INCOME TAX

Dr. Sandeep Kumar

Department of Commerce,
St. Xavier’s College, Ranchi
 DIRECT TAX AND INDIRECT TAX
There are two types of taxes: Direct Tax and Indirect Tax
• Tax, of which incidence and impact fall on the same
person, is known as Direct Tax, such as Income Tax.
• On the other hand, tax, of which incidence and impact
fall on two different persons, is known as Indirect Tax,
such as GST, etc.
• It means, in the case of Direct Tax, tax is recovered
directly from the assessee, who ultimately bears such
taxes, whereas in the case of Indirect Tax, tax is
recovered from the assessee, who passes such burden
to another person & is ultimately borne by consumers
of such goods or services.
 DIRECT TAX INDIRECT TAX
Incidence and impact fall on the same Incidence and impact fall on two different
person. persons.

Assessee, himself bears such taxes. Thus, Tax is recovered from the assessee, who
it pinches the taxpayer. passes such burden to another person.
Thus, it does not pinch the taxpayer.
Levied on income E.g. Income Tax.
Levied on goods and services. Thus, this
Progressive in nature i.e., higher tax are type of tax leads to inflation and have
levied on person earning higher income wider base. E.g. GST, Customs Duty, etc.
and vice versa.
Regressive in nature i.e., all persons will
bear equal wrath of tax on goods or
service consumed by them irrespective of
their ability.

Useful tool to promote social welfare by

checking the consumption of harmful
goods or sin goods through higher rate of
tax.
Administration of Tax Law
 BASIC PRINCIPLES FOR CHARGING
INCOME TAX [SEC. 4]
• Income of the previous year of a person is
charged to tax in the immediately following
assessment year.
• Rate of tax is applicable as specified by the
Annual Finance Act of that year. Further, though
the Finance Act prescribes the rates of tax, in
respect of certain income, the Income Tax Act
itself has prescribed specific rates,
• In respect of income chargeable to tax, tax shall
be deducted at source, or paid in advance
(wherever applicable).
 Assessment Year - Sec 2(9)
• Assessment year means the period of 12
months commencing on the 1st day of April
every year. It is the year (just after the
previous year) in which income earned in the
previous year is charged to tax. E.g., A.Y.2020-
21 is a year, which commences on April 1,
2020 and ends on March 31, 2021. Income of
an assessee earned in the previous year 2019-
2020 is assessed in the A.Y. 2020-21.
 Previous Year – (Sec -3)
• Previous Year means the financial year
immediately preceding the Assessment Year.
Income earned in a year is assessed in the
next year. The year in which income is earned
is known as Previous Year and the next year in
which income is assessed is known as
Assessment Year. It is mandatory for all
assessee to follow financial year (from 1st
April to 31st March) as previous year for
Income-Tax purpose.
Determination of the first previous year in case
of a newly set-up business or profession or for
a new source of income
In case of Previous
year is
the
period
Business or profession being Beginning with the date of
newly set-up setting up of the business &
ending on 31st March of that
financial year.
A source of income newly Beginning with the date on
coming into existence which the new source of
income comes into existence &
ending on 31st March of that
financial year.
 Assessee [Sec. – 2(7)]
Assessee means,
1. a person by whom any tax or any other sum of money (i.e.,
penalty or interest) is payable under this Act (irrespective of the
fact whether any proceeding under the Act has been taken against
him or not);
2. every person in respect of whom any proceeding under this Act
has been taken (whether or not he is liable for any tax, interest or
penalty) for the assessment of his income or loss or the amount of
refund due to him;
3. a person who is assessable in respect of income or loss of another
person;
4. every person who is deemed to be an assessee under any
provision of this Act; and
5. a person who is deemed to be an ‘assessee in default’ under any
provision of this Act. E.g. A person, who was liable to deduct tax
but has failed to do so, shall be treated as an ‘assessee in default’.
 PERSON [SEC. 2(31)]
The term person includes the following:
• an Individual;
• a Hindu Undivided Family (HUF);
• a Company;
• a Firm;
• an Association of Persons (AOP) or a Body of
Individuals (BOI) – (co-heirs or co-donees etc.),
whether incorporated or not;
• a Local authority; &
• every artificial juridical person not falling within any of
the preceding categories.
 Examples
Case Status
a) Ranchi Municipal Corporation Local
authority
b) Punjab National Bank Company
c) Mr. Amitabh Bachchan Individual
d) Amitabh Bachchan Corporation Company
Ltd.
e) A joint family of Sri Ram, Smt. HUF
Ram and their son Lav and Kush
f) Ranchi University Artificial
juridical
person
g) X and Y who are legal heirs of Z BOI
h) Sole proprietorship business Individual
i) Partnership Business Firm
 INCOME [SEC. 2(24)]
Cash vs. Kind Income may be received in cash or in kind. Income received in kind is
to be valued as per the rules prescribed and if there is no specific
direction regarding valuation in the Act or Rules, it may be valued at
market price.

Notional income A person cannot make profit out of transaction with himself. Hence,
goods transferred from one department to another department at a
profit, shall not be treated as income of the business.

Source of income Income may be from a temporary source or from a permanent source.

Capital vs. A capital receipt is not liable to tax, unless specifically provided in the
Revenue receipt Act, whereas, a revenue receipt is not exempted, unless specifically
provided in the Act. (Further refer following heading)
 INCOME [SEC. 2(24)]
Loss Income also includes negative income.

In case of dispute regarding the title of

income, assessment of income cannot
Disputed income
be withheld and such income, normally,
be taxed in the hands of recipient.

There is no difference between income

Lump-sum receipt
received in lump sum or in installment.

Mere reimbursement of expenses is not

Reimbursement
an income.

The Act does not make any difference

Legality
between legal or illegal income.

Double taxation Same income cannot be taxed twice.

 INCOME [SEC. 2(24)]
Pin money is money received by wife for her personal
expenses & small savings made by a woman from money
received from her husband for meeting household
Pin money
expenses. Such receipt is not treated as income.
Note: Income on investment out of pin money shall be
treated as income.

Contingent income A contingent or anticipated income is not taxable.

Assistance in the form of a subsidy or grant or cash

incentive or duty drawback or waiver or concession or
reimbursement (by whatever name called) by the Central
Subsidy
Government or a State Government or any authority or
body or agency in cash or kind to the assesse, e.g. LPG
Subsidy etc. - shall not be taxable.
 HEADS OF INCOME [SEC. 14]
1. Salaries;
2. Income from house property;
3. Profits and gains of business or profession;
4. Capital gains;
5. Income from other sources.
 GROSS TOTAL INCOME (GTI)
Particulars Amount
1. Salaries ***
2. Income from house property ***
3. Profits and gains of business or profession ***
4. Capital gains ***
5. Income from other sources ***
Gross Total Income ****
Less: Deduction u/s 80C to 80U ****
Total Income ****
Residence and Tax Liability
 Residence and Tax Liability
Residential status is determined in respect of
each previous year. In other words, residential
Different for each previous year
status of a person may vary from one previous
year to another previous year.

A person can have only one residential status for

a previous year i.e. he cannot be a resident for
Single Status for each source of income
one source of income and non-resident for
another source.

Citizenship and residential status are two

Impact of citizenship different concepts. A citizen of India may not be
a resident in India for the purpose of income-tax.

A person can have same residential status in more

Country Specific
than one country.
 DETERMINATION OF RESIDENTIAL STATUS –
Individual [Sec 6(1)]
Resident in India
An individual is said to be a resident in India, if he satisfies
any one of the following conditions -
• He is in India in the previous year for a period of 182 days
or more [Sec. 6(1)(a)]; or
• He is in India for a period of 60 days or more during the
previous year and for 365 or more days during 4 previous
years immediately preceding the relevant previous year
[Sec. 6(1)(c)]

Non-Resident in India
An assessee who is not satisfying sec. 6(1) shall be treated
as a non-resident in India for the relevant previous year.
 EXCEPTIONS TO THE ABOVE RULE
In the following cases, condition (ii) of sec. 6(1) [i.e. sec.
6(1)(c)] is irrelevant:
1. An Indian citizen, who leaves India during the previous year
for employment purpose.
0r
An Indian citizen, who leaves India during the previous year
as a member of crew of an Indian ship.
2. An Indian citizen or a person of Indian origin, who normally
resides outside India, comes on a visit to India during the
previous year.

Taxpoint: Above assessee shall be treated as resident in India

only if he resides in India for 182 days or more in the relevant
previous year.
ADDITIONAL CONDITIONS TO TEST WHETHER RESIDENT INDIVIDUAL
IS ‘ORDINARILY RESIDENT OR NOT’
Resident and ordinarily resident
• If a resident individual satisfies the following two additional
conditions, he will be treated as resident & ordinarily resident in
India -
(a) He has been resident in India in at least 2 out of 10 previous
years immediately preceding the relevant previous year;
and
(b) He has resided in India for a period of 730 days or more during 7
previous years immediately preceding the relevant previous year.

• Taxpoint: To be a Resident & Ordinarily resident in India, one has to

satisfy at least one condition of sec. 6(1) & both the additional
conditions.

Resident but not ordinarily resident

• If a resident individual does not satisfy both additional conditions,
he is “Resident but not ordinarily resident in India”.
 INCIDENCE OF TAX [SEC. 5]
Tax incidence in the case of

Name of Income Resident &

Resident but not Non
ordinarily
ordinarily resident resident
resident
Income accrued or deemed to be accrued and
Taxable Taxable Taxable
receiv ed or deemed to be receiv ed in India
Income accrued outside India but receiv ed or
Taxable Taxable Taxable
deemed to be receiv ed in India.
Income accrued or deemed to be accrued in India
Taxable Taxable Taxable
but receiv ed outside India
Income accrued and receiv ed outside India from a Not
Taxable Taxable
business controlled in or profession set-up in India. taxable
Income accrued and receiv ed outside India from a Not
business controlled or profession set-up outside Taxable Not taxable
India. taxable
Income accrued and receiv ed outside India in the
Not
prev ious year (it makes no difference if the same is Taxable Not taxable
taxable
later remitted to India).

Income accrued and receiv ed outside India in any

Not Not
year preceding the prev ious year and later on Not taxable
taxable taxable
remitted to India in current financial year.