Concept of Income 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. ‘hese definite sources olicy, it is assessable ployee relationship it is assessable under the it facilities) carried on8 INCOME TAX A person born on Ist April would be considered to have attained a particular age on 31st March, the day preceding the anniversary of his birthday. In particular, the question of attainment of the age of eligibility for being considered is as a senior citizen would, therefore be decided on the basis of the above criteria. For example, date of birth of Mr. X (resident in India) is 1.4.1963. He will be a senior citizen on 31.3.2023. He will get tax benefit w.e.f. the Assessment Year 2023-24. Firm : A firm is liable to pay tax for the Assessment Year 2023-24 at the following rates : (i) On short-term capital gains specified in Sec. 111A—@ 15%; Gi) On long-term capital gains—@ 10%/20% (Sec. 112); (ia) On long-term capital gains Sec. 112A—@ 10% ii) On winnings from lotteries, crossword puzzles, horse races, ete—@ 30%; (iv) On other income—@ 30%. Surcharge : If total income exceeds ® 1 crore @ 12%. Marginal Relief : Where the total income exceeds % 1 crore, the total amount payable as income-tax and surcharge on such income shall not exceed the total amount payable as income tax on net income of one crore rupees by more than the amount of income that exceeds one crore rupees. Health and Education Cess : On the amount of income tax and surcharge @ 4%. 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 /ess 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 sections 68, 69, 69A, 69B, 69C or 69D) tax shall be charged under section LISBBE as : Income Tax @ 60%, Surcharge @ 25%, Health and Education Cess 4%. IMPORTANT DEFINITIONS | 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 : INCOME [Sec. 2(24)] ‘Income’ is one of the important terms of the Income Tax Act 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 : () 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 a co-operative society;__INGOME TAX (INTRODUCTION AND IMPORTANT DEFINITIONS) solution tic ‘Tax on F 50,00, On first ® 2,50,000 | Next ® 2,50,000 | Next € 5,00,000 — 20% | Balance € 40,90,000 — 30% \ r 5% ‘Add : Surcharge 10% Marginal relief i Income tax on ¥ 50,00,000 Tax and surcharge as per marginal relief, 100% of income exceeding ® 60,00,000 | (50,90,000 ~ 50,00,000) = | Total tax including surcharge payable under marginal relief { Tax payable as per normal provisions or as per provisions of marginal relief whichever is less (i.e, € 14,73,450 or ® 14,02,500 whichever is less) ‘Add ; Health and Education Cess @ 4% Total Tax Payable _ Note: The total income and the tax payable is rounded off to the nearest multiple of @ 10. » Example 1,33, 14,73,450 13,12,500 Total income of Mr. X for the Assessment Year 2023-24 is % 1,02,00,000. Compute the tax payable by X for the Assessment Year 2023-24. Assume he does not opt to be taxed section LISBAC (é.e., new tax regime). Solution Tax on @ 2,50,000 Tax on % 2,50,000 @ 5% Tax on 2 5,00,000 @ 20% Tax on % 92,00,000 @ 30% Add : Surcharge @ 15% Less : Marginal relief Add : Health and Education Cess @ 4% Tax Payable Marginal relief has been computed as under : Tax on @ 2,00,000 @ 30% (excess over % 1 crore) Add : Surcharge (4,30,875 — 2,81,250) Tax and surcharge cannot exceed the amount of income that exceeds % 1 crore Marginal Relief > Health and Education Cess Add Health and Education © In brief : Income tax on total income at the prescribed rates Add : Surcharge, if any Add : Health and Education Cess @ 4% ‘Tax Payable z 12,500 1,00,000 27,60,000 28,72,500 4,30,875 33,03,375 9,625 32,93,750 1,31,750 34,25,500 60,000 1,49,625 2,09,625 2,00,000 9,625 @ 4% on the amount of income tax and surcharge.é - INCOME TAX Example Particulars Components of Total Applicable Rate of Income Surcharge (iv) | Where total income | (excluding — dividend | income and capital | gains chargeable to Exampte @ Dividend income ¢ 60 lakh; | Surcharge@® 16% would bo © STCG u/s 1114 € 60 Ink lovied on income tax on © LPCG w/a 112 © 42 lakh; © Dividend income of ¢ 60 tax we 111A, 112 and | LNCG u/e 112A ¢ 66 lakh; and Jakh; 112A) > @ 5 crore | @ Other income € 6 crore, @ STCG of? 60 lakh charge- Rate of surcharge on Not able to tax u/a 111A. | the income tax pay-| exceeding @ LTCG oft 42 lakh charge- | able on the portion of 15% able to tax u/s 112; and dividend income and @ LTCG of ¢ 65 lakh charge- capital gains charge- ule to tax u/s 112A. Surcharge@ 37% would be joviable on the income tax computed on other income of @ 6 crore included in total | income. (v) |Where total income} 15% | Example (including dividend in- @ Dividend income ¢ 56 lakh; | Surcharge would be levied | come and capital gains STCG ws 111A 60 lakh; | @15% on income tax com- chargeable to tax u/s LI'CG w/s 112% 42 lakh; | puted on total income of ® IIA, 112 and 112A) > © LICG ws 112A 55 lakh; and | 3,22 crore, % 2 crore in cases not © Other income ¥ 1.10 crore. covered under (iit) and (iv) above > Marginal Relief ‘The purpose of marginal relief is to ensure that the increase in amount of tax payable (including surcharge) due to increase in total income of an assessee beyond the prescribed limit should not exceed the amount of increase in total income. Individual/HUF/AOP/Artificial Juridical Person (for the Assessment Year 2023-24) : Income | Marginal Relief Exceed ¥ 60 lakh |The total amount payable as income tax and surcharge on such income shall not exceed ‘the total amount payable as income tax on net income of ® 50 lakh by more than the amount of income that exceeds ® 50 lakh. Above ® Lerore The total amount payable as income tax and surcharge on such income shall not exceed the total amount payable as income tax and surcharge on net income of ® 1 crore by 2 more than the amount of income that exceeds ¥ 1 crore. - Above? 2erore |Thetotal amount payable as income tox and surcharge on auch income shall not exceed ‘the total amount payable as income tax and surcharge on net income of & 2 crore by ___|more than the amount of income that exceeds ® 2 crore. ve ® Serore ‘The otal amount payable as income tax and surcharge on such income shall not exceed ‘the total amount. payable as income tax and surcharge on net income of 8 6 crore by more than the amount of income that exceeds & 5 crore. No marginal relief will be allowed on health and education cess. = Example : Computation of Marginal Relief The total income of R for the Assessment Year 2023-24 is 50,90,000. Compute the tax payable by R for the Assessment Year 2023-24. Assume he does not opt to be taxed section LISBAC (ie., new tax regime). able to tax ws 111A, | | 112 and 112A |INCOME TAX (INTRODUCTION AND IMPORTANT DEFINITIONS) === REBATE OF INCOME TAX (Sec. BTA. In case of an individual resident in India, whose total income does not exceed 5,00, 00 =a shall be entitied to a deduction from the amount of income tax payable up to % 12,500. The key features of section 87A are as under : ; 1, Rebate ws 874 is available only to a Resident Individual. Rebate ws 87A is not available to HUF/AOP/BOVFirm/Company and Non-resident Individual. 2. There is a ceiling on the total income for claiming rebate u/s 87A. The total income after all deductions including deductions under Chapter VIA should not exceed ? 6 lakh. If the total income exceeds % 5 lakh, then no rebate ws 87 will be admissible. 3. Total rebate is limited toa maximum of ? 12,500, In short, lower of actual income tax liability of the resident individual tax payers or % 12,500 is available as deduction u/s 87A. 4. This rebate is available on the tax computed before charging of Education and Health Cess which is 4% at present. > Surcharge The rates of surcharge applicable for Assessment Year 2023-24 are as follows : (2) Individual/HUF/AOP (other than an AOP consisting of only companies as members)/ BOVArtificial Juridical Person Income tax computed applying the slab rates or section 111A or section 112 or section 112A. or section 115BAC would be increased by surcharge given under the following table ‘Rate of ‘Example . Surcharge — — Sep ——— — Particulars on Components of Total Applicable Rate of | Income Income Surcharge : Tax 7 - - _ =—— ‘otal | rxample come (including Dividend & 10 lakh; Surcharge would be | dividend income and STCG ws 111A 20 lakh; levied@10% on income tax capital gains charge- @ LTCG ws 112% 15 lakh; computed on total income of able to tax u/s 111A, @ LTCG ws 112A 20 lakh; and | 2 90 lakh. 112 and 112A) > % 50 @ Other income % 25 lakh. lakh but <¥ 1 crore (i) Where total income 15% | Example (including dividend in- @ Dividend income % 10 lakh; | Surcharge would be come and capital gains @STCG ws 11147 40 lakh; | | levied@15% on income tax chargeable to tax u/s @LICG ws 112% 55 lakh; computed on total income of 111A, 112 and 112A) > LTCG w/s 112A% 35 lakh; and = 1.90 crore. % Lcrore but <¥ 2crore | @ Other income % 50 lakh. (iii) Where total income 25% | Example | (excluding dividend | @ Dividend income 51 lakh; — Surcharge@ 15% would be “income and capital @STCG ws 111A7 44 lakh; levied on income tax on gains chargeable to | @LTCG w/s 1122 42 lakh; @ Dividend income of % 51 tax ws 111A, 112 and | @ LICG ws 112A% 55 lakh; and lakh; | 112A) > & 2 crore but [© Other income 3 crore. © STCG of 44 lakh charge- aera’ ____| able to tax ws 111A. ‘The rate of surcharge Not | @LTCG off 42 lakh charge- on the income tax pay- exceeding | able to tax ws 112 and. ‘able on the portion of 15% @LICG of 55 lakh charge- dividend income and | _ ble to tax ws 112A. capital gains charge- | Surcharge @ 25% would be able to tax u/s 111A, leviable on income tax com- ina and 112A | puted on other income of @ 3 crore included in total in- comeINCOME TAX : nn (©) Other individuals, HUF, AOP or BOI: On ® 2,50,000 (Minimum exemption limit) Nil Nest on & 2,50,000 Se Next on & 5,00,000 20% Next—Balance 50% or Income Tax Slabs under the New Tax Regime for Individual : or HUF for Financial Year 2022.23 (Assessment Year 2023-24) (Sec. 115BAC) | Total Income I Applicable Tax Rate [Upto & 2,50,000 | Nil | 2,50,001 to 5,00,000 | 5% 2 5,00,001 to 7,50,000. | - 10% %7,50,001 to 10,00,000 | 15% % 10,00,001 to 12,560,000 20% © 12,50,001 to 15,00,000 25% above & 15,00,000 i 30% Individuals and HUFs exercising option under section 115BAC are not liable to pay Alternate Minimum Tax (AMT) Availing a new slab rate is one time non-revocable process. Furthermore, if availing this scheme, an individual has to forgo all tax benefits provided for Leave Travel concession, House Rent Allowance, Standard Deduction, interest on housing loan on self-occupied or vacant property, exemption of & 1,500 per minor child in respect of income of minor child clubbed in the hands of the parent assessee, and other deductions provided in sections 80C, 80D, 80E and SOTTA. However, deduction under sections 80CCD(2) or 80CCH(2) or 80JJAA shall be allowed. An individual or HUF who does not have any business income would have an option to choose either of the two tax regimes each year depending upon their tax liability under each one of them. However, in respect of an individual or HUF having business income, the option once exercised cannot be withdrawn. In such a case, an option once exercised would be applicable for all subsequent assessment years and can be withdrawn only once for a previous year other than the year in which it was exercised and thereafter, the individual or HUF shall never be eligible to exercise option under this section, except where such individual or HUF ceases to have any business income. NEW TAX REGIME Vs. OLD TAX REGIME (for Assessment Year 2023-24) Income Tax Slabs ____ New Tax Regime | Old Tax Regime _ Upto ® 2,50,000 Nil | Nil % 2,50,001 to & 5,00,000 5% | 5% % 5,00,001 to & 7,50,000 % 12,500 + 10% of total income exceeding, 12,500 + 20% of total income exceeding 5,00.000 | 5,00,000 7,50,001 to ® 10,00,000 £37,500 + 15% of total income exceeding & 62,500 + 20% of total income exceeding | 7,50,000 3 7,50,000 ¥ 10,00,001 to ® 12,50,000 3.000 + 20% of total income exceeding, & 1,12/500 + 30% of total income exceeding. = 10,00,000 z 10,00,000 F 12,50,001 to ® 15,00,000 7 1,25,000 + 25% of total income exceeding’ & 1,87,500 + 30% of total income exceeding ¥ 12,50,000 %12,50,000 Above @ 15,00,000 00 + 30% of total income exceeding 2,62,500 + 30% of total income exceeding 2 15,00.000 £15,00,000 Notes: 1. Ifthe individual opts for the new tax regime, then he will have to forego the major deductions 2, Under the old tax regime, the individual can still avail all the deductions. 2. Special Rates : On specified incomes the tax is charged at a specified flat rate (a) On short-term capital gains specified in Sec. 111A—@ 15%; (b) On long-term capital gains—@ 20%; 44 (c) On gains from listed shares without indexing the cost of acquisition—@ 10%; (ci) On long-term capital gains Sec. 112A—@ 10%. (d) On winnings from lotteries, crossword puzzles, horse races, ete —@ 30%.- . = INCOME TAX (INTRODUCTION AND IMPORTANT DEFINITIONS) —__ (C) Other Individuals, ‘ati i (D) Firm, Company, eat eas of Persons and Body of Individuals ® 2,50,000. a rete 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 js 6% and maximum tax rate is 30%. Firms’ incomes are taxed at the rate of 30% and companies incomes are taxed at the rate of 15% or 22% or 25% or 30% (whichever is applicable). 6, Surcharge : Surcharge’ is imposed on the amount of income tax. Surcharge rates are aS follows for the Assessment Year 2023-24, (i) For individuals, HUF, AOP or BOL :(a)@ 10%, if total income exceeds ® 50 lakh but does not exceed ® 1 crore. (b) @ 15%, if total income exceeds ¥ 1 crore but does not exceed % 2 crores (o) @ 25%, if total income exceeds % 2 crore but docs not exceed % 5 crore; (d) @ 37%, if total exceeds & 5 crore, (ii) For Firms : @ 12%, if total income exceeds % 1 crore. (iii) For Domestic Company : (a) @ 7% if total income exceeds & 1 crore but does not exceed £10 crore. (b) @ 12% if total income exceeds z 10 crore. Note : In above all three conditions, provision of marginal relief will also be applicable. a 7. Health and Education Cess : All assesses are liable to pay health and education ce9s @ 4% on the total amount of income tax including surcharge. 8. Tax Burden : Tax is imposed at a progressive rate on the income of individual and HUF therefore, rich person bear more tax burden. 9. Administration : Tax is imposed and recovered by the income tax department, Income ‘Tax Department works under the control of the 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 the Central Government and the State Government according to the recommendation of the Finance Commission. The State Government will not be given any share of income tax revenue from the following amounts : (i) Income tax amount recovered from companies. Gi) Amount of surcharge. (iii) Amount of health and education cess. TAX RATES > |, Rates of Tax for the Assessment Year 2023-24 Rates of tax for an Individual, Hindu Undivided Family, Association of Persons, Body of Individuals or every Artificial Juridical Person : 1. General Rates : Excluding short-term capital gains, specified in Sec. 111A, long-term capital gains, winnings from lotteries, crossword puzzles, races, ete. : (a) Individual—Senior citizen (resident in India, who is of the age of 60 years or more but less than 80 years at any time during the previous year) : On 3,00,000 (Minimum exemption limit) Nil Next on % 2,00,000 5% Next on % 5,00,000 20% Next—Balance 30% (b) Individual—Super senior citizen (resident in India, who is of the age of 80 years or more at any time during the previous year) : On & 5,00,000 (Minimum exemption limit) Nil Next on % 5,00,000 20% Next—Balance 30% [Ne Deduction The term ‘Tax’ referred wls 40(aXi), shall include and shall be deemed to have always included an Me dicen jest on such tax, bY whatever name called. Therefore, no deduction shall be allowed with respect to the surcharge or cess paid on the Tax as specified ws 40(aXii)Taxes Law (Amendment) Acts of 1988 and 1989; Direct Tax Law (Second Amendment) Act, 1989 and at last The Taxation Law (Amendment) Act, 1991. The amendments in the Finance Acts, 1992 and 1993; are mostly based on the recommendations of Chelliah Committee Report, (8) As a matter of fact, the Income Tax Act, 1961; which came into force on 1st April, 1962; has been amended and re-amended widely. It has, therefore, become very complicated both for the administering authorities and the tax-payers. BASIS AND PROCEDURE OF CHARGING INCOME TAX (Sec. 4) The following basic principles are the basis of charging income tax : 1. Income tax is an annual tax charged on income, 2. Income of the previous year is taxable in the next following assessment year at the rate or rates applicable to that assessment year. However, there are certain exceptions to this rule, 3. Tax rates are fixed by the annual Finance Act. 4, Tax is charged on every person as defined in section 2(31). 5. Tax is charged on the total income of every person computed in accordance with the provisions of this Act. 6. Income tax is to be deducted at the sources of income or paid in advance as provided under provisions of the Act. 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; 2. Income from House Property; 3. Profits and Gains of Business or Profession; 4. Capital Gains; and 5. Income from Other Sources. For computing the total income of an assessee and the tax payable by him, following procedure is followed : (1) Classify the income under each of the above 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 of the assessable income of each head or 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 Finance Act for the relevant assessment year and the rates prescribed under different sections of the Act. 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 the tax burden. 2. Central Tax : Income Tax is imposed and recovered by the 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 the Income Tax Act. 4. Tax-Exempted Limit : If income exceeds tax-exempt limit of income, then tax is imposed. Tax-exempt limit of income for the Assessment Year 2023-24, are as follows : (A) Individual : Senior citizen (resident in India), who is of the age of 60 years or more but less than 80 years at any time during the previous year & 3,00,000. (B) Individual : Super senior citizen (resident in India), who is of the age of 80 years or more at any time during the previous year % 5,00,000. =ss | | : INCOME TAX | INTRODUCTION AND IMPORTANT DEFINITIONS. L | INTRODUCTION Income tax is an important direct tax. It is a prominent and most significant source of | revenue of the Government. The Government needs money to maintain law and order in the | country, safeguard the security of the country from foreign powers and promote the welfare of the people. Since our government is wedded to the socialistic pattern of society it is the foremost duty of the Government to bring out such welfare and development programmes which will | _ bridge the gap between the rich and the poor. All this requires mobilisation of funds from various sources. These sources may be direct or indirect. Income tax, being a direct tax, is an important tool to achieve balanced socio-economic growth by providing concessions and incentives in income tax for various developmental 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 income tax during the current financial year on the income of the previous financial year at the rates applicable during the current financial year. BRIEF HISTORY OF INCOME TAX IN INDIA (1) In India, this tax was introduced for the first time in 1860, by Sir James Wilson in order to meet the losses sustained by the Government on account of the Military Mutiny of 1857. (2) In 1886, a separate Income Tax Act was pas: force up to 1917, with various amendments from time to time. (3) In 1918, a new Income Tax Act was passed and again it was replaced by another new Act which was passed in 1922. This Act remained in force up to the Assessment Year 1961-62 with numerous amendments. (4) The Income Tax Act of 1922 had become very complicated on account of innumerable amendments. The Government of India, therefore, referred it to the Law Commission in 1956 with a view to simplifying and for the prevention of tax evasion. The Law Commission submitted its report in September 1958, but in the meantime, the Government of India had appointed the Direct Taxes Administration Enquiry Committee to suggest measures to minimise inconveniences to assessees and to prevent evasion of tax. This Committee submitted its report | in 1959. In consultation with the Ministry of Law finally the Income Tax Act, 1961 was passed. (5) The Income Tax Act, 1961 has been brought into force with effect from 1st April, 1962. It extended to the whole of India. (6) Since 1962 several amendments of far-reaching nature have been made in the Income Tax Act by the Finance Act every year. (7) Besides this, amendments have also been made by various Amendment Acts, for | instance, Taxation Laws Amendment Act, 1984; Direct Taxes Amendment Act. 1987: Direct dj