INCOME TAX PART A- 2 MARKS

1.Casual Income
Casual income, as the name suggests, is non-recurring in nature. It's an
income which is earned by chance and not likely to occur again in a year. This
earning is neither anticipated nor provided for in any agreement.

For example, incomes from winning lotteries, card games, game shows,

horse races, crossword puzzles or any other games come under casual
incomes. Lotteries include winning money through prizes, by drawing of lots
or by chance.

Card games or other games include any game show, be it an entertainment

program on television or electronic medium in which people take part in a
competition to win prizes.

The frequency of casual income is uncertain and not fixed. Apart from these,
any income which is unanticipated and unplanned is also called casual
income. The question is, do you have to pay tax on casual income? Yes, like
most other types of incomes, casual income is also taxable.

What’s not Casual Income?

Any income that occurs as a part of an agreement and has a likelihood of

recurring in future will not be treated as casual income. Similarly, money
received from the sale of property or investments, receipts from business or
occupation and bonuses given to employees is not casual income.

Tax implication for Casual Income

Casual income is chargeable under the head ‘Income from other Sources’
under section 115BB of the Income Tax act.

 You have to pay tax on casual income at a flat rate of 30% which, after
adding the cess, amounts to 31.2%.
For example, if your casual income is ₹3 lakh, then a tax of ₹ 90,000 will
be applicable on the amount along with the education cess. Casual
income is included in the gross and total income, but while assessing
 tax liability of an individual or firm, it is separated from overall total
income.
 If the prize money is more than Rs, 10,000 and received in cash, cheque
or demand draft, then the winner will get the winning amount after
the TDS (Tax Deduction at Source) at 31.2%.
 If the prize is received in kind, say a car, the distributor of the prize must
ensure that the tax is paid before awarding the prize.
 If the prize money is received in both cash and kind, then the total tax
will be calculated according to the money received in cash and on the
market value of the prize given in kind.

Other Conditions for Tax on Casual Income

 No expenditure is allowed as a deduction from casual income

 No deduction under the section 80C or 80D of the Income Tax Act is
allowed from such income.
 The winner cannot avail the benefit of basic exemption limit because it
is not applicable for this type of income.

How to calculate tax for Casual Income?

Casual income is taxed under section 115BB of the Income Tax Act, under the
heading "Income from Other Sources." Casual income is taxed at a flat rate of
30%, which is increased to 31.2 percent when the Education cess is added.

2.MEANING OF ASSESMENT AND

PREVIOUS YEAR:
Financial Year lasts from 1st April to 31st March. This is the time period in which
a person’s yearly income is calculated. To know what is Assessment year in
Income Tax is, it is important to know about the previous year as well. 
The Previous Year and Assessment Year in Income Tax that is for example, if you
are filing your income tax return for FY 2017-18, then the previous year would be
FY 2016-17. The tax that a person pays in the current financial year is on the
income earned in the last year. This year is known as the previous year. 
Section 3 of the Income tax act of 1961 says that the previous is the immediately
preceding year. It starts on April 1 and ends on 31st March. The tax for the
previous year is paid in the assessment year. 

Assessment Year
The assessment year is the financial year in which an income tax return is filed.
The assessment year can be the same as the Financial Year or different from
Financial Year. For example, if a business person starts his/her business on 1st
April 2016 and files his/her income tax return for FY 2016-17 (the assessment year
2017-18) then FY 2016-17 will be the assessment year for Income Tax Return
filing purposes.
Assessment year is the year in which an individual assesses their Income for
income tax filing purposes. Assessment of income can be done in several ways;
one of the most common assessments is called self-assessment. 
In this, a person analyzes the entire income and the information they provide and
make sure that it is up-to-date and accurate. If you need help with filing income tax
returns and assessment of the information you can reach out to legal experts
at Vakilsearch. You can also take help in Income Tax Return assessments and
they will guide you through the entire procedure step by step.
Importance of Assessment Year in ITR:-
The income tax assessment year is the financial year in which an income tax return
has to be filed. The assessment year is decided by the Income Tax Department
based on your previous years’ income and other relevant factors. The assessment
year for an individual starts on the 1st of April of a particular financial year and
ends on the 31st of March of the next financial year.
Assessment year allows the taxpayers as well as the income tax department to
assess the previous year’s income and ensure its accuracy. This is helpful while
filing the income tax return. The assessment year starts on April 1 and ends on 31st
March.
To put it in simpler words, the year in which the income is earned is the previous
year whereas the year in which that Income is assessed for income tax filing
purposes is the assessment year.
3. What is Gross Total Income?
Gross total income (GTI) is the sum of incomes computed under the five headsof income i.e.
salary, house property, business or profession, capital gain and other sources after applying
clubbing provisions and making adjustments of set off and carry forward of losses.

GTI = Salary Income + House Property Income + Business or Profession Income +

Capital Gains + Other Sources Income + Clubbing of Income - Set-off of Losses

4. What is Total Income? What is the difference between Gross Total

income and Total Income?
The income arrived at after claiming all allowable deductions from Gross Total Income is
known as Total Income.

Gross Total Income is the sum of all of the income a person receives during a year, whereas
Total incomeis the amount of income that is subject to taxation, after all allowable deductions
or exemptions have been subtracted from the Gross Total Income.

Total income =Gross Total Income –Allowable Deductions

5. What are the types of Gross Total income (GTI)?

Gross total income is to be categorized in 2 parts

 one which is to be taxed at normal slab rates i.e. Normal GTI

 and other which is subject to tax at specific rates i.e. Other GTI.

Other GTI includes:

Short term capital gains on which Securities Transaction Tax has been paid (taxed @ 15%)

Long term capital gains except for those exempted u/s 10(38) (Taxed @ 20%)

Casual income like lottery income, income from horse racing (taxed @ 30%)
What is the meaning of transfer of a
capital asset?

Transfer of a capital asset includes:

1. Sale, exchange, relinquishment (Surrender) of the asset;

2. Extinguishment of any rights in the asset (reducing any right on the
asset);
3. Compulsory acquisition of an asset;
4. Conversion or treatment of any capital asset into or as stock in trade
of a business;
5. Maturity or redemption of zero-coupon bonds;
6. Any other transaction which allows to take or retain the possession of
the immovable property in part performance of the contract as per sec
53A of the Transfer of Property Act;
7. Any other transaction which has the effect of transferring or enabling
the enjoyment of an immovable property whether by way of becoming a
member, or acquiring shares in a cooperative society, company or any
other association by way of any agreement or arrangement;

If any capital asset is transferred by way of gift or will or inheritance, this

shall not be treated as a transfer;

If an asset transferred is not a capital asset, capital gain provisions shall

not apply.
What Is a Capital Asset?
Companies invest their cash in various sources, such as the stock
market, bonds, assets, cash reserves or cash management funds.
They may invest in capital assets, also known as fixed assets, to run
daily operations and for long-term financial gains. If you work in
finance, learning about fixed assets can help you understand how
companies benefit from this investment activity. In this article, we
discuss what a capital asset is, highlight its importance, provide
relevant examples, describe how they differ from current assets and
share steps to record them in a balance sheet.

What Is A Capital Asset?

A capital asset is a long-term property expected to generate revenue

over a period. It can include buildings, land, machinery, computer
hardware, vehicles and furniture and fixtures. Companies can use
these assets for their daily operations and as an investment. The
criteria for an asset to qualify as a fixed-asset are:

 Useful life: The asset has a useful life of over 12 months.

 Economic benefit: An asset has the potential to provide future
economic benefit or service. If an asset is no longer valuable,
disposed or damaged because of a natural calamity or
accident, it cannot qualify as a fixed asset.
 Capitalised cost: Businesses can expense the value of an asset
over its useful life and not just during the time of purchase.
There is a capitalisation threshold below which an asset cannot
qualify as a fixed asset and instead counts as a business
expense.

Additional Depreciation Under
Income Tax Act
Depreciation is defined as the process in which there is a reduction in the asset value due to
wear and tear of the asset. This is mostly applicable for long term assets which will be give
benefits for a longer duration of time such as computers, buildings, vehicles, plant and,
machinery, etc. There are two types of depreciation i.e. Written down Value (WDV) Method
and Straight Line Method (SLM).
According to the WDV method, depreciation of assets is computed on the book value of the
asset and there is a decrease in the book value of the asset every year. The WDV method is
one of the most logical methods for depreciation calculation and according to this method,
the depreciation amount goes on decreasing with time. In the SLM method, an equal quantity
of depreciation is levied on an asset over the time period of its usefulness.
According to Section 32 of the Income Tax Act, 1961, depreciation is allowed as an expense
for a block of assets for the computation of Income Tax. The depreciation under Income Tax
is permissible according to the WDV method only. Consideration of depreciation as an
expense is extremely necessary for carrying out financial management and this serves as a tax
saving option as well.
Depreciation is allowed only for those assets which are intended to be used in business or
profession. Moreover, depreciation is allowed only in case of the use of the asset in the year
in which it was purchased. According to an amendment made into the provisions of Section
32 of the Income Tax Act, 1961, currently considered as Section 32(1) (iia), an additional
depreciation of 20% of the real cost of the asset shall be allowed on those machinery or plant
which have been installed by assessee involved in the business of manufacture or in the
production of an article. These machines or plants must have been purchased and installed
after 31st March 2005, excluding aircrafts and ships.
From Assessment year 2013-14, this additional depreciation has also been made permissible
for those assessees who are involved in the professions related to the generation of power or
the generation and distribution of power. Again from the Assessment year 2017-18, this
additional depreciation has also been allowed for those assesses involved in the profession of
transmission of power. For those assets which have been used for a time period of less than
180 days, additional depreciation permitted is half of the actual rate permissible. This means
10% and the remaining half depreciation, which has not been allowed in the year of plant or
machinery acquisition and installation can be claimed by the assessee in the next succeeding
year.

Unabsorbed Depreciation
Unabsorbed depreciation is that amount of unutilised depreciation which
the assessee will not be able to claim as an expense in his income tax
returns due to lack of sufficient profit in the profit & loss account. Such
unabsorbed depreciation can be set off against any heads of income and
the remaining balance can be carried off till for any number of assessment
years.

Meaning of unabsorbed depreciation

It is that portion of the depreciation which could not be absorbed by such
assessee in his books of accounts made for tax purposes. It could be the
result of a huge amount of depreciation against the profits. In such a
scenario, the portion of depreciation that is unabsorbed can be carried
forward to be absorbed against the future taxable profits. 

It must be noted that the unabsorbed depreciation has nothing to do with

the books of accounts prepared for the financial statements. If the profits in
the books of accounts for financial statements and tax purposes are
different due to the change of rates of depreciation, then the concept of
deferred tax would arise, and it must be dealt with accordingly.

Conditions of set-off of unabsorbed

depreciation
Depreciation has to be first deducted from the income chargeable to tax
under the head “Profit and loss of business and profession”. If the
depreciation is not fully adjusted with such income chargeable to tax in the
current period, then the remaining unabsorbed portion will be carried off to
the next year and would be deemed as part of depreciation for that year. In
the case of set-off, the following order should always be followed:
  At first, adjustments must be made towards the current scientific
research expenditure, family planning expenditure and current
year depreciation.

 Secondly, the brought forward business loss should be adjusted.

 Lastly, the unabsorbed depreciation, unabsorbed capital

expenditure on scientific research or family planning have to be
adjusted.

Unabsorbed depreciation can be carried forward for an indefinite period

and can be set off against any other income (other than salary). The
unabsorbed depreciation can be carried forward even if the business
related to such depreciation has been discontinued. 

What Is Asset Deficiency?

Asset deficiency is a situation where a company's
liabilities exceed its assets. Asset deficiency is a sign of
financial distress and indicates that a company
may default on its obligations to creditors and may be
headed for bankruptcy.
Asset deficiency can also cause a publicly traded
company to be delisted from a stock exchange. A
company may be involuntarily delisted for failing to meet
minimum financial standards. When a company no
longer meets listing requirements, the listing exchange
will issue a warning of noncompliance. If the company
fails to address and correct the issues outlined in the
warning, the company's stock may be delisted.

Example of Asset Deficiency

Following the financial crisis of 2007-2008, many U.S.
companies struggled to stay afloat, finding themselves
with limited assets and growing liabilities. While many
succumbed to asset deficiency and folded, others opted
for Chapter 11 restructuring and some eventually
reemerged from bankruptcy as profitable businesses.
Two of Detroit's Big Three automakers—Chrysler and
General Motors—filed for Chapter 11 protection in 2009.
Despite closing thousands of dealerships and laying off
tens of thousands of employees, neither company could
survive the dramatic decline in new car sales brought
about by the Great Recession. The U.S. Treasury
ended up bailing out both car companies through loans
from the Troubled Asset Relief Program (TARP).
By 2012, however, the fortunes of Chrysler and General
Motors had turned around significantly. Both companies
repaid their bailout loans and enjoyed a rebound back
into profitability.1
Understanding Asset Deficiency
While a company may experience a temporary or short-
term asset deficiency, there are usually warning signs
that indicate the financial distress is much more serious
and could lead to the company's failure. Reviewing a
company's financial statements over a few years can
help investors get a clearer picture of the company's
current health and future prospects.
Key points to look for would be negative cash flows in
the cash flow statement. Negative cash flow could be a
sign that managers are not efficient at using the
company's assets to generate revenue. Poor sales
growth and declining sales over a period of time could
indicate insufficient demand for a company's products
or services.
Investors should also review a company's debt load,
which can be found on the balance sheet and
represents the amount of debt the company is carrying
on its books. High fixed costs combined with a high debt
load and income insufficient to pay liabilities are all red
flags that a company's financial health is in jeopardy.

What is Bond-washing Transactions?

Bond-washing Transactions is a practice of selling
a bond just before it pays a coupon payment
and then buying it back once the coupon has
been paid. Bond-washing results in a tax-free
capital gains because after the coupon has
been paid the bond will sell for less. We may
say bond-washing is a form of tax evasion,
whereby buyers and sellers may collude to
benefit from tax avoidance, it has been
banned though the practice still exists.
Generally, it happens that securities earn
interest on a half-yearly or an yearly basis on a
specific date the interest on securities is
payable to the person who holds the security
on the date of accrual of the interest. Taking
advantage of this, some people sell their
securities a few days before the due date of
interest payment.

On that day, they do not remain the owner of

the securities and thus, do not have to pay
tax. What they do is they sell their securities
to persons who fall in the no-tax bracket or
they fall in a lesser income bracket, so that
either less tax or no tax is paid. Thus, very
cleverly tax has been evaded or lesser tax has
been paid. If tax is paid on a lower rate, it is
secretly paid by the actual owner of the
security to the owner for the time being.

Such transactions are labelled as bond-

washing transactions. The general rule that
tax is payable by the person who is the owner
of the securities on the due date of interest
does not apply to bond-washing transactions.
In order to prevent such transactions, Income-
tax Act has a specific provision to this regard
[Section 94(1)] which sees to the fact that in
case of Bond Washing Transactions the
person transferring such security is taxed
instead of the one who is shown as the
purchaser of the security.
What Is Bad Debt? Write Offs and
Methods for Estimating
The term bad debt refers to an amount of money that a
creditor must write off as a result of a default on the part
of the debtor. If a creditor has a bad debt on the books,
it becomes uncollectible and is recorded as a charge-
off. Bad debt is a contingency that must be accounted
for by all businesses that extend credit to customers, as
there is always a risk that payment won't be collected.
These entities can estimate how much of their
receivables may become uncollectible by using either
the accounts receivable (AR) aging method or the
percentage of sales method. Bad debt is any credit
advanced by any lender to a debtor that shows no
promise of ever being collected, either partially or in full.
Any lender can have bad debt on their books, whether
that's a bank or other financial institution, a supplier, or
a vendor.
Bad debts end up as such because the debtor can't or
refuses to pay because of bankruptcy, financial
difficulty, or negligence. These entities may exhaust
every possible avenue to collect on bad debts before
deeming them uncollectible, including collection activity
and legal action.
What Is Bad Debt Recovery?
Bad debt recovery refers to a payment received for a
debt that had previously been written off and considered
uncollectible. Because bad debt usually generates a
loss when it is written off, bad debt recovery generally
produces income. In accounting, the bad debt recovery
credits the allowance for bad debts or bad debt reserve
categories and reduces the accounts receivable
category in the company's books.
How Bad Debt Recovery Works
Bad debts are difficult or impossible to collect, so they're
often written off by the debt holder. In most cases, a
company or lender will have taken many steps before
classifying a debt as "bad," including in-house and third-
party collections or even legal action. Collection efforts
may continue even after the debt has been written off.
When a full or partial repayment of a debt is received
after it has been written off, that's referred to as a bad
debt recovery. A bad debt might be recovered through a
payment from a bankruptcy trustee or because the
debtor has decided to settle the debt at a lower amount.
A bad debt may also be recovered if an asset used
as collateral is sold. For example, a lender may
repossess a car and sell it to pay the outstanding
balance on an auto loan. A bank may also receive
equity in exchange for writing off a loan that could later
result in a recovery of the debt and, perhaps, additional
profit.
Bad debt is all but inevitable, as companies will always
have customers who won't fulfill their financial
obligations. That's why there is a high demand for bad
debt recovery companies or (third-party) collection
agencies.
Revocable Transfer of Assets'
for Clubbing of Income
(Section 61)
1. Examples of Revocable Transfer with
different situations :
2. When a transfer is Revocable [Section
63]:
3. Section 61 not applicable, if the transfer
is Irrevocable for a specified period
[Section 62]:
By virtue of section 61, if an asset is transferred under a
“revocable transfer”, income from such asset is taxable in the
hands of the transferor. The transfer for this purpose
includes any settlement, trust, covenant, agreement or
arrangement.

1. Examples of Revocable Transfer

with different situations :
In the following cases, a Transfer is a Revocable Transfer :

Situations Example
Situation 1 - If an asset X transfers a house property to a trust
is transferred under a for the benefit of A and B. However, X
trust and it is revocable has a right to revoke the trust during
during the lifetime of the lifetime of A and/or B. It is a
the beneficiary. revocable transfer and income arising
from the house property is taxable in
the hands of X
Situation  2 - If an asset is transferred to a X transfers a house property to A.
person and it is revocable during the However, X has a right to revoke
lifetime of transferee.
Situation  3 - If an asset is transferred
before April 1, 1961 and it is revoca- ble
within six years.
Situation 4  - If the transfer contains any
provision to re-transfer the asset (or
income therefrom) to the trans- feror
directly or indirectly, wholly or partly.
Situation 5  - if the transferor has any right
to reassume power over the asset (or
income therefrom) directly or indirectly,
wholly or partly.
2. When a transfer is Revocable [Section 63]:
As per section 63, a transfer for the purpose of sections 60, 61 and 62 shall be
deemed to be revocable if:
the transfer during the lifetime of
A. It is a revocable transfer and
income arising from the house
property is taxable in the hands of
X.
X transfers an asset on March
31,1961. It is revocable on or
before June 6,1963. It is a
revocable transfer. Income arising
from the asset is taxable in the
hands of X. Conversely, if X
transfers an asset before April
1,1961 and it is revocable after 6
years (say, on April 10, 1967), it is
not taken as a revocable transfer.
X transfers an asset. Under the
terms of transfer, on or after April
1, 1998, he has a right to utilize
the income of the asset for his
benefit. However, he has not
exercised this right as yet. On or
after April 1, 1998, income of the
asset would be taxable in the
hands of X, even if he has not
exercised the aforesaid right.
X transfers an asset. Under the
terms of transfer, he has a right to
use the asset for the personal
benefits of his family members
whenever he wants. Till date, he
has not exercised this right. It is a
revocable transfer. The entire
income from the asset would be
taxable in the hands of X.
 1. it contains any provision for the re-transfer, directly or indirectly of the
whole or any part of the income or assets to the transferor, during the
life time of the beneficiary or the transferee as the case may be, or

2. it gives the transferor a right to re-assume power directly or indirectly

over the whole or any part of the income or assets during the life time
of the beneficiary or the transferee as the case may be.

3. Section 61 Not applicable, if the transfer is

Irrevocable for a specified period [Section 62]:
As per section 62(1), the provisions of revocable transfer, discussed in section
61, shall not apply in certain circumstances. Such circumstances are—

1. in the case of transfer by way of trust, the transfer is not revocable

during the life time of the beneficiary;

2. in the case of any other transfer, the transfer is not revocable during the
life time of the transferee;

3. in case the transfer is made before 1.4.1961, the transfer is not revocable
for a period exceeding 6 years.

The above exceptions are applicable provided the transferor derives no direct
or indirect benefit from such income.

In the above cases, the income shall be taxable in the hands of the transferee.

Although in case of transfer mentioned as per section 62 in clauses (a), (b) and
(c) above, the income from such assets transferred shall not be taxable in the
hands of transferor as it is not treated as revocable transfer, but it will be
chargeable to income-tax as the income of the transferor as and when the
power to revoke the transfer arises and shall then be included in his total
income. [Section 62(2)]
Difference Between AOP & BOI
– Taxation
Association of Persons (AOP) means a group of persons who come
together for achieving a common objective and have the same mindsets.
Members of the AOP can be natural or artificial persons.

Body of Individuals (BOI) means a group of individuals (natural persons)

who join together for earning income.

Association of Persons
The Indian Income Tax Act, 1961, defines AOP (Association of Persons) as
an integration of persons for a mutual benefit or a common purpose. They
may be individual or artificial persons such as LLP or a company. For
example, two companies may join together and form an AOP for the
achievement of a common objective.
Body of Individuals
BOI (Body of individuals) is similar to an AOP and is also an accumulation
of individuals who have come together with an objective of earning some
income. For example, two individuals may get together and do something
together for earing some income.

Differences Between AOP and BOI

An Association of Persons (AOP) and a Body of Individuals (BOI) convey
two different arrangements of people. The fact that both of these
expressions at times are used interchangeably doesn’t justify the restrictive
interpretation. We need to stop interchanging the usage of these words as
they represent two different compositions.

There are certain differences between an Association of Persons and Body

of Individuals. A person in AOP could be a company or an individual
person. The term person could include any association, body of individuals
or company, irrespective of whether it is incorporated or not.

However, in a BOI, only individuals can join with the intention of earning
some income. Hence we can say, BOI only comprises of individuals,
whereas an AOP could include legal entities.

In a nutshell, it could be said that an AOP (association of persons) has a

legal meaning and it represents a unit having duties and rights. For
instance, if a group of people are travelling in a train, or waiting for a bus at
the bus stop, they might be a group of people or in the literal sense a “body
of individuals”. However, they’re not an AOP (association of persons) in a
legal sense.

Moreover, an AOP implies a combination of persons which doesn’t mean

that any combination or group of persons is an AOP. It’s only when these
individuals associate themselves with any income-producing activity they
can be called an AOP.

AOP & BOI Taxation

Individual shares in AOP or BOI could be unknown/intermediate or
known/determinate. In such cases the tax payable by AOP&BOI will be
calculated as given below:

Share of profits of members is

unknown/intermediate
If the individual shares of the member’s income of AOP/BOI are wholly or
partially unknown/intermediate, then the tax will be charged on the total
income at the maximum marginal rate of AOP/BOI. In case if the income of
any member of AOP is chargeable at a rate which is higher than the
marginal rate the former rates will apply.

Share profits of members is known/determinate

If the total income of any member of AOP/BOI exceeds the maximum
exemption limit than a particular member holding a higher income will be
charged at the maximum marginal rate of 30% plus surcharge 10.5%. In
case none of the members are exceeding the maximum exemption limit,
then none of the members is liable to pay tax at the marginal rate. The AOP
will pay the Taxes as per the income tax rates applicable to the individual.
Also, the AOP will gain the benefits of the basic exemption of Rs. 2,50,000..