DIRECT TAX

MEANING
DIRECT TAX
Charged directly on an individual, firm, company etc.
Tax on earning
INDIRECT TAX
Charged indirectly on everybody, whether rich or poor
Tax on purchases
QUESTIONS

Whose income is charged to tax?

What is charged to tax?
When is liability for tax is computed?
Income earned during what period is taxed?
Who is liable to pay tax?
How is income & tax computed?

PERSON Section 2(31)

Includes

An Individual
A H.U.F.
A Company
A Firm
An A.O.P/ B.O.I
A Local Authority
Every other artificial juridical person

Problems
Q and A
INCOME Section 2(24)
Includes
Profit
Dividends
Perquisites
Allowance such as D.A

Page 1 of 41

Profit on sale of Import License

Export Cash Assistance
Refund of Excise or Customs duty
Remuneration received by partner of a firm

Contd.
Capital Gain
Profit of any business of insurance
Winning from lotteries, crossword puzzles, horse race, card games etc.
Important Points
Periodical Return
Illegal Income
Cash or Kind
Real Income (Remittance)
Mutual Activity- from outside source
Problems
Q and A
ASSESSMENT YEAR
The period of Twelve months
Commencing on the first day of April every year
Ending on March
Year in which income is taxed
PREVIOUS YEAR
A Financial year
Immediately preceding the assessment year
Newly started business
Period beginning with date of setting up the business till March
ASSESSEE
A person
by whom any tax, interest, penalty is due
Page 2 of 41

 Whose assessment of income, loss or refund is pending

A deemed assessee a representative assessee
An assessee in default
Problems
Q and A
ASSESSMENT
A PROCESS
Determining, Computing
Amount of Income
Fixing the tax dues
Capital and revenue expenditure
Not defined under the act, but one has to follow the natural meaning & decided
cases.
Acquisition of fixed asset against routine expenditure
Capital expenditure means expenses incurred while purchasing a fixed
assets, as against revenue expenditure is recurring or incurred during the
normal course of business
Contd.
Benefit over several years against one year
Capital expenditure benefits us for several years (life of the asset) as
against revenue expenditure is consumed within a year.
Improvement as against maintenance
Capital expenditure leads to increasing the efficiency or earning capacity
of the fixed asset. Whereas revenue expenditure helps in running the
business smoothly.
Contd.
Lump sum payment as against periodic payments
To decide whether Capital expenditure or revenue expenditure, whether
payment was made in lump sum or periodic cannot be deciding factor.
Company
Section 2(17) defines Company to mean
An Indian company or

Page 3 of 41

 A body Corporate incorporated under the laws of a foreign country

Any institution, association or a body, whether incorporated or not and
whether Indian or non Indian, which is declared by general or special
order of the CBDT to be a Company
Indian Company
Indian Company Section 2(26)
A company formed and registered under the Indian Companies act of 1956
A company formed and registered under any law in force in the state of
Jammu and Kashmir
Any institution , association or body which is declared by the board to be a
Company under section 2(17)
Dividend Section 2(22)
Under Section 2(22) following payments or distribution by a company to its
shareholders are deemed as dividend to the extent of accumulated profits of the
company
Any distribution entailing the release of companys assets.
Any distribution of debentures, debenture stock, deposit certificates and
bonus to preference share holders
Distribution on liquidation of company
Contd.
Distribution on reduction of Capital
Any payment by way of loan or advance by a closely held company to a
shareholder, holding substantial interest; provided the loan should not
have been made in the ordinary course of business and money lending
should not be substantial part of the companys business
Total Income & its computation
It is Gross total Income
*****
Less: Permissible deduction u/s.80 *****
( section 80 C to 80 U)
Net taxable income
*****
Tax is calculated on the Net taxable income as per the applicable rates.
The net taxable income is rounded off as per the provisions of section 288A and
the tax payable is rounded off to as per provisions of section 288B

Page 4 of 41

RESIDENTIAL STATUS

BASIC CONDITIONS
STAY IN INDIA IN PREVIOUS YEAR
182 DAYS OR MORE
OR
60 DAYS IN PREVIOUS YEAR & PRECEDING PREVIOUS 4 YEARS 365
DAYS
EXCEPTIONS
An Individual
Indian citizen, leaves India in previous year, as a crew member of an
Indian Ship
OR

Page 5 of 41

 For employment
An Individual
Who is person of an Indian Origin or Who is an Indian Citizen
Stayed outside India
Comes on a visit to India
CONDITIONS FOR R & OR
Preceding previous 10 years, Resident at-least for two years
AND
Stay in India in preceding previous seven years 730 days.
Problems
Q and A
HUF & RESIDENTIAL STATUS
Resident
Control & Management of affairs is exercised
Either completely or partially from India
R & OR
Status of Karta of HUF?
R & OR
OR
NR or R but NOR
Control & Management
Refers to Head and Brain which direct the affairs of the business i.e. the
policies, finance, disposal of profits, vital things concerning the management of
the business
Problems
Q and A
COMPANY/AOP/BOI/FIRM
AND
RESIDENTIAL STATUS
AOP/BOI/FIRM/Local authority/Artificial person
R & OR
Page 6 of 41

 Control & Management of affairs is exercised

Either completely or partially from India
COMPANY
Indian always R & OR
Any other company
R & OR
Control & Management of affairs is exercised
Completely in India
Relationship between residential status & incidence of tax
Incidence of tax on a tax payer depends
on his residential status and
also on the place & time of accrual or receipt of income.
Indian Income & Foreign Income
Indian Income
If income is received in India & also accrues in India (deemed to received
& accrues in India)
If Income is received in India but accrues outside India
If Income is received outside India but accrues in India
Foreign Income
Income is not received in India ( not deemed to receive in India)
Income does not accrue or arise in India.
INCOME DEEMED TO RECEIVE AND ACCRUE IN INDIA
Examples of Income deemed to receive
Contribution by the employer to the EPF account in excess of 12% of
employees salary
Annual interest credited to the employees PF account in excess of 9.5%
Examples of Income deemed to Accrue
All income accruing or arising whether directly or indirectly through /
from
Any business connection in India or Property in India or Asset or
source of income in India or Transfer of Capital asset in India
Contd.
Salary payable for services rendered in India
Salary received by Indian national from Government in respect of services
rendered outside India is deemed to accrue or arise in India
Any dividend paid by an Indian Company outside India

Page 7 of 41

 Etc.
SCOPE OF INCOME
Particulars

R & OR

R but NOR

NRI

Income received in
India
Accrues in India

TAXABLE

TAXABLE

TAXABLE

TAXABLE

TAXABLE

TAXABLE

Deemed to receive or TAXABLE

accrue in India

TAXABLE

TAXABLE

Contd.
Business income
controlled wholly or
partly from India

Taxable

Business / Profession Taxable

controlled from outside
of India

Taxable

Not Taxable

Not Taxable

Not Taxable

Any Other Taxpayer

Type of Income

Resident in India

Non-resident In India

Indian Income

Taxable in India

Taxable in India

Foreign Income

Taxable in India

Not taxable in India

Problems
Q and A
HEADS OF INCOME

Income from Salary

Income from House Property
Profits & gains from Business & Profession
Capital Gain
Income from other sources

INCOME FROM HOUSE PROPERTY

Page 8 of 41

 Basic Conditions
There should be a House Property
Should be owned by the assessee
Should not be used for the business of the assessee, the income from
which is taxable
HOUSE PROPERTY
Meaning
Building And / or Land attached to or connected to the building
Commercial as well as Residential
OWNERSHIP
Actual
Deemed
Transfer by Husband to wife without adequate consideration (except to
leave apart)
Part performance of an agreement
TYPES OF House Property
FLOP
PLOP
VLOP
DLOP
SOP/UOP
CALCULATION OF INCOME
GAV
LESS MUNICIPAL TAX
NAV
LESS DEDUCTION U/S. 24
ADD ADDITION U/S. 25
G.A.V
Page 9 of 41

 FLOP/ PLOP/DLOP
R.L.V
FAIR RENT
MUNCIPAL VALUTION
ACTUAL RENT
S.O.P/ U. O. P
Nil
VLOP
If A.R lower than R.L.V. due to Vacancy
EXAMPLE FOR RLV
FAIR RENT
OR
MUNCIPAL VALUTION
WHICH EVER IS
HIGHER
SECTION 24
Standard Deduction
30% of G.A.V.
Interest on Loan borrowed for the H.P.
Pre-construction
Post-construction
EXAMPLE FOR PRE-CONSTRUCTION INTEREST

Loan taken on 1st April 2000 Rs.10,00,000 @ 12%

Construction completed on 2nd July 2002
Pre construction period=1/4/2000 to 31/3/2002
Pre construction interest = 2,40,000
Deduction over next five years starting from 1/4/2002 to 31/3/2007 (20% each
year) in addition of the annual interest

EXAMPLE FOR POST-CONSTRUCTION INTEREST

Page 10 of 41

 FLOP/PLOP/VLOP/ DLOP
Loan taken for construction/ purchase of the property
No Limit
SOP/ UOP

Loan taken for construction/purchase of the property

Rs.1,50,000 (Loan taken after 1-4.99)
Rs.30000 (For prior period)
Limit incl. repair loan repayment

SECTION 25
Unrealized Rent
Arrears of Rent
CAPITAL GAINS
Basic Conditions
There must be a Capital Asset.
There must be Transfer of the asset.
Transfer During the previous year.
Due to transfer Gain/ Profit arises
CAPITAL ASSET
Meaning Section 2 (14)
Property of any kind
Tangible or Intangible
Whether connected to business or not
Held by Assessee
Subject to certain exceptions
Exceptions
Stock in trade, consumables or raw material held for business.
Agricultural Land in rural area
Page 11 of 41

 Special bearer bonds 1991

6.5 % Gold Bonds 1977, 7% Gold Bonds 1980, National Defence gold bonds
Contd.
Personal effects of the assessee i.e.
Movable property including furniture, wearing apparel , held for personal
use of assessee or his dependents
Excluding Gold, Silver, Semi Precious Stone, Real Stone, Metal Jewellery,
Ornaments
TRANSFER 2(47)

Sale or Exchange or Relinquishment

Extinguishment (like due to fire, theft etc.)
Compulsory Acquisition
Conversion into stock
Transfer of capital asset by a person to a firm in which he is a partner
Distribution of capital assets on dissolution of firm

PREVIOUS YEAR
To decide the previous year Date of Transfer is Important except
In case of receipt of insurance claim Date of Receipt
In case of conversion of Capital asset into stock Date of sale of Stock
In case of Compulsory Acquisition Date of receipt of compensation.
TYPES OF ASSETS
Short term asset
Asset held for less than 36 months
Subject to exception
Long term asset
Asset held for more than 36 months
Subject to exception
EXCEPTION
With respect to
Equity shares/ Pref. shares any Co.
Page 12 of 41

 Securities such as Deb. & others of Govt. listed on Stock Exchange

Units of Unit Trust of India (Quoted or not)
Units of Mutual Funds specified U/s.10 (23D) (Quoted or not)
Held for a period less than 12 months- Short Term otherwise Long Term
Problems
Q and A
Computation of Gain
Short Term Gain

Full value of consideration

Less: Transfer Exp.
Less: Cost of Acquisition
Less: Cost of Improvement

Long term Gain

Full value of consideration

Less: Transfer Exp.
Less: Indexed Cost of Acquisition
Less: Indexed Cost of Improvement

Full Consideration
Full = Gross
Means Sale consideration / Sale price / Value received or receivable on transfer.
Special cases
Transfer of asset between firm and partners (amount in firms book)
Conversion of capital asset into stock (F.M.V. on date of conversion)
Compulsory acquisition (Amount of compensation)
Cost of Acquisition
Actual Cost
Deemed Cost
Transfer of asset under will/gift/inheritance holding & subsidiary etc.
[49(1)]
Amalgamation of companies- cost for amalgamated company
Conversion of Debentures (Cost of Debentures)
Assets received by a member on liquidation (F.M.V.)

Page 13 of 41

Cost of Improvement 55(1)(b)

Intangible Assets
Nil
Tangible Asset
Exp. Which are Capital in nature
Incurred to do additions or alterations to the asset
Allowed only if incurred after1st April 1981.
Indexing
Formula
Cost of acq.* index no. of year of transfer/ index no of year of
acquisition
No indexing possible
Short term gain
Transfer of Debentures or bonds
Transfer by NRI
Problems
Q and A
Conversion of assets into stock

Date of sale of Stock = year of taxability of gain

Full consideration on conversation = Fair market value as on conversation
For indexing year of conversation to be considered
Actual sale of Stock = Business income

Income from Salary

Basic Conditions
Master And servant or employer and employee relationship
Contract of employment is important
BASIS OF CHARGE

Either accrual or receipt (which ever is earlier)

Salary due from an existing and/or former employer
Salary paid or allowed by the employer though not due
Arrears of salary paid or allowed

SALARY COMPONENTS
Page 14 of 41

Basic salary
Advance salary
Arrears of salary
Bonus
Allowances
Leave encashment on retirement

COMPONENTS

Retrenchment compensation
Pension
Gratuity
Voluntary retirement payments
Perquisites
Provident fund payments

CONCEPT
Gross salary
Deductions such as G.P.F., P.T.
Net salary
COMPUTATION

Gross salary
Less:- exemption us. 10
Less:-deduction us. 16
Net salary
Deduction under chapter VI-A
Net taxable salary

EXEMPTION UNDER SECTION 10 FOR SALARY

LEAVE ENCASHMENT 10(10AA)

GRATUITY 10(10)
PENSION 10(10A)
HOUSE RENT PAID 10(13A)
TRANSPORT ALLOWANCE 10(14) RULE 2BB
LEAVE TRAVEL CONCESSION 10(5)

Leave Encashment Sec.10(10AA)

Page 15 of 41

 Meaning Leave Salary

Salary standing / accumulated to the credit of an employee at the time of
retirement is Leave Salary
Encashment of the same at the time of retirement is referred to as leave
encashment
Tax treatment for the same next slide
Leave encashment tax treatment
Nature of Leave encashment Status of the
Tax treatment
employee
Leave encashment during
continuity of employment

Government/ Non- Taxable

government

Leave encashment at the time Government

of retirement or leaving of job

Fully Exempt

Leave encashment at the time Non-government

of retirement or leaving of job

Fully or partly exempt

Non government Employee exemption detail

In case of non-government employee (including an employee of local authority or

public sector undertaking exemption is least of the followings.
Period of earned leave to the credit of the employee * average monthly
salary

10 * average monthly salary

Rs.300000 (specified amount by government)

Leave encashment actually received

Gratuity Section 10 (10)

It is a retirement benefit.
Payable at the time of cessation of employment & on the duration of service.
Government employees i.e. Central Government employees, State government
employees, employees of local authority but not of statutory corporations

Page 16 of 41

 Tax treatment - next slide

Tax treatment
Status of the employee

Whether Gratuity is taxable

Government employee

Fully exempt U/s. 10(10)(i)

Non Government employee covered

by Payment of Gratuity Act , 1972

Fully or partly exempt from tax U/s.

10(10)(ii)

Non Government employee not

Fully or partly exempt from tax U/s.
covered by Payment of Gratuity Act , 10(10)(iii)
1972

Employees covered by Payment of Gratuity Act, 1972

Any gratuity received is exempt to the least of the following:
1.

15 days salary (7 days in case of seasonal establishment)

based on salary last drawn for each year of service.(15
days salary * length of service) (6 months & above = full
year) (Salary= last drawn salary =Basic + D.A.) (days
in month=26)

2.

Rs.350000

3.

Gratuity actually received

Page 17 of 41

Page 18 of 41

Page 19 of 41

Page 20 of 41

Page 21 of 41

Page 22 of 41

Page 23 of 41

Page 24 of 41

Page 25 of 41

Page 26 of 41

Page 27 of 41

Page 28 of 41

Page 29 of 41

Page 30 of 41

Page 31 of 41

Page 32 of 41

Page 33 of 41

Page 34 of 41

Page 35 of 41

Page 36 of 41

Page 37 of 41

Page 38 of 41

Page 39 of 41

Page 40 of 41

Page 41 of 41