BASIC CONCEPT OF INCOME TAX

SSGURU CA SURAJ SATIJA

1. BASIC CONCEPTS OF INCOME TAX
WHAT IS TAX?
 Tax is NOT “Compulsory Extortion of Money” by the government.
 It is the financial charge (fee) imposed by the Government on income, commodity or activity.
WHY ARE TAXES LEVIED?
Taxes constitute the basic source of revenue to the Government, which are utilized for meeting
the expenses of Government like the one defense, provision of education, health-care,
infrastructure facilities like roads, dams etc.
TAXATION SYSTEM IN INDIA
 In India, Constitution of India is the parent law. All other laws should be enacted (made)
without exceeding the framework of Constitution & subject to the norms (T&C) laid down in it.
 Article 265 of Constitution provides that no tax shall be levied or collected except by authority
of law. Further, the law imposing the tax must not violate any fundamental right.
 Constitution empowers Central Government (CG) & State Government to levy & collect tax on
Income.
 Parliament (Union) & SG are empowered to levy taxes by virtue of Article 246 of Constitution.
 Entry 82 of Union List (List I to Seventh Schedule of Constitution) gives power to Parliament
to levy taxes on Income other than Agricultural Income.
 Seventh Schedule to Article 246 contains three lists which enumerate the matters under
which the Union & SGs have the authority to make laws for the purpose of levy of taxes.
The following are the lists:
1) Union List: CG has exclusive power to make laws on the matters contained in Union List.
2) State List: SG has exclusive power to make laws on matters contained in the State List.
3) Concurrent List: Both CG & SG have power to make laws on matters contained in this list.
Particulars Direct Tax Indirect Tax
Levied on Income/wealth of the person Price of Goods or Services
Examples Income tax, Tax on undisclosed GST, Custom duty.
foreign Income or Assets.
Shifting of burden There is No Shifting of burden. Tax burden is shifted to
 Direct Taxes are directly subsequent buyer /user.
borne by taxpayer  Thus whole burden falls on
final consumer.
Time of Collection Collected on yearly basis Collected at the time of
sale/purchase of goods or
rendering of services.

COMPONENTS OF INCOME TAX LAWS

A. INCOME TAX ACT, 1961
 It came into force on 1st April, 1962. The act contains 298 sections & XIV schedules.
 A section may have sub-sections, clauses & sub-clauses.

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 Ex: Clause (1A) of Section 2 defines “agricultural income”, Clause (1B) defines “amalgamation”.
 Section 5 defining the scope of total income has two sub-sections (1) & (2).
 Sub-section (1) defines the scope of total income of a resident;
 Sub-section (2) defines the scope of total income of a non-resident.
 A Section may also have Provisos & Explanations.
 Proviso gives the exceptions to the provision contained in the respective by sub-
section/clause. (Proviso gives the cases where the provision contained in the respective
section/sub- section/clause would not apply or where the provision would apply with certain
modification).
 Explanation gives clarification relating to the provision contained in that by sub-
section/clause. The Act (since it is Revenue-based Act) undergo changes every year with
additions & deletions brought by the Annual Finance Act passed by the parliament ACT.

B. ANNUAL FINANCE ACT

 Every year, Finance Minister Introduces the Finance Bill in Parliament’s Budget session.
 Part A of budget speech contains the proposed policies of government in the area.
 Part B of budget speech contains the detailed tax proposals.
 When the Finance Bill is passed by both the houses of the Parliament & gets the assent of the
President, it becomes the Finance Act which is incorporated in the Income- Tax Act.
 Amendments are made every year to the Act & other tax laws by the Finance Act.

C. NOTIFICATIONS
 Notifications are subordinate legislation issued by CG to give effect to the provisions of the Act.
 The CBDT is also empowered to make & amend rules by issuing notifications.
 They are binding on everyone. [Assessee + Income Tax department]

D. INCOME TAX RULES

 The CBDT is empowered to make rules for proper administration of the ACT.
 Ex: Sec 32 states that depreciation will be allowed as deduction but the rates for computation
of depreciation are given by Rule 5.
 Rules also have sub-rules, provisos and Explanations.
 The First Schedule to the Finance Act contains four parts which specify the rates of tax.
 Part I: Rate of Tax applicable for the current Assessment Year.
 Part II: Rate of TDS for the current Financial Year.
 Part III: Rate of Advance Tax & Rate of tax to be deducted from income u/h ‘Salaries’.
 Part IV: Rules for computing Net Agricultural Income.

E. CIRCULARS
 Circulars are issued by the CBDT to deal with certain specific problems & to clarify the doubts
regarding the scope & meaning of the provisions of the law.

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 Circulars provide guidance to the Income Tax officers & Assesses.
 These circulars are binding on the department but not on the assessee.
 However assessee can take advantage of beneficial circulars.

F. CASE LAWS (JUDICIAL DECISIONS)

 It is not possible for the parliament to provide for all possible issues that may arise in the
implementation of any act. Hence the judiciary will hear the disputes between the assesses &
the Income tax Department & give its decisions.
 Supreme Court Decisions becomes Judicial Precedent (Law) & are binding on all the courts,
Appellate Tribunal, Income Tax Authorities & on assesses.
 High Court decisions are binding on the assesses & Income Tax Authorities which come under
its jurisdiction unless it is overruled by a higher authority (Supreme Court).
 Decision of a High Court cannot bind other High Court.

LEVY / CHARGE OF INCOME TAX [SECTION 4]

Income-tax is a tax levied on the total income of the Previous Year of every person (Section 4).
Procedure for Computation of total income of person for levy of income tax is as follows:

Step 1 - Determination of Residential Status

Step 2 - Classification of Income under 5 different heads

Step 3 - Computation of Income under each head.

Step 4 - Clubbing of income of spouse, minor child etc.

Step 5 - Set-off or carry forward and set-off of losses.

Step 6 - Computation of Gross Total Income [Net Result of Step 1 – 5].

Step 7 - Deductions from Gross Total Income. [Payment based/Income Based

deductions].

Step 8 - Total income [GTI – Deductions under Step 7].

Step 9 - Application of Rates of Tax on the total income.

Step 10 - Surcharge / Rebate u/s 87A.

Step 11 - Health & Education Cess on Income Tax.

Step 12 - Advance tax & TDS.

Step 13 - Tax Payable/Tax Refundable.

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We will study all the above steps in details in the respective chapters

SOME IMPORTANT DEFINITIONS

 Terms defined in the Act: Section 2 gives definitions of various terms used in the Act. If a
particular definition is given in the Act itself, we will have to use that definition only.
 Terms not defined under the Act: If a particular definition is not given in the Act, reference is
to be made to the General Clauses Act or dictionaries, day-to-day meanings.

1. INDIA [SECTION 2(25A)]

 The term 'India' means –
 Territory of India as per Article 1 of the Constitution,
 Territorial Waters of India (TWI), seabed and subsoil underlying such waters,
 Continental Shelf,
 Exclusive Economic Zone
 Any other specified maritime zone & air space above its territory & TWI. Specified maritime
zone means the maritime zone as referred to in Territorial Waters, Continental Shelf, Exclusive
Economic Zone and other Maritime Zones Act, 1976.

2. ASSESSEE - [SECTION 2(7)]

 Any person by whom any tax or any other sum of money is payable under this Act.
 It includes –
a) Tax Payable: Every Person by whom any tax or any other sum of money is payable under this
Act whether or not any proceeding under this act has started against him.
b) Proceeding started: Any Person in respect of whom any proceeding under the act has been
taken whether or not any tax, interest or penalty is payable by him under this act. Proceeding may
be taken for/of –
 Assessment of his income (or loss) sustained by him;
 Income (or loss) of any other person in respect of whom he is assessable;
 Refund due to him or to such other person.
 Assessment of Fringe Benefits.
c) Deemed Assessee: Sometimes, a person becomes assessable in respect of the income of some
other persons. In such a case, he may be deemed as an assessee.
d) Representative Assessee: Sometimes a person may be assessed for Income of another person.
Such person is known as representative assessee.

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Ex: Legal Heir is assessable for the income of deceased person.
e) Assessee in default: Any person who does not deduct tax at source or after deducting tax, fails to
pay deducted tax to the government or who fails to pay advance tax is deemed to be assessee in
default u/s [201(1)]/218.

3. ASSESSMENT [SECTION 2(8)]

 This is the procedure by which the income of an assessee is determined by AO.
 It may be normal assessment or by way of reassessment of an income previously assessed.

4. PERSON [SECTION 2(31)]

AN INDIVIDUAL
Individual means only A Natural Human Being (Male/Female/Minor/Unsound Mind).
Note: Income of Minor & Person of unsound Mind → Assessed in hands of Manager/Guardian u/s
161(1).

COMPANY [SECTION 2(17)]

‘Company’ has a much wider meaning under Income Tax Act than Companies Act.
It means:
 Any Indian Company defined in section 2(26);
 Any Body Corporate incorporated under the foreign laws [Foreign company];
 Any institution, association or body (incorporated/not) whether indian or non-Indian,
 which is declared by general or special order of CBDT to be a company

A FIRM [SECTION 2(23)]

 A firm includes a partnership firm (registered or not) & shall include a LLP.
 “Partnership firm” has same meanings as assigned to them in Indian Partnership Act.
 However, for IT purposes, a minor admitted to the benefits of existing partnership would also
be treated as partner. This is specified u/s 2(23) of the Act.
 Same Tax Treatment would be applicable for both General Partnerships & LLPs.

ASSOCIATION OF PERSONS (AOP)

 When two or more persons combine together for promotion of joint enterprise, they are

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assessable as an AOP when they do not constitute a partnership legally.
 Conditions to form AOP: Persons must join in a common purpose, common action & their
object must be to produce Income, but they should not form a partnership.
 Co-heirs, co-donees joining together for common purpose would be chargeable as AOP.

BODY OF INDIVIDUALS (BOI)

Persons who merely receive the income jointly & who may be assessable in like manner & to the
same extent as the beneficiaries individually. (Ex: Executors/trustees).
 Co-Executors/Co-trustees are assessable as BOI since their title & interest are indivisible.
 Note: Tax is not payable by the assessee on share of Income received by him from BOI on
which the tax has already been paid by such BOI. [To avoid Double Taxation]

LOCAL AUTHORITY
Municipal committee, district board, Municipality, body of port commissioners etc. legally
entitled/entrusted by Government with control & management of Municipal/ local fund.
Note: Income of LA is taxable only if it is derived from the business of supply of
commodity/service (other than water & electricity) outside its own jurisdictional area. Income
arising from supply of water & electricity even outside its own jurisdictional areas → Exempt.
EVERY OTHER ARTIFICIAL JURIDICAL PERSON (not falling within above categories)
 This is a residuary clause. If the assessee does not fall in any of the first six categories, he is
assessed under this clause.
Ex: An idol, or deity.

Q. What is the difference between AOP & BOI?

Answer: The difference between AOP & BOI is that whereas an association implies a voluntary
getting together for a definite purpose, a body of individuals would be just a body without an
intention to get-together. Moreover, members of BOI can be individuals only but members of AOP
can be individual or non-individuals (i.e. artificial persons).

5. CLASSES OF COMPANIES
HINDU UNDIVIDED FAMILY
 HUF is not defined under IT Act. However, it is treated as separate entity under IT Act.
 As per Hindu Law, it consists of all males lineally descended from a common ancestor &
includes their wives & unmarried daughters.

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 The Status in HUF is received by birth & not by operation of law.
 Even a single male member can have HUF (w.e.f 6/9/2005).
 Only Co-parceners have the right to Partition.
Coparceners → HUF may contain many members, but only members within 4 degrees including
KARTA are called co-parceners (including daughters w.e.f 6/9/2005).
Note: wife/ daughter-in-law cannot be co-parceners; however they can be members.
 Jain & Sikh undivided families would also be assessed as a HUF under IT Act. .

DOMESTIC COMPANY [SECTION 2(22A)]

 An Indian company or
 Any other company, which has made prescribed arrangements for declaration & payment of
dividends within India payable out of the taxable Income in India.

6. PERSON HAVING SUBSTANTIAL INTEREST IN THE COMPANY [Section 2(32)]

 Any person who is the beneficial owner of shares (not being shares entitled to fixed rate of
dividend), whether participating in profit or not, carrying at least 20% of total voting power.

7. AVERAGE RATE OF TAX [SECTION 2(10)]

 Generally, the word ‘Income’ covers receipts in the shape of money or money’s worth, which
arise with certain regularity.
 Average Rate of Tax = Amount of Income Tax calculated on Total Income using applicable slab
rate/Total Income

8. MAXIMUM MARGINAL RATE OF TAX [SECTION 2(29C)]

 Rate of Income Tax (including SC) applicable in relation to Highest Slab of Income specified in
the Finance Act of the relevant Previous Year, in the case of
(i) An Individual, or (ii) An AOP /BOI.

INCOME & ITS CONSTITUENTS [SECTION 2(24)]

1) MEANING & DEFINITION OF INCOME
 Income is a periodical monetary return with some sort of regularity. However, all receipts do
not form the basis of taxation under the Act.
Income for the purpose of Income Tax Act includes:
[Each of these will be covered in respective chapter]

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S. No. Income under Section 2(24) Head Of Income
1. Profits and gains PGBP
2. Dividend Other Sources
3. Voluntary contributions received by a trust/institution created Generally exempt
wholly or partly for charitable or religious purposes or by under Section 11 and
certain research association or universities and other 12
educational institutions or hospitals and other medical
institutions or an electoral trust.
4. The value of any perquisite or profit in lieu of salary taxable Salary
5. Any special allowance or benefit specifically granted to the Salary (Generally
assessee to meet expenses wholly, necessarily and exclusively exempt)
for the performance of the duties of an office or employment of
profit.
6. City Compensatory Allowance/ Dearness allowance : any Salary
allowance granted to the assessee either to meet his personal
expenses at the place where the duties of his office or
employment of profit are ordinarily performed by him or at a
place where he ordinarily resides or to compensate him for the
increased cost of living.
7. Benefit or Perquisite to a Director : The value of any benefit Salary (if as per
or perquisite, whether convertible into money or not, obtained employment
from a company by. (a) a director, or (b) a person having agreement) else
substantial interest in the company, or (c) a relative of the under Other Sources
director or of the person having substantial interest, and any (if not in the terms of
sum paid by any such company in respect of any obligation employment
which, but for such payment, would have been payable by the agreement)
director or other person aforesaid;
8. Any Benefit or perquisite to a Representative Assessee : Other Sources
the value of any benefit or perquisite (whether convertible
into money or not) obtained by any representative assessee
under Section 160(1) (iii)/ (iv) or beneficiary, or any amount
paid by the representative assessee in respect of any obligation
which, but for such payment, would have been payable by the
beneficiary;
9. Deemed profits chargeable to tax under section 28 or section 41 PGBP
or section 59
10. Capital Gain : any capital gains chargeable to tax under Capital Gains
Section 45; since the definition of income in Section 2(24) is
inclusive and not exhaustive capital gains chargeable under
Section 46(2) are also assessable as income.

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11. Insurance Profit : The profits and gains of any Insurance PGBP
business carried on by a mutual insurance company or by a co-
operative society computed in accordance with the provisions of
Section 44 or any surplus taken to be such profits and gains by
virtue of the profits contained in the First Schedule to the
income-tax act
12. Banking income of a Co-operative Society: The profits and PGBP
gains of any business of banking (including) providing credit
facilities carried on by a cooperative society with its members.
13. Winnings from Lottery: any winnings from lotteries, Other Sources
crossword puzzles, races, including horse-races, card-games
and games of any sort or from gambling or betting of any form.
14. Employees Contribution Towards Provident Fund : any PGBP if not deposited
sum received by the assessee from his employees as by the assessee to the
contributions to any provident fund or superannuation fund or specified fund
any fund set-up under the provisions of the employees State
insurance act, 1948 (34 of 1948) or any other fund for the
welfare of such employees.
15. Amount Received under keyman Insurance Policy: any sum PGBP
received under a Keyman insurance Policy including the sum
allocated 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 the employee of the first
mentioned person or is or was connected with the business of
the first mentioned person in any manner whatsoever.
16. Amount received for not carrying out any activity : any sum PGBP
referred to in Section 28(va), i.e. any sum, whether received or
receivable in cash or kind, under an agreement for -
(i) not carrying out any activity in relation to any business
or profession; [amendment vide Finance act, 2016]
(ii) not sharing any know-how, patent, copyright, trade-mark,
license, franchise or any other business or commercial right of
similar nature or information or technique likely to assist in
the manufacture or processing of goods or provision for
services
17. any sum referred to in clause (v) or (vi) of sub-section (2) Other sources
of section 56
18. Gift received for an amount exceeding Rs. 50,000 : any sum Other sources
of money or value of property referred to in clause (vii) or
clause (viia) of sub-section (2) of Section 56

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19. any consideration received for issue of shares as exceeds Other sources
the fair market value of the shares referred in section
56(2)(viib).
20. amount received as an advance or otherwise in the course Other sources
of negotiation for transfer of a capital asset referred to in
clause (ix) of section 56(2).
21. any sum of money or value of property received without Other sources
consideration or for inadequate consideration as referred
to in clause (x) of Section 56(2)
22. any compensation or payment in connection with Other sources
termination of employment as referred under clause (xi)
of Section 56(2).
23. assistance in the form of a subsidy or grant or cash PGBP
incentive or duty drawback or waiver or concession or
reimbursement (by whatever name called) by the Central
Government or a State Government or any authority or
body or agency in cash or kind to the assessee other than
the subsidy or grant or reimbursement which is taken into
account for determination of the actual cost of the asset in
accordance with the provisions of explanation 10 to clause
(1) of section 43.

2) REGULARITY OF INCOME
 Income means periodical monetary return coming from definite source with some sort of
regularity.
 However, this does not mean that income, which does not arise regularly, will not be treated as
income for tax purposes. Ex: Winnings from lotteries, card games, etc. which do not arise from
definite source & do not have element of regularity are specifically included in Income under
IT Act.
 Even a single transaction can constitute business. Repetition of such transactions is not
necessary under Income Tax Act.

3) CASH/KIND
 The income received by the assessee need not be in the form of cash only.
 It may also be some other property or right which has monetary value.
 Wherever income is received in kind (like perquisites), then their value has to be found as per
the prescribed rules & this value shall be taken to be the income.

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4) ILLEGAL/ TAINTED INCOME

 Income is income, though tainted. Thus, illegal Income is also taxed.

 For purposes of Income-tax, there is no difference between legal & tainted income.
Case Law: If smuggling activity can be regarded as a business, confiscation of currency notes by
customs authorities is a loss which is directly relatable to carrying of business & thus is
permissible as deduction
5) DISPUTED INCOME
 Any dispute regarding the title of the income cannot stop the assessment of the income in the
hands of the recipient.
 Thus, disputed income is taxable in the hands of recipient though there may be rival claims to
the income.
6) CONTINGENT INCOME

 A contingent income is not income. Until the contingency has happened, it cannot be assumed
that income has accrued or has arisen to the assessee.
7) PERSONAL GIFTS

 Gifts of personal nature do not constitute income upto Rs. 50,000 received in cash
 However, Gifts in kind having FMV > Rs. 50,000 is wholly taxable. [To be studied in IFOS].
8) COMPOSITE INCOME
 Income-tax is a tax on all incomes received by or arising to a taxpayer during a FY.
9) PIN MONEY

 Pin money received by a woman (Moneys given to a woman by her husband for running the
expenses of the kitchen) would not be income in the eyes of the law.
 Any property acquired using such money/savings is a Capital Asset of the lady.
10) LUMPSUM RECEIPT

 Receipt in lumpsum or in instalments would not affect its taxability.

 Ex: If a person receives arrears of salary in a lump sum amount, it would still be his income.

11) INCOME MUST COME FROM OUTSIDE

 A person cannot earn income from himself
 In case of mutual activities, where some people contribute to the common fund & are entitled
to participate in the fund & a surplus arises which are distributed to the contributors of the
fund, such surplus cannot be called income.

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12) RELEVANCE OF METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE

HEADS Relevant Method of Accounting

Salaries (15-17) ▪ Taxable on due basis or on receipt basis whichever is earlier.

▪ Method of accounting followed by the assessee is irrelevant

HP (22-27) Taxable on Accrual basis. Method of accounting of assessee is irrelevant.

PGBP PGBP Income is taxable as per method of accounting followed by assessee.

(28-44DB) If assessee follows Accrual basis of accounting → Income taxed on accrual
basis. If assessee follows Cash basis of accounting → Income taxed on Cash
basis.
 Certain payments are allowable only on Payment basis. [Refer PGBP]
Cap. Gain (45 – Taxable in the PY in which the capital asset is transferred.
55A)  Method of accounting followed by the assessee is irrelevant.
IFOS (56 – 59) Same as PGBP.

13) CAPITAL & REVENUE RECEIPTS

Particular Capital Receipts Revenue Receipts

Meaning ▪ Receipt referable to fixed capital. ▪ Receipt referable to

▪ Receipts towards substitution of circulating capital.
source of income. ▪ Any receipt toward substitution
▪ Amount received as compensation of Income.
for surrender of any right of ▪ Any compensation received for
ownership the Loss of future profit.
Tax ▪ Not Taxable unless expressly ▪ Taxable.
Treatment provided. Ex: Profits arising from sale of
Ex: Profit from Sale of Capital Asset is Trading Asset is taxable as
chargeable to tax u/h Capital Gains Business Income
u/s 45.

Q. How to determine whether a receipt is a Revenue receipt or Capital receipt?

 If the Income-generating activity is within the normal dealing of the assessee → Revenue
receipt.
 If the Income-generating activity is outside the normal dealing of the assessee (although
connected to business) → Capital receipt.

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Ex: Profit on sale of shares & securities held by a bank as investments would be of Capital Nature.
But Profit on sale of shares & securities held by a stock broker as SIT would be of Revenue Nature.

Note: Where profits arise from transactions which are outside the normal dealing of the assessee,
although connected with his business, taxability would depend upon the fact whether transactions
constitute trading activity for the Assessee.

CRUX: Only Revenue Receipt is taxable. Capital Receipts are normally Exempt. But certain capital
receipts which have been specifically included in the definition of “Income u/s 2(24) are taxable.

14) CAPITAL EXPENDITURE & REVENUE EXPENDITURE

Capital Expenditure Revenue Expenditure

1. Cost of acquisition & installation charges 1. Purchase price of a current Asset for
of Fixed Asset. resale or manufacture.

2. Incurred to increase operating capacity. 2. Incurred to maintain the asset.

3. Expenditure incurred to free oneself 3. Expenditure incurred to free oneself

form a Capital Liability from a Revenue liability

4. Expenditure for acquisition of source of 4.Expenditure incurred for earning income

Income

Liquidated damages → Capital receipt. Amount received towards compensation for sterilization
of profit earning source is not in ordinary course of business.

Compensation on Termination of Agency → Capital receipt. Receipt of compensation on

termination of the agency business being the only source of income by the assessee. But if the
assessee has several agencies and one of them is terminated & compensation is received, the
receipt would be revenue receipt since taking agencies & exploiting the same for earning income is
the ordinary course of business & loss of one agency would be made good by taking another.
Compensation received from the employer or from any person for premature termination of
the service contract is a capital receipt but is taxable as profit in lieu of salary u/s 17(3) or IFOS
u/s 56(2)(xi), respectively .

Compensation received or receivable in connection with termination/modification of T&Cs of

any contract relating to its business shall be taxable as business income

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15) APPLICATION OF INCOME VS DIVERSION OF INCOME

Application of Income Diversion of Income

 If assessee applies his income to  If there is an overriding charge on the source of

discharge his obligation such income, which diverts the income, it is
 after the income reaches in the called diversion of Income.
hands of the assessee,  In case of diversion of income before it reaches
 it would be an application in the hands of the assessee,
(apportionment) of income &  it cannot be treated as an income of the
 this would result in taxation of such assessee & thus NO TAX
income in the hands of the assesse
▪ Conditions: ▪ Conditions:
1. Income accrues to the assessee 1. An overriding charge/title on income &
2. Income reaches the assessee 2. Income is diverted at source.
3. Income is applied to discharge 3. Charge is on sources of income & not on the
obligation (Self- Receiver.
imposed/gratuitous)

CONCEPT OF FINANCIAL YEAR, PREVIOUS YEAR & ASSESSMENT YEAR

Financial Year.
▪ Financial year means a year starting on 1st April & ending on 31st March.
PY [Sec 3]
▪ FY in which the income is earned is called “Previous Year”.
▪ PY means the Financial Year immediately preceding the AY.
▪ PY 2023-24 will commence on 1.4.2023 & will end on 31.3.2024.
AY ▪ The year in which income is assessed to tax is called Assessment Year.
[Sec 2(9)] ▪ AY 2024-25 will commence on 1.4.2024 & will end on 31.3.2025.
▪ Thus Income earned during PY 2023-24 will be assessed / taxed in AY
2024-25.

CRUX: PY → Year in which Income is earned; AY → Next year in which income is taxed is AY.
Ex: A is running a business from 2003 onwards. Determine PY for AY 2024-25. [Ans: PY = 1.4.2023
- 31.3.2024].

DUAL ROLE OF A FINANCIAL YEAR

▪ Each financial year is both Previous Year as well as Assessment Year.
▪ It is PY for income earned during that FY & AY for the income earned during the preceding FY.
Financial
PREVIOUS YEAR ASSESSMENT YEAR
year

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FY 2022-23 is PY for income received/accrued FY 2023-24 is AY for incomes
2022-23
during 1 April 2022 to 31 March 2023 earned in PY 2022-23.
FY 2023-24 is PY for income received/accrued FY 2024-25 is AY for incomes
2023-24
during April 1, 2023 to March 31, 2024. earned in PY 2023-24.

FIRST PREVIOUS YEAR FOR NEWLY SET-UP BUSINESS/PROFESSION DURING FY

 First PY = The period beginning from the date of setting up of the business or from the date the
new source came into existence & ending on the last day of that FY (31st March).
 Therefore, first PY of a newly set-up business/ profession or a new source of income will be
either 12 months or less than 12 months. It can never exceed a period of 12 months.

Note: The same provision will be applicable for the “New Source of Income.”

QUESTIONS
Q1. Mr. SS set up a new business on 24.2.2023, what will be the first PY for that business?
Answer: From 24.02.2023 – 31.3.2024; PY 2023-24; AY 2024-25.
Q2. What will be the 2nd PY for his business?
Answer: PY 2024-25; AY 2025-26.

UNIFORM PREVIOUS YEAR

 Assessees are required to follow Financial year as Previous Year uniformly for every year.
[From 1st April to 31st March]
 An Assessee may maintain books of account on calendar year basis but for Income Tax
purpose, his previous year will be financial year & not the calendar year.

Ex: Mr. SS can maintain books of accounts on calendar year basis, but tax will be levied on the
basis of financial year only.
Accounting Income as per Splitting of income as per FY Taxable Income
year books of A/c.
JAN-MARCH APRIL –DEC
2021 60000 18000 42000 18000

2022 70000 26000 44000 PY 21-22 & AY 22-23 =

68000(42000+26000)

2023 90000 21000 69000 PY 22-23 & AY 23-24

=65000
(44000+21000)

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CASES WHERE INCOME OF PREVIOUS YEAR IS ASSESSED IN SAME YEAR
 General Rule: Income earned during any PY is assessed to tax in immediately succeeding AY.
 However, in following circumstances, income is taxed in PY in which it is earned. Thus AY &
PY in these exceptional circumstances will be the same.
 These exceptions have been made to protect the interests of revenue.

FOLLOWING ARE THE EXCEPTIONS:

1. SHIPPING BUSINESS OF NON-RESIDENTS [SECTION 172]

 If a ship belonging to or chartered by NR carries passengers /livestock /mail /goods shipped at

a port in India,
 Such Ship is allowed to leave the port only when tax has been paid or satisfactory arrangement
has been made for payment thereof.
 Income = 7.5% of the freight paid/payable to the owner or his agent whether in India or o/s
India for such carriage.
 Such income is charged to tax in the same year in which it is earned.

2. PERSONS LEAVING INDIA [SECTION 174]

 Where it appears to AO that any individual may leave India during the current AY or shortly
after its expiry &
 He has no present intention of returning to India,
Then Total Income of such individual for the period from the expiry of the respective PY up to the
probable date of his departure from India is chargeable to tax in that AY
Ex: Suppose Mr. X is leaving India for USA on 10.6.2023 & it appears to AO that he has no intention
to return. Before leaving India, Mr. X will be required to pay tax on the income earned during PY
2023-24 as well as the total income earned during the period 1.4.2023 to 10.06.2024.

3. AOP/BOI/AJP FORMED FOR A PARTICULAR EVENT OR PURPOSE [SEC 174A]

 If AOP/BOI etc. is formed or established for a particular event or purpose &
 AO apprehends that AOP/BOI is likely to be dissolved in the same year or in next year,
 he can make assessment of the income upto date of dissolution as income of relevant AY.

4. PERSONS LIKELY TO TRANSFER PROPERTY TO AVOID TAX [SECTION 175]

 During the current AY, if it appears to AO that a person is likely to charge, sell, transfer, dispose
any of his assets
 to avoid payment of any liability under this Act,
Total income of such person for the period from the expiry of PY to the date when AO commences
proceedings is chargeable to tax in that assessment year.

5. DISCONTINUED BUSINESS [SECTION 176]

 If any business or profession is discontinued in any AY,

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 Income of the period from the expiry of the PY up to the date of such discontinuance may,
 at the discretion of AO may be charged to tax in that assessment year.

Note: Section 176 is a Discretionary power. The Assessing Officer has the discretion of applying
it. AO may choose not to apply it & wait till the end of the Assessment Year

VITAL STATISTICS AND LAYOUT

Contribution of Direct Taxes to Total Tax Revenue
(Rs. in crore)

Financial Year Direct Taxes Indirect Taxes Total Taxes Direct Tax As %
Of Total Taxes
2000-01 68305 119814 188119 36.31%
2001-02 69198 117318 186516 37.10%
2002-03 83088 132608 215696 38.52%
2003-04 105088 148608 253696 41.42%
2004-05 132771 170936 303707 43.72%
2005-06 165216 199348 364564 45.32%
2006-07 230181 241538 471719 48.80%
2007-08 314330 279031 593361 52.97%
2008-09 333818 269433 603251 55.34%
2009-10 378063 243939 622002 60.78%
2010-11 445995 343716 789711 56.48%
2011-12 493987 390953 884940 55.82%
2012-13 558989 472915 1031904 54.17%
2013-14 638596 495347 1133943 56.32%
2014-15 695792 543215 1239007 56.16%
2015-16 741945 711885 1454180 51.03%
2016-17 849818 861515 1711333 49.66%
2017-18 1002037 915256 1918210 52.24%
2018-19* 1137685 939018 2076703 54.78%
COMPUTATION OF TAXABLE INCOME AND TAX LIABILITY OF AN ASSESSEE

Particulars Amount (Rs.)

Income under the head :
+ income from Salaries XXX

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+ income from House Property XXX
+ Profits and gains of business or profession XXX
+ Capital gains XXX
+ income from other sources XXX
Adjustment in respect of :
+ Clubbing of income XXX
– Set off and carry forward of losses (XXX)
= Gross Total Income xxx
– deductions under section 80C to 80U (or Chapter Via) (XXX)
= Total Income xxx

TAX RATES FOR FY 2023-24 i.e. AY 2024-25

Calculation of tax on income
 tax rate depends upon the category of person
 amount of income
 residential status of person
 age of individual
 type of income
Components of tax are

Education Tax
Tax Surcharge SHEC
Cess Payable

Tax Rates for Different types of person depending upon various parameters:
1. For :
 resident individual of the age below 60 years
 Non-Residents individual
 Hindu undivided family
 association of Persons
 Body of individuals (other than Co-operative society)
 Artificial Juridical Person
Rates prescribed by the Annual Finance Act under the optional tax regime
Total Income (Rs.) Tax Rate Tax liability (Rs.)
upto 2,50,000 Nil Nil
2,50,001 – 5,00,000 5% 5% of (Total Income – 2,50,000)

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5,00,001 – 10,00,000 20% 20% of (Total Income – 5,00,000) + 12,500
above 10,00,000 30% 30% of (Total Income – 10,00,000) + 1,12,500

2. Applicable for :
Resident individual of the age of 60 years or more but less than eighty years at any time during the
previous year

Total Income (Rs.) Tax Rate Tax liability (Rs.)

upto 3,00,000 Nil Nil
3,00,001 – 5,00,000 5% 5% of (Total Income – 3,00,000)
5,00,001 – 10,00,000 20% 20% of (Total Income – 5,00,000) + 10,000
above 10,00,000 30% 30% of (Total Income – 10,00,000) + 1,10,000

3. Applicable for :
Resident individual of the age of 80 years or more at anytime during the previous year

Total Income (Rs.) Tax Rate Tax liability (Rs.)

upto 5,00,000 Nil Nil
5,00,001 – 10,00,000 20% 20% of (Total Income – 5,00,000)
above 10,00,000 30% 30% of (Total Income – 10,00,000) + 1,00,000
CBDT has clarified vide Circular No. 28/2016 27.07.2016, that a person born on 1st April would be
considered to have attained a particular age on 31st March, the day preceding the anniversary of
his birthday.
Therefore a resident individual, whose 60th / 80th birthday falls on 1st April, 2024 would be
treated as having attained the age of 60 years/80 years in the P. Yr. 2023-24.

4. For firm and local authroties:

Types of person Tax Rates
i. Firms (including LLP) 30% of total Income
ii. Local authorities 30% of total Income

Good to know: Entity or individual other than a company whose adjusted total income
exceeds Rs.20 lakhs is liable to pay Alternate Minimum tax @ 18.5%.
5. FOR COMPANY
Domestic Company Assessment
Year 2024-25

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 Where it opted for Section 115BA 25%
 Where it opted for Section 115BAA 22%
[This benefit shall be available when total income of the company is
computed without claiming specified deductions, incentives, exemptions
and additional depreciation available under the income-tax act.]
 Where it opted for Section 115BAB 15%
[This regime shall be available only for the manufacturing companies
incorporated in India on or after 01-10-2019. Hence, old companies will
not be able to take the benefit of this section.]
 Where it has not opted for Section 115BAA and the total turnover 25%
or Gross receipts of the company in the previous year 2021-22 does
not exceeds 400 crore rupees
 any other domestic company 30%
Foreign Company 40%

Good to know: A company is liable to pay MAT @ 15%.

6. For Co-operative Society (Other than co-operative society opting for section 115BAD or
section 115BAE):
Income Slabs Tax Rates
i. Where the taxable income does not exceed rs. 10% of the income
10,000/-
ii. Where the taxable income exceeds rs. 10,000/- Rs. 1,000/- + 20% of income in excess
but does not exceed rs. 20,000/- of Rs. 10,000/-
iii. Where the taxable income exceeds rs. 20,000/- Rs. 3,000/- + 30% of the amount by
which the taxable income exceeds rs.
20,000/-

Surcharge
Surcharge is an additional tax imposed on certain cases. It is imposed over the basic tax rate
calculated on the income.
For example : Suppose total taxable income of an individual of 45 years is rs. 1,30,00,000, then
Base tax will be : Rs. 1,12,500 + 30% of (1,20,00,000)= Rs. 37,12,500.
Surcharge @12%* of Rs. 37,12,500 = Rs. 4,45,500. There are different rate of surcharge prescribed
in the following manner :
Types of person Surcharge Rates

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i. individuals, HUF, AOP, BOI if income exceeds Rs. 50 lakhs but 10% of income
does not exceed Rs. 1 crore tax
if income exceeds Rs. 1 crore but 15% of income
does not exceed Rs. 2 crore tax
if income exceeds Rs. 2 crore but 25% of income
does not exceed Rs. 5 crore tax
if total income exceeds Rs. 5 crore 37% of income
tax
ii Firm / local authority if income exceeds Rs. 1 crore 12% of income
tax
iii. Domestic Companies*/ Co- if income exceeds Rs. 1 crore but does 7% of income tax
operative Society** not exceed Rs. 10 crores
if income exceeds Rs. 10 crore 12% of income
tax
iv. Companies other than a if income exceeds Rs. 1 crore but does 2% of income tax
domestic company not exceed Rs. 10 crores
if income exceeds Rs. 10 crore 5% of income tax
*The rate of surcharge in case of a company opting for taxability under Section 115BAA or Section
115BAB shall be 10% irrespective of amount of total income.
** Other than co-operative society opting for section 115BAD or section 115BAE.
Note:
 In case of Individual, HUF, AOP, BOI, AJP maximum surcharge limit is 15% on tax calculated on
LTCG 112, LTCG 112A, STCG 111A and Dividend Income. From AY 23-24 it is proposed to
include LTCG 112 also, so from AY 23-24 maximum surcharge limit of 15% applicable on all
type of LTCG.

Marginal Relief in Surcharge : When an assessee’s taxable income exceeds rs. 1 crore, he is
liable to pay Surcharge at prescribed rates mentioned above on income tax payable by him.
However, the amount of income tax and surcharge on total income shall not exceed the amount of
income that exceeds rs. 1 crore.
Example : Suppose Mr. ram an individual assessee of 42 years is having taxable income of rs.
1,00,01,000/-
1. income tax Rs. 28,12,800
2. Surcharge @15% of Income Tax Rs. 4,21,920
3. income tax on income of rs. 1 crore Rs. 28,12,500
4. Maximum Surcharge payable (income over rs. 1 crore i.e. rs. Rs. 1,000
1,000)
5. (income tax + Surcharge) payable Rs. 28,13,500

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Thus, in the above case, though the surcharge @15% is Rs. 4,21,920. However, since the income of
Mr. Ram exceeds rs. 1 crore by just rs. 1,000, ram will be eligible for marginal relief and maximum
surcharge will be restricted to rs. 1,000 only.

CESS
 Governments resort to imposition of cess for meeting specific expenditure
 education Cess and Senior and Higher education Cess are additional levy on the basic
tax liability + surcharge, if applicable.
 Rate of Education Cess is 2%
 Rate of SHEC is 1%.
 Rate of Health Cess is 1%.

Section 87A: Rebate from tax to certain individuals

For Resident Individual having Total Income Upto ₹ 5,00,000
a) 100% of tax payable, or
b) ₹ 12,500
Whichever is Lower
Notes:
1. This rebate shall be reduced before adding health & education cess.
2. Rebate u/s 87A available against all types of Income except LTCG u/s112A.
3. Marginal relief concept not applicable on rebate except when assessee opted 115BAC.
4. Rebate in case of 115BAC discussed with concept of 115BAC in later part of this topic.

Example: Calculate tax liability of Miss. Aarthiki resident Individual (Age 24 years).

Case-1 Case-2
Total Income 4,40,000 5,07,000
Tax Liability 9,500 13,900
Less: Rebate 87A
a) Tax Amount 9,500 9,500
Not Available
b) 12,500 12,500
Whichever is lower
Nil 13,900
Add: HEC @ 4% Nil 556
Net Tax Liability Nil 14,456

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Default tax regime under section 115BAC of the Income-tax Act, 1961 (Amendment)
I. Concessional tax rates
Individuals/ HUF/ AoPs/ BoIs or artificial judicial persons, other than those who exercise
the option to opt out this regime under section 115BAC(6), have to pay tax in respect of their
total income (other than income chargeable to tax at special rates under Chapter XII such as
section 111A, 112, 112A, 115BB, 115BBJ etc.) at the following concessional rates, subject to
certain conditions specified under section 115BAC(2) –

(i) Upto ` 3,00,000 NIL

(ii) From ` 3,00,001 to ` 6,00,000 5%
(iii) From ` 6,00,001 to ` 9,00,000 10%
(iv) From ` 9,00,001 to ` 12,00,000 15%
(v) From ` 12,00,001 to ` 15,00,000 20%
(vii) Above ` 15,00,000 30%

 Special income (u/s 111A, 112, 112A etc.) shall be taxable @ special rates.
II. Conditions to be satisfied
The following are the conditions to be satisfied:
(i) Certain deductions/exemptions not allowable: Section 115BAC(2) provides that
while computing total income, the following deductions/exemptions would not be
allowed:
Section Provision
10(5) Leave travel concession
10(13A) House rent allowance
10(14) Exemption in respect of special allowances or benefit to meet expenses
relating to duties or personal expenses (other than those as may be
prescribed for this purpose)
10(17) Daily allowance or constituency allowance of MPs and MLAs
10(32) Exemption in respect of income of minor child included in the
income of parent
10AA Tax holiday for units established in SEZ
16 (i) Entertainment allowance
(ii) Professional tax
24(b) Interest on loan in respect of self-occupied property
32(1)(iia) Additional depreciation

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35(1)(ii) Deduction in respect of contribution to-
,(iia),(iii)/35  notified approved research association/ university/ college/
other institutions for scientific research [Section 35(1)(ii)]
(2A A)
 approved Indian company for scientific research [Section 35(1)
(iia)]
 notified approved research association/ university/ college/
other institutions for research in social science or statistical
research [Section 35(1)(iii)]
 An approved National laboratory/ University/ IIT/ Specified
person for scientific research undertaken under an approved
programme [Section 35(2AA)]
35AD Investment linked tax incentives for specified businesses
80C to 80U Deductions under Chapter VI-A (other than employers contribution
towards NPS u/s 80CCD(2), Central Government contribution towards
Agnipath Scheme under section 80CCH(2) and deduction in respect of
employment of new employees under section 80JJAA).
(ii) Certain losses not allowed to be set-off: While computing total income, set- off of any
loss-
a) carried forward or depreciation from any earlier assessment year, if such loss or
depreciation is attributable to any of the deductions referred to in (i) above; or
b) under the head house property with any other head of income; would not
be allowed.
(iii) Depreciation or additional depreciation: Depreciation u/s 32 is to be determined in
the prescribed manner. Depreciation in respect of any block of assets entitled to more
than 40%, would be restricted to 40% on the written down value of such block of
assets. Additional depreciation u/s 32(1)(iia), however, cannot be claimed.
(iv) Exemption or deduction for allowances or perquisite: While computing total income,
any exemption or deduction for allowances or perquisite, by whatever name called,
provided under any other law for the time being force in India would not be allowed.

Additional points:
 Total income under default tax regime should be computed without set-off of any loss brought
forward or depreciation from any earlier assessment year, where such loss or depreciation is
attributable to any of the deductions listed in (1) above. Such loss and depreciation would be
deemed to have been already given effect to and no further deduction for such loss or
depreciation shall be allowed for any subsequent year.
 Where income-tax on total income of the assessee is computed under this section and there is
a depreciation allowance in respect of a block of asset from an earlier assessment year
attributable to additional depreciation u/s 32(1)(iia), which has not been given full effect to
prior to A.Y. 2024-25 and which is not allowed to be set-off in the A.Y.2024-25 due to
section 115BAC, corresponding adjustment shall be made to the WDV of such block of assets
as on 1.4.2023 in the prescribed manner i.e., the WDV as on 1.4.2023 will be increased by
the unabsorbed additional depreciation not allowed to be set-off.

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Example: Let us consider the case of Mr. X, who carries on business of manufacturing of steel. He
has unabsorbed depreciation as on 1.4.2023, which includes amount attributable to additional
depreciation u/s 32(1)(iia) of P.Y.2022- 23 or any earlier previous year in respect of block of
plant and machinery. If he pays tax under default tax regime under section 115BAC for P.Y.2023-
24 relevant to A.Y.2024-25, the amount so attributable to additional depreciation of earlier year
remaining unabsorbed as on 1.4.2023 would not be eligible for set-off against current year
income and no further deduction for such loss or depreciation shall be allowed for any
subsequent year. Accordingly, the WDV of the block as on 1.4.2023 has to be increased by the
said amount not allowed to be set-off.

III. Time limit for exercising the option to shift out of the default tax regime
(i) In case of an assessee having no income from business or profession:
Where such individual/HUF/AoP/BoI or Artificial Juridical person is not having income from
business or profession, he/it can exercise an option to shift out/opt out of the default tax regime
under this section and such option has to be exercised along with the return of income to be
furnished under section 139(1) for a previous year relevant to the assessment year. In effect,
such individual/HUF/AoP/BoI or Artificial Juridical person can choose whether or not to exercise
the option of shifting out of the default tax regime in each previous year. He may choose to pay
tax under default tax regime under section 115BACin one year and exercise the option to shift out
of default tax regime in another year.
(ii) In case of an assessee having income from business or profession: Such
individual/HUF/AoP/BoI or Artificial Juridical person having income from business or
profession has an option to shift out/ opt out of the default tax regime under this section
and the option has to be exercised on or before the due date specified under section 139(1)
for furnishing the return of income for such previous year and once such option is exercised,
it would apply to subsequent assessment years.
Such person who has exercised the above option of shifting out of the default tax regime for
any previous year shall be able to withdraw such option only once and pay tax under the
default tax regime under section 115BAC for a previous year other than the year in which it was
exercised.
Thereafter, such person shall never be eligible to exercise option under this section, except
where such person ceases to have any business income in which case, option under (i) above
would be available.
AMT liability not attracted: Individual/HUF/AoP/BoI or Artificial Juridical person paying tax
under default tax regime under section 115BAC is not liable to alternate minimum tax u/s 115JC.
Such person would not be eligible to claim AMT credit also.
Note: It may be noted that in case of Individual/HUF/AoP/BoI or Artificial Juridical person not
having income from business or profession, the total income and tax liability (including provisions
relating to AMT, if applicable under normal provisions) may be computed every year both in

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accordance with the regular provisions of the Income-tax Act, 1961 and in accordance with the
provisions of section 115BAC, in order to determine which is more beneficial and accordingly
such person may decide whether to pay tax under default tax regime under section 115BAC or
exercise the option to shift out and pay tax under normal provisions of the Act for that year.

Rebate to resident individual paying tax under default tax regime under section 115BAC
Section 87A1

In order to provide tax relief to the individual tax payers, section 87A provides a rebate
from the tax payable by an assessee, being an individual resident in India. The rebate shall
be provided as under-

(a) If total income of such individual does not exceed ₹ 7,00,000, the rebate shall be equal
to the amount of income-tax payable on his total income for any assessment year or an
amount of ₹ 25,000, whichever is less.
(b) If total income of such individual exceeds ₹ 7,00,000 and income-tax payable on such
total income exceeds the amount by which the total income is in excess of ₹ 7,00,000, the
rebate would be as follows:
Step 1 - Total income (-) ₹ 7 lakhs (A)
Step 2 - Compute income-tax liability on total income (B)

Step 3 - If B>A, rebate under section 87A would be a B-A.

The amount of rebate under section 87A shall not exceed the amount of income- tax (as computed
before allowing such rebate) on the total income of the assessee.

SPECIAL TAX REGIME APPLICABLE TO A CO-OPERATIVE SOCIETIES [SECTION 115BAE &

115BAD] Amendment
A manufacturing co-operative society, resident in India, can opt for concessional rates of tax under
section 115BAE and other co-operative societies, resident in India, canopt for concessional rates of
tax under section 115BAD.
Tax rate in case of a manufacturing co-operative society, resident in India (set up and
registered on or after 1.4.2023 and commences manufacture of article or thing before
31.3.2024) opting for concessional tax regime u/s 115BAE
 15% of income derived from or incidental to manufacturing or production of an article or
thing
Tax rate in case of other resident co-operative society opting for concessional tax regime
u/s 115BAD:

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 22% of total income
Note - Co-operative society, resident in India, can opt for concessional rate of tax u/s 115BAD or
115BAE, as the case may be, subject to certain conditions. The total income of such co-operative
societies would be computed without giving effect to deduction under section 10AA, 33AB,
33ABA, 35(1)(ii)/(iia)/(iii), 35(2AA), 35AD, 35CCC, additional depreciation under section
32(1)(iia), deductions under Chapter VI-A (other than section 80JJAA) etc. and set off of loss and
depreciation brought forward from earlier years relating to the above deductions. The
provisions of alternate minimum tax under section 115JC would not be applicable to a co-
operative society opting for section 115BAD or 115BAE.
 Special rates for capital gains under sections 112, 112A and 111A would be applicable
to Co-operative society also.
Surcharge:
Particulars Rate
In case of a co-operative society (other than a co-operative society
opting for section 115BAD or section 115BAE)-
 If total income exceeds ₹ 1 crore but does not exceed ₹ 10 crores 7%
 If total Income exceeds ₹ 10 crores 12%

In case of a co-operative society opting for section 115BAD or section 10%

115BAE (Since there is no threshold limit for applicability of surcharge.
consequently, there would be no marginal relief)

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