CHAPTER 1

BASICS OF INCOME TAX

1.1 What is Tax –

Tax is a fee charged /amount collected by a Government on a product, income or activity, for
meeting the expenses of Government like defence, provision of education, health-care,
Social welfare, infrastructure facilities like roads, dams etc. “Tax is compulsory contribution
from the person to the government to defray the expense incurred in the common interest of
all without reference to special benefits conferred” - Prof Seligman
Characteristics of Tax:
- Tax is compulsory
- Tax is contribution
- Tax is for public benefit without direct benefit
- Government has power to levy tax
- Tax is levied on income, product or activity.

1.2 There are two classifications of taxes – direct taxes and indirect taxes.

Direct Taxes: - The person paying the tax bears the incidence. The impact and incidence of
tax are on same person. Tax burden cannot be shifted. e.g. income-tax, Wealth tax, Stamp
duty etc.,

Indirect Taxes: The person paying the tax passes on the incidence to another person. Tax
is on one person and incidence is on other. The tax burden can be shifted. e.g. GST, Excise
duty, Customs duty, VAT

1.3 Power to levy taxes

No tax can be levied without authority of law – Article 265. The Power to levy taxes should
be permitted by Constitution. Constitution of India gives the power to levy and collect taxes,
whether direct or indirect, to the Central and State Government. The Union and State
Government are empowered to levy taxes by virtue of Article 246 of the Constitution of India.

Seventh Schedule to Article 246 contains three lists which enumerate the matters under
which the Union and the State Governments have the authority to make laws for the purpose
of levy of taxes. The following are the lists:
(i) Union List: Central Government has the exclusive power to make laws on the
matters contained in Union List. Eg: Income Tax, Customs Duty, Excise duty, Tax
on shares/stocks transactions etc.
 (ii) State List: State Government has the exclusive power to make laws on the
matters contained in the State List. Eg: VAT, Profession Tax, Stamp duty, State
excise on liquor, Road tax etc.,
(iii) Concurrent List: Both Central and State Governments have the power to make
laws on the matters contained in the Concurrent list.
Note : GST though not under concurrent list is in the nature of concurrent tax – Article 246A
of the Constitution

1.4 CENTRAL GOVERNMENT TAXES – Break Down In crores

Note : The highlighted cells are income tax

2. INCOME TAX ACT 1961

Income-tax is the most significant direct tax. Entry 82 of the Union List i.e., List I of Seventh
Schedule to Article 246 of the Constitution of India has given the power to Central
Government to levy taxes on income other than agricultural income. It came into force on 1st
April, 1962.
2.1 COMPONENTS OF INCOME TAX

- Income Tax Act : The Act containing all the provisions relating to levy, collection,
penalties and administration of Income Tax. It contains 298 sections and XIV
schedules
- Income Tax Rules : Containing the procedural and compliance matters
- Annual Finance Act : Containing the annual amendments to Income Tax Act and
other central revenue Acts. Usually referred as Union Budget. The budget of Feb
2021 is called Finance Act 2021
- Circulars & Notifications : Circulars for providing guidance, clarifications, reliefs.
Notifications to give effect to provisions of income tax act.
- Legal Decisions: Decisions on Income Tax matters by Supreme Court, High Court
and Income Tax Tribunals

2.2 Levy of Income Tax

Income-tax is a tax levied on the total income of the previous year of every person(Section
4).A person includes an individual, Hindu Undivided Family (HUF), Association of
Persons(AOP), Body of Individuals (BOI), a firm, a company etc.

2.3 Total Income and Tax Payable

Income-tax is levied on an assessee’s total income. Such total income has to be computed
as per the provisions contained in the Income-tax Act, 1961. The procedure for computation
of total income of an individual is as below:
Step 1 – Determination of residential status
Step 2– Computation of income under each head - Salaries, House property, Business
and profession, Capital Gains and Income from other sources
Step 3 – Clubbing of income of spouse, minor child etc.
Step 4 – Set-off or carry forward and set-off of losses
Step 5 – Computation of Gross Total Income
Step 6 – Deductions from Gross Total Income
Step 7 – Computation of tax liability on total income and tax payable
3. IMPORTANT DEFINITIONS
a) Person - Section 2(31) : Includes
i) Individual
ii) Hindu undivided Family
iii) Company (includes Domestic Company
and Foreign company)
iv) Firm (Includes LLP)
v) Association of persons or body of
individuals
vi) Local Authority
vii) Every artificial juridical person not covered above.

b) Assessee [Section 2(7)]

“Assessee” means a person by whom any tax or any other sum of money is payable
under this Act. It includes –
• Every person in respect of whom any proceeding under this Act has been taken
for the assessment of
his income or loss;
the income or loss of any other person in respect of which he is assessable; or
the amount of refund due to him or by such other person.
• Every person who is deemed to be an assessee
• Every person who is deemed to be an assessee-in-default.

c) Income [Section 2(24)]

The definition of income as per the Income-tax Act, 1961 begins with the words
“Income includes”. Therefore, it is an inclusive definition and not an exhaustive one. At
present, the following items of receipts are specifically included in income:—
i) Profits and gains from business or profession
ii) Dividends.
iii) Voluntary contributions received by a trust, certain research association or universities,
educational institutions, hospitals, medical institutions or an electoral trust.
iv) All allowances or benefits or perquisites received in the course of employment.
v) Deemed profits chargeable to tax under section 41 or section 59.
vi) Any capital gains chargeable under section 45.
vii) The profits and gains of any insurance company, Banking company or cooperative
society.
viii) Any winnings from lotteries, cross-word puzzles, races including horse races, card
games, gambling, or betting of any form or nature whatsoever.
ix) Any sum received by the assessee from his employees as PF, ESI, Superannuation or
any employee welfare contributions
x) Any sum received under a Keyman insurance policy including the sum allocated by
way of bonus on such policy will constitute income.
xi) Any sum, in cash or kind for not carrying out any activity in relation to any business or
profession; or not sharing any know-how, patent, copy right, trade-mark, licence,
franchise, or any other business or commercial right of a similar nature, or information
or technique.
xii) Any consideration received for issue of shares as exceeds the fair market value of the
shares.
xiii) Any money received as advance and is forfeited.
xiv) Any sum of money or value of property received without consideration or for
inadequate consideration by any person.
xv) Any sum received as subsidy or grant or cash incentive or duty drawback or waiver or
concession or reimbursement from Central Government or a State Government or any
authority or body or agency in cash or kind

d) Previous year – Section 3

Previous year means the financial year immediately preceding the assessment year. In case
of Business or profession newly set up, or a source of income coming into existence for the
first time during the year, then the previous year shall be the period beginning on the date of
setting up of the business or profession or the source of income coming into existence and
ending with 31st March.

Certain cases when income of a previous year will be assessed in the previous year
itself
Apart from above income from undisclosed sources like unexplained credits, unexplained
investment, unexplained expenditure etc., will be taxed in respective year, which will be dealt
in detail in subsequent chapter.

e) Assessment year – Section 2(9)

Assessment year means a period of 12 months commencing on 1st April every year. The
year in which income is earned is the previous year and such income is taxable in the
immediately following year which is the assessment year. Income earned in the previous
year 2020-21 is taxable in the assessment year 2021-22

4. INCOME TAX RATES

Income-tax is to be charged at the rates fixed for the year by the annual Finance Act. The
rates of income tax applicable for A.Y.2022-23 (Income earned in PY 2021-22) are as
follows:
4.1
However a New Section 115BAC, provides an option for following concessional slab
rates to individuals and HUF subject to certain conditions which will be explained at
the end part of this syllabus.

The above rates will be discussed in later part of syllabus.

(5) Company
(i) Domestic Company - If the total turnover or gross receipt for the
FY 2019-20 is less than or equal to 400
Crores - 25%
- In other cases = 30%

(ii) Foreign Company 40%

Note: In case of domestic companies, Concessional rates of tax @ 22% u/s 115BAA
and 15% u/s 115BAB has been provided, subject to satisfaction of certain conditions.

(6) Special Rates of Tax : There are certain incomes like long term capital gains, Short term
gain on listed shares, winnings from lottery/cardgame/tv shows, Dividend etc., which are
taxed at special fixed rates. These rates will be dealt in detail in respective chapters dealing
with different heads of income.

4.2 : Surcharge:
It is tax on tax and levied only if the income exceeds specified limits. The surcharge is
calculated (percentage applied) on the income tax as aforesaid calculated.

4.3 : Health & Educational Cess :

This is additional tax levied with object of providing quality health services and quality
education services. This is calculated on the total of income tax plus surcharge.

4.4 : Rebate :
A resident Individual is eligible for tax rebate (tax reduction / discount) if his total income
does not exceed Rs. 5 Lakhs. The amount of rebate is the tax up to Rs. 12,500. Effectively
if an individual’s income is less than Rs. 5,00,000/- he will not pay any income tax. The
entire tax amount is set off as rebate.

The rates of Surcharge and Health cess are as below:

Note : In case of tax on income from dividend, and gains on transfer of listed securities the
rate of surcharge shall not exceed at 15%.

4.5 Marginal relief is available total income exceeds 50 lakh / 1 Crore / 2 Crore/ 5
Crore:
The total amount of income-tax payable (together with surcharge) on such income should
not exceed the amount of income-tax payable on 50 lakh, 1/2/5 crore as the case be, by
more than the amount of income that exceeds 50 lakh, 1/2/5 crore.

Compute tax liability in following independent cases for assessment year 2022-23. None of
these below cases have any income taxable at special rates
a) Mr ND aged 22 years – total income Rs. 2.30 Lakhs
b) Mr HD aged 63 years – total income 4.50 Lakhs
c) Mrs MX aged 40 – total income Rs. 6 Lakhs
 d) Mrs MR aged 21 – Total income 13 Lakhs
e) Mr XL – Total income 65 Lakhs
f) Mr WD – total income 130 Lakhs
g) Mr DM aged 80 years – Total Income 620 Lakhs
h) Mr RM – Total income 360 Lakhs
i) X Ltd an Indian Company – Total income Rs. 56,00,000 (Turnover during FY 2019-
20 was Rs. 60 Crores)
j) Z Ltd an Indian Company – Total income Rs. 4,50,00,000/- (Turnover during FY
2019-20 was Rs. 500 Crores)
k) MNS & Co, a partnership firm – Total Income 1,12,00,000
l) DNN, a LLP – Total income 68,00,000
m) B Ltd a foreign company – Total income 1,16,00,000

5. RESIDENTIAL STATUS AND SCOPE OF TOTAL INCOME

5.1 RESIDENTIAL STATUS [SECTION 6]

The incidence of tax on any assessee depends upon his residential status under the Act.
The residential status of an individual must be applied and tested for each of the previous
years independently. For all purposes of income-tax, taxpayers are classified into three
broad categories on the basis of their residential status viz.
a) Resident and ordinarily resident
b) Resident but not ordinarily resident
c) Non-resident
d) Deemed Resident but not ordinarily resident
5.2 Basic Conditions
Under section 6(1), an individual is said to be resident in India in any previous year, if he
satisfies any one of the following conditions:
(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 for at least 60 days in the previous year AND has been in India
during the 4 years immediately preceding the previous year for a total period of 365
days or more and
Exceptions to Condition (ii) - (Condition not to be applied)
a) Indian citizens, who leaves India in any previous year as a member of the crew of an
Indian ship or for purposes of employment outside India, or
b) Indian citizen or person of Indian origin whose total income excluding income from
foreign sources exceeds Rs. 15 Lakhs, being outside India, comes on a visit to India
in any previous year

5.3 Additional Conditions

(i) If such individual has been resident in India in any 2 out of the 10 previous years
preceding the relevant previous year, or
(ii) If such individual has during the 7 previous years preceding the relevant previous year
been in India for a period of 730 days or more.

5.4 TYPES OF RESIDENTS – INDIVIDUAL

1) Resident / Resident and ordinarily resident : If the individual satisfies any one of the
basic conditions and both additional conditions.

2) Resident but not ordinarily resident: If the individual satisfies any one of the basic
conditions but does not satisfy both additional conditions.

3) Non Resident - If both the basic conditions are not satisfied, the individual is a non-
resident.

4) Deemed Resident - An individual who is non resident is deemed to be resident but not
ordinarily resident if
a) He is citizen of India
b) His total income excluding the income from foreign sources exceeds Rs. 15
Lakhs during the previous year
c) He is not required to pay tax in any country by reason of his domicile or any other
criteria.

5.6 Practice questions

1) Bret lee an Australian Citizen visits India for 100 days every financial year
since past 10 years including the FY 2021-22. Find out residential status for
AY 2022-23

2) Mr. C, a Japanese citizen left India after a stay of 10 years on 1.06.2019.

During the financial year 2020-21, he comes to India for 46 days. Later, he
returns to India for 1 year on 10.10.2021. Determine his residential status for
the A.Y.2022-23

3) Mr E who was born in Kolkota is visits India during the PY 2021-22, after 15
years. He comes on to India on 01.04.2021 and leaves for Australia on
01.12.2021. Determine the residential status of E for AY 2022-23

4) Mr F who was born in Kolkota is visits India during the PY 2021-22, after 15
years. He comes on to India on 01.04.2021 and leaves for Australia on
01.08.2021. He does not have any income in India. Determine the residential
status of E for AY 2022-23
 5) Ram an Indian Citizen, left India on 22.09.2021 for the first time to work as an
officer in Germany. Determine residential status for AY 2022-23

6) B, a Canadian Citizen, comes to India for the first time during 2017-18. During
financial years 2017-18, 2018-19, 2019-20, 2020-21, 2021-22, he was in India
for 55 days, 60 days, 90 days, 150 days, 70 days respectively. Determine his
residential status for AY 2022-23

7) L, an Indian Citizen has been employed and living in UAE since last 16 years. He
regularly visits India for social purposes. His details of days of visit to India were:
2020-21 – 71 days 2019-20 – 73 days, 2018-19 – 59 days, 2017-18 – 61 days, 2016-
17 – 170, 2015-16– 150 days, 2014-15 -12 days and earlier to that 50 days every
financial year.

6. Scope of Total Income – Section 5

Nature of income R.O.R R.N.O.R / Non
Deemed Resident
RNOR
1 Income received in India,
irrespective where ever earned Taxable Taxable Taxable
2 Income earned in India, irrespective
wherever received Taxable Taxable Taxable
3 Income earned and received
outside India :
a) From business controlled or Taxable Taxable Not Taxable
profession set up in India
b) Any other source Taxable Not Taxable Not Taxable

6.1 Income deemed to accrue in India: - Section 9

The following incomes shall be deemed to be earned / to accrue in India even if they
actually are earned outside India
1) Income through or from any business connection in India,
2) Income from property, asset or source of income in India
3) Income through transfer of a capital asset situated in India
4) Income from salaries for past services rendered in India
 5) Income from salaries payable by the Government for services rendered
outside India
6) Dividend paid by a Indian company outside India
7) Interest, Royalty or fee for technical services paid by:
a) Government
b) A resident except when the source of such income is used outside india
c) A non resident only when the source of such income is used in India.

6.2 Practice Questions

1) Calculate the Total income, if the assesse is Resident and ordinary individual,
Resident but not ordinarily resident and Non Resident
i) Capital gains on sale of shares in Indian company, transacted and received in
Singapore - Rs. 85,000
ii) Pension received in Singapore in respect of employment in India Rs. 3,00,000
iii) Dividend from PTE Ltd a Singapore Company Rs. 89,000
iv) Computed rental income from property in Singapore (30% received in India)
Rs. 1,80,000
v) Income from business in India but controlled fully from Singapore Rs. 4,00,000
vi) Interest on debentures of RL Limited an Indian company, Rs. 95,000
vii) Fee for technical service received from Government of India for service
rendered in Australia Rs. 98,000
viii) Professional Income received in Australia for services rendered to a Indian
Company in Australia Rs. 92,000
ix) Agriculture income from land in Malaysia – Rs. 90,000
x) Income from profession in Malaysia (set up India) received there – Rs. 85,000
xi) Dividend from PQR Limited an Indian Company received in Malaysia – Rs.
10,000
xii) Interest received in Malaysia from Fixed Deposit in SBI branch in Malaysia –
Rs. 65,000

2)