UNIT: 1

Income Tax
PROF. RAJIMOL K P, ACME, BANGALORE
 INTRODUCTION
Tax is the compulsory financial charge levy by the government
on income, commodity, services, activities, or transaction. The
word ‘tax’ derived from the Latin word ‘Taxo’. Taxes are the
basic source of revenue for the government, which are utilized
for the welfare of the people of the country through government
policies, provisions, and practices

PROF. RAJIMOL K P, ACME, BANGALORE

 Income Tax Act, 1961: The Act contains the major
provisions related to Income Tax in India.
Income Tax Rules, 1962: Central Board of Direct Taxes
(CBDT) is the body which looks after the administration
of Direct Tax. The CBDT is empowered to make rules
for carrying out the purpose of this Act.
Finance Act: Every year Finance Minister of
Government of India presents the budget to the
Components of parliament. Once the finance bill is approved by the
income tax law parliament and get the clearance from President of India,
it became the Finance Act.
Circulars and Notifications: Sometimes the provisions
of an act may need clarification and that clarification
usually in a form of circulars and notifications which
has been issued by the CBDT from time to time. It
includes clarifying the doubts regarding the scope and
meaning of the provisions.
PROF. RAJIMOL K P, ACME, BANGALORE
 The Income Tax Act is a comprehensive statute that
focuses on the different rules and regulations that
govern taxation in the country. It provides for
levying, administering, collecting, and recovering
income tax for the Indian government. It was enacted
in 1961.
INCOME TAX
ACT 1961 The Income Tax Act contains a total of 23 chapters
and 298 sections according to the official website of
the Income Tax Department of India. These different
sections deal with various aspects of taxation in
India. Every year, the Indian government presents a
finance budget during the month of February. The
budget brings in various amendments to the Income
PROF. RAJIMOL K P, ACME, BANGALORE
Tax Act.
 Direct Tax is levied directly on the income of the
person. Direct tax is the amount of tax where
incidence and impact will be on the same person.
Income Tax and Wealth Tax are the part of Direct
Tax.
TYPES OF TAXES Indirect taxes, the person who pays the tax, shifts
the burden to the person who consumes the goods
or services. Indirect Tax is the amount of tax where
the incidence and impact will be on different
people.

PROF. RAJIMOL K P, ACME, BANGALORE

Direct Tax Indirect Tax

Incidence and impact fall on the same person Incidence and impact fall on two different persons

Assesses, himself bears such taxes. Thus, it pinches the Tax is recovered from the assesses, who passes such burden to
taxpayer. another person. Thus, it does not pinch the taxpayer.

Levied on income Levied on goods and services. Thus, this type of tax leads to
inflation and have wider base.

Progressive in nature i.e., higher tax are levied on person Regressive in nature i.e., all persons will bear equal wrath of tax
earning higher income and vice versa on goods or service consumed by them irrespective of their
ability.

E.g. Income Tax E.g. GST, Customs Duty, etc

Difference between Direct & Indirect Tax

PROF. RAJIMOL K P, ACME, BANGALORE
 BASIC CONCEPT OF INCOME TAX ACT

Income
Income is known as a regular periodic return to a
person from his activities. However, the Income has
broader classified in Income Tax law. The Income
Tax Act even take consideration of income which
has not arisen regularly and periodically. For
instance, winning from lotteries, crossword puzzles,
income from winning of shows is also subject to tax
as per income tax.

PROF. RAJIMOL K P, ACME, BANGALORE

 Person
Income tax is levied on the total income of the previous year
of every person. In general terms, the meaning of a person can
be interpreted in a short term. Whereas, as per Section 2
(31), Person includes:
BASIC
✓An individual
CONCEPT OF
INCOME ✓A Hindu undivided family
TAX ACT ✓A company
✓A firm
✓An association of persons (AOP) or a body of individuals
(BOI)
✓A local authority
PROF. RAJIMOL K P, ACME, BANGALORE ✓Artificial juridical person (AJP),
 Assessee
An Assessee is a taxpayer means a person who under the
income tax act is subject to pay taxes or any other sum of
money, as defined under section 2 (7) of the Act. The
expression ‘any other sum of money’ includes other such
BASIC obligations payable, for instance fine, interest, penalty, and
CONCEPT OF other tax etc. It includes:
INCOME ◦ Every person in respect of whom any proceeding under the
act has been taken for the assessment of his income or loss
TAX ACT or the amount of refund due to him.
◦ Any person who is deemed to be an
Assessee.(representative Assessee)
◦ An Assessee in default

PROF. RAJIMOL K P, ACME, BANGALORE

 Assessment Year
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
BASIC on April 1, 2020 and ends on March 31, 2021. Income of an
CONCEPT OF Assessee earned in the previous year 2019-2020 is assessed in
INCOME the A.Y. 2020-21.
TAX ACT Tax point:
Duration: Period of 12 months starting from 1st April.
Relation with Previous Year: It falls immediately after the
Previous Year.
Purpose: Income of a previous year is assessed and taxable in
PROF. RAJIMOL K P, ACME, BANGALORE
the immediately following Assessment Year
 Previous Year
Previous Year means the financial year
immediately preceding the Assessment
Year. Income earned in a year is assessed
BASIC in the next year. The year in which
CONCEPT OF income is earned is known as Previous
INCOME Year and the next year in which income
TAX ACT 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.
PROF. RAJIMOL K P, ACME, BANGALORE
 Financial Year
According to sec. 2(21) of the General
BASIC Clauses Act, 1897, a Financial Year means
CONCEPT OF the year commencing on the 1st day of
INCOME April. Hence, it is a period of 12 months
TAX ACT starting from 1st April and ending on 31st
March of the next year. It plays a dual role
i.e. Assessment Year as well as Previous
Year.

PROF. RAJIMOL K P, ACME, BANGALORE

 BASIC CONCEPT OF INCOME TAX ACT
Heads of Income
As per Income tax, section 14 classifies income under five heads:
i. Income from salaries
ii. Income from House Property
iii. Profits and gains of business and profession
iv. Capital Gains
v. Income from other sources

PROF. RAJIMOL K P, ACME, BANGALORE

BASIC CONCEPT OF INCOME TAX ACT
Gross total income
Gross total income is the aggregate of income under all the
five heads of income after adjusting the set-off & carry
forward of losses. Deductions under chapter VIA is provided
from GTI, to arrive at Total income or taxable income

PROF. RAJIMOL K P, ACME, BANGALORE

 BASIC CONCEPT OF INCOME TAX ACT
Tax Rates
The Income is taxed at the rates prescribed by the relevant Finance Act. The tax
levied based on a slab system where different tax rates have been directed for the
different slab. In India, there are three categories of individual taxpayers:
i. An individual below the age of 60 years,
ii. A senior citizen above the age of 60 years, but below the age of 80 years,
iii. A super senior citizen above 80 years of age.
The tax slab varies according to the different persons.

PROF. RAJIMOL K P, ACME, BANGALORE

 BASIC CONCEPT OF INCOME TAX ACT

Surcharge
The Surcharge is commonly known as Tax on Tax. It is an additional tax
levied on the taxpayers on a special group of people. It is an additional tax
liability levied on the person having more income than prescribed.
Education Cess and Secondary Higher Education Cess
The amount of income tax shall be increased by an Education Cess on
Income Tax by 3% and Secondary and Higher Education Cess by 1% of the
tax liability.

PROF. RAJIMOL K P, ACME, BANGALORE

 Taxable Income

TAX
TREATMENT
OF Exempted Incomes
“INCOME’

Rebateable ( Tax Free) Incomes

PROF. RAJIMOL K P, ACME, BANGALORE

 A capital receipt is not liable to tax, unless
specifically provided in the Act, whereas, a
revenue receipt is not exempted, unless
specifically provided in the Act. Further, capital
Capital Receipts receipts are to be charged to tax under the head
“Capital Gains” and revenue receipts are taxable
under other heads. The Act does not provide
exhaustive definition of the income, thus,
distinction between capital receipts and revenue
receipts is not easily made.

PROF. RAJIMOL K P, ACME, BANGALORE

 Receipt in lump sum or in Instalments
Nature of receipt in the hands of recipient
Accounting treatment
Points to Income from wasting assets
remember
under receipts Magnitude of receipt
Time of receipt
Quality of receipt
Tests as to the purpose of keeping an article
PROF. RAJIMOL K P, ACME, BANGALORE
Instances of transactions which are capital in
nature but specifically taxable:

❖Capital gains arising from sale of capital assets being defined u/s
2(14). [Sec. 45]
❖Compensation for termination of service or modification in the
terms of service [Sec. 17(3)]
❖Compensation or other payments due to or received by the persons
specified u/s 28(ii)/28

PROF. RAJIMOL K P, ACME, BANGALORE

 A capital expenditure is not
allowable as expenses, unless
Capital
specifically allowed in the Act,
Expenses whereas, a revenue expenditure is
allowable as expenses, unless
specifically disallowed in the Act.

PROF. RAJIMOL K P, ACME, BANGALORE

 On the basis of nature of Assets : If a receipt is
referred to Fixed Asset, it is capital receipt and if it
is referred to circulating asset it is revenue receipt.
Termination of source of income : Any sum
received in compensation for the termination of
CAPITAL source of income is capital receipt.
RECEIPT VS Amount received in substitution of income : Any
REVENUE sum received in substitution of income is revenue
RECEIPTS receipt.
Compensation received on termination of Lease
or surrender of a Right. Any amount received as
compensation on surrendering a right or termination
of any Lease is Capital Receipt whereas any amount
received for loss of future income is a revenue
receipt.
PROF. RAJIMOL K P, ACME, BANGALORE
 CAPITAL EXPENSES VS REVENUE EXPENSES

Nature of the Assets : Any expenditure incurred to acquire a Fixed Assets or

in connection with installation of Fixed Assets is Capital Expenditure.
Whereas any expenditure incurred as price of goods purchased for resale
along with other necessary expenses incurred in connection with such
purchase are Revenue Expenses.
Nature of Liability : A payment made by a person to discharge a capital
liability is a capital expenditure. Whereas An expenditure incurred to
discharge a revenue liability is Revenue Expenditure, e.g. Amount paid to a
contractor for cancellation of contract to construct
a factory building is capital expenditure.

PROF. RAJIMOL K P, ACME, BANGALORE

 CAPITAL EXPENSES VS REVENUE EXPENSES

Nature of Payment in the hands of payer : If an expenditure is incurred

by an assessee as a Capital Expenditure, it will remain a capital expenditure
even if the amount may be revenue receipt in the hands of receiver.
e.g. purchase of Motor Car by a businessman is capital expenditure in his
hands although it is revenue receipt in the hands of car dealer.
Nature of Transaction : if an Expenditure is incurred to acquire a source of
income, it is Capital Expenditure e.g. purchase of patents to produce picture
tubes of T.V. sets. Whereas an Expenditure incurred to earn an income is
revenue expenditure , e.g. salary to staff, advertisement expenses. Etc.

PROF. RAJIMOL K P, ACME, BANGALORE

 SCOPE OF TOTAL INCOME

1. Subject to the provision of Income TaxAct, the total income of any

previous year of a person who is a resident includes all income from
whatever source derived which—
(a) is received or is deemed to be received in India in such year by or on
behalf of such person ; or
(b) accrues or arises or is deemed to accrue or arise to him in India during
such year; or
(c) accrues or arises to him outside India during such year :

PROF. RAJIMOL K P, ACME, BANGALORE

SCOPE OF TOTAL INCOME
2. Subject to the provisions of this Act, the total income of any
previous year of a person who is a non-resident includes all
income from whatever source derived which—
(a) is received or is deemed to be received in India in such year
by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in
India during such year

PROF. RAJIMOL K P, ACME, BANGALORE

CHARGE OF INCOME TAX

Income-tax shall be charged –

➢on every person
➢in respect of his total income
➢of the previous year
➢for any assessment year
➢at any rate or rates in force
➢in accordance with and subject to the provisions of this Act

PROF. RAJIMOL K P, ACME, BANGALORE

 DETERMINATION OF RESIDENTIAL STATUS OF AN INDIVIDUAL

An individual is classified as resident or non-resident and

again a resident individual may further be categorized as
Ordinarily Resident or Not Ordinarily Resident in India.
According to Income Tax Act there are Two Basic
Conditions and Two Additional Conditions.

PROF. RAJIMOL K P, ACME, BANGALORE

 DETERMINATION OF RESIDENTIAL STATUS OF AN INDIVIDUAL

Basic Conditions
•He is in India in the previous year for a period of 182 days or more.
•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

Additional Conditions
• He has been resident in India in at least 2 out of 10 previous years immediately preceding
the relevant previous year
• He has resided in India for a period of 730 days or more during 7 previous years
immediately preceding the relevant previous year

PROF. RAJIMOL K P, ACME, BANGALORE

 DETERMINATION OF RESIDENTIAL STATUS OF AN INDIVIDUAL

RESIDENT IN INDIA : An individual is said to be a resident in India, if he satisfies any

one of the basic conditions
NON-RESIDENT IN INDIA : An assessee who is not satisfying any one of the basic
conditions shall be treated as a non-resident in India for the relevant previous year.
RESIDENT AND ORDINARILY RESIDENT: If a resident individual satisfies the two
additional conditions, he will be treated as resident & ordinarily resident in India. To be a
Resident & Ordinarily resident in India, one must satisfy at least one basic condition & both
the additional conditions
RESIDENT BUT NOT ORDINARILY RESIDENT: If a resident individual does not satisfy
both additional conditions as given u/s 6(6), he is “Resident but not ordinarily resident in
India”.

PROF. RAJIMOL K P, ACME, BANGALORE

 •An Indian citizen, who leaves India
during the previous year for
employment purpose.
EXCEPTIONS •An Indian citizen, who leaves India
TO THE BASIC during the previous year as a member
CONDITION of crew of an Indian ship.
•An Indian citizen or a person of Indian
origin, who normally resides outside
India, comes on a visit to India during
the previous year.
PROF. RAJIMOL K P, ACME, BANGALORE
INCIDENCE OF TAX

The incidence of a tax refers to the extent to

which an individual or organisation suffers from
the imposition of a tax – it may fall on the
consumer, the producer, or both. The incidence
is also called the ‘burden’ of taxation.

PROF. RAJIMOL K P, ACME, BANGALORE

Nature of Income Tax incidence in the case of

Resident & ordinarily resident Resident but not ordinarily resident Non resident

Income accrued or deemed to be accrued and received or deemed to be received in India Taxable Taxable Taxable

Income accrued outside India but received or deemed to be received in India Taxable Taxable Taxable

Income accrued or deemed to be accrued in India but received outside India Taxable Taxable Taxable

Income accrued and received outside India from a business controlled in or profession Taxable Taxable Not taxable
set-up in India.

Income accrued and received outside India from a business controlled or profession set- Taxable Not Taxable Not Taxable
up outside India

Income accrued and received outside India in the previous year (it makes no difference Taxable Not Taxable Not Taxable
if the same is later remitted to India).

Income accrued and received outside India in any year preceding the previous year and Not Taxable Not Taxable Not Taxable
later on remitted to India in current financial year

Note: In case of resident assessee like company, firm etc. (Other than Individual and HUF) in which there is no classification as ‘Resident but not ordinarily resident’, income
accrued and received outside India from a business controlled or profession setup outside India shall be taxable.

PROF. RAJIMOL K P, ACME, BANGALORE

 INCOME DEEMED TO ACCRUE OR ARISE IN INDIA
[SEC. 9]
Income from connection in India [Sec. 9(1)(i)]
All income accruing or arising, whether directly or indirectly,
a) through one or from any business connection in India; or
b) through or from any property/asset or source of income in
India; or
c) through the transfer of a capital asset situated in India.

PROF. RAJIMOL K P, ACME, BANGALORE

 INCOME DEEMED TO ACCRUE OR ARISE IN INDIA
[SEC. 9]
Salaries earned in India [Sec. 9(1)(ii)]
Salary payable for –
a) Services rendered in India; and
b) The rest period or leave period which is preceded and
succeeded by the period during which services were rendered in
India and forms part of the service contract of employment,
- shall be deemed to accrue or arise in India.

PROF. RAJIMOL K P, ACME, BANGALORE

 INCOME DEEMED TO ACCRUE OR ARISE IN INDIA [SEC. 9]

Salary payable by the Government to Indian citizen for services

rendered outside India [Sec. 9(1)(iii)]
Any salary –
● payable by the Government of India.
● to a citizen of India.
● for services rendered outside India.
- shall be deemed to accrue or arise in India.
Note: In this regard it is to be noted that any allowances or perquisites paid
by the Government to a citizen of India for services rendered outside India
shall be exempted [Sec. 10(7)]

PROF. RAJIMOL K P, ACME, BANGALORE

INCOME DEEMED TO ACCRUE OR ARISE IN INDIA [SEC. 9]

Income from dividend [Sec. 9(1)(iv)]

Any dividend paid by an Indian company outside
India is deemed to accrue or arise in India.

PROF. RAJIMOL K P, ACME, BANGALORE

 Interest payable by Condition
INCOME The Government Nil
DEEMED TO
A resident person Money borrowed is not used for the purpose of –
ACCRUE OR
● business or profession carried on by such person outside
ARISE IN INDIA India; or
[SEC. 9]
● earning any income from any source outside India
Income from
Interest [Sec. 9(1)(v)]
Following interest shall be deemed to A non-resident person Money borrowed is used for the purpose of business or
accrue or arise in India –
profession carried on by such person in India.

Tax point: In case money borrowed and used for the

purpose of earning an income from any other source in
India, interest shall not be treated as deemed to accrue or
arise in India.

PROF. RAJIMOL K P, ACME, BANGALORE

Royalty payable by Condition

The Government Nil INCOME DEEMED TO

A resident person The right, property, information, or services are not ACCRUE OR ARISE IN
utilized for the purpose of – INDIA [SEC. 9]
● business or profession carried on by such person
outside India; or
● earning any income from any source outside India.
Income from royalty
[Sec. 9(1)(vi)]

A non-resident The right, property, information, or services must be utilised

person
for the purpose of –

● business or profession carried on by such person in India;

or

● earning any income from any source in India.

PROF. RAJIMOL K P, ACME, BANGALORE

Fee for technical services Condition
payable by
INCOME DEEMED TO
The Government Nil
ACCRUE OR ARISE IN
A resident person Such services must not be utilised in - ● business or INDIA [SEC. 9]
profession carried on by such person outside India; or

● earning any income from any source outside India

Income from
technical services [Sec.
9(1)(vii)]

A non-resident person Such services must be utilized in –

● business or profession carried on by such person in

India; or

● earning any income from any source in India.

PROF. RAJIMOL K P, ACME, BANGALORE

Tax planning
Tax planning is a way to reduce tax liability by taking full
advantages provided by the Act through various exemptions,
deductions, rebates & relief. In other words, it is a way to
reduce tax liability by applying script & moral of law. It is
the scientific planning so as to attract minimum tax liability
or postponement of tax liability for the subsequent period by
availing various incentives, concessions, allowance, rebates,
and relief provided in the Act.
PROF. RAJIMOL K P, ACME, BANGALORE
 Tax evasion is the illegal way to reduce
tax liability by deliberately suppressing
income or sale or by increasing expenses,
etc., which results in reduction of total
Tax evasion income of the assessee. Tax evasion is
illegal, both in script & moral. It is the
cancer of modern society and work as a
clog in the development of the nation.

PROF. RAJIMOL K P, ACME, BANGALORE

Tax avoidance
Tax avoidance is an exercise by which the
assessee legally takes advantages of loopholes in
the Act. Tax avoidance is a practice of bending
the law without breaking it. It is a way to reduce
tax liability by applying script of law only

PROF. RAJIMOL K P, ACME, BANGALORE

Tax management
Tax management refers to the implementation
of tax planning devised by a corporation or individual to
reduce their tax liability. The objective of Tax Management
is to comply with the provisions of Income Tax Law and its
allied rules. Tax Management deals with filing of Return in
time, getting the accounts audited, deducting tax at source
etc.

PROF. RAJIMOL K P, ACME, BANGALORE

Points of Tax planning Tax Avoidance Tax Evasion Tax Management
distinction
Definition It is a way to reduce tax liability by taking It is an exercise by which the assessee legally takes It is the illegal way to reduce tax liability by deliberately It is It is a procedure to comply with the
full advantages provided by the Act through advantage of the loopholes in the Act. suppressing income or sale or by increasing expenses, etc., provisions of the law.
various exemptions, deductions, rebates & which results in reduction of total income of the assessee.
relief.
Feature Tax planning is a practice to follow the Tax avoidance is a practice of bending the law Tax evasion is illegal, both in script & moral. It is implementation or execution part of
provisions of law within the moral framework without breaking it taxation department of an organisation.

Object To reduce tax liability by applying script & To reduce the tax liability to the minimum by To reduce tax liability by applying unfair means. To comply with the provisions of laws.
moral of law applying script of law only

Approach It is futuristic and positive in nature. The It is futuristic but short term in nature, as loophole It is concerned with past and applied after the liability of It is a continuous approach, which is concerned
planning is made today to avail benefits in of the law will be corrected in future by amendments tax has arisen. It is done with negative approach to avail with past (rectification, revisions etc.), present
future. of the law. benefits by killing the moral of law. (filing of return, etc.) & future (corrective
action).
Benefit Generally, arises in long run. Generally, arises in short run. Generally, benefits do not arise but it causes penalty and Penalty, interest & prosecution can be avoided
prosecution.

Treatment of Law It uses benefits of the law. It uses loopholes in the law. It overrules the law It implements the law.

Practice It is tax saving. It is tax hedging It is tax concealment. It is tax administration.

Need It is desirable It is avoidable It is objectionable It is essential.

Morality It is moral in nature It is immoral in nature It is illegal It i It is duty

Distinguish between Tax Planning, Tax Evasion,

Tax Avoidance and Tax Management
PROF. RAJIMOL K P, ACME, BANGALORE
PROF. RAJIMOL K P, ACME, BANGALORE