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EXECUTIVE SUMMARY
Income tax is an annual tax on income. The Indian Income Tax Act (Section 4) provides that in
respect of the total income of the previous year of every person, income tax shall be charged for
the corresponding assessment year at the rates laid down by the Finance Act for that assessment
year. Section 14 of the Income tax Act further provides that for the purpose of charge of income
tax and computation of total income all income shall be classified under the following heads of
income:- I. Income from Salaries II. Income from House Property III. Income from Business or
Profession IV. Income from Capital Gains V. Income from Other Sources. The total income
from all the above heads of income is calculated in accordance with the provisions of the Act as
they stand on the first day of April of any assessment year.
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TAX
MEANING:
A tax (from the Latin taxo; "rate") is a financial charge or other levy imposed upon a taxpayer
(an individual or legal entity) by a state or the functional equivalent of a state to fund various
public expenditures. A failure to pay, or evasion of or resistance to taxation, is usually
punishable by law. Taxes are also imposed by many administrative divisions. Taxes consist of
direct or indirect taxes and may be paid in money or as its labour equivalent. Few countries
impose no taxation at all, such as the United Arab Emirates and the kingdom of Saudi Arabia
The legal definition and the economic definition of taxes differ in that economists do not regard
many transfers to governments as taxes. For example, some transfers to the public sector are
comparable to prices. Examples include tuition at public universities and fees for utilities
provided by local governments. Governments also obtain resources by "creating" money and
coins (for example, by printing bills and by minting coins), through voluntary gifts (for example,
contributions to public universities and museums), by imposing penalties (such as traffic fines),
by borrowing, and by confiscating wealth. From the view of economists, a tax is a non-penal, yet
compulsory transfer of resources from the private to the public sector levied on a basis of
predetermined criteria and without reference to specific benefit received.
In modern taxation systems, governments levy taxes in money; but in-kind and corvée taxation
are characteristic of traditional or pre-capitalist states and their functional equivalents. The
method of taxation and the government expenditure of taxes raised is often highly debated[by
whom?] in politics and economics. Tax collection is performed by a government agency such as
the Canada Revenue Agency, the Internal Revenue Service (IRS) in the United States, or Her
Majesty's Revenue and Customs (HMRC) in the United Kingdom. When taxes are not fully paid,
the state may impose civil penalties (such as fines or forfeiture) or criminal penalties (such as
incarceration) on the non-paying entity or individual.
Money provided by taxation has been used by states and their functional equivalents throughout
history to carry out many functions. Some of these include expenditures on war, the enforcement
of law and public order, protection of property, economic infrastructure (roads, legal tender,
enforcement of contracts, etc.), public works, social engineering, subsidies, and the operation of
government itself. A portion of taxes also go to pay off the state's debt and the interest this debt
accumulates. Governments also use taxes to fund welfare and public services. These services can
include education systems, health care systems, pensions for the elderly, unemployment benefits,
and public transportation. Energy, water and waste management systems are also common public
utilities. Colonial and modernizing states have also used cash taxes to draw or force reluctant
subsistence producers into cash economies.
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DEFINITION OF TAX:
“Compulsory monetary contribution to the state's revenue, assessed and imposed by a
government on the activities, enjoyment, expenditure, income, occupation, privilege, property,
etc., of individuals and organizations.”
TYPES OF TAX
There are two types of taxes
1. Direct Tax
2. Indirect Tax
DIRECT TAXES:
A tax that is paid directly by an individual or organization to the imposing entity. A taxpayer
pays a direct tax to a government for different purposes, including real property tax, personal
property tax, income tax or taxes on assets. In a general sense, a direct tax is one imposed upon
an individual person (juristic or natural) or property (i.e. real and personal property, livestock,
crops, wages, etc.) as distinct from a tax imposed upon a transaction. In this sense, indirect taxes
such as a sales tax or a value added tax (VAT) are imposed only if and when a taxable
transaction occurs. People have the freedom to engage in or refrain from such transactions;
whereas a direct tax (in the general sense) is imposed upon a person, typically in an
unconditional manner, such as a poll-tax or head-tax, which is imposed on the basis of the
person's very life or existence, or a property tax which is imposed upon the owner by virtue of
ownership, rather than commercial use. Some commentators have argued that "a direct tax is one
that cannot be shifted by the taxpayer to someone else, whereas an indirect tax can be."
The unconditional, inexorable aspect of the direct tax was a paramount concern of people in the
18th century seeking to escape tyrannical forms of government and to safeguard individual
liberty. The distinction between direct and indirect taxation was first extensively discussed by
Adam Smith in his Wealth of Nations, as in the following passage:
“It is thus that a tax upon the necessaries of life operates exactly in the same manner as a direct
tax upon the wages of labour. if he is a manufacturer, will charge upon the price of his goods this
rise of wages, together with a profit; so that the final payment of the tax, together with this
overcharge, will fall upon the consumer.”
The Pennsylvania Minority, a group of delegates to the 1787 U.S. Constitutional Convention
who dissented from the document sent to the states for ratification, objected over this kind of
taxation, and explained:
“The power of direct taxation applies to every individual ... it cannot be evaded like the objects
of imposts or excise, and will be paid, because all that a man hath will he give for his head. This
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tax is so congenial to the nature of despotism, that it has ever been a favorite under such
governments. ...
The power of direct taxation will further apply to every individual ... however oppressive, the
people will have but this alternative, either to pay the tax, or let their property be taken for all
resistance will be vain.
A Direct tax is a kind of charge, which is imposed directly on the taxpayer and paid directly to
the government by the persons (juristic or natural) on whom it is imposed. A direct tax is one
that cannot be shifted by the taxpayer to someone else. The some important direct taxes imposed
in India are as under:
Income Tax: Income Tax Act, 1961 imposes tax on the income of the individuals or Hindu
undivided families or firms or co-operative societies (other tan companies) and trusts (identified
as bodies of individuals associations of persons) or every artificial juridical person. The inclusion
of a particular income in the total incomes of a person for income-tax in India is based on his
residential status. There are three residential status, viz., (i) Resident & Ordinarily Residents
(Residents) (ii) Resident but not Ordinarily Residents and (iii) Non Residents. There are several
steps involved in determining the residential status of a person. All residents are taxable for all
their income, including income outside India. Non residents are taxable only for the income
received in India or Income accrued in India. Not ordinarily residents are taxable in relation to
income received in India or income accrued in India and income from business or profession
controlled from India.
Corporation Tax: The companies and business organizations in India are taxed on the income
from their worldwide transactions under the provision of Income Tax Act, 1961. A corporation is
deemed to be resident in India if it is incorporated in India or if it’s control and management is
situated entirely in India. In case of non resident corporations, tax is levied on the income which
is earned from their business transactions in India or any other Indian sources depending on
bilateral agreement of that country.
Property Tax: Property tax or 'house tax' is a local tax on buildings, along with appurtenant
land, and imposed on owners. The tax power is vested in the states and it is delegated by law to
the local bodies, specifying the valuation method, rate band, and collection procedures. The tax
base is the annual ratable value (ARV) or are abased rating. Owner-occupied and other
properties not producing rent are assessed on cost and then converted into ARV by applying a
percentage of cost, usually six percent. Vacant land is generally exempted from the assessment.
The properties lying under control of Central are exempted from the taxation. Instead a 'service
charge' is permissible under executive order. Properties of foreign missions also enjoy tax
exemption without an insistence for reciprocity.
Inheritance (Estate) Tax: An inheritance tax (also known as an estate tax or death duty) is a tax
which arises on the death of an individual. It is a tax on the estate, or total value of the money
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and property, of a person who has died. India enforced estate duty from 1953 to 1985. Estate
Duty Act, 1953 came into existence w.e.f. 15th October, 1953. Estate Duty on agricultural land
was discontinued under the Estate Duty (Amendment) Act, 1984. The levy of Estate Duty in
respect of property (other than agricultural land) passing on death occurring on or after 16th
March, 1985, has also been abolished under the Estate Duty (Amendment) Act, 1985.
Gift Tax: Gift tax in India is regulated by the Gift Tax Act which was constituted on 1st April,
1958. It came into effect in all parts of the country except Jammu and Kashmir. As per the Gift
Act 1958, all gifts in excess of Rs. 25,000, in the form of cash, draft, check or others, received
from one who doesn't have blood relations with the recipient, were taxable. However, with effect
from 1st October, 1998, gift tax got demolished and all the gifts made on or after the date were
free from tax. But in 2004, the act was again revived partially. A new provision was introduced
in the Income Tax Act 1961 under section 56 (2). According to it, the gifts received by any
individual or Hindu Undivided Family (HUF) in excess of Rs. 50,000 in a year would be taxable.
Indirect Tax: An indirect tax is a tax collected by an intermediary (such as a retail store) from the
person who bears the ultimate economic burden of the tax (such as the customer). An indirect tax
is one that can be shifted by the taxpayer to someone else. An indirect tax may increase the price
of a good so that consumers are actually paying the tax by paying more for the products. The
some important indirect taxes imposed in India are as under:
Customs Duty: The Customs Act was formulated in 1962 to prevent illegal imports and exports
of goods. Besides, all imports are sought to be subject to a duty with a view to affording
protection to indigenous industries as well as to keep the imports to the minimum in the interests
of securing the exchange rate of Indian currency. Duties of customs are levied on goods imported
or exported from India at the rate specified under the customs Tariff Act, 1975 as amended from
time to time or any other law for the time being in force. Under the custom laws, the various
types of duties are leviable. (1) Basic Duty: This duty is levied on imported goods under the
Customs Act, 1962. (2) Additional Duty (Countervailing Duty) (CVD): This is levied under
section 3 (1) of the Custom Tariff Act and is equal to excise duty levied on a like product
manufactured or produced in India. If a like product is not manufactured or produced in India,
the excise duty that would be leviable on that product had it been manufactured or produced in
India is the duty payable. If the product is leviable at different rates, the highest rate among those
rates is the rate applicable. Such duty is leviable on the value of goods plus basic custom duty
payable. (3) Additional Duty to compensate duty on inputs used by Indian manufacturers: This is
levied under section 3(3) of the Customs Act. (4) Anti-dumping Duty: Sometimes, foreign sellers
abroad may export into India goods at prices below the amounts charged by them in their
domestic markets in order to capture Indian markets to the detriment of Indian industry. This is
known as dumping. In order to prevent dumping, the Central Government may levy additional
duty equal to the margin of dumping on such articles. There are however certain restrictions on
imposing dumping duties in case of countries which are signatories to the GATT or on countries
given "Most Favoured Nation Status" under agreement. (5) Protective Duty: If the Tariff
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Commission set up by law recommends that in order to protect the interests of Indian industry,
the Central Government may levy protective anti-dumping duties at the rate recommended on
specified goods.
Central Excise Duty: The Central Government levies excise duty under the Central Excise Act,
1944 and the Central Excise Tariff Act, 1985. Central excise duty is tax which is charged on
such excisable goods that are manufactured in India and are meant for domestic consumption.
The term "excisable goods" means the goods which are specified in the First Schedule and the
Second Schedule to the Central Excise Tariff Act 1985. It is mandatory to pay Central Excise
duty payable on the goods manufactured, unless exempted eg; duty is not payable on the goods
exported out of India. Further various other exemptions are also notified by the Government
from the payment of duty by the manufacturers. Various Central Excise are: (1) Basis Excise
Duty: Excise Duty, imposed under section 3 of the ‘Central Excises and Salt Act’ of 1944 on all
excisable goods other than salt produced or manufactured in India, at the rates set forth in the
schedule to the Central Excise tariff Act, 1985, falls under the category of Basic Excise Duty In
India. (2) Special Excise Duty: According to Section 37 of the Finance Act, 1978, Special Excise
Duty is levied on all excisable goods that come under taxation, in line with the Basic Excise
Duty under the Central Excises and Salt Act of 1944. Therefore, each year the Finance Act spells
out that whether the Special Excise Duty shall or shall not be charged, and eventually collected
during the relevant financial year. (2) Additional Duty of Excise: Section 3 of the ‘Additional
Duties of Excise Act’ of 1957 permits the charge and collection of excise duty in respect of the
goods as listed in the Schedule of this Act. (4) Road Cess: (a) Additional Duty of Excise on
Motor Spirit: This is leviable by the Finance Act (No.2), 1998. (b) Additional Duty of Excise on
High Speed Diesel Oil: This is leviable by the Finance Act, 1999. (5) Surcharge: (a) Special
Additional Duty of Excise on Motor Spirit: This is leviable by the Finance Act, 2002. (b)
Surcharge on Pan Masala and Tobacco Products: This Additional Duty of Excise has been
imposed on cigarettes, pan masala and certain specified tobacco products, at specified rates in the
Budget 2005-06. Biris are not subjected to this levy. (6) National Calamity Contingent Duty
(NCCD): NCCD was levied on pan masala and certain specified tobacco products vide the
Finance Act, 2001. The Finance Act, 2003 extended this levy to polyester filament yarn, motor
car, two wheeler and multi-utility vehicle and crude petroleum oil. (7) Education Cess:
Education Cess is leviable @2% on the aggregate of duties of Excise and Secondary and Higher
Education Cess is Leviable @1% on the aggregate of duties of Excise. (8) Cess - A cess has been
imposed on certain products.
Service Tax: The service providers in India except those in the state of Jammu and Kashmir are
required to pay a Service Tax under the provisions of the Finance Act of 1994. The provisions
related to Service Tax came into effect on 1st July, 1994. Under Section 67 of this Act, the
Service Tax is levied on the gross or aggregate amount charged by the service provider on the
receiver. However, in terms of Rule 6 of Service Tax Rules, 1994, the tax is permitted to be paid
on the value received. The interesting thing about Service Tax in India is that the Government
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depends heavily on the voluntary compliance of the service providers for collecting Service Tax
in India.
INDIRECT TAX:
An indirect tax (such as sales tax, a specific tax, value added tax (VAT), or goods and services
tax (GST)) is a tax collected by an intermediary (such as a retail store) from the person who
bears the ultimate economic burden of the tax (such as the consumer). The intermediary later
files a tax return and forwards the tax proceeds to government with the return. In this sense, the
term indirect tax is contrasted with a direct tax which is collected directly by government from
the persons (legal or natural) on which it is imposed. Some commentators have argued that "a
direct tax is one that cannot be shifted by the taxpayer to someone else, whereas an indirect tax
can be."
An indirect tax may increase the price of a good so that consumers are actually paying the tax by
paying more for the products. Examples would be fuel, liquor, and cigarette taxes. An excise
duty on motor cars is paid in the first instance by the manufacturer of the cars; ultimately the
manufacturer transfers the burden of this duty to the buyer of the car in form of a higher price.
Thus, an indirect tax is such which can be shifted or passed on. The degree to which the burden
of a tax is shifted determines whether a tax is primarily direct or primarily indirect. This is a
function of the relative elasticity of the supply and demand of the goods or services being taxed.
Under this definition, even income taxes may be indirect. In fact, in the United States, the federal
income tax has always been, since its inception on July 1, 1862, an indirect tax (more
specifically an excise), even though, during the 1940s, its application grew from a historical
average of about 8% of the population owing and paying it to around 90% of the population
paying it (though not owing it), as a measure to support the war effort.
The term indirect tax has a different meaning for U.S. constitutional law purposes: see direct tax
and excise tax in the United States.
Sales Tax: Sales Tax in India is a form of tax that is imposed by the Government on the sale or
purchase of a particular commodity within the country. Sales Tax is imposed under both, Central
Government (Central Sales Tax) and State Government (Sales Tax) Legislation. Generally, each
State follows its own Sales Tax Act and levies tax at various rates. Apart from sales tax, certain
States also imposes additional charges like works contracts tax, turnover tax and purchaser tax.
Thus, Sales Tax Acts as a major revenue-generator for the various State Governments. From
10th April, 2005, most of the States in India have supplemented sales tax with a new Value
Added Tax (VAT).
Value Added Tax (VAT): The practice of VAT executed by State Governments is applied on
each stage of sale, with a particular apparatus of credit for the input VAT paid. VAT in India
classified under the tax slabs are 0% for essential commodities, 1% on gold ingots and expensive
stones, 4% on industrial inputs, capital merchandise and commodities of mass consumption, and
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12.5% on other items. Variable rates (State-dependent) are applicable for petroleum products,
tobacco, liquor, etc. VAT levy will be administered by the Value Added Tax Act and the rules
made there-under and similar to a sales tax. It is a tax on the estimated market value added to a
product or material at each stage of its manufacture or distribution, ultimately passed on to the
consumer. Under the current single-point system of tax levy, the manufacturer or importer of
goods into a State is liable to sales tax. There is no sales tax on the further distribution channel.
VAT, in simple terms, is a multi-point levy on each of the entities in the supply chain. The value
addition in the hands of each of the entities is subject to tax. VAT can be computed by using any
of the three methods: (a) Subtraction method: The tax rate is applied to the difference between
the value of output and the cost of input. (b) The Addition method: The value added is computed
by adding all the payments that is payable to the factors of production (viz., wages, salaries,
interest payments etc). (c) Tax credit method: This entails set-off of the tax paid on inputs from
tax collected on sales.
DISTINCTION BETWEEN DIRECT & INDIRECT TAX
DIRECT TAX INDIRECT TAX
1. Direct tax is a tax which is charged
on the income of a person
1. Indirect tax is a tax which is
charged on the expenses of a
person i.e. on goods and services
2. The rules regulations and laws of
this tax is framed by the central
government.
2. The rules and regulations and law
of this tax is framed by the central as
well as state government.
3. The burden of this tax cannot be
shifted from one person to another.
3. The burden of this tax will always
be shifted from one person to another.
4. Examples : Income tax and wealth
tax
4. Example: service tax, VAT.
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RESIDENTIAL STATUS
Every assessee is Either Resident or Non‐Resident. Based on legal status of the assessee there are
different provisions, which decide whether a particular assessee is resident or non‐resident.If an
assessee becomes Resident as per the provisions of the act then it is to be decided further,
whether he is:
1. Resident and Ordinary Resident
OR
2. Resident but Not Ordinary Resident.
RESIDENTIAL STATUS OF AN INDIVIDUAL — SEC. 6 (1)
For an individual to become Resident he has to satisfy any one of the following two conditions:
1. He should have been in India in the year for which Residential Status is to be decided for a
period amounting to 182 days or more.
OR
2. Within the 4 years preceding to the year for which residential status is to be decided, he should
have been in India for a period amounting to 365 days or more and should have been in India for
60 days or more in the year for which Residential Status is to be decided.
Exception to condition 2:
An Indian Citizen or an Indian member of a crew of an Indian ship who leaves India in any
previous year for employment outside OR an Indian Citizen or a person of Indian origin who is
outside India and comes on a visit to India, in the second part of the condition no.2 the words 60
days should be replaced by 182 days. It is clear that condition no.2 becomes non‐functional in
case of such assesses. A person is deemed to be of Indian origin if he or either of his parents or
any of his grandparents was born in undivided India.
If an individual becomes a Resident it is to be decided further which type of Resident he is.
These provisions are discussed in Section 6 (6) For an individual to become Resident and
Ordinary Resident he has to satisfy both the conditions given below: ‐
1. He should have been resident in India at least 2 out of 10 previous years, preceding to the
previous year in which he is resident.
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AND
2. He should have been in India for a period amounting to 730 days or more in 7 years preceding
to the previous year in which he is resident.
If assessee does not satisfy any one of the above mentioned conditions (or both) his Residential
Status will be Resident but Not Ordinary Resident.
RESIDENTIAL STATUS OF HUF, FIRM AND AOP OR BOI SEC. 6 (2)
HUF, Firm or AOP is said to be Resident in India in any previous year if the control and
management thereof is situated either partly or wholly in India.
RESIDENTIAL STATUS OF COMPANY SEC. 6 (3)
A company is said to be Resident in India in any previous year if:
1) It is an Indian company or
2) During the previous year control and management of its affairs is situated wholly in India.
RESIDENTIAL STATUS OF OTHER ASSESSEES Sec. 6 (4)
Any other assessee is said to be Resident in India in any previous year if the control &
management of its affairs is wholly or partly situated in India.
RESIDENT AND ORDINARY RESIDENT: Sec. 6 (6)
1. H.U.F.: ‐ H.U.F. is said to be Ordinary Resident in any previous year if its ‘Karta’ is resident
and Ordinary Resident in that previous year.
2. Firm, AOP, Company and All Other Assesses: ‐ The term ‘Ordinary Resident’ is not
applicable to other assesses. They are either Resident or Non Resident.
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SCOPE OF TOTAL INCOME
On what income an assessee will pay tax in India depends upon his residential status. Scope of
total income is explained in the following chart: ‐
INCOME :‐
A. INDIAN INCOME
1. Received or deemed to be received in India
2. Accruing or arising or deemed to accrue or arise in India.
B. FOREIGN INCOME
ACCRUING OR ARISING OUTSIDE INDIA & RECEIVED OUTSIDE INDIA :‐
1. From a business Controlled from India or Profession setup in India.
2. From a business controlled from outside India or profession set up outside India.
Note : - If in respect of any business, operations are not carried out in India it will be treated
as Foreign income even if it is controlled from India. However, if such an income is received in
India it will be treated as Indian Income.
TAXABILITY BASED ON RESIDENTIAL STATUS
1. Resident and Ordinary Resident : Has to pay Income‐ tax in India on total income earned by
him. i.e. Indian as well as Foreign Income.
2. Resident but Not Ordinary Resident : Has to pay Income‐tax in India on total income
earned by him except income from business controlled from outside India or profession setup
outside India.
3. Non‐Resident : Has to pay Income‐tax in India only on Indian income.
SECTION 7 : INCOME DEEMED TO BE RECEIVED IN INDIA
Income deemed to be received in India in the previous year is also included in the taxable
income of the assessee. The following income shall be deemed to be received in India:
(a) Annual accretion to the credit balance of an employee in the case of recognised provident
fund to the extent provided under the rules.
(b) Excess contribution of employer in case of recognised provident fund to the extent provided
under the rules.
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c) Transfer balance in a recognised provident fund to the extent as provided under the rules.
SECTION 8 : DIVIDEND INCOME
Any dividend declared by a company or distributed or paid by it shall be deemed to be the
income of the previous year in which it is so declared, distributed or paid, as the case may
be; Any interim dividend shall be deemed to be the income of the previous year in which the
amount of such dividend is unconditionally made available to the member who is entitled to it.
SECTION 9 : INCOME DEEMED TO ACCRUE OR ARISE IN INDIA
1) All income accruing or arising through or from:
a. Any business connection in India.
b. Any property in India.
c. Any asset or source of income in India.
d. Transfer of capital asset situated in India.
2) Salaries payable for services rendered in India will be called Indian income.
3) Salary received by Indian National from the Government in respect of services rendered
outside India is an Indian income.
4) Any dividend paid by an Indian company is considered as an Indian income.
Tax incidences on income from different sources vary based on the residential status of an
assessee – Sec 5. These are summarized as under:
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SOURCES OF INCOME
Source of income Resident
And
Ordinarily
resident
Resident
but Not
Ordinarily
resident
Non Resident
Indian Income
Income earned and received or deemed to
be earned and received in India.
Yes Yes Yes
Income earned or deemed to be earned
outside India but received in India.
Yes Yes Yes
Income earned or deemed to be earned in
India but received outside India.
Yes Yes Yes
Foreign Income
Income earned and received or deemed to
be earned and received outside India from
a business controlled from or Profession
setup in India.
Yes Yes No
Income earned and received or deemed to
be earned and received outside India from
a business controlled from or Profession
setup outside India.
Yes No No
Non-Business Income earned and received
or deemed to be earned and received
outside India
Yes No No
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EXCLUSIONS FROM TOTAL INCOME (SECTION 10)
Under Section 10 of Income Tax Act of 1961 certain income is exempted from tax either fully
or partially. In other words it is a list of tax‐free income in the hands of the assessee and though
it is an income of the year assessee is not required to pay tax on it.
Agricultural income Sec. 10 (1): ‐ For an income to be called an agricultural income conditions
to be satisfied are‐
(a) Rent or revenue should be derived from land. (b) Land should be used for agricultural
purpose. (c) The land should be situated in India.
Examples: ‐
1. Income from lease of agricultural land.
2. 2 Income from land used for agricultural purpose e.g. produce grown for consumption
by man (grains, vegetables or fruits) or animals (grass or pastures); cash crops (cotton
jute etc.), luxury items such as coffee, tobacco; crops grown for self‐consumption etc;
3. Compensation received from Insurance Company for damage to tea garden.
4. Income from growing flowers.
5. 5 Salary or interest on capital received by a partner from a firm engaged in agriculture (as
salary or interest is only a way of distributing profits).
Examples of Non agricultural income: ‐
1. Income not directly derived from land: Interest on arrears of rent; dairy farming, poultry
farming, dividend received from a limited company having only agricultural income;
salary of a manager of an agricultural estate, rent for land used for storing crops;
manufacture of salt from sea‐water.
2. Income without performing basic agricultural operations: Sale of plants which have
grown spontaneously (on their own without any sowing of seeds e.g. mushrooms); sale of
trees which were already standing on the agricultural estate when purchased.
3. Income from produce sold by others and not by the cultivator: Sale of agricultural
produce received as interest on loan; received as price for water supplied to agricultural
land; sale of agricultural produce by a broker.
2. Receipt from H.U.F. Sec. 10 (2): Any amount received by member of H.U.F. out of the family
income is exempt from tax.
3. Partners Share in the profits of the firm Sec. 10 (2A): Partner of the firm is not required to pay
tax in individual capacity on his share in profits of the firm.
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4. Leave Travel Concession Sec. 10 (5): It is the amount given by the employer to the employee
for traveling while on leave or to settle at any place in India after retirement.
Subject to certain restrictions this income is exempt from tax in respect of travel concession
received by an assessee from his employer or former employer:
(a) For himself & his family in connection with his proceeding to any place in India.
(b) For himself & his family in connection with his proceeding to any place in India
after retirement from service or after termination of his service.
However, exemption under this section is restricted to amount actually spent by the
assessee. For the purpose of this section Family in relation to any individual means:
i. The spouse and children of the individual.
ii. The parents, brothers & sisters of the individual or any of them wholly or mainly dependent
on the individual.
Question:
Mr. Brij Mohan earns the following income during the previous year 2013-14. Compute his
Gross total income for assessment year 2014-15 if he is
(i)resident and ordinarily resident.
(ii)resident but not ordinarily resident.
(iii)non-resident.
(1)Dividend from an Indian company, received in Japan 120000
(2)Profit on sale of machinery in India, but received in Japan 225000
(3)Profits from business in Bombay, managed from Japan 145000
(4)Profits from business in Japan, managed from there, received there 15000
(5)Income from house property in India 15000
(6)Income from property in Japan and received there 75000
(7)Income from agriculture in Japan being invested there 65000
(8)Fees for technical services rendered in India but received in Japan 80000
(9)Interest on Government securities accrued in India but received in Japan 40000
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(10)Interest on Japan Government securities, received in India
Solution:
Particulars ROR NOR NR
1.Income accruing/arising in India but exempt u/s 10(34) -------- -------- --------
2.Income accruing /arising in India 1,20,000 1,20,000 1,20,000
3.Income accruing/arising in India 2,25,000 2,25,000 2,25,000
4.Income accruing/arising and received outside India 1,45,000 ------- -------
5.Income accruing/a Income accruing/arising in India 1,50,000 1,50,000 1,50,000
6.Income accruing/arising outside India and received outside
India 1,50,000 ------- -------
7.Income accruing/arising outside India and received outside
India 75,000 ------- -------
8.Income accruing/arising in India 65,000 65,000 65,000
9.Income accruing/arising in India 80,000 80,000 80,000
10.Income received in India 40,000 40,000 40,000
GROSS TAXABLE INCOME
10,50,000 6,80,000 6,80,000
17
SALARY
SALARY (SECTION 15 TO 17) Salary means remuneration received by an employee from
employer or former employer in any form such as gift, pension, gratuity, usual remuneration etc.
Some important points regarding income taxable under the head Salary: ‐
1) Employer—employee relationship.
2) For tax purpose there is no difference between salary & wages.
3) Even gift received from employer is considered as salary income.
4) MP or MLA is not considered as an employee of the Government.
Therefore, Salary & allowances received by him are not chargeable under the head ‘Salary’.
They are to be included under the head ‘Income from Other Sources’.
BASIS OF CHARGE:
Under section 15 following income is chargeable to tax under the head ‘Salary’:‐
(1) Any salary due from an employer or a former employer to an assessee in the previous year
whether paid or not.
(2) Any salary paid or allowed to him in the previous year by or on behalf of an employer or
former employer though not due.
(3) Any arrears of salary paid or allowed to him in the previous year by or on behalf of employer
or former employer if not charged to tax earlier.
(4) Any salary, bonus, commission or remuneration due to or received by Partner of the firm
from the firm shall not be regarded as Salary for the purpose of this section.
Under Section 17(1), SALARY is defined as:
a. Wages;
b. any annuity or pension;
c. any gratuity;
d. any fees, commission, perquisite or profits in lieu of or in addition to any salary or wages;
e. any advance of salary;
f. any payment received in respect of any period of leave not availed by him;
18
g. the portion of the annual accretion in any previous year to the balance at the credit of an
employee participating in Recognised Provident Fund to the extent it is taxable; and
h. transferred balance in a Recognised Provident Fund to the extent it is taxable; and
i. the contribution made by the Central Government in the previous year, to the account of an
employee under a pension scheme referred to in section 80CCD.
PERQUISITES‐ SECTION 17 (2):
Perquisite is additional benefit received by an employee over and above his basic salary but it is
different from allowance. Perquisite may be paid voluntarily or by virtue of service contract.
Under Section 17 (2) Perquisite includes: ‐
1. The value of rent‐free accommodation provided to the assessee.
2. Value of concession given in rent relating to accommodation provided to the assessee.
3. Value of any benefit granted free of cost or at a concessional rate in respect of following
persons: ‐
(a) By a company to an employee who is also a Director of the company.
(b) By a company to an employee being a person who has substantial interest in the company.
(Person holding 20% or more equity shares carrying voting rights is known as person having
substantial interest in the company.)
(c) By an employer to an employee whose income under the head salary exceeds ` 50,000
excluding the value of non‐monetary perquisites. For the purpose of this clause, use of any
vehicle provided by a company or an employer for journey by the assessee from his residence to
his office or other place of work, or from such office or place to his residence shall not be
regarded as benefit granted free of cost or at a concessional rate.
4. Any sum payable by the employer in respect of any obligation but for which payment would
have been made by the assessee.
5. Any sum payable by the employer whether directly or through a fund to effect an assurance on
the life of an assessee excluding contribution made to recognised provident fund or any other
prescribed funds.
6. The value of any other fringe benefit or amenity as may be prescribed.
19
TAXABILITY OF PERQUISITES
For this purpose Perquisites can be classified into 3 categories:
Perquisites taxable in all cases (i.e. Specified & Non‐Specified employees): ‐
1) Rent‐free furnished or unfurnished accommodation in cases other than:
a. Rent free accommodation given in a remote area.
b. A temporary accommodation of 800 sq.ft. given at a mining site.
c. Hotel accommodation given after transfer not exceeding 15 days.
d. Rent free official accommodation provided to a Judge of High Court or Supreme
Court or an official of Parliament or a Union Minister and a Leader of opposition in
Parliament.
2) Furnished or unfurnished accommodation is provided in above cases at a nominal rent
3) Service of a sweeper, a gardener, a watchman or a personal attendant provided by an employer
to an employee without charge or with nominal charge if Domestic servant is engaged by
employee and salary is paid by employer.
4) Supply of gas, electric energy or water for household consumption of employee without any
charge or with nominal charge if connection is in the name of employee and bills are paid by
employer [covered by sec. 17(2) (iv)]
5) Education facility to any household members of the employee without any charge or with
nominal charge if bills are issued in the name of employee but paid by employer [covered by sec.
17 (2) (iv)]
6) Any sum paid by employer in respect of an obligation which for such payment, would have
been payable by the employee.
7) Amount payable by an employer directly or indirectly to effect an assurance on the life of
employee or to effect a contract of an annuity (not being payments to recognised provident fund,
etc.)
8) Interest‐free loan or concessional loan to an employee where loan exceeds ` 20,000.
9) Providing use of any other movable asset to an employee or any member of his household
10) Transfer of any movable asset to an employee or any member of his household
11) Any medical facility in India provided to an employee or any member of his family when
bills are
20
in the name of employee and paid or reimbursed by employer in excess of 15,000 per assessment
year
12) Value of any specified security or sweat equity shares allotted or transferred by the employer
or former employer free of cost or at concessional rate (applicable from the assessment year
2012‐13).
13) Any contribution to an approved superannuation fund by the employer in respect of the
employee to the extent it exceeds 1 lakh (applicable from the assessment year 2012‐13).
14) Value of any other fringe benefit or amenity notified for the purpose of section 17(3) (viii)
(applicable from the assessment year 2012‐13).
15) Travelling, touring accommodation.
16) Free food and beverages except if provided in office hours and the expenditure is 50 per
meal or less.
17) Gift or gift voucher of the value of not less than ` 5,000 (if gift is in kind).
18) Club expenditure incurred by the employer in respect of personal use.
19) Credit card payments by the employer in respect of household use.
Perquisites taxable only for specified employees: ‐
1) Services of a sweeper, a gardener, a watchman or a personal attendant provided by an
employer to an employee without charge or with nominal charge if domestic servant is engaged
by employer and salary is paid by employer.
2) Supply of gas, electric energy or water for household consumption of employee without any
charge or with nominal charge if connection is in the name of employer and bills are paid by
employer
3) Education facility to any household members of the employee without any charge or with
nominal charge if bills are issued in the name of & paid by employer.
4) Any medical facility in India provided to an employee or any member of his family if bills are
in the name of employer and paid or reimbursed by employer in excess of ` 15,000 per
assessment year.
5) Car or any other automotive conveyance.
6) Transport facility by a transport undertaking (not being provided by railways or by an airline).
21
Perquisites not taxable in all cases: ‐
1) Rent‐free furnished or unfurnished accommodation in cases mentioned below: ‐
a) Rent free‐accommodation given in a remote area.
b) A temporary accommodation of 800 sq. ft given at mining site, etc.
c) Hotel accommodation given after transfer for not exceeding 15 days
d) Rent‐free official accommodation provided to a Judge of High Court or Supreme Court or an
official of Parliament or a Union Minister and a Leader of opposition in Parliament.
2) Leave travel concession to employees subject to provision of section 10(5)
3) Providing use of computer & laptop to an employee or any member of his household.
4) Providing medical facilities to an employee or any member of his family: ‐
a) in a hospital maintained by the Government or any local authority or approved by the
Government for the medical treatment of Government employees.
b) in a hospital maintained by the employer.
c) in respect of prescribed diseases or ailments, in any hospital approved by the Chief
Commissioner having regard to the prescribed guidelines.
5) Health insurance premium of the employee or any member of his household paid by the
employer
6) Any other medical facility in India provided to an employee or any member of his family
a) Bills are in the name of employer and paid or reimbursed by employer up to 15,000 per
assessment year
b) Bills are in the name of employee and paid or reimbursed by employer up to 15,000 per
assessment year
c) Medical facility outside India if a few conditions are satisfied
7) Any perquisite other than taxable perquisites already mentioned (few examples are car,
holiday home, club, free tea / refreshment / lunch, gift, etc.)
22
Section 17 (3) Profits in Lieu of Salary
It is not a regular payment received from the employer. It is received instead of salary.
It includes:
1) The amount of any compensation due to or received by an assessee from his employer or
former employer at or in connection with the termination of his employment or the modification
of the terms and conditions relating there to;
2) Any payment other than any payment referred to in clause (10) (clause (10 A)) (Clause (10B),
Clause (11) Clause (12) Clause (13) or clause (13A) of section 10, due to or received by an
assessee from an employer or a former employer or from provident fund or other fund, to the
extent to which it does not consist of contributions by the assessee or interest on such
contributions;
3) Any sum received under a Keyman insurance policy including the sum allocated by way of
bonus on such policy.
4) Any amount due to or received, whether in lump sum or otherwise, by an assessee from any
person ‐
a) Before his joining any employment with that person, or
b) After termination of his employment with that person.
23
TAXABLE PROVIDENTFUND
Particulars Statutory Recognised Unrecognised Public
ProvidentFund ProvidentFund ProvidentFund Provident
Fund (PPF)
1) Who runs the Government Respective Respective Nationalised
Fund employer Employer Banks
2) Contribution Nottaxable. Nottaxable Nottaxable NotTaxable
made by Deductionu/s Deductionu/s80C No deductionu/s Deductionu/s
Employee 80C 80C 80C
3) Contribution Totallyexempt Exemptonlyup Totallyexempt Employer
made by to 12% of basic doesnot
Employer Salary contribute
4) Interestearned Totallyexempt Exemptupto8.5% Totallyexempt Exemptu/s
p.a.
on the fund 10(15)
5) Maturity on Totallyexempt Totallyexempt 1) Employee’s Term of this
Retirement ownsaving‐tax account is
free 15 years
2) Int. onhis whichmay
savings‐fully be extended
taxedas other upto20/25
Income years
3) employer’s maturityare
Contributionfully fullyexempt
taxedas salary
Income
4) Int. on
Employer’s
contributionfully
taxedas salary
income
Note :‐
“Salary” referred above is basic salary. It includes D.A. if terms of employment so provide.
By adding salary, taxable perquisites and profit in lieu of salary we get Gross Salary of
an employee. From Gross Salary certain deductions are allowed u/s 16 & only remaining
amount is considered as Net Taxable Salary.
24
DEDUCTIONS FROM SALARY INCOME—SECTION 16
ENTERTAINMENT ALLOWANCE U/S 16 (ii):
If any entertainment allowance is granted to the assessee who is in receipt of salary from the
government deduction is allowed against it u/s 16 (ii) as follows: ‐
Deduction for Entertainment Allowance
Government employee Other employees
1) 1/5th
of Basic Salary Nil
OR
2) ` 5,000
OR
3) Entertainment Allowance actually received
Whichever is less.
TAX ON EMPLOYMENT U/S 16 (iii)
Any tax paid by an employee on employment to the state Govt. is fully deductible from taxable
salary e.g. Profession tax charged by Govt. of Maharashtra.
If profession tax is paid by the employer, it is first included in taxable salary as perquisite and
then deduction u/s 16 (iii) is allowed.
25
GRATUITY
Government POGA Other
Employees Employees Employees
Fully Exempt 15
26⁄ X Last Salary X Completed 1
2⁄ X Average X completed
pm. years of salary years of
service service
Actual Received Actual received
Maximum Rs. 1000000 Maximum Rs. 1000000
(WHICHEVER IS LESS) (WHICHEVER IS LESS)
Last Salary pm. Average Salary
= Basic salary = Average basic salary
+ +
DA (all) Average DA (in terms)
+
Average Turnover
Commission
Average of last 10 months
preceding the month
of retirement
26
FORM NO.16
[See rule 31(1)(a)]
PART A
Certificate under section 203 of the Income-tax Act, 1961 for tax deducted at source on salary
Certificate No. ZTIYHZI Last updated on 26 AUGUST 2015
Name and address of the Employer Name and address of the Employee
LIC BR.890 MALAD GR FLOOR, HEMU
CLASSIC BLDG, S.V.RD MALAD WEST,MUMBAI
400064 MAHARASHTRA +(91) 22-61221250
bo_890@licindia.com
ROHIT LALAN MOURYA
CHITRAKUT SEVA SAMITI VASARI HILL LINK RD
GOREGAON WEST MUMBAI 400062 MAHARASHTRA
+(91) 9768832877
PAN of the Deductor
TAN of the Deductor PAN of the
Employee
Employee
Reference No.
provided by the
Employer
(If available)
AAACL0582H MUML04671C BWDPM0842C
CIT (TDS)
Assessment Year Period with the Employer
From To
27
Address.The Commissioner of Income Tax (TDS)
Room no.900A,9th Floor, K.G. Hospital, Charni
Rd,Mumbai 400002
2015-16
01/04/2014 31/03/2015
Summary of amount paid/credited and tax deducted at source thereon in respect of the employee
Quarter(s) Receipt Numb ers of
original quarterly
state ments of TDS
under sub-se ction
(3) of
section 200
Amount
p aid/credited
Amount of tax
deducted
( Rs. )
Amount of
tax deposited/
remitted (Rs. )
Total (Rs.) 263264 24000 24000
I. DETAILS OF TAX DEDUCTED AND DEPOSITED IN THE CENTRAL GOVERNMENT ACCOUNT THROUGH BOOK
ADJUSTMENT
(The deductor to provide payment wise details of tax deducted and deposited with respect to the deductee)
Sl. No. Tax Deposited in
respect of the
deductee
Book Identification Number (BIN)
Receipt
numbers of
DDO serial number in Date of transfer Status of
28
( Rs. ) Form No.
24G
Form No.
24G
voucher
(dd/mm/yyyy)
matching
with Form
No.24G
Total ( Rs. )
II. DETAILS OF TAX DEDUCTED AND DEPOSITED IN THE CENTRAL GOVERNMENT ACCOUNT THROUGH
CHALLAN
(The deductor to provide payment wise details of tax deducted and deposited with respect to the deductee)
Sl. No. Tax Deposited in
respect of the
deductee
( Rs. )
Challan Identification Number (CIN)
BSR Code of the
Bank Branch
Date on which tax deposited
(dd/mm/yyyy)
Challan Serial
Number
Status of
matching
with
OLTAS
1. 24000 63903777 31/08/2015 0003 YES
Total ( Rs. ) 24000
Verification
29
Notes:
1. Government deductors to fill information in item I if tax is paid without production of an
income-tax challan and in item II if tax is paid accompanied by an income-tax challan.
2. Non-Government deductors to fill information in item II.
3. The deductor shall furnish the address of the Commissioner of Income-tax (TDS) having
jurisdiction as regards TDS statements of the assessee.
4. If an assessee is employed under one employer only during the year, certificate in Form No.
16 issued for the quarter ending on 31st March of the financial year shall contain the details
of tax deducted and deposited for all the quarters of the financial year.
5. If an assessee is employed under more than one employer during the year, each of the
employers shall issue Part A of the certificate in Form No. 16 pertaining to the period for
which such assessee was employed with each of the employers. Part B (Annexure) of the
I,Mr.Rohit Lalan Mourya son/daughter of Lalan Mourya working in the capacity of Agency Manager
(designation) do hereby certify that a sum of Rs.24000 [Rs. Twenty Four Thousand Only (in words)] has
been deducted and deposited to the credit of the Central Government. I further certify that the
information given above is true, complete and correct and is based on the books of account, documents,
TDS statements, TDS deposited and other available records.
Place
Mumbai
(Signature of person responsible for deduction of tax)Date
26/08/2015
Designation: Agency Manager
Full Name: Mr.Rohit Lalan Mourya
30
certificate in Form No.16 may be issued by each of the employers or the last employer at
the option of the assessee.
PART B (Annexure)
Details of Salary paid and any otherincome and tax deducted
1 Gross Salary
(a) Salary as per provisions contained in sec.17(1)Rs.526888
(b) Value of perquisites u/s 17(2) (as per
Form No.12BA, wherever applicable)
Rs.
(c) Profits in lieu of salary under section
17(3)(as per Form No.12BA, wherever
applicable)
Rs.
(d) Total
2 Less: Allowance to the extent exempt u/s 10
Rs. 526888
Allowance Rs.
Rs. 6400
Rs. 520488
Transport Allowance 6400
3 Balance(1-2)
31
4 Deductions :
(a) Entertainment Allowance
(b) Tax on Employment
5 Aggregate of 4(a) and (b)
6 Income chargeable under the
head Salaries
7 Add: Any other income reported
by the employee
Interest on Housing Loan Rs. 126000
Gross Total Income
Rs 1700
Rs. 1700
Rs.518788
Rs.126000
Rs. 6447888
(a) Entertainment allowance Rs.
(b) Tax on employment Rs.
5 Aggregate of 4(a) and (b) Rs.
6 Income chargeable under the head
'salaries'
(3-5) Rs.
7 Add: Any other income reported
by the em
ployee
Rs.
Rs.
Income Rs.
8 Gross total income (6+7)
32
9 Deductions under Chapter VI-A
(A) sections 80C, 80CCC and 80CCD
(a) section 80C
(i) PPF
(ii) Insurance Premium
(iii) ……………….
(iv) ……………….
(v) ………….……
(vi) ………….……
(vii) ………….……
(b) section 80CCC
(c) section 80CCD
Note: 1. Aggregate amount deductible under
sections 80C, 80CCC and 80CCD(1) shall not
exceed one lakh rupees.
Rs.12000
Rs.138081
Gross
Amount
Rs.
Rs.
R
s.
R
s.
Rs.
Rs. 150081
Deductible amount
(B) Other sections (e.g. 80E, 80G, 80TTA, etc.)
under Chapter VI-A.
33
Gross
amount
Qualifying
amount
Deductible
amount
(i) section 80D Rs. 8370 Rs. 8370 Rs. 8370
(ii) section……….. Rs. Rs. Rs.
(iii) section……….. Rs. Rs. Rs.
(iv) section……….. Rs. Rs. Rs.
(v) section……….. Rs. Rs. Rs.
10 Aggregate of deductible amount under Chapter VI-A Rs. 158370
11 Total Income (8-10) Rs. 486420
12 Tax on total income Rs. 21642
13 Education cess @ 3% (on tax computed at S. No. 12) Rs. 649
14 Tax Payable (12+13) Rs. 22291
15 Less: Relief under section 89 (attach details) Rs
16 Tax payable (14-15) Rs. 22291
17 Tax Deducted at Source u/s 192 Rs. 24000
Verification
I Mr.Rohit Lalan Mourya, son/daughter of Lalan Mourya working in the capacity of Agency Manager
(designation) do hereby certify that the information given above is true, complete and correct and is based
on the books of account, documents, TDS statements, and other available records.
Place Mumbai
(Signature of person responsible for deduction of tax)Date 26/08/2015
34
6. In items I and II, in column for tax deposited in respect of deductee, furnish total amount of
TDS and education cess.
BUSINESS / PROFESSION:
Business is an activity of purchase and sell of goods with the intention of making profit
Profession is an occupation requiring intellectual skill. E.g. Doctor, Lawyer etc. Vocation is an
activity, which requires a special skill, which is used to earn income. e.g. Painter, Singer etc.
For income tax purpose there is no difference between business income, profession income and
vocation income.
Section 2 ( 13 ) : Business
Business includes any trade, commerce or manufacture or any adventure or concern in the
nature of trade, commerce or manufacture. Thus business is any activity carried out with the
intention to earn profit, whether such an activity is continuous or temporary is immaterial. In
determining whether a particular transaction is an adventure in the nature of trade or not, total
impression and effect of all relevant facts and circumstances of the transaction have to be seen.
To bring a transaction within the term “ business”, the transaction must be a “trade” or in the
nature of “trade”. Hence everything depends upon the facts and circumstances of the case. E.g.
A person making investment of surplus funds in shares or debentures cannot be deemed to be
carrying on the business of trading in shares although occasionally he may be selling “some”
shares or debentures and making gains thereon.
METHODS OF COMPUTING TAXABLE INCOME
1. Gross Sales or Gross fees as the case may be are to be taken as the base if Receipt and
Payment A/c or cash Book is given. From this Gross income expenses which are specifically
allowed by the income tax act are deducted to arrive at taxable income.
Designation: Agency Manager Full Name: Mr.Rohit Lalan Mourya,
35
2. If profit & loss a/c or income & expenditure a/c is given Net Profit or (Surplus) is taken as
the base and then following adjustments are made: ‐
1) Expenses, which are debited, to profit & loss a/c, but disallowed by the Income Tax Act and
either fully or partially are added back.
2) Expenses, which are not debited, to profit & loss a/c but which are allowed by the Income
Tax Act are deducted.
3) Income that is credited to profit & loss a/c but not taxable at all or taxable under some
different head is to be deducted.
4) Income that is not credited to profit & loss a/c, but which is chargeable to tax as business
income is to be added.
DEDUCTIONS FOR EXPENSES SPECIFICALLY ALLOWED SECTION 30 TO
SECTION 43D
1. Rent, rates, taxes, repairs and insurance of building (Section 30):
1) If assessee has occupied the premises as a tenant, rent of the premises and if he has agreed
to bear cost of repairs, such cost is allowed as deduction, provided it is not of capital nature.
2) If assessee has occupied premises as the owner; repairs, land revenue, local taxes, insurance
premium etc. are allowed as deduction. However, no expenditure in form of capital
expenditure is allowed.
2. Repairs & Insurance of machinery, Plant & Furniture (Sec.31): Amount paid on account of
repairs and insurance premium against risk of damage in respect of machinery, plant &
furniture are allowed as deduction provided they are not of capital nature.
3. Depreciation u/s 32: Under Section 32 depreciation on assets is allowed as deduction while
computing income from business or profession. To claim this deduction following conditions
should be satisfied:
1) Assessee should be owner of the asset.
36
2) Asset must be used for the business.
3) Such use must be in the previous year.
Depreciation is allowed not on individual asset items, but on block of assets under following
categories: ‐
1) Buildings
2) Plant & Machinery
3) Furniture
4) Intangible Assets acquired after March 31, 1998 such as know‐ how, Patents,
Trademarks, licenses, franchises or any other business or commercial rights of similar nature.
The term plant includes ships, vehicles, books, scientific apparatus and surgical equipments
used for the business but excludes tea bushes or live stock. If any asset falling in block of
assets is acquired during the year and put to use during the previous year for less than 180 days
depreciation on such asset shall be restricted to 50% of the normal depreciation.
4. Deduction u/s. 36 & 37:
1. Insurance: Section 36(1) (i)‐ Premium paid to cover the risk of damage or destruction of stocks,
stores, cattle and on health of employees under the approved scheme.
2. Insurance Premium paid by Federal milk co‐op. society on the lives of cattle owned by the members
of a Primary Milk Co‐op, Society affiliated to it. Section 36(1) (ia) 49
3. Premia for insurance on health of employees in accordance with scheme framed by GIC & approved
by Central Government or any other insurer & approved by the Insurance Regulatory & Development
Authority (only if paid by cheque) Section 36(1) (ib).
4. Bonus or commission paid to Employees: Section 36(1) (ii): It is allowed as deduction so far as they
are not paid as profit or dividend.
5. Interest on borrowed capital: Section 36(1) (iii): ‐ It is allowed as deduction. However, interest paid
by firm to its partners is allowed subject to provisions of Sections 40(b).
37
6. Discount on zero coupon bonds is deductible by issuing Company on pro rata Basis Sec.36(1)(iii a)
7. Contribution to recognised Provident fund or an approved super annuation fund: Section
36(1)(iv).Any sum paid by the assessee as an employer by way of contribution towards pension
scheme.
8. Contribution to Pension Scheme: Sectlon 36(1)(iv a) Any contribution by an employer by way of
contribution towards a pension scheme for an employee up to 10% of salary shall be allowed as
deduction.
9. Contribution to approved Gratuity Fund Section 36(1)(v): ‐ Amount contributed to the fund which is
for the exclusive benefit of the employees will be allowed as deduction.
10. Contributions received from employees (when deposited) Section 36(1)(va): ‐ Any contribution
received from employees towards any funds for the welfare of the employees e.g. P.F. will be allowed
as deduction when such contribution is credited to employees a/c on or before the due date. It is
allowed as deduction not because it is an expenditure of the assessee. In fact, it is not at all an
expenditure of the assessee. But when this amount is deducted from salary of employees, it is treated as
an income under section 2(24)(x). Therefore, deduction is allowed when payment is made by the due
date.
11. Animals used for the business: Section 36 (1) (vi): ‐ Deduction is allowed when animals have died
or have become permanently useless. Amount of deduction will be difference between actual cost of
the animals and amount realised if any in respect of carcasses of the animals. Deduction is allowed only
if animals are used for the purpose of business but not as stock in trade.
12. Bad debts: Section 36(1)(vii) and Section 36(2): ‐ Deduction is allowed on this account if debts
have arisen out of business transaction. It is the responsibility of the assessee to prove to the satisfaction
of income tax officer that such debts are irrecoverable.
13. Expenditure for promoting family planning: Section 36(1)(ix): ‐ Only a company can
claim this deduction. Any expenditure incurred by a company to promote family planning
among its employees is allowed as deduction fully, provided it is revenue expenditure. Any
capital expenditure on this account is allowed as deduction in 5 equal instalments. If profit is
not sufficient to absorb this expenditure it can be carried forward to be set off in future. No
38
depreciation can be claimed under section 32 on capital assets used for promoting family
planning and allowed as deduction under section 36(1)(ix).
14. Any amount of banking cash transaction tax paid during the year. 36(1)(xiii)
14. General Expenditure for the purpose of business or profession Section 37: ‐ Any other
expenditure not covered by section 30 to 36 which is of revenue nature will be allowed as
deduction provided it is incurred exclusively for the purpose of business or profession.
1. Embezzlement of cash.
2. Expenses on local festival such as Diwali, Muhurta etc.
3. Cash shortage found in the business at the end of the day
4. Entertainment Expenses
5. Advertisement Expenses
6. Travelling Expenses
7. Guest House Expenses.
8. Lawful expenses related to illegal business.
9. Premium on redemption of debentures
10. Discount on issue of debentures (on pro rata basis)
Expenses Not Deductible Under Section 37
1. Donations
2. Charities
3. Gifts to relatives
4. Income tax
5. Wealth tax
39
6. Advance income tax
7. Fines and penalties for breach of any laws.
8. Personal Drawings
9. Salary to owner
10. Interest on proprietors capital
11. Capital expenditure
12. Purchase of an assets
13. Extension of building
14. Personal expenditure
15. Household expenses.
16. Drawings
17. Education expenses of children
18. Residential telephone bill
19. Residential electricity bill
20. Residential maintenance
21. Amount transferred to reserve
22. Personal Hotel expenses
40
Question: The following is the profit and loss account of the United Plastic for the
P.Y. 2008-09
Rs. Rs.
To Op. Stock 30,000 By Sales 6,10,000
“ Purchases 1,59,000 “ Dividends (Gross) 6,000
“ Wages and Salaries 50,000 “ Rent from staff quarters 7,000
“ Rent 20,000 “ Interest on Govt.
Securities
50,000
“ Reserve for bad debts 10,000 Closing. Stock 25,000
Advertisement 5,000 Income from Smuggling 10,000
Depreciation on
Machinery
5,000 “ Dividend from Foreign
Co. (net)
2,000
“ Wealth tax 7,000
“ Interest
* Reserve for IT
7,000
7,000
“ Sales Tax 15,000
“ Insurance 2,000
“ Donation 25,000
“ Loss on sale of old
Typewriters
3,000
“ Computer 45,000
“ Staff Welfare Fund 40,000
“ Net Profit 2,80,000
7,10,000 7,10,000
41
Solution
42
CONCLUSION:
Reforming taxation is an on going process, through which tax policy makers and tax
administrators are continuously adapting their tax system to reflect changing economic, social
and political circumstances. The present study examines the Taxation of Income in India during
post liberalisation period and policy perspective in this regard. It has analysed the growth of
income tax revenue, performance of Income Tax Department and perception of tax professionals
regarding Income Tax System in India. With a view to have a proper understanding of the
research topic important studies relating to personal income tax, capital gains taxation,
agricultural taxation, efficiency of income tax administration etc. conducted in India have been
reviewed. For evaluating growth of income tax revenue in India and performance of the income
tax administration secondary data has been collected mainly from Finance Acts, Explanatory
Memorandum on the Budget of the Central Government, Reports of the various
committees/commissions, Indian Economic Survey, Income Tax Act 1961, Income Tax Rules
1962, various announcements, circulars and notifications of Central Board of Direct Taxes,
Budget speeches of Finance Ministers, Reports of Comptroller and Auditor General of India on
Direct Taxes .
43
BIBLIOGRAPHY
 https://en.wikipedia.org/wiki/Tax
 http://www.businessdictionary.com/definition/tax.html
 http://mospi.nic.in/Mospi_New/upload/statistical_year_book_2011/SECTOR-1-
INDIA%20AN%20OVERVIEW/CH-06-
DIRECT%20&%20INDIRECT%20TAXES/DIRECT-INDIRECT%20TAX-
WRITEUP.pdf
 http://www.vazecollege.net/staffprofile/commercejunior/Unit1_2_3PDF.pdf
 https://en.wikipedia.org/wiki/Indirect_tax
 http://www.dvsca.net/admin/pdffiles/13597250832-
Scope%20of%20Total%20Income%20and%20Residential%20status.pdf
 http://www.vazecollege.net/staffprofile/commercejunior/Unit_4-SalaryPDF.pdf
 http://www.vazecollege.net/staffprofile/commercejunior/Unit_6-
Business_IncomePDF.pdf

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Tax

  • 1. 1 EXECUTIVE SUMMARY Income tax is an annual tax on income. The Indian Income Tax Act (Section 4) provides that in respect of the total income of the previous year of every person, income tax shall be charged for the corresponding assessment year at the rates laid down by the Finance Act for that assessment year. Section 14 of the Income tax Act further provides that for the purpose of charge of income tax and computation of total income all income shall be classified under the following heads of income:- I. Income from Salaries II. Income from House Property III. Income from Business or Profession IV. Income from Capital Gains V. Income from Other Sources. The total income from all the above heads of income is calculated in accordance with the provisions of the Act as they stand on the first day of April of any assessment year.
  • 2. 2 TAX MEANING: A tax (from the Latin taxo; "rate") is a financial charge or other levy imposed upon a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state to fund various public expenditures. A failure to pay, or evasion of or resistance to taxation, is usually punishable by law. Taxes are also imposed by many administrative divisions. Taxes consist of direct or indirect taxes and may be paid in money or as its labour equivalent. Few countries impose no taxation at all, such as the United Arab Emirates and the kingdom of Saudi Arabia The legal definition and the economic definition of taxes differ in that economists do not regard many transfers to governments as taxes. For example, some transfers to the public sector are comparable to prices. Examples include tuition at public universities and fees for utilities provided by local governments. Governments also obtain resources by "creating" money and coins (for example, by printing bills and by minting coins), through voluntary gifts (for example, contributions to public universities and museums), by imposing penalties (such as traffic fines), by borrowing, and by confiscating wealth. From the view of economists, a tax is a non-penal, yet compulsory transfer of resources from the private to the public sector levied on a basis of predetermined criteria and without reference to specific benefit received. In modern taxation systems, governments levy taxes in money; but in-kind and corvée taxation are characteristic of traditional or pre-capitalist states and their functional equivalents. The method of taxation and the government expenditure of taxes raised is often highly debated[by whom?] in politics and economics. Tax collection is performed by a government agency such as the Canada Revenue Agency, the Internal Revenue Service (IRS) in the United States, or Her Majesty's Revenue and Customs (HMRC) in the United Kingdom. When taxes are not fully paid, the state may impose civil penalties (such as fines or forfeiture) or criminal penalties (such as incarceration) on the non-paying entity or individual. Money provided by taxation has been used by states and their functional equivalents throughout history to carry out many functions. Some of these include expenditures on war, the enforcement of law and public order, protection of property, economic infrastructure (roads, legal tender, enforcement of contracts, etc.), public works, social engineering, subsidies, and the operation of government itself. A portion of taxes also go to pay off the state's debt and the interest this debt accumulates. Governments also use taxes to fund welfare and public services. These services can include education systems, health care systems, pensions for the elderly, unemployment benefits, and public transportation. Energy, water and waste management systems are also common public utilities. Colonial and modernizing states have also used cash taxes to draw or force reluctant subsistence producers into cash economies.
  • 3. 3 DEFINITION OF TAX: “Compulsory monetary contribution to the state's revenue, assessed and imposed by a government on the activities, enjoyment, expenditure, income, occupation, privilege, property, etc., of individuals and organizations.” TYPES OF TAX There are two types of taxes 1. Direct Tax 2. Indirect Tax DIRECT TAXES: A tax that is paid directly by an individual or organization to the imposing entity. A taxpayer pays a direct tax to a government for different purposes, including real property tax, personal property tax, income tax or taxes on assets. In a general sense, a direct tax is one imposed upon an individual person (juristic or natural) or property (i.e. real and personal property, livestock, crops, wages, etc.) as distinct from a tax imposed upon a transaction. In this sense, indirect taxes such as a sales tax or a value added tax (VAT) are imposed only if and when a taxable transaction occurs. People have the freedom to engage in or refrain from such transactions; whereas a direct tax (in the general sense) is imposed upon a person, typically in an unconditional manner, such as a poll-tax or head-tax, which is imposed on the basis of the person's very life or existence, or a property tax which is imposed upon the owner by virtue of ownership, rather than commercial use. Some commentators have argued that "a direct tax is one that cannot be shifted by the taxpayer to someone else, whereas an indirect tax can be." The unconditional, inexorable aspect of the direct tax was a paramount concern of people in the 18th century seeking to escape tyrannical forms of government and to safeguard individual liberty. The distinction between direct and indirect taxation was first extensively discussed by Adam Smith in his Wealth of Nations, as in the following passage: “It is thus that a tax upon the necessaries of life operates exactly in the same manner as a direct tax upon the wages of labour. if he is a manufacturer, will charge upon the price of his goods this rise of wages, together with a profit; so that the final payment of the tax, together with this overcharge, will fall upon the consumer.” The Pennsylvania Minority, a group of delegates to the 1787 U.S. Constitutional Convention who dissented from the document sent to the states for ratification, objected over this kind of taxation, and explained: “The power of direct taxation applies to every individual ... it cannot be evaded like the objects of imposts or excise, and will be paid, because all that a man hath will he give for his head. This
  • 4. 4 tax is so congenial to the nature of despotism, that it has ever been a favorite under such governments. ... The power of direct taxation will further apply to every individual ... however oppressive, the people will have but this alternative, either to pay the tax, or let their property be taken for all resistance will be vain. A Direct tax is a kind of charge, which is imposed directly on the taxpayer and paid directly to the government by the persons (juristic or natural) on whom it is imposed. A direct tax is one that cannot be shifted by the taxpayer to someone else. The some important direct taxes imposed in India are as under: Income Tax: Income Tax Act, 1961 imposes tax on the income of the individuals or Hindu undivided families or firms or co-operative societies (other tan companies) and trusts (identified as bodies of individuals associations of persons) or every artificial juridical person. The inclusion of a particular income in the total incomes of a person for income-tax in India is based on his residential status. There are three residential status, viz., (i) Resident & Ordinarily Residents (Residents) (ii) Resident but not Ordinarily Residents and (iii) Non Residents. There are several steps involved in determining the residential status of a person. All residents are taxable for all their income, including income outside India. Non residents are taxable only for the income received in India or Income accrued in India. Not ordinarily residents are taxable in relation to income received in India or income accrued in India and income from business or profession controlled from India. Corporation Tax: The companies and business organizations in India are taxed on the income from their worldwide transactions under the provision of Income Tax Act, 1961. A corporation is deemed to be resident in India if it is incorporated in India or if it’s control and management is situated entirely in India. In case of non resident corporations, tax is levied on the income which is earned from their business transactions in India or any other Indian sources depending on bilateral agreement of that country. Property Tax: Property tax or 'house tax' is a local tax on buildings, along with appurtenant land, and imposed on owners. The tax power is vested in the states and it is delegated by law to the local bodies, specifying the valuation method, rate band, and collection procedures. The tax base is the annual ratable value (ARV) or are abased rating. Owner-occupied and other properties not producing rent are assessed on cost and then converted into ARV by applying a percentage of cost, usually six percent. Vacant land is generally exempted from the assessment. The properties lying under control of Central are exempted from the taxation. Instead a 'service charge' is permissible under executive order. Properties of foreign missions also enjoy tax exemption without an insistence for reciprocity. Inheritance (Estate) Tax: An inheritance tax (also known as an estate tax or death duty) is a tax which arises on the death of an individual. It is a tax on the estate, or total value of the money
  • 5. 5 and property, of a person who has died. India enforced estate duty from 1953 to 1985. Estate Duty Act, 1953 came into existence w.e.f. 15th October, 1953. Estate Duty on agricultural land was discontinued under the Estate Duty (Amendment) Act, 1984. The levy of Estate Duty in respect of property (other than agricultural land) passing on death occurring on or after 16th March, 1985, has also been abolished under the Estate Duty (Amendment) Act, 1985. Gift Tax: Gift tax in India is regulated by the Gift Tax Act which was constituted on 1st April, 1958. It came into effect in all parts of the country except Jammu and Kashmir. As per the Gift Act 1958, all gifts in excess of Rs. 25,000, in the form of cash, draft, check or others, received from one who doesn't have blood relations with the recipient, were taxable. However, with effect from 1st October, 1998, gift tax got demolished and all the gifts made on or after the date were free from tax. But in 2004, the act was again revived partially. A new provision was introduced in the Income Tax Act 1961 under section 56 (2). According to it, the gifts received by any individual or Hindu Undivided Family (HUF) in excess of Rs. 50,000 in a year would be taxable. Indirect Tax: An indirect tax is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the customer). An indirect tax is one that can be shifted by the taxpayer to someone else. An indirect tax may increase the price of a good so that consumers are actually paying the tax by paying more for the products. The some important indirect taxes imposed in India are as under: Customs Duty: The Customs Act was formulated in 1962 to prevent illegal imports and exports of goods. Besides, all imports are sought to be subject to a duty with a view to affording protection to indigenous industries as well as to keep the imports to the minimum in the interests of securing the exchange rate of Indian currency. Duties of customs are levied on goods imported or exported from India at the rate specified under the customs Tariff Act, 1975 as amended from time to time or any other law for the time being in force. Under the custom laws, the various types of duties are leviable. (1) Basic Duty: This duty is levied on imported goods under the Customs Act, 1962. (2) Additional Duty (Countervailing Duty) (CVD): This is levied under section 3 (1) of the Custom Tariff Act and is equal to excise duty levied on a like product manufactured or produced in India. If a like product is not manufactured or produced in India, the excise duty that would be leviable on that product had it been manufactured or produced in India is the duty payable. If the product is leviable at different rates, the highest rate among those rates is the rate applicable. Such duty is leviable on the value of goods plus basic custom duty payable. (3) Additional Duty to compensate duty on inputs used by Indian manufacturers: This is levied under section 3(3) of the Customs Act. (4) Anti-dumping Duty: Sometimes, foreign sellers abroad may export into India goods at prices below the amounts charged by them in their domestic markets in order to capture Indian markets to the detriment of Indian industry. This is known as dumping. In order to prevent dumping, the Central Government may levy additional duty equal to the margin of dumping on such articles. There are however certain restrictions on imposing dumping duties in case of countries which are signatories to the GATT or on countries given "Most Favoured Nation Status" under agreement. (5) Protective Duty: If the Tariff
  • 6. 6 Commission set up by law recommends that in order to protect the interests of Indian industry, the Central Government may levy protective anti-dumping duties at the rate recommended on specified goods. Central Excise Duty: The Central Government levies excise duty under the Central Excise Act, 1944 and the Central Excise Tariff Act, 1985. Central excise duty is tax which is charged on such excisable goods that are manufactured in India and are meant for domestic consumption. The term "excisable goods" means the goods which are specified in the First Schedule and the Second Schedule to the Central Excise Tariff Act 1985. It is mandatory to pay Central Excise duty payable on the goods manufactured, unless exempted eg; duty is not payable on the goods exported out of India. Further various other exemptions are also notified by the Government from the payment of duty by the manufacturers. Various Central Excise are: (1) Basis Excise Duty: Excise Duty, imposed under section 3 of the ‘Central Excises and Salt Act’ of 1944 on all excisable goods other than salt produced or manufactured in India, at the rates set forth in the schedule to the Central Excise tariff Act, 1985, falls under the category of Basic Excise Duty In India. (2) Special Excise Duty: According to Section 37 of the Finance Act, 1978, Special Excise Duty is levied on all excisable goods that come under taxation, in line with the Basic Excise Duty under the Central Excises and Salt Act of 1944. Therefore, each year the Finance Act spells out that whether the Special Excise Duty shall or shall not be charged, and eventually collected during the relevant financial year. (2) Additional Duty of Excise: Section 3 of the ‘Additional Duties of Excise Act’ of 1957 permits the charge and collection of excise duty in respect of the goods as listed in the Schedule of this Act. (4) Road Cess: (a) Additional Duty of Excise on Motor Spirit: This is leviable by the Finance Act (No.2), 1998. (b) Additional Duty of Excise on High Speed Diesel Oil: This is leviable by the Finance Act, 1999. (5) Surcharge: (a) Special Additional Duty of Excise on Motor Spirit: This is leviable by the Finance Act, 2002. (b) Surcharge on Pan Masala and Tobacco Products: This Additional Duty of Excise has been imposed on cigarettes, pan masala and certain specified tobacco products, at specified rates in the Budget 2005-06. Biris are not subjected to this levy. (6) National Calamity Contingent Duty (NCCD): NCCD was levied on pan masala and certain specified tobacco products vide the Finance Act, 2001. The Finance Act, 2003 extended this levy to polyester filament yarn, motor car, two wheeler and multi-utility vehicle and crude petroleum oil. (7) Education Cess: Education Cess is leviable @2% on the aggregate of duties of Excise and Secondary and Higher Education Cess is Leviable @1% on the aggregate of duties of Excise. (8) Cess - A cess has been imposed on certain products. Service Tax: The service providers in India except those in the state of Jammu and Kashmir are required to pay a Service Tax under the provisions of the Finance Act of 1994. The provisions related to Service Tax came into effect on 1st July, 1994. Under Section 67 of this Act, the Service Tax is levied on the gross or aggregate amount charged by the service provider on the receiver. However, in terms of Rule 6 of Service Tax Rules, 1994, the tax is permitted to be paid on the value received. The interesting thing about Service Tax in India is that the Government
  • 7. 7 depends heavily on the voluntary compliance of the service providers for collecting Service Tax in India. INDIRECT TAX: An indirect tax (such as sales tax, a specific tax, value added tax (VAT), or goods and services tax (GST)) is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the consumer). The intermediary later files a tax return and forwards the tax proceeds to government with the return. In this sense, the term indirect tax is contrasted with a direct tax which is collected directly by government from the persons (legal or natural) on which it is imposed. Some commentators have argued that "a direct tax is one that cannot be shifted by the taxpayer to someone else, whereas an indirect tax can be." An indirect tax may increase the price of a good so that consumers are actually paying the tax by paying more for the products. Examples would be fuel, liquor, and cigarette taxes. An excise duty on motor cars is paid in the first instance by the manufacturer of the cars; ultimately the manufacturer transfers the burden of this duty to the buyer of the car in form of a higher price. Thus, an indirect tax is such which can be shifted or passed on. The degree to which the burden of a tax is shifted determines whether a tax is primarily direct or primarily indirect. This is a function of the relative elasticity of the supply and demand of the goods or services being taxed. Under this definition, even income taxes may be indirect. In fact, in the United States, the federal income tax has always been, since its inception on July 1, 1862, an indirect tax (more specifically an excise), even though, during the 1940s, its application grew from a historical average of about 8% of the population owing and paying it to around 90% of the population paying it (though not owing it), as a measure to support the war effort. The term indirect tax has a different meaning for U.S. constitutional law purposes: see direct tax and excise tax in the United States. Sales Tax: Sales Tax in India is a form of tax that is imposed by the Government on the sale or purchase of a particular commodity within the country. Sales Tax is imposed under both, Central Government (Central Sales Tax) and State Government (Sales Tax) Legislation. Generally, each State follows its own Sales Tax Act and levies tax at various rates. Apart from sales tax, certain States also imposes additional charges like works contracts tax, turnover tax and purchaser tax. Thus, Sales Tax Acts as a major revenue-generator for the various State Governments. From 10th April, 2005, most of the States in India have supplemented sales tax with a new Value Added Tax (VAT). Value Added Tax (VAT): The practice of VAT executed by State Governments is applied on each stage of sale, with a particular apparatus of credit for the input VAT paid. VAT in India classified under the tax slabs are 0% for essential commodities, 1% on gold ingots and expensive stones, 4% on industrial inputs, capital merchandise and commodities of mass consumption, and
  • 8. 8 12.5% on other items. Variable rates (State-dependent) are applicable for petroleum products, tobacco, liquor, etc. VAT levy will be administered by the Value Added Tax Act and the rules made there-under and similar to a sales tax. It is a tax on the estimated market value added to a product or material at each stage of its manufacture or distribution, ultimately passed on to the consumer. Under the current single-point system of tax levy, the manufacturer or importer of goods into a State is liable to sales tax. There is no sales tax on the further distribution channel. VAT, in simple terms, is a multi-point levy on each of the entities in the supply chain. The value addition in the hands of each of the entities is subject to tax. VAT can be computed by using any of the three methods: (a) Subtraction method: The tax rate is applied to the difference between the value of output and the cost of input. (b) The Addition method: The value added is computed by adding all the payments that is payable to the factors of production (viz., wages, salaries, interest payments etc). (c) Tax credit method: This entails set-off of the tax paid on inputs from tax collected on sales. DISTINCTION BETWEEN DIRECT & INDIRECT TAX DIRECT TAX INDIRECT TAX 1. Direct tax is a tax which is charged on the income of a person 1. Indirect tax is a tax which is charged on the expenses of a person i.e. on goods and services 2. The rules regulations and laws of this tax is framed by the central government. 2. The rules and regulations and law of this tax is framed by the central as well as state government. 3. The burden of this tax cannot be shifted from one person to another. 3. The burden of this tax will always be shifted from one person to another. 4. Examples : Income tax and wealth tax 4. Example: service tax, VAT.
  • 9. 9 RESIDENTIAL STATUS Every assessee is Either Resident or Non‐Resident. Based on legal status of the assessee there are different provisions, which decide whether a particular assessee is resident or non‐resident.If an assessee becomes Resident as per the provisions of the act then it is to be decided further, whether he is: 1. Resident and Ordinary Resident OR 2. Resident but Not Ordinary Resident. RESIDENTIAL STATUS OF AN INDIVIDUAL — SEC. 6 (1) For an individual to become Resident he has to satisfy any one of the following two conditions: 1. He should have been in India in the year for which Residential Status is to be decided for a period amounting to 182 days or more. OR 2. Within the 4 years preceding to the year for which residential status is to be decided, he should have been in India for a period amounting to 365 days or more and should have been in India for 60 days or more in the year for which Residential Status is to be decided. Exception to condition 2: An Indian Citizen or an Indian member of a crew of an Indian ship who leaves India in any previous year for employment outside OR an Indian Citizen or a person of Indian origin who is outside India and comes on a visit to India, in the second part of the condition no.2 the words 60 days should be replaced by 182 days. It is clear that condition no.2 becomes non‐functional in case of such assesses. A person is deemed to be of Indian origin if he or either of his parents or any of his grandparents was born in undivided India. If an individual becomes a Resident it is to be decided further which type of Resident he is. These provisions are discussed in Section 6 (6) For an individual to become Resident and Ordinary Resident he has to satisfy both the conditions given below: ‐ 1. He should have been resident in India at least 2 out of 10 previous years, preceding to the previous year in which he is resident.
  • 10. 10 AND 2. He should have been in India for a period amounting to 730 days or more in 7 years preceding to the previous year in which he is resident. If assessee does not satisfy any one of the above mentioned conditions (or both) his Residential Status will be Resident but Not Ordinary Resident. RESIDENTIAL STATUS OF HUF, FIRM AND AOP OR BOI SEC. 6 (2) HUF, Firm or AOP is said to be Resident in India in any previous year if the control and management thereof is situated either partly or wholly in India. RESIDENTIAL STATUS OF COMPANY SEC. 6 (3) A company is said to be Resident in India in any previous year if: 1) It is an Indian company or 2) During the previous year control and management of its affairs is situated wholly in India. RESIDENTIAL STATUS OF OTHER ASSESSEES Sec. 6 (4) Any other assessee is said to be Resident in India in any previous year if the control & management of its affairs is wholly or partly situated in India. RESIDENT AND ORDINARY RESIDENT: Sec. 6 (6) 1. H.U.F.: ‐ H.U.F. is said to be Ordinary Resident in any previous year if its ‘Karta’ is resident and Ordinary Resident in that previous year. 2. Firm, AOP, Company and All Other Assesses: ‐ The term ‘Ordinary Resident’ is not applicable to other assesses. They are either Resident or Non Resident.
  • 11. 11 SCOPE OF TOTAL INCOME On what income an assessee will pay tax in India depends upon his residential status. Scope of total income is explained in the following chart: ‐ INCOME :‐ A. INDIAN INCOME 1. Received or deemed to be received in India 2. Accruing or arising or deemed to accrue or arise in India. B. FOREIGN INCOME ACCRUING OR ARISING OUTSIDE INDIA & RECEIVED OUTSIDE INDIA :‐ 1. From a business Controlled from India or Profession setup in India. 2. From a business controlled from outside India or profession set up outside India. Note : - If in respect of any business, operations are not carried out in India it will be treated as Foreign income even if it is controlled from India. However, if such an income is received in India it will be treated as Indian Income. TAXABILITY BASED ON RESIDENTIAL STATUS 1. Resident and Ordinary Resident : Has to pay Income‐ tax in India on total income earned by him. i.e. Indian as well as Foreign Income. 2. Resident but Not Ordinary Resident : Has to pay Income‐tax in India on total income earned by him except income from business controlled from outside India or profession setup outside India. 3. Non‐Resident : Has to pay Income‐tax in India only on Indian income. SECTION 7 : INCOME DEEMED TO BE RECEIVED IN INDIA Income deemed to be received in India in the previous year is also included in the taxable income of the assessee. The following income shall be deemed to be received in India: (a) Annual accretion to the credit balance of an employee in the case of recognised provident fund to the extent provided under the rules. (b) Excess contribution of employer in case of recognised provident fund to the extent provided under the rules.
  • 12. 12 c) Transfer balance in a recognised provident fund to the extent as provided under the rules. SECTION 8 : DIVIDEND INCOME Any dividend declared by a company or distributed or paid by it shall be deemed to be the income of the previous year in which it is so declared, distributed or paid, as the case may be; Any interim dividend shall be deemed to be the income of the previous year in which the amount of such dividend is unconditionally made available to the member who is entitled to it. SECTION 9 : INCOME DEEMED TO ACCRUE OR ARISE IN INDIA 1) All income accruing or arising through or from: a. Any business connection in India. b. Any property in India. c. Any asset or source of income in India. d. Transfer of capital asset situated in India. 2) Salaries payable for services rendered in India will be called Indian income. 3) Salary received by Indian National from the Government in respect of services rendered outside India is an Indian income. 4) Any dividend paid by an Indian company is considered as an Indian income. Tax incidences on income from different sources vary based on the residential status of an assessee – Sec 5. These are summarized as under:
  • 13. 13 SOURCES OF INCOME Source of income Resident And Ordinarily resident Resident but Not Ordinarily resident Non Resident Indian Income Income earned and received or deemed to be earned and received in India. Yes Yes Yes Income earned or deemed to be earned outside India but received in India. Yes Yes Yes Income earned or deemed to be earned in India but received outside India. Yes Yes Yes Foreign Income Income earned and received or deemed to be earned and received outside India from a business controlled from or Profession setup in India. Yes Yes No Income earned and received or deemed to be earned and received outside India from a business controlled from or Profession setup outside India. Yes No No Non-Business Income earned and received or deemed to be earned and received outside India Yes No No
  • 14. 14 EXCLUSIONS FROM TOTAL INCOME (SECTION 10) Under Section 10 of Income Tax Act of 1961 certain income is exempted from tax either fully or partially. In other words it is a list of tax‐free income in the hands of the assessee and though it is an income of the year assessee is not required to pay tax on it. Agricultural income Sec. 10 (1): ‐ For an income to be called an agricultural income conditions to be satisfied are‐ (a) Rent or revenue should be derived from land. (b) Land should be used for agricultural purpose. (c) The land should be situated in India. Examples: ‐ 1. Income from lease of agricultural land. 2. 2 Income from land used for agricultural purpose e.g. produce grown for consumption by man (grains, vegetables or fruits) or animals (grass or pastures); cash crops (cotton jute etc.), luxury items such as coffee, tobacco; crops grown for self‐consumption etc; 3. Compensation received from Insurance Company for damage to tea garden. 4. Income from growing flowers. 5. 5 Salary or interest on capital received by a partner from a firm engaged in agriculture (as salary or interest is only a way of distributing profits). Examples of Non agricultural income: ‐ 1. Income not directly derived from land: Interest on arrears of rent; dairy farming, poultry farming, dividend received from a limited company having only agricultural income; salary of a manager of an agricultural estate, rent for land used for storing crops; manufacture of salt from sea‐water. 2. Income without performing basic agricultural operations: Sale of plants which have grown spontaneously (on their own without any sowing of seeds e.g. mushrooms); sale of trees which were already standing on the agricultural estate when purchased. 3. Income from produce sold by others and not by the cultivator: Sale of agricultural produce received as interest on loan; received as price for water supplied to agricultural land; sale of agricultural produce by a broker. 2. Receipt from H.U.F. Sec. 10 (2): Any amount received by member of H.U.F. out of the family income is exempt from tax. 3. Partners Share in the profits of the firm Sec. 10 (2A): Partner of the firm is not required to pay tax in individual capacity on his share in profits of the firm.
  • 15. 15 4. Leave Travel Concession Sec. 10 (5): It is the amount given by the employer to the employee for traveling while on leave or to settle at any place in India after retirement. Subject to certain restrictions this income is exempt from tax in respect of travel concession received by an assessee from his employer or former employer: (a) For himself & his family in connection with his proceeding to any place in India. (b) For himself & his family in connection with his proceeding to any place in India after retirement from service or after termination of his service. However, exemption under this section is restricted to amount actually spent by the assessee. For the purpose of this section Family in relation to any individual means: i. The spouse and children of the individual. ii. The parents, brothers & sisters of the individual or any of them wholly or mainly dependent on the individual. Question: Mr. Brij Mohan earns the following income during the previous year 2013-14. Compute his Gross total income for assessment year 2014-15 if he is (i)resident and ordinarily resident. (ii)resident but not ordinarily resident. (iii)non-resident. (1)Dividend from an Indian company, received in Japan 120000 (2)Profit on sale of machinery in India, but received in Japan 225000 (3)Profits from business in Bombay, managed from Japan 145000 (4)Profits from business in Japan, managed from there, received there 15000 (5)Income from house property in India 15000 (6)Income from property in Japan and received there 75000 (7)Income from agriculture in Japan being invested there 65000 (8)Fees for technical services rendered in India but received in Japan 80000 (9)Interest on Government securities accrued in India but received in Japan 40000
  • 16. 16 (10)Interest on Japan Government securities, received in India Solution: Particulars ROR NOR NR 1.Income accruing/arising in India but exempt u/s 10(34) -------- -------- -------- 2.Income accruing /arising in India 1,20,000 1,20,000 1,20,000 3.Income accruing/arising in India 2,25,000 2,25,000 2,25,000 4.Income accruing/arising and received outside India 1,45,000 ------- ------- 5.Income accruing/a Income accruing/arising in India 1,50,000 1,50,000 1,50,000 6.Income accruing/arising outside India and received outside India 1,50,000 ------- ------- 7.Income accruing/arising outside India and received outside India 75,000 ------- ------- 8.Income accruing/arising in India 65,000 65,000 65,000 9.Income accruing/arising in India 80,000 80,000 80,000 10.Income received in India 40,000 40,000 40,000 GROSS TAXABLE INCOME 10,50,000 6,80,000 6,80,000
  • 17. 17 SALARY SALARY (SECTION 15 TO 17) Salary means remuneration received by an employee from employer or former employer in any form such as gift, pension, gratuity, usual remuneration etc. Some important points regarding income taxable under the head Salary: ‐ 1) Employer—employee relationship. 2) For tax purpose there is no difference between salary & wages. 3) Even gift received from employer is considered as salary income. 4) MP or MLA is not considered as an employee of the Government. Therefore, Salary & allowances received by him are not chargeable under the head ‘Salary’. They are to be included under the head ‘Income from Other Sources’. BASIS OF CHARGE: Under section 15 following income is chargeable to tax under the head ‘Salary’:‐ (1) Any salary due from an employer or a former employer to an assessee in the previous year whether paid or not. (2) Any salary paid or allowed to him in the previous year by or on behalf of an employer or former employer though not due. (3) Any arrears of salary paid or allowed to him in the previous year by or on behalf of employer or former employer if not charged to tax earlier. (4) Any salary, bonus, commission or remuneration due to or received by Partner of the firm from the firm shall not be regarded as Salary for the purpose of this section. Under Section 17(1), SALARY is defined as: a. Wages; b. any annuity or pension; c. any gratuity; d. any fees, commission, perquisite or profits in lieu of or in addition to any salary or wages; e. any advance of salary; f. any payment received in respect of any period of leave not availed by him;
  • 18. 18 g. the portion of the annual accretion in any previous year to the balance at the credit of an employee participating in Recognised Provident Fund to the extent it is taxable; and h. transferred balance in a Recognised Provident Fund to the extent it is taxable; and i. the contribution made by the Central Government in the previous year, to the account of an employee under a pension scheme referred to in section 80CCD. PERQUISITES‐ SECTION 17 (2): Perquisite is additional benefit received by an employee over and above his basic salary but it is different from allowance. Perquisite may be paid voluntarily or by virtue of service contract. Under Section 17 (2) Perquisite includes: ‐ 1. The value of rent‐free accommodation provided to the assessee. 2. Value of concession given in rent relating to accommodation provided to the assessee. 3. Value of any benefit granted free of cost or at a concessional rate in respect of following persons: ‐ (a) By a company to an employee who is also a Director of the company. (b) By a company to an employee being a person who has substantial interest in the company. (Person holding 20% or more equity shares carrying voting rights is known as person having substantial interest in the company.) (c) By an employer to an employee whose income under the head salary exceeds ` 50,000 excluding the value of non‐monetary perquisites. For the purpose of this clause, use of any vehicle provided by a company or an employer for journey by the assessee from his residence to his office or other place of work, or from such office or place to his residence shall not be regarded as benefit granted free of cost or at a concessional rate. 4. Any sum payable by the employer in respect of any obligation but for which payment would have been made by the assessee. 5. Any sum payable by the employer whether directly or through a fund to effect an assurance on the life of an assessee excluding contribution made to recognised provident fund or any other prescribed funds. 6. The value of any other fringe benefit or amenity as may be prescribed.
  • 19. 19 TAXABILITY OF PERQUISITES For this purpose Perquisites can be classified into 3 categories: Perquisites taxable in all cases (i.e. Specified & Non‐Specified employees): ‐ 1) Rent‐free furnished or unfurnished accommodation in cases other than: a. Rent free accommodation given in a remote area. b. A temporary accommodation of 800 sq.ft. given at a mining site. c. Hotel accommodation given after transfer not exceeding 15 days. d. Rent free official accommodation provided to a Judge of High Court or Supreme Court or an official of Parliament or a Union Minister and a Leader of opposition in Parliament. 2) Furnished or unfurnished accommodation is provided in above cases at a nominal rent 3) Service of a sweeper, a gardener, a watchman or a personal attendant provided by an employer to an employee without charge or with nominal charge if Domestic servant is engaged by employee and salary is paid by employer. 4) Supply of gas, electric energy or water for household consumption of employee without any charge or with nominal charge if connection is in the name of employee and bills are paid by employer [covered by sec. 17(2) (iv)] 5) Education facility to any household members of the employee without any charge or with nominal charge if bills are issued in the name of employee but paid by employer [covered by sec. 17 (2) (iv)] 6) Any sum paid by employer in respect of an obligation which for such payment, would have been payable by the employee. 7) Amount payable by an employer directly or indirectly to effect an assurance on the life of employee or to effect a contract of an annuity (not being payments to recognised provident fund, etc.) 8) Interest‐free loan or concessional loan to an employee where loan exceeds ` 20,000. 9) Providing use of any other movable asset to an employee or any member of his household 10) Transfer of any movable asset to an employee or any member of his household 11) Any medical facility in India provided to an employee or any member of his family when bills are
  • 20. 20 in the name of employee and paid or reimbursed by employer in excess of 15,000 per assessment year 12) Value of any specified security or sweat equity shares allotted or transferred by the employer or former employer free of cost or at concessional rate (applicable from the assessment year 2012‐13). 13) Any contribution to an approved superannuation fund by the employer in respect of the employee to the extent it exceeds 1 lakh (applicable from the assessment year 2012‐13). 14) Value of any other fringe benefit or amenity notified for the purpose of section 17(3) (viii) (applicable from the assessment year 2012‐13). 15) Travelling, touring accommodation. 16) Free food and beverages except if provided in office hours and the expenditure is 50 per meal or less. 17) Gift or gift voucher of the value of not less than ` 5,000 (if gift is in kind). 18) Club expenditure incurred by the employer in respect of personal use. 19) Credit card payments by the employer in respect of household use. Perquisites taxable only for specified employees: ‐ 1) Services of a sweeper, a gardener, a watchman or a personal attendant provided by an employer to an employee without charge or with nominal charge if domestic servant is engaged by employer and salary is paid by employer. 2) Supply of gas, electric energy or water for household consumption of employee without any charge or with nominal charge if connection is in the name of employer and bills are paid by employer 3) Education facility to any household members of the employee without any charge or with nominal charge if bills are issued in the name of & paid by employer. 4) Any medical facility in India provided to an employee or any member of his family if bills are in the name of employer and paid or reimbursed by employer in excess of ` 15,000 per assessment year. 5) Car or any other automotive conveyance. 6) Transport facility by a transport undertaking (not being provided by railways or by an airline).
  • 21. 21 Perquisites not taxable in all cases: ‐ 1) Rent‐free furnished or unfurnished accommodation in cases mentioned below: ‐ a) Rent free‐accommodation given in a remote area. b) A temporary accommodation of 800 sq. ft given at mining site, etc. c) Hotel accommodation given after transfer for not exceeding 15 days d) Rent‐free official accommodation provided to a Judge of High Court or Supreme Court or an official of Parliament or a Union Minister and a Leader of opposition in Parliament. 2) Leave travel concession to employees subject to provision of section 10(5) 3) Providing use of computer & laptop to an employee or any member of his household. 4) Providing medical facilities to an employee or any member of his family: ‐ a) in a hospital maintained by the Government or any local authority or approved by the Government for the medical treatment of Government employees. b) in a hospital maintained by the employer. c) in respect of prescribed diseases or ailments, in any hospital approved by the Chief Commissioner having regard to the prescribed guidelines. 5) Health insurance premium of the employee or any member of his household paid by the employer 6) Any other medical facility in India provided to an employee or any member of his family a) Bills are in the name of employer and paid or reimbursed by employer up to 15,000 per assessment year b) Bills are in the name of employee and paid or reimbursed by employer up to 15,000 per assessment year c) Medical facility outside India if a few conditions are satisfied 7) Any perquisite other than taxable perquisites already mentioned (few examples are car, holiday home, club, free tea / refreshment / lunch, gift, etc.)
  • 22. 22 Section 17 (3) Profits in Lieu of Salary It is not a regular payment received from the employer. It is received instead of salary. It includes: 1) The amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his employment or the modification of the terms and conditions relating there to; 2) Any payment other than any payment referred to in clause (10) (clause (10 A)) (Clause (10B), Clause (11) Clause (12) Clause (13) or clause (13A) of section 10, due to or received by an assessee from an employer or a former employer or from provident fund or other fund, to the extent to which it does not consist of contributions by the assessee or interest on such contributions; 3) Any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy. 4) Any amount due to or received, whether in lump sum or otherwise, by an assessee from any person ‐ a) Before his joining any employment with that person, or b) After termination of his employment with that person.
  • 23. 23 TAXABLE PROVIDENTFUND Particulars Statutory Recognised Unrecognised Public ProvidentFund ProvidentFund ProvidentFund Provident Fund (PPF) 1) Who runs the Government Respective Respective Nationalised Fund employer Employer Banks 2) Contribution Nottaxable. Nottaxable Nottaxable NotTaxable made by Deductionu/s Deductionu/s80C No deductionu/s Deductionu/s Employee 80C 80C 80C 3) Contribution Totallyexempt Exemptonlyup Totallyexempt Employer made by to 12% of basic doesnot Employer Salary contribute 4) Interestearned Totallyexempt Exemptupto8.5% Totallyexempt Exemptu/s p.a. on the fund 10(15) 5) Maturity on Totallyexempt Totallyexempt 1) Employee’s Term of this Retirement ownsaving‐tax account is free 15 years 2) Int. onhis whichmay savings‐fully be extended taxedas other upto20/25 Income years 3) employer’s maturityare Contributionfully fullyexempt taxedas salary Income 4) Int. on Employer’s contributionfully taxedas salary income Note :‐ “Salary” referred above is basic salary. It includes D.A. if terms of employment so provide. By adding salary, taxable perquisites and profit in lieu of salary we get Gross Salary of an employee. From Gross Salary certain deductions are allowed u/s 16 & only remaining amount is considered as Net Taxable Salary.
  • 24. 24 DEDUCTIONS FROM SALARY INCOME—SECTION 16 ENTERTAINMENT ALLOWANCE U/S 16 (ii): If any entertainment allowance is granted to the assessee who is in receipt of salary from the government deduction is allowed against it u/s 16 (ii) as follows: ‐ Deduction for Entertainment Allowance Government employee Other employees 1) 1/5th of Basic Salary Nil OR 2) ` 5,000 OR 3) Entertainment Allowance actually received Whichever is less. TAX ON EMPLOYMENT U/S 16 (iii) Any tax paid by an employee on employment to the state Govt. is fully deductible from taxable salary e.g. Profession tax charged by Govt. of Maharashtra. If profession tax is paid by the employer, it is first included in taxable salary as perquisite and then deduction u/s 16 (iii) is allowed.
  • 25. 25 GRATUITY Government POGA Other Employees Employees Employees Fully Exempt 15 26⁄ X Last Salary X Completed 1 2⁄ X Average X completed pm. years of salary years of service service Actual Received Actual received Maximum Rs. 1000000 Maximum Rs. 1000000 (WHICHEVER IS LESS) (WHICHEVER IS LESS) Last Salary pm. Average Salary = Basic salary = Average basic salary + + DA (all) Average DA (in terms) + Average Turnover Commission Average of last 10 months preceding the month of retirement
  • 26. 26 FORM NO.16 [See rule 31(1)(a)] PART A Certificate under section 203 of the Income-tax Act, 1961 for tax deducted at source on salary Certificate No. ZTIYHZI Last updated on 26 AUGUST 2015 Name and address of the Employer Name and address of the Employee LIC BR.890 MALAD GR FLOOR, HEMU CLASSIC BLDG, S.V.RD MALAD WEST,MUMBAI 400064 MAHARASHTRA +(91) 22-61221250 bo_890@licindia.com ROHIT LALAN MOURYA CHITRAKUT SEVA SAMITI VASARI HILL LINK RD GOREGAON WEST MUMBAI 400062 MAHARASHTRA +(91) 9768832877 PAN of the Deductor TAN of the Deductor PAN of the Employee Employee Reference No. provided by the Employer (If available) AAACL0582H MUML04671C BWDPM0842C CIT (TDS) Assessment Year Period with the Employer From To
  • 27. 27 Address.The Commissioner of Income Tax (TDS) Room no.900A,9th Floor, K.G. Hospital, Charni Rd,Mumbai 400002 2015-16 01/04/2014 31/03/2015 Summary of amount paid/credited and tax deducted at source thereon in respect of the employee Quarter(s) Receipt Numb ers of original quarterly state ments of TDS under sub-se ction (3) of section 200 Amount p aid/credited Amount of tax deducted ( Rs. ) Amount of tax deposited/ remitted (Rs. ) Total (Rs.) 263264 24000 24000 I. DETAILS OF TAX DEDUCTED AND DEPOSITED IN THE CENTRAL GOVERNMENT ACCOUNT THROUGH BOOK ADJUSTMENT (The deductor to provide payment wise details of tax deducted and deposited with respect to the deductee) Sl. No. Tax Deposited in respect of the deductee Book Identification Number (BIN) Receipt numbers of DDO serial number in Date of transfer Status of
  • 28. 28 ( Rs. ) Form No. 24G Form No. 24G voucher (dd/mm/yyyy) matching with Form No.24G Total ( Rs. ) II. DETAILS OF TAX DEDUCTED AND DEPOSITED IN THE CENTRAL GOVERNMENT ACCOUNT THROUGH CHALLAN (The deductor to provide payment wise details of tax deducted and deposited with respect to the deductee) Sl. No. Tax Deposited in respect of the deductee ( Rs. ) Challan Identification Number (CIN) BSR Code of the Bank Branch Date on which tax deposited (dd/mm/yyyy) Challan Serial Number Status of matching with OLTAS 1. 24000 63903777 31/08/2015 0003 YES Total ( Rs. ) 24000 Verification
  • 29. 29 Notes: 1. Government deductors to fill information in item I if tax is paid without production of an income-tax challan and in item II if tax is paid accompanied by an income-tax challan. 2. Non-Government deductors to fill information in item II. 3. The deductor shall furnish the address of the Commissioner of Income-tax (TDS) having jurisdiction as regards TDS statements of the assessee. 4. If an assessee is employed under one employer only during the year, certificate in Form No. 16 issued for the quarter ending on 31st March of the financial year shall contain the details of tax deducted and deposited for all the quarters of the financial year. 5. If an assessee is employed under more than one employer during the year, each of the employers shall issue Part A of the certificate in Form No. 16 pertaining to the period for which such assessee was employed with each of the employers. Part B (Annexure) of the I,Mr.Rohit Lalan Mourya son/daughter of Lalan Mourya working in the capacity of Agency Manager (designation) do hereby certify that a sum of Rs.24000 [Rs. Twenty Four Thousand Only (in words)] has been deducted and deposited to the credit of the Central Government. I further certify that the information given above is true, complete and correct and is based on the books of account, documents, TDS statements, TDS deposited and other available records. Place Mumbai (Signature of person responsible for deduction of tax)Date 26/08/2015 Designation: Agency Manager Full Name: Mr.Rohit Lalan Mourya
  • 30. 30 certificate in Form No.16 may be issued by each of the employers or the last employer at the option of the assessee. PART B (Annexure) Details of Salary paid and any otherincome and tax deducted 1 Gross Salary (a) Salary as per provisions contained in sec.17(1)Rs.526888 (b) Value of perquisites u/s 17(2) (as per Form No.12BA, wherever applicable) Rs. (c) Profits in lieu of salary under section 17(3)(as per Form No.12BA, wherever applicable) Rs. (d) Total 2 Less: Allowance to the extent exempt u/s 10 Rs. 526888 Allowance Rs. Rs. 6400 Rs. 520488 Transport Allowance 6400 3 Balance(1-2)
  • 31. 31 4 Deductions : (a) Entertainment Allowance (b) Tax on Employment 5 Aggregate of 4(a) and (b) 6 Income chargeable under the head Salaries 7 Add: Any other income reported by the employee Interest on Housing Loan Rs. 126000 Gross Total Income Rs 1700 Rs. 1700 Rs.518788 Rs.126000 Rs. 6447888 (a) Entertainment allowance Rs. (b) Tax on employment Rs. 5 Aggregate of 4(a) and (b) Rs. 6 Income chargeable under the head 'salaries' (3-5) Rs. 7 Add: Any other income reported by the em ployee Rs. Rs. Income Rs. 8 Gross total income (6+7)
  • 32. 32 9 Deductions under Chapter VI-A (A) sections 80C, 80CCC and 80CCD (a) section 80C (i) PPF (ii) Insurance Premium (iii) ………………. (iv) ………………. (v) ………….…… (vi) ………….…… (vii) ………….…… (b) section 80CCC (c) section 80CCD Note: 1. Aggregate amount deductible under sections 80C, 80CCC and 80CCD(1) shall not exceed one lakh rupees. Rs.12000 Rs.138081 Gross Amount Rs. Rs. R s. R s. Rs. Rs. 150081 Deductible amount (B) Other sections (e.g. 80E, 80G, 80TTA, etc.) under Chapter VI-A.
  • 33. 33 Gross amount Qualifying amount Deductible amount (i) section 80D Rs. 8370 Rs. 8370 Rs. 8370 (ii) section……….. Rs. Rs. Rs. (iii) section……….. Rs. Rs. Rs. (iv) section……….. Rs. Rs. Rs. (v) section……….. Rs. Rs. Rs. 10 Aggregate of deductible amount under Chapter VI-A Rs. 158370 11 Total Income (8-10) Rs. 486420 12 Tax on total income Rs. 21642 13 Education cess @ 3% (on tax computed at S. No. 12) Rs. 649 14 Tax Payable (12+13) Rs. 22291 15 Less: Relief under section 89 (attach details) Rs 16 Tax payable (14-15) Rs. 22291 17 Tax Deducted at Source u/s 192 Rs. 24000 Verification I Mr.Rohit Lalan Mourya, son/daughter of Lalan Mourya working in the capacity of Agency Manager (designation) do hereby certify that the information given above is true, complete and correct and is based on the books of account, documents, TDS statements, and other available records. Place Mumbai (Signature of person responsible for deduction of tax)Date 26/08/2015
  • 34. 34 6. In items I and II, in column for tax deposited in respect of deductee, furnish total amount of TDS and education cess. BUSINESS / PROFESSION: Business is an activity of purchase and sell of goods with the intention of making profit Profession is an occupation requiring intellectual skill. E.g. Doctor, Lawyer etc. Vocation is an activity, which requires a special skill, which is used to earn income. e.g. Painter, Singer etc. For income tax purpose there is no difference between business income, profession income and vocation income. Section 2 ( 13 ) : Business Business includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. Thus business is any activity carried out with the intention to earn profit, whether such an activity is continuous or temporary is immaterial. In determining whether a particular transaction is an adventure in the nature of trade or not, total impression and effect of all relevant facts and circumstances of the transaction have to be seen. To bring a transaction within the term “ business”, the transaction must be a “trade” or in the nature of “trade”. Hence everything depends upon the facts and circumstances of the case. E.g. A person making investment of surplus funds in shares or debentures cannot be deemed to be carrying on the business of trading in shares although occasionally he may be selling “some” shares or debentures and making gains thereon. METHODS OF COMPUTING TAXABLE INCOME 1. Gross Sales or Gross fees as the case may be are to be taken as the base if Receipt and Payment A/c or cash Book is given. From this Gross income expenses which are specifically allowed by the income tax act are deducted to arrive at taxable income. Designation: Agency Manager Full Name: Mr.Rohit Lalan Mourya,
  • 35. 35 2. If profit & loss a/c or income & expenditure a/c is given Net Profit or (Surplus) is taken as the base and then following adjustments are made: ‐ 1) Expenses, which are debited, to profit & loss a/c, but disallowed by the Income Tax Act and either fully or partially are added back. 2) Expenses, which are not debited, to profit & loss a/c but which are allowed by the Income Tax Act are deducted. 3) Income that is credited to profit & loss a/c but not taxable at all or taxable under some different head is to be deducted. 4) Income that is not credited to profit & loss a/c, but which is chargeable to tax as business income is to be added. DEDUCTIONS FOR EXPENSES SPECIFICALLY ALLOWED SECTION 30 TO SECTION 43D 1. Rent, rates, taxes, repairs and insurance of building (Section 30): 1) If assessee has occupied the premises as a tenant, rent of the premises and if he has agreed to bear cost of repairs, such cost is allowed as deduction, provided it is not of capital nature. 2) If assessee has occupied premises as the owner; repairs, land revenue, local taxes, insurance premium etc. are allowed as deduction. However, no expenditure in form of capital expenditure is allowed. 2. Repairs & Insurance of machinery, Plant & Furniture (Sec.31): Amount paid on account of repairs and insurance premium against risk of damage in respect of machinery, plant & furniture are allowed as deduction provided they are not of capital nature. 3. Depreciation u/s 32: Under Section 32 depreciation on assets is allowed as deduction while computing income from business or profession. To claim this deduction following conditions should be satisfied: 1) Assessee should be owner of the asset.
  • 36. 36 2) Asset must be used for the business. 3) Such use must be in the previous year. Depreciation is allowed not on individual asset items, but on block of assets under following categories: ‐ 1) Buildings 2) Plant & Machinery 3) Furniture 4) Intangible Assets acquired after March 31, 1998 such as know‐ how, Patents, Trademarks, licenses, franchises or any other business or commercial rights of similar nature. The term plant includes ships, vehicles, books, scientific apparatus and surgical equipments used for the business but excludes tea bushes or live stock. If any asset falling in block of assets is acquired during the year and put to use during the previous year for less than 180 days depreciation on such asset shall be restricted to 50% of the normal depreciation. 4. Deduction u/s. 36 & 37: 1. Insurance: Section 36(1) (i)‐ Premium paid to cover the risk of damage or destruction of stocks, stores, cattle and on health of employees under the approved scheme. 2. Insurance Premium paid by Federal milk co‐op. society on the lives of cattle owned by the members of a Primary Milk Co‐op, Society affiliated to it. Section 36(1) (ia) 49 3. Premia for insurance on health of employees in accordance with scheme framed by GIC & approved by Central Government or any other insurer & approved by the Insurance Regulatory & Development Authority (only if paid by cheque) Section 36(1) (ib). 4. Bonus or commission paid to Employees: Section 36(1) (ii): It is allowed as deduction so far as they are not paid as profit or dividend. 5. Interest on borrowed capital: Section 36(1) (iii): ‐ It is allowed as deduction. However, interest paid by firm to its partners is allowed subject to provisions of Sections 40(b).
  • 37. 37 6. Discount on zero coupon bonds is deductible by issuing Company on pro rata Basis Sec.36(1)(iii a) 7. Contribution to recognised Provident fund or an approved super annuation fund: Section 36(1)(iv).Any sum paid by the assessee as an employer by way of contribution towards pension scheme. 8. Contribution to Pension Scheme: Sectlon 36(1)(iv a) Any contribution by an employer by way of contribution towards a pension scheme for an employee up to 10% of salary shall be allowed as deduction. 9. Contribution to approved Gratuity Fund Section 36(1)(v): ‐ Amount contributed to the fund which is for the exclusive benefit of the employees will be allowed as deduction. 10. Contributions received from employees (when deposited) Section 36(1)(va): ‐ Any contribution received from employees towards any funds for the welfare of the employees e.g. P.F. will be allowed as deduction when such contribution is credited to employees a/c on or before the due date. It is allowed as deduction not because it is an expenditure of the assessee. In fact, it is not at all an expenditure of the assessee. But when this amount is deducted from salary of employees, it is treated as an income under section 2(24)(x). Therefore, deduction is allowed when payment is made by the due date. 11. Animals used for the business: Section 36 (1) (vi): ‐ Deduction is allowed when animals have died or have become permanently useless. Amount of deduction will be difference between actual cost of the animals and amount realised if any in respect of carcasses of the animals. Deduction is allowed only if animals are used for the purpose of business but not as stock in trade. 12. Bad debts: Section 36(1)(vii) and Section 36(2): ‐ Deduction is allowed on this account if debts have arisen out of business transaction. It is the responsibility of the assessee to prove to the satisfaction of income tax officer that such debts are irrecoverable. 13. Expenditure for promoting family planning: Section 36(1)(ix): ‐ Only a company can claim this deduction. Any expenditure incurred by a company to promote family planning among its employees is allowed as deduction fully, provided it is revenue expenditure. Any capital expenditure on this account is allowed as deduction in 5 equal instalments. If profit is not sufficient to absorb this expenditure it can be carried forward to be set off in future. No
  • 38. 38 depreciation can be claimed under section 32 on capital assets used for promoting family planning and allowed as deduction under section 36(1)(ix). 14. Any amount of banking cash transaction tax paid during the year. 36(1)(xiii) 14. General Expenditure for the purpose of business or profession Section 37: ‐ Any other expenditure not covered by section 30 to 36 which is of revenue nature will be allowed as deduction provided it is incurred exclusively for the purpose of business or profession. 1. Embezzlement of cash. 2. Expenses on local festival such as Diwali, Muhurta etc. 3. Cash shortage found in the business at the end of the day 4. Entertainment Expenses 5. Advertisement Expenses 6. Travelling Expenses 7. Guest House Expenses. 8. Lawful expenses related to illegal business. 9. Premium on redemption of debentures 10. Discount on issue of debentures (on pro rata basis) Expenses Not Deductible Under Section 37 1. Donations 2. Charities 3. Gifts to relatives 4. Income tax 5. Wealth tax
  • 39. 39 6. Advance income tax 7. Fines and penalties for breach of any laws. 8. Personal Drawings 9. Salary to owner 10. Interest on proprietors capital 11. Capital expenditure 12. Purchase of an assets 13. Extension of building 14. Personal expenditure 15. Household expenses. 16. Drawings 17. Education expenses of children 18. Residential telephone bill 19. Residential electricity bill 20. Residential maintenance 21. Amount transferred to reserve 22. Personal Hotel expenses
  • 40. 40 Question: The following is the profit and loss account of the United Plastic for the P.Y. 2008-09 Rs. Rs. To Op. Stock 30,000 By Sales 6,10,000 “ Purchases 1,59,000 “ Dividends (Gross) 6,000 “ Wages and Salaries 50,000 “ Rent from staff quarters 7,000 “ Rent 20,000 “ Interest on Govt. Securities 50,000 “ Reserve for bad debts 10,000 Closing. Stock 25,000 Advertisement 5,000 Income from Smuggling 10,000 Depreciation on Machinery 5,000 “ Dividend from Foreign Co. (net) 2,000 “ Wealth tax 7,000 “ Interest * Reserve for IT 7,000 7,000 “ Sales Tax 15,000 “ Insurance 2,000 “ Donation 25,000 “ Loss on sale of old Typewriters 3,000 “ Computer 45,000 “ Staff Welfare Fund 40,000 “ Net Profit 2,80,000 7,10,000 7,10,000
  • 42. 42 CONCLUSION: Reforming taxation is an on going process, through which tax policy makers and tax administrators are continuously adapting their tax system to reflect changing economic, social and political circumstances. The present study examines the Taxation of Income in India during post liberalisation period and policy perspective in this regard. It has analysed the growth of income tax revenue, performance of Income Tax Department and perception of tax professionals regarding Income Tax System in India. With a view to have a proper understanding of the research topic important studies relating to personal income tax, capital gains taxation, agricultural taxation, efficiency of income tax administration etc. conducted in India have been reviewed. For evaluating growth of income tax revenue in India and performance of the income tax administration secondary data has been collected mainly from Finance Acts, Explanatory Memorandum on the Budget of the Central Government, Reports of the various committees/commissions, Indian Economic Survey, Income Tax Act 1961, Income Tax Rules 1962, various announcements, circulars and notifications of Central Board of Direct Taxes, Budget speeches of Finance Ministers, Reports of Comptroller and Auditor General of India on Direct Taxes .
  • 43. 43 BIBLIOGRAPHY  https://en.wikipedia.org/wiki/Tax  http://www.businessdictionary.com/definition/tax.html  http://mospi.nic.in/Mospi_New/upload/statistical_year_book_2011/SECTOR-1- INDIA%20AN%20OVERVIEW/CH-06- DIRECT%20&%20INDIRECT%20TAXES/DIRECT-INDIRECT%20TAX- WRITEUP.pdf  http://www.vazecollege.net/staffprofile/commercejunior/Unit1_2_3PDF.pdf  https://en.wikipedia.org/wiki/Indirect_tax  http://www.dvsca.net/admin/pdffiles/13597250832- Scope%20of%20Total%20Income%20and%20Residential%20status.pdf  http://www.vazecollege.net/staffprofile/commercejunior/Unit_4-SalaryPDF.pdf  http://www.vazecollege.net/staffprofile/commercejunior/Unit_6- Business_IncomePDF.pdf