Taxation is an important source of revenue for governments worldwide. Taxes are collected on income, sales, purchases, and properties to fund government operations. There are several principles of a good taxation system including fairness, adequacy, simplicity, transparency, and administrative ease. The Income Tax Act of 1961 currently governs income tax in India and has been amended several times since its enactment. The Act defines key terms like "previous year", "assessment year", "person", and outlines the different types of residential statuses (resident, resident but not ordinarily resident, non-resident) and their implications for tax liability.

1. BBA-III
Taxation Law

2. INTRODUCTION
Tax is today an important source of revenue for
governments in all the countries. It has become
inevitable imposition because it has great potentials for
raising funds for meeting the development and defense
needs of a nation. In other word taxes on income, sale,
purchase and properties were collected to run
Government machineries.

3. Principles of Good Taxation
System
 Fairness, or equity, means that everybody should
pay a fair share of taxes. There are two important
concepts of equity: horizontal equity and vertical
equity.
 Adequacy means that taxes must provide
enough revenue to meet the basic needs of
society. A tax system meets the test of adequacy
if it provides enough revenue to meet the demand
for public services, if revenue growth each year is
enough to fund the growth in cost of services, and
if there is enough economic activity of the type
being taxed so rates can be kept relatively low.

4.  Simplicity means that taxpayers can avoid a maze of
taxes, forms and filing requirements. A simpler tax system
helps taxpayers better understand the system and
reduces the costs of compliance.
 Transparency means that taxpayers and leaders can
easily find information about the tax system and how tax
money is used. With a transparent tax system, we know
who is being taxed, how much they are paying, and what
is being done with the money. We also can find out who
(in broad terms) pays the tax and who benefits from tax
exemptions, deductions, and credits.
 Administrative ease means that the tax system is not too
complicated or costly for either taxpayers or tax collectors.
Rules are well known and fairly simple; forms are not too
complicated; the state can tell if taxes are paid on time
and correctly, and the state can conduct audits in a fair

5. Income & Expences

6. Total Income Tax Collection

8. INCOME TAX ACT 1961

9. HISTORY
1857

10. • Income tax was first introduced in India in 1860 by the
British ruler James Wilson (who become 1st India’s
Finance Member), in order to meet heavy expenses and
losses suffered by the rulers due to India’s first freedom
movement of 1857. It was introduced as a temporary
revenue measure only for five years.
• The history of Income tax in India can be divided into
three periods:
 1860-1885
 1886-1914
 1914 to date

11. At present, the Income Tax Act 1961 is force in
India. The present Income tax act was enacted
in 1961, which came into force on 1st April
1962. In 1956, the government referred the
Income Tax Act to the Law commission which
submitted its report in 1958. Direct Taxes
Administration Enquiry Commission was
appointed in 19958 under the Chairmanship of
Shri Mahavir Tyagi. On the basis of
recommendations of both these bodies the
present IT Act was enacted. This Act of 1961
has since been amended number of times.

12. Income Tax
Definition
 Direct Tax
Direct tax is a direct from of tax where assesses is directly
taxed for his income
e.g. Income Tax, Service Tax & Wealth Tax
 Indirect Tax
Indirect tax is a direct from of tax where assesses is directly
taxed for his income
e.g. Sales Tax, VAT, Costume Duty

13. "Agricultural income"
 (1A) "Agricultural income" means - (a) any rent or revenue
derived from land which is situated in India and is used for
agricultural purposes;
 (b) Any income derived from such land by - (i) Agriculture; or
 (ii) The performance by a cultivator or receiver of rent-in-kind
of any process ordinarily employed by a cultivator or receiver
of rent-in-kind to render the produce raised or received by him
fit to be taken to market; or
 (iii) The sale by a cultivator or receiver of rent-in-kind of the
produce raised or received by him, in respect of which no
process has been performed other than a process of the nature
described in paragraph

14. Assessment Year -Sec.2(9)
The period of twelve month commencing on
1st. Day of
April every year e.g. A.Y.2022-2023
Assessment year means the financial
year immediately
succeeding the previous year, i.e. A.Y. 2022-2023 &
P.Y. 2021-2022

15. Previous Year-Sec.3
Previous year means the financial year immediately
preceding the assessment year.
The year in which income is earned.
From the assessment year 1989-90 onwards
all assesses are required to follow financial
year(i.e.1st.Apr.to 31st.Mar.)as the previous year.
Previous year may not be necessarily a period
of 12month.

16. Person- Sec.2(3)
• An individual
• A Hindu Undivided Family (HUF)
• A Company
• A Firm
• An Association of Person (APO) or
• An Body of individual whether incorporated or not
• A Local Authority
• Every Artificial Juridical Person (AJP)

17.  Person- Individual means natural person i.e. human being. Mr.
and Mrs. Sharma
 HUF – It is also a separate entity and is governed by Hindu
law. IT laws have not defined the HUF but it is the creation of
Hindu law and is applicable only on the persons covered by the
Hindu law.
 Farm- There may be a partnership firm or proprietorship firm
but in the eyes of IT laws “Firm” means a Partnership firm.

18.  Company- Company means (a). An Indian Company (b). Any
body corporate incorporated by or under the laws of a country
outside India (c). Any institution or body which is or was
assessable or was assessed as a company under the Income tax
Act, 1922 or which is or was assessable or was assessed under
this Act, as a company for any assessment year commencing on
or before the 1st. Day of April 1970, or (d). Any institution or
body (Indian or out side) which is declared by the Board to be
a company
 An association of persons or a body of Individuals, whether
incorporated or not:-
When more than one persons engaged themselves in a activity
without forming a partnership , they will be called “Association
of persons or body of Individuals”.

19.  Local Authority: -
Krishi Upaj mandi Samiti, Municipal council, Urban
improvement trust.
 Every artificial persons, not falling within any of the
categories above-
Example- Bar council of India, Chamber of commerce, an
idol or deity.

20. Assessee Sec.2(7)
Assessee means a person by whom tax or any other
sum of money is payable under this Act.
Income Sec.2(24)
The definition of income is inclusive & not
exhaustive
Profit & Gain
Dividend
Capital Gain chargeable under Sec.45
Profit from insurance under Sec.44
The value of perquisite or profit in lieu of salary
Special Allowance receive to cover personal expenses
Winning from lottery, crossword puzzles

21. Capital and Revenue Receipts
BASIS FOR
COMPARISON
CAPITAL RECEIPT
REVENUE
RECEIPT
Meaning
Capital Receipts are the
income generated from
investment and financing
activities of the business.
Revenue Receipts are
the income generated
from the operating
activities of the
business.
Term Long Term Short Term
Shown in Balance Sheet Income Statement
Nature Non-Recurring Recurring

22. Capital and Revenue Expenditure
BASIS FOR
COMPARISON
CAPITAL EXPENDITURE
REVENUE
EXPENDITURE
Meaning
The expenditure incurred in
acquiring a capital asset or
improving the capacity of an
existing one, resulting in the
extension in its life years.
Expenses incurred in
regulating day to day
activities of the business.
Term Long Term Short Term
Capitalization Yes No
Shown in
Income Statement & Balance
Sheet
Income Statement
Nature Non-recurring Recurring
Benefit More than one year
Only in current
accounting year

23. Residential Status & Charge of Income
A amount of tax payable the individual/HUF/
Firm/company depends upon the residential status.
In case of individual- he can be called Resident &
Ordinary Resident i.e. ROR, Resident but Not
Ordinarily Resident i.e. .RNOR or Non-Resident
i.e. NR
In order to call him as ROR or RNOR or there are
some basic condition & Some additional condition.

24. Basic Condition
1) He should be India for 182 days or more during the
current previous year
2) He should be India for 60 days or more during the
current previous year & 365 days or more during the
four year immediately preceding the previous year.
Additional Condition
1) He is Resident in India for 2 out of 10 previous years
immediately preceding the current previous year.
2) He has been in India for 730 days or more during 7
year immediately preceding the current previous
year

25. ROR
If he satisfies 1 of the 2 basic conditions & both the addition
conditions.
RNOR
If he satisfies 1 of the 2 basic conditions & one or none of
the additional condition.
NR
If he does not satisfies any of the two basic condition

26. FIRM/AOP
1) Firm can be either resident or not resident.
2) It is resident if control & affairs are wholly or partly
situated in India, It is NR if control & management
of its affairs is wholly situated out side of India.
COMPANY
1) Indian company is always a Resident .
2) Foreign company is a Resident only if control
management of its affairs is wholly situated in
India
If control & management is partly or wholly situated
outside India it will be call as Non Resident

27. Residential Status of HUF
Wholly in India - Residential
Wholly out of India - N.R.
Partly in India & - Residential
Partly outside of India

28. Now what are the income that is chargeable to tax in case of
ROR, RNOR & NR
ROR:
a) Income received or is deemed to received in India.
or
b) Accrued or deemed to accrue in India, or
c) Income accruing arising & received outside India
from a business & profession setup in India, or
d) Income accruing arising & received outside India
from other sources. All such income is Taxable in
RNOR : Taxable income, a, b & c above.
NR : Taxable income, a & b above

29. For example,
 consider the case of Mr. D, who is business head
for Asia Pacific regions for a private firm. Mr. D
was born and brought up in India. He has to
travel to various locations of the continent for
business purposes. He has spent 200 days
travelling in the current financial year. Also, he
has been travelling abroad from the past two
years and has stayed out of India for about 400
days in this period.

30. Answer
 Condition I (Resides in India for a minimum of 182 days in
a year) – Not satisfied
 To figure out the resident status of Mr. D, you will understand
that he has only spent 165 days in India during the current
financial year. Hence, he does not satisfy the first condition.
 Condition II (Resides in India for a minimum of 365 days in
the immediately preceding four years and for a minimum
of 60 days in the current financial year) – Satisfied
 However, It is given that Mr. D has been travelling only from
the past two years. Also, it is said that he has travelled for 400
days in the past two years. That means, in the past four years,
Mr. D has stayed in India for more than 365 days (1061 days).
Hence, Mr. D has resided for atleast 60 days in the current
financial year and for more than 365 days in the immediately
preceding four financial years. Therefore, Mr. D satisfies the
second condition.

31. Question
 There is a further classification under the resident
status – Resident and Ordinarily Resident
(ROR) and Resident but Not Ordinarily Resident
(RNOR).
In addition to the basic conditions, if both the below
conditions are met, he will be a ROR:
 He has resided in India for at least 2 out of 10
immediate previous years.
 He has resided in India for at least 730 days in seven
immediately previous years.
 In above example Mr. D has satisfed as resident of
India. Let us further classify whether Mr. D is ROR
or RNOR

32. Answer
 If both the additional conditions are satisfied then Mr. D is
ROR
Considering the example, Mr. D was travelling out of India
since past 2 years only. Hence, the first condition is satisfied
as he resided in India for atleast 2 years out of the immediate
previous 10 years. Also, he has fulfilled the criteria of residing
for at least 730 days in seven immediately preceding years.
Therefore, he can be considered as Resident Ordinarily
Resident.
If any one of the additional conditions is satisfied then Mr.
D is RNOR.
Alternatively, consider that he had to work from the
headquarters of his firm, located in Kota Kinabalu, Malaysia
for the past six years. He has only visited his parents for a
week, twice a year during this time. That means, he has
resided in India for 449 days in the past six years and the

33.  Non-Resident
 An individual who does not satisfy the basic conditions of
resident can be considered as a non-resident.
For example, Ms. G went to London to join a reputed university for a
graduation course (three years). While studying there, her professor
suggested her to join a post-graduate course at the same university
(two years). She had to get an internship certificate to complete the
course. Upon completion, the firm offered her a permanent position.
She has been an employee there for the past four years. That is, Ms
G has stayed out of India for nine years now. She receives rental
income from the property that she inherited from her parents. Both
the basic condition are not satisfied. That makes Ms. G a non-
resident.

Note:
The condition of minimum 60 days stay in the current financial year
will get extended to 182 days in all the cases if:
 A person is a citizen of India and he leaves India for the purpose of
employment during the current financial year.
 A person who stays outside India, being a citizen of India or a Person
of Indian Origin (PIO), and comes on a visit to India during the year.

34. Question
 Residential Status of an Individual – Example
1 : –
 Rahul is an Indian citizen working at an MNC in
Mumbai. He was given an opportunity to work on
an assignment in UK for such an MNC. He had
never visited any foreign country earlier and left
India on June 30, 2016. Determine his residential
Status ?

35. Solution : –
 An individual is said to be resident in India, if he stays
in India for 60 days or more during the previous year
and for 365 days or more during 4 preceding years.
However, when an Individual is leaving India for the
purpose of employment outside India, then the said
period of 60 days during the previous year is
extended to 182 days.
 In this case Rahul stayed in India for 91 days during
the PY 2016-17.
 [30 days (April) + 31 days (May) +30 days (June)]
during PY 2016-17.
 Since he has stayed in India for less than 182 days he
is NR for PY , 2016-17 as he does not satisfy any of
the basic conditions.

36. Questions
 Residential Status of an Individual – Example
2 : –
 Jerry is a foreign citizen outside India, who is a
person of Indian origin. He comes on a personal
visit to India on January 1, 2017. He left India on
April 1, 2017. Determine his residential Status for
PY 2016-17 ?

37. Solution : –
 As a general rule, a person is said to be resident
in India if he is in India for 60 days or more during
the previous year and 365 days or more during 4
preceding years.
 However, when a person of Indian origin comes
on visit to India, then the said period of 60 days is
extended to 182 days. Since Jerry was in India
forless than 182 days, he is a NR for previous
year 2016-17.

41.  Surcharge is an additional charge levied for persons
earning Income above the specified limits, it is charged
on the amount of income tax calculated as per
applicable rates
 10% - Taxable Income above ₹ 50 lakh – up to ₹ 1 crore
 15% - Taxable Income above ₹ 1 crore - up to ₹ 2 crore
 25% - Taxable Income above ₹ 2 crore - up to ₹ 5 crore
 37% - Taxable Income above ₹ 5 crore
 Maximum rate of Surcharge on Income by way of
Dividend or Income under the provisions of Sections
111A, 112A and 115AD is 15%
 .

42. Co-operative Society
Income Slabs Tax Rates
Where the taxable income does
not exceed Rs. 10,000/-.
10% of the income.
Where the taxable income
exceeds Rs. 10,000/- but does
not exceed Rs. 20,000/-.
Rs. 1,000/- + 20% of income in
excess of Rs. 10,000/-.
Where the taxable income
exceeds Rs. 20,000/-
Rs. 3.000/- + 30% of the amount
by which the taxable income
exceeds Rs. 20,000/-.
Surcharge : 10% of the Income Tax, where taxable income is more than Rs. 1 crore.
Education Cess : 3% of the total of Income Tax and Surcharge.

43.  Farm
 Income Tax : 30% of taxable income.
 Surcharge : 12% of the Income Tax, where taxable
income is more than Rs. 1 crore.
 Education Cess : 3% of the total of Income Tax and
Surcharge
 Local Authority
 Income Tax : 30% of taxable income.
 Surcharge : 12% of the Income Tax, where taxable
income is more than Rs. 1 crore.
 Education Cess : 3% of the total of Income Tax and
Surcharge.

44. Sources of Income
 Income from Salary
 Income from House Property
 Profits & Gains from Business & Profession.
 Capital Gain.
 Income from Other Sources