Basic Concept
&
Residential Status
Prepared By Deepak C Dama
Index
Introduction
Definitions
Tax & Its Types
Charge of Income Tax
Year (Assessment & Previous )
Person
Assessee
Assessment
Income
Receipt ( Capital & Revenue)
Diversion & Application of Income
Accounting Standard
Residential Status
Scope of income in respect of residential status
Tax Structure of India
Introduction
Before Present Act, Income Tax Act, 1922
was prevailing
Income Tax Act came in to force w.e.f. 1st
April 1962
Scope extends to whole of India
Act enacted by Parliament in the Twelfth
year of the Republic of India
The Act contains 298 sections and XIV
schedules.
Tax
means Fees charged by a government
on a product, income or activity.
Which constitute basic source of revenue to Government.
Direct Tax: In Direct Tax, Person who pays and bears tax is
same. It is directly paid by the person really bearing the tax.
Indirect Tax : In Indirect Tax, Person who pays and bears tax is
different. It is not directly paid by the person really bearing the tax
Direct Taxes
1. Income Tax
2. Wealth Tax
Indirect Taxes
1. Excise Duty
2. Custom Duty
3. Service Tax
4. Sales Tax /
Value Added Tax
Charge Of Income Tax
Tax Shall be charged on income of every person
defined under section 2(31) which is earned during
the previous year at rate prescribed by annual
Finance Act.
Year (Assessment & Previous)
Assessment Year : As Per Section 2(9), Assessment
Year means a period of 12months commencing on 1st April
every year & ending on 31st March of year in which tax is
paid.
Previous Year: As Per Section 3, Previous Year means
the financial year immediately preceding the assessment
year, in which income is earned.
The rule of chargeability of income of previous year
taxed in next year is not applicable to certain cases :U/s. 172 Shipping business of non-resident
U/s. 174 Persons leaving India
U/s. 174A AOP / BOI / Artificial Juridical Person formed for a
particular event or purpose
U/s. 175 Persons likely to alienate property to avoid tax
U/s. 176 Discontinued business
Person Defined by section 2(31)
Includes : Individual :
In The term ‘individual’ means only a natural
person, i.e., a human being. In the case of deceased person,
assessment would be made on the legal representative.
HUF : The expression is however defined under the Hindu Law
as a family, which consists of all males lineally descendant from
a common ancestor and includes their wives and unmarried
daughters.
Contd…
Firm : As Per Partnership Act 1932, Relationship between
person who have agreed to share profit of business carried on by all
any of them acting for all which should evidenced by instrument.
Company :
- any Indian company,
Private Company or
Public Company
any body corporate incorporated by or under the laws of a
country outside India, or
- any institution, association or body, whether incorporated or not
and whether Indian or non-Indian, which is declared by general or
special order of the Central Board of Direct Taxes to be a company.
Contd…
Association of Person : An association of persons
means one in which two or more persons i.e. individual
as well as non-individual voluntarily join for a common
purpose or common action i.e. for producing income.
Body of individual : Body of individual means one in
which two or more persons i.e. only human being
voluntarily join for a common purpose or common
action i.e. for producing income.
Local authority : The term means a municipal
committee, district board, body of port commissioners
or other authority legally entitled to or entrusted by the
Government with the control or management of a
municipal or local fund
Artificial Juridical Persons :This category could
cover every artificial juridical person not falling under
other heads. An idol, or deity would be assessable in
the status of an artificial juridical person.
Can the female blend her property with
joint family?
Can an individual of unsound mind be included
in the definition of person ?
 No, The right to blending is limited to
Coparceners. The Female member of joint
family cannot blend separate property with
joint family property.
 Yes
Can a minor be a member of an ‘association of
persons’ ?
Yes, if his lawful guardian gives his consent.
Assessee : Person by whom any tax or any other sum
payable under the Act. can be classified in four ways : First
: A Person who is normally liable to pay tax under
Act e.g. Individual, HUF , Firm etc.
Second : A Person in respect of whom any proceeding is
taken e.g. Assessment of amount of person’s
income
Third : Every person who is deemed to be assessee e.g.
Representative of any assessee
Fourth : Person who is deemed to be an assessee in
default under any provision of the Act. e.g. Person
who has not deducted Tax at Source required
under provisions of Act.
Assessment : Entire process of computation of
income & levy of tax on it.
Under Income Tax Act There are certain types of
assessment which are …
1.
2.
3.
4.
Summary Assessment (Section 143(1)
Scrutiny Assessment (Section 143(3)
Best Judgment Assessment (Section 144)
Income Escaping Assessment (Section 147)
Income : Generally Income means Periodically monetary
return coming from definite sources.
It Consider :
Business Gift
Illegal Income
Tax free Income
Application of Income
Negative Income (Loss)
Awards As Professional Capacity
Not Consider :
Pin Money
Personal Gift (Up to some extent)
Dharmada receipt
Diversion of income
Capital receipt otherwise than taxable
Contd…
Income-tax Act levies tax on ‘income’ , a
term which is nowhere defined.
Act says ,
“Income is inclusive and not exhaustive”.
Covers 82 List in I of 7th Schedule of Constitution
For Example : 1. Income from Salaries (Section 15)
2. Income from House Property (Section 22)
3. Income from Business / Profession (Section 28)
4. Income from Capital Gains (Section 45)
5. Income from Other Sources (Section 56)
Golden Rule For Taxation of Receipts
Capital receipts are exempt from tax unless they are
expressly taxable
 Revenue receipts are taxable unless they are
expressly exempt from tax.
Capital Receipt
Fixed capital is one which the owner
keeps in his possession for making
profit
A receipt referable to
fixed capital would be a
capital receipt.
E.g. Receipt on sale of fixed
asset,
Receipt in lieu of source
of income
Revenue Receipt
Circulating Capital is one which turned
over, yields income or loss
A receipt referable to
circulating capital would
be a revenue receipt.
E.g. Sales of goods in
ordinary course of business,
Compensation on termination
of an agreement
Diversion Of Income
Income is received by person
other than the person
who is actually entitled for it
Application Of Income
Income is received by person
Person
who is actually entitled for it
Income which is diverted before Income which is required to applied
to discharge of obligation after such
It reaches to assessee it is
reaches to assessee it is taxable
not taxable
e.g. Amount towards certain
fund for the purpose of
returning to it
e.g. Portion of salary retained by
employer for compulsory deposit
fund
Accounting Standard under Income Tax Act
Given Accounting Standard are relevant only for Person who
has income U/s. 28 & U/s. 56
1. Disclosure of Accounting Polices
In respect of above mentioned standard one should keep
following points mind :
(i) Prudence
- Provisions should be made for all known liabilities
and losses even though the amount cannot be determined with
certainty and represents only a best estimate in the light of
available information;
(ii) Substance over form - The accounting treatment and
presentation in financial statements of transactions and events
should be governed by their substance and not merely by the
legal form;
Contd…
Accounting Standard under Income Tax Act
iii) Materiality - Financial statements should disclose all
material items, the knowledge of which might influence the
decisions of the user of the financial statements.
2. Disclosure of Prior period and Extraordinary items and
changes in accounting policies :
Prior Period items means income or expense which arise in the
current period as result of errors or omission in preparation of
financial statement of one or more prior periods.
Extraordinary Items means income or expenses that arise
from events or transactions that are clearly distinct from the
ordinary activities of the enterprise and, therefore, are not
expected to recur frequently or regularly.
Contd…
Accounting Standard under Income Tax Act
Change in Accounting Polices means change in an
accounting estimate that has a material effect in previous
year shall be disclosed and quantified. Any change in an
accounting estimate, which is reasonably expected to have
a material effect in year subsequent to previous year, shall
also be disclosed.
Can different Methods of Accounting be
adopted for different BUSINESSES?
Yes
If an assessee is carrying on more than one business
he can follow Cash System for one business and
Mercantile (Accrual) System for the other business.
Residential Status (Section 6)
Chargeability of Income Tax depends upon
Residential Status of Person
Persons included for the determination of residential status
are …
 Individual
 Hindu Undivided Family
 Firm
 Association of Persons or Body of Individual
 Company
 Local Authority
 Artificial Juridical Person
Status of Individual
Non Resident
Resident
If any of the conditions are not satisfied
i) He has been in India during the previous year for a total
period of 182 days or more, Or
ii) He has been in India during the 4 years immediately
preceding the previous year for a total period of 365 days or
more and has been in India for at least 60 days in the previous
year.
Resident and ordinarily
Resident &
Resident but not ordinarily
resident
Any
One
He is a resident in any 2 out of the His total stay in India in the last 7
years preceding the relevant
last 10 years preceding the any
previous year is730 days or more.
relevant previous year
Exception to Basic Condition : (1) Indian citizens, who leave India in any previous year as a
member of the crew of an Indian ship or for purposes of
employment outside India, or
(2) Indian citizen or person of Indian origin engaged outside
India in an employment or a business or profession or in any
other vocation, who comes on a visit to India in any previous
year
A person is said to be of Indian origin if he or
either of his parents or either of his
grandparents were born in undivided India.
Status of HUF
Resident
Control & Management of affairs of
HUF is wholly or partly in India.
Non Resident
Control & Management of affairs of
HUF is wholly out side India.
Resident and ordinarily
Resident &
Karta Satisfies both condition
He is a resident in any 2 out of the
last 10 years preceding the relevant
previous year, and
(ii) His total stay in India in the last 7
years preceding the relevant previous
year is730 days or more.
Status of Firm ,AOP
Local Authority & Artificial
Juridical Person
Resident
Control & Management of affairs
of Firm/AOP or other person is
wholly or partly in India.
Non Resident
Control & Management of affairs
of Firm/AOP or other person is
wholly outside India.
Firm , Association of Person & Other Person can not be
“ordinarily resident” or “not ordinarily resident”
Status of Company
Resident
Indian Company Foreign Company
Non Resident
Control & Management of
affairs of Company is wholly
outside India.
Control & Management of
affairs of Company is wholly
in India.
Company can not be “ordinarily resident” or “not
ordinarily resident”
Scope of Income In respect of Residential Status
For Chargeability of Tax Incidence
Resident &
Ordinarily
Resident
Resident but
Ordinarily
Resident
Non
Resident
Income received in India
√
√
√
Deemed to be received in India
√
√
√
Accrued or Arisen in India
√
√
√
Deemed to accrue
or arise in India
√
√
√
Income which accrues or arises
outside India from a business
controlled from or profession
set up in India.
√
√
X
Other than Above
√
X
X
Mere Remittance (Not Income)
X
X
X
Particulars
Tax Structure In India
1) What Are You Doing?
Ans.: Business. (Pay Professional Tax)
2) What Are You Doing In Business?
Ans.: Selling The Goods (Pay Sales Tax/VAT)
3) Where Are You Getting Goods?
Ans.: From Other State/Abroad (Pay Central Sales
Tax, Custom Duty & Octroi
4) What Are You Getting In Selling Goods?
Ans.: Profit (Pay Income Tax
5) Where You Manufacturing The Goods?
Ans.: Factory ( Pay Excise Duty)
Tax Structure In India
6) Do You Have Office / Warehouse/ Factory?
Ans.: Yes (Pay Municipal & Fire Tax)
7) Where Are You Taking Your Client For Lunch &
Dinner?
Ans.: Hotel (Pay Food & Entertainment Tax)
8) Have You Taken Or Given Any Service/S?
Ans.: Yes (Pay Service Tax)
9) Do You Have Any Wealth?
Ans.: Yes (Pay Wealth Tax)
10) Have You Purchased House?
Ans.: Yes (Pay Stamp Duty & Registration Fee)
Tax Structure In India
11) Any Additional Tax?
Ans.: Yes (Pay Educational, Additional Educational
& Surcharge On All The Central Govt.'S Tax )
12) Delayed Any Time Paying Any Tax?
Ans.: Yes (Pay Interest & Penalty)
Thank You
Secret of Success
Have the spirit to start ,
Have the courage to continue,
&
Have the will to win