UNIT I

BASIC CONCEPTS

INTRODUCTION
The concept of taxation is as old as civilization. The principle of “welfare state” extends the rate of
government as unlimited. The scope of functions of the government is not restricted to any particular limit and
widens from time to time. With reference to developing country like India, taxes are the most important way of
collecting funds for government activities. It brings in large revenues in to public treasury and influence the
economic activity in a number of ways. The government uses tax policy in pursuits of its several economic and
social objectives. It is also most important instrument for ensuring social justice, equal distribution of wealth
and mobilization of savings etc. Taxes are not only source of revenue to government but also useful to control
inflation and improving balance of trade in country. Taxation policy of the country plays a vital role in the
working of our economy. While designing the taxation policy, it has to be confirmed that it is in accordance
with our economic and social objectives.

Q. EXPLAIN THE BRIEF HISTORY OF INCOME TAX IN INDIA.

The origin of the word “tax” is from “taxation” which means an estimate. The tax is a compulsory
payment that has to be made by an individual or other person to central government, state government and local
government. Tax is based on certain well established rules or criteria such as income earned, property owned or
expenditure made. It may be defined as legal execution by the state for purposes of the state. Taxes may be
classified as direct and indirect taxes. Direct tax is one which is demanded from the very person to whom it is
intended or desired. Indirect taxes on other hand are a tax which is paid by one person and borne by another
person.
James Wilson introduced first income tax act in 1860, who later become (British) India’s first finance
member. This act lapsed in 1865. Thereafter act II of 1886 was the next land mark. The Indian income tax act
1922 which came in to being as a result of the recommendations of the all India income tax committee is a
milestone in the evolution of direct tax laws in India. The act of 1922 remained in force till 1961. Meanwhile in
1956 the government had referred the act of the commission to recast it. The income tax bill giving effect to its
recommendations was submitted in the Lok sabha in April 1961. The bill received the assent of the president on
September 13, 1961.
Income tax is charged under the Indian income tax act 1961. It is an annual tax on income levied by the
central government. Tax is charged in respect of the income of the financial year (Known as assessment year) at
the rates fixed for such assessment year in the finance act passed each year by the parliament.

Q. EXPLAIN THE IMPORTANCE OF TAXATION

Importance of taxation are as follows.
 Tax is one of the most important sources of revenue to the government. These sources may be direct or
indirect.
 Taxes are not only sources of revenue to the government but also useful to control inflation and
improving balance of trade in country.
 Taxation policy of the country plays a vital role in the working of our economy.
 The taxation is an exercise in the collective solution of individual problems.
 In our present day economic structure income tax plays a vital role as a measure of removal of economic
disparity.
 The government uses tax policy in pursuits of its several economic and social objectives.
 It is also most important instrument for ensuring social justice, equal distribution of wealth and
mobilization of savings etc.
 The taxes levied by the government form a pool of resources to be used for collective benefit of the
public.
 State can discourage consumption of harmful and undesirable goods by levying prohibitive rates of tax.
 Imports of undesirable products can be curbed by imposing prohibitively high import duties. Exports
can be encouraged by cutting duties and taxes on export.

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Q. ENUMERATE THE OBJECTIVES OF TAXATION.
The basic objective of taxation is to raise resources for the State. In fact, experts like David. A. wells
contend that “Taxation is for revenue only and a so called tax which looks to anything besides the securing of
revenue is not a tax, but an unconstitutional exercise of the taxing power”. However, all the modern States in
the post second world war era have realized that taxation is a powerful instrument with multiple applications. It
can be used to reduce inequalities, to accelerate economic development, as a tool to regulate consumption,
imports and exports, in addition to its basic objective of raising revenues.

Different objectives of taxation may be summed up as under.

1. Objective of raising revenue.
2. Regulatory objectives.
a. Regulating consumption.
b. Regulating production.
c. Regulating imports and exports.
d. Regulating the effects of inflation, depression etc.
3. Developmental objectives.
a. Objective of economic development.
b. Objective of capital formation.
c. Objective of increasing employment opportunities.
4. Objectives of reducing inequalities.
a. Reduction in economic disparities.
b. Reduction in regional imbalances.

Q. EXPLAIN THE FOLLOWING DEFINITIONS: (A) AGRICULTURAL INCOME (B) ASSESSEE

(C) DEEMED ASSESSEE (D)ASSESSEE IN DEFAULT (E) BLOCK OF ASSETS (F) CHILD (G) FAIR
MARKET VALUE (H) PERSON (I) PREVIOUS YEAR (J) ASSESSMENT YEAR.

(A) AGRICULTURAL INCOME [Sec.2 (1A)]

Agricultural income is fully exempted from tax u/s 10(1) and as such does not form part of total income.
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 received 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(ii) of this sub clause.
c. Any income derived from any building owned and occupied by the receiver of the rent or revenue of
any such land or occupied by the cultivator or the receiver of rent in kind of any land with respect to
which, or the produce of which, any process mentioned in paragraphs (ii) and (iii) of sub clause (b) is
carried on.
Non-Agricultural Incomes from land:
The following incomes are not derived from land used for agricultural purposes hence they are non-
agricultural incomes;
1) Income from markets.
2) Income from stone quarries.
3) Income from mining royalties.
4) Income from land used for storing agricultural produce.
5) Income from supply of water for irrigation purposes.
6) Income from self-grown, trees or bamboos.
7) Income from fisheries.
8) Income from the buyer of a ripe crop.
9) Income from dairy farm, poultry farming, etc. and
10) Income from interest on arrears of rent of agriland.

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Partly Agricultural Income:
Which is partially agricultural and partially non-agricultural? For determining the non-agricultural
income chargeable to tax, the market value of any agricultural produce which has been utilized by the assessee
and which has been utilized as a raw material in such business, shall be deducted. No further deduction shall be
made in respect of cost of cultivation incurred by the assessee as a cultivator.

(B) ASSESSEE [Sec. 2(7)]

Assess refers to any person by whom any tax or any other sum of money is payable under the income
tax act 1961. It includes the following persons.
1. Who is liable to pay tax (or)
2. Who is liable to pay penalty (or) interest (or) any sum of money under the act (or)
3. Any person in respect of whom any proceeding is going (or)
4. A person who is deemed to be an assessee under any provisions of the act (or)
5. A person who is deemed to be an assessee in default under any provisions of the act.
Types of assessee
The income tax act has identified three important types of assesses.
a. Ordinary assessee.
b. Deemed assessee
c. Assessee in default.

ORDINARY ASSESSEE
In this group the act has specified the following.
a. A person who is to pay tax under this act or any other sum of money. Any other sum means interest or
penalty under the act.
b. Any person on whom any action is taken by the income tax department to assess his income. In case a
person is incurring loss and he has filed a return of loss to the income tax department he is considered as
an assessee.
c. Any person to whom refund of tax is payable by the department.

(C) DEEMED ASSESSEE OR REPRESENTATIVE ASSESSEE.

This type of assessee is not only responsible for his income but also responsible for the income of the
other person to whom he acts as a representative.
Particular Deemed assessee.
For a minor Guardian
For a non resident Agent
For deceased person (With will) Executor
For deceased person (Without will) Legal heir or the eldest in the family.

(D) ASSESSEE IN DEFAULT

A person is deemed to be an assessee in default if he fails to fulfill his statutory obligations. In case of
an employer paying salary or a person who is paying interest it is their duty to deduct tax at source and deposit
the amount of tax so collected in government treasury. If he fails to deduct tax at source or deducts tax but does
not deposit it in the treasury he is known as assessee in default.

(E) BLOCK OF ASSETS [SEC.2 (11)]

It means a group of assets falling within a class of assets comprising:
a. Tangible assets being building, machinery, plant or furniture.
b. Intangible assets being know-how, patents, copyrights trade marks licenses, franchise or any other business
or commercial rights of similar nature in respect of which same percentage of depreciation is prescribed.
For example all machines having 15% rate of depreciation would form one block and all machines
having 40% rate of depreciation would fall in another block of assets.

(F) CHILD [SEC.2 (15A)]

“Child” in relation to an individual, includes a step-child and an adopted child of that individual. It
includes both male and female children.

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(G) FAIR MARKET VALUE (SEC.2 (22)]
The “fair market value” in relation to a capital asset means-
a) the price that capital asset would ordinarily fetch on sale in the open market on the relevant date;
and
b) where the price referred to in sub-clause (a) is not ascertainable, such price as may be determined
in accordance with the rules made under this act.

(H) PERSON (SEC. 2(31)

The term person includes the following.
a) An individual: It refers to natural human being and will include male or female, adult or minor.
b) A Hindu undivided family: This is the creation of Hindu law and assumes that the members of the
family live together. The head of the family is known as ‘Karta’ and all those who have a right to claim
partners are known as ‘coparceners’.
c) Company: It is an artificial person registered under Indian companies act 1956or any other law.
d) Firm: The sec 4 of the Indian partnership act 1932, defines partnership as “Relationship between two or
more persons who have agreed to share the profits of business carried on by all or any of them acting for
all”. Persons who have entered in to partnership with one another or individually called as a firm.
e) Association of persons (AOP): It means two or more persons who join for a common purpose with a
view to earn an income. It may consist individual or non individual as its members. For example where
Mr. A an individual, PQR & Co, a partnership firm and ABC Ltd, a company joins together for a
particular venture.
f) Body of individuals (BOI): The term of body of individual means a group of individuals (Natural
persons) who carries on some activity with the objective of earning some income. It may or may not
have a common purpose. It must not include non individual members like partnership firms and
companies as its members.

Distinction between AOP and BOI

 A BOI has to consist of individuals only. An AOP may consist of non-individuals also. If two or more
person (like firm, company, HUF, individuals etc) joint together, it is called an AOP. But if only
individuals join together, it is called a BOI.
 An AOP may be formed by voluntarily getting together for a common design or in combination, will be
engaged in income producing activities, whereas a BOI may or may not have such common design or
will
g) Local authority: Municipality, panchayat, cantonment board, port trust etc. are called local authorities.
h) Artificial juridicial person: A public corporation established under special act of legislature and a
body having juristic personality of its own are known to be artificial juridicial persons. Universities are
an important example of this category.
From 1.4.2002:
“Person” will now include an association of persons (AOP) or body of individuals (BOI) or a local
authority or an artificial judicial person, whether or not such association, body, authority or judicial person was
formed or established or incorporated with the object of deriving income or profits or gains.

(I) PREVIOUS YEAR (SECTION 3):

Previous year means the financial year immediately preceding the assessment year. In other words
previous year refers to 12 months immediately preceding the particular assessment year. If the assessment year
is 2010-2011 then previous year will be 2009-2010 starting from 1 st April 2009 and ending on 31st March of
2010. It is a standard procedure to follow 12 months period for assessment year and previous year. If a new
business is started in between then the period of previous year may differ. But the assessment year will remain
same.
 Current Previous Year: 1.4.2022-31.03.2023

a. Previous year in case of a continuing business: It is the financial year proceeding the assessment year.

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 b. Newly setup business or profession: The assessee is free to setup a new business or start a new
profession on any day and the first previous year in case of a newly set up business/profession or newly
created source of income shall on the day it is set up and end on 31 st March next following. So the 1st
previous year may be of 12 months or less than 12 months but all subsequent previous years shall be of
12 months duration and always be starting on 1st April each year.
c. In case of a newly created source of income: In such case the previous year shall be the period
between the day on which such source comes in to existence and 31st March next following.

(J) ASSESSMENT YEAR [SECTION 2(9)]

Assessment year means the period of twelve months commencing on the first day of April every year
and ending on 31st Marcy of the next year. An assessee is liable to pay tax on the income of the previous year
during the next following year. For example, during the assessment year 2010-2011, tax shall be paid for the
previous year 2009-2010.
Current Assessment Year: 1.4.2023-31.03.2024

DETERMINATION OF ASSESSMENT YEAR AND PREVIOUS YEAR:

Example: 1
For the assessment year 2010-11 find out previous year in following cases:
Income Previous Year
1. For a business commencing on 1-1-2023, books of account of which 1.1.2023 to 31.3.2023
are maintained on calendar year basis
2.An employee who joins his job on 10th September 2022 10.09.2022 to 31.03.2023
3. A new business is set up on 1st May 2022. 01.05.2022 to 31.03.2023
4. A business maintains his account on Diwali to Diwali basis (set on Diwali 2023 to 31.3.2023
Diwali 2022)
5. A person wins a lottery prize on 1.11.2022 01.04.2022 to 31.03.2023

Example: 2
Income Previous Year
1. Salary income for job joined on 1.7.2022. 01.07.2022 to
31.03.2023
2. Newly set up business on Diwali 2022 Diwali 2022 to 31.3.2023
3. New House completed on and let out from 1.10.2022. 01.10.2022 to 31.03.2023
4. Income from examinership fee from university in April, 2022. 01.04.2022 to 31.03.2023
5. Business income April 2022 to March 2023 April 2022to March 2023

Example: 3
An assessee commences his business on: Previous Year

1. 1st July, 2022 1.07.2022 to 31.03.2023

2. 1st October 2022 1.10.2022 to 31.03.2023
3. 1st January, 2023 1.01.2023 to 31.03.2023

Example: 4
Find out the assessment year for the following previous years:
Income Previous year Assessment year
Salary income of Mr.A April 2022 to March 2023 2022-2023
Business income of Mr.B April 2022 to March 2023 2023-2024
Newly set up business on 12.05.2022 2023-2024
Newly set up business on Diwali 2022 2023-2024
House property income April 2023 to March 2024 2024-2025

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Q. WRITE SHORT NOTE ON INCOME [Section 2(24)]
The income tax act does not define the term “Income”. It has just specified certain things, which can be
brought under the concept of income. The normal dictionary meaning [any thing which brings benefit in the
form of cash or kind] of income is taken in to account for income tax purposes. The following are some of the
points that can be brought under the concept of income.
1. Profits and gains.
2. Dividend.
3. Voluntary contribution to any trust created wholly or partly for charitable purposes.
4. Value of any benefit or perquisites either in cash or kind.
5. Profit in lieu of salary.
6. Any allowances given to the assessee.
7. Any special allowance or benefits.
8. Any sum paid as obligation by the company.
9. Any capital gains chargable u/s 45.
10. Any winnings from lotteries, crossword puzzles, races including horse races, card games and other
games of any sort.
11. Any sum received by the employee as contribution to any provident fund or superannuation fund or any
fund set up under the employee state insurance act.
12. Any sum received under Keyman insurance policy.
The above mentioned points can be considered under the concept of income. Apart from this any benefit in
the form of cash or kind can also be considered provided if it is during the previous year and the assessee has
really been benefited by the same.

Q. WHAT ARE THE FEATURES OF INCOME? EXPLAIN

The following are the features of income.
1) Definite source: Income has been compared with a fruit of a tree or a crop from the field fruit comes
from a tree and crop from fields. Thus the source of income is definite in both cases. The existence of a
source for income is some what essential to bring a receipt under the charge of tax.
2) Income must come from outside: No one can earn income from himself. There can be no income from
transactions between head office and branch office. Contributions made by members for the mutual
benefit and found surplus cannot be termed as income of such group.
3) Trained Income: Income earned legally or illegally remains income and it will be taxed according to
the provisions of the act. Assessment of illegal income of a person does not grant him immunity from
the applicability of the provisions of other act.
4) Diversion of income vs. application of income: Diversion of income means that a part of the income
or whole of such income does not reach the assessee. It is diverted to some other person due to some
legal obligation whereas the application of income means after receiving the income spending it.
5) Temporary or permanent: Whether the income is permanent or temporary, it is immaterial from the
tax point of view.
6) Voluntary receipts: The receipts which do not arise from the exercise of a profession or business or do
not amount to remuneration and are made for reasons purely of personal nature are not included in the
scope of total income.
7) Dispute regarding the title: In case a person is receiving some income but his title to such receipts is
disputed, it will not free him from tax liability. The recipient of such income has to pay tax.
8) Income in money or money’s worth: The income may be in cash or in kind. It is taxable in both cases.
9) Income of an assessee: i.e priest from offerings made by the devotees from time to time has been held
as income but any spontaneous offerings made out of respect, love and affection is of personal nature,
hence not included in income.
10) Gifts to constitute income: An amount of gift or gifts received in cash or by cheque from a person or
persons other than a relative shall be deemed as income from other sources. Gifts upto Rs. 50,000 shall
be exempted.

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Q. EXPLAIN THE CONCEPT OF INCOME.
a. Income must be from a definite source in order to get it taxed.
b. Self generated income can not be taxed. Therefore income must be from outside.
c. Legal as well as illegal income is taxed.
d. It is not necessary that income should be in the form of money. It can also be in the form of kind.
e. Income earned may be temporary or permanent.
f. Pin money received by housewife is not considered as an income.
g. Any amount received due to devaluation of currency is taxable income.
h. If income is diverted without receiving, it is not taxable income.
i. If income is colleted and then distributed that income will be taxable income.
j. Any loss is also included under the concept of income.
k. In case there is any dispute regarding the title of the income, the beneficiary will be taxed.
l. Income may be a lumpsum or in installment.
m. Revaluation of assets and excesses if any can not be considered as income.

Q. WRITE SHORT NOTE ON CASUAL INCOME.

(i) Any receipt which is of a casual and non-recurring nature is casual income. In other words, casual income is
that income the receipt of which is accidental and without any stipulation. It is in nature of an unexpired wind-
fall Winning from lottery, crossword puzzles, card games and other games of any sort are casual incomes.
Receipts even from habitual betting are non-recurring receipts and assessable as casual income.
The casual income does not include:
a. Capital gains, chargeable under the provisions of section 45;or
b. Receipts arising from business or the exercise of a profession or occupation; or
c. Receipts, by way of addition to remuneration of an employee, such as bonus, gratuity,
perquisites etc.
(ii)Voluntary payments received in exercise of an occupation are not treated as causal income.
(iii)A gift from a relative is not income at all. Birthday and wedding gifts are simplest instances in point. A gift
from a relative does not become income merely because it is repeated year after year.
(iv)Payment by husband to his wife under an agreement to live a part as maintenance allowance is neither
casual income nor a personal gift. Hence, it is taxable.
(v)Prize awarded for coin collection or stamp collection may be a casual income. This income is due to hobby.

Q. WRITE SHORT NOTE ON GROSS TOTAL INCOME AND TOTAL INCOME

Gross Total Income (sec.14)
U/s 14 the term “Gross Total Income” (GTI) means aggregate of incomes computed under the following
five heads.
 Income under the head “salaries”
 Income under the head “House property”,
 Income under the head “profits and gains of Business or profession”,
 Income under the head “Capital Gains”,
 Income under the head “Other sources”
After aggregating income under various heads, losses are adjusted and the resultant figure is
called “GTI”.

Total Income [sec.2 (45)]

U/s 2(45) ‘Total income’ means the total amount of income referred to in section 5, computed in the
manner laid down in this act. In other words, total income means the amount left after making the deductions
under sec. 80C to 80U form the GTI.

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 RESIDENTIAL STATUS
INTRODUCTION
Tax is levied on total income of assessee. Under the provisions of income-tax act, 1961 the total income
of each person is based upon his residential status. Section 6 of the act divides the assessable persons into three
categories.
1. Ordinary resident.
2. Resident but not ordinarily resident.
3. Non-resident.

Q. WHAT IS MEANT BY RESIDENTIAL STATUS?

Residential status is a term coined under income tax act and has nothing to do with nationality or
domicile of a person. An Indian, who is a citizen of India can be non-resident for income-tax purposes, whereas
an American who is a citizen of America can be resident of India for income-tax purposes. Residential status of
a person depends upon the territorial connections of the person with this country. i.e., for how many days he has
physically stayed in India.
The residential status of different types of persons is determined differently. Similarly, the residential
status of the assessee is to be determined each year with reference to the “previous year”. The residential status
of the assessee may change from year to year. What is essential is the status during the previous year and not in
the assessment year.

Q. EXPLAIN THE PROCEDURE TO DETERMINE THE RESIDENTIAL STATUS OF AN

INDIVIDUAL
Resident status of Individual (Sec.6)

Resident [Sec.6(1)] Non – Resident [Sec.2 (30)]

Ordinary Resident Not ordinary Resident

For the purpose of determining the residential status of an individual the act lay down two types of
conditions namely, basic conditions and additional conditions. These are discussed as follows.

BASIC CONDITIONS [SEC 6(1)]

(a) He is in India in the previous year for a period of 182 days or more. (OR)
(b) He is India for a period of 60 days or more during the previous year AND 365 days or more during four
years immediately preceding the previous year.

Exceptions
However the condition as per Sec 6(1)(a) is alone applicable in the following cases.
1. In the case of an Indian citizen who is going outside India for a job and his contract for such
employment outside India has been approved by the central government.
2. In the case of an Indian citizen who is going outside India as a member of the crew of an Indian ship.
3. In the case of persons who are Indian citizens or persons of Indian origin living outside India when they
come to visit India.

ADDITIONAL CONDITIONS [SEC 6(6)]

a. He has been resident in India in at least 2 out of 10 previous year (according to basic condition noted above)
immediately preceding the relevant previous year.

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b. He has been in India for a period of 730 days or more during 7 years immediately preceding the relevant
previous year.

While calculating number of days for stay in India both, day of departure from India and day of arrival
in India are to be counted as stay in India.

I. RESIDENT (ORDINARY RESIDENT) [SEC 6(1)]

Ordinary resident = Satisfying any one of two basic conditions + Satisfying both the additional
conditions.

II. NOT ORDINARILY RESIDENT [SEC 6(6)]

Not ordinarily resident = Satisfying any one of the two basic conditions + Satisfying none or any one
of the additional conditions.

III. NON RESIDENT

Under section 2(30) of the income-tax act, 1961 an assessee who does not fulfill any of the two basic
conditions would be regarded as ‘non-resident’ assessee during the relevant previous year for all purposes of
this act.

Explanation
 Meaning of stay in India
It means stay any where within Indian geographical territory.
 Stay may be continuous or intermittent
Stay in India for specified days should not necessarily be continuous. In such a case the stay in India
will be counted by adding stay in India on each different occasion.
 Stay need not be at one place
A person must stay within Indian territory and where he stays is not an important consideration.
 Object of stay is not important
It is immaterial whether he stays in India for business purposes or on a personal purposes or visits
India as a tourists.

Residential status of individual in a Nutshell

S.No Status Basic Conditions Additional Conditions

1. Resident Satisfied -
2. Resident and ordinary Resident [OR] Satisfied Satisfied
3. Resident and Not Ordinary Resident [NOR] Satisfied Not Satisfied
4. Non-Resident [NR] Not Satisfied -

PROBLEMS ON RESIDENTIAL STATUS

PROBLEM NO 1
Mr Gatting, a foreign citizen, leaves India for the first time in the last 20 years on November 25, 2020.
During the calendar year 2021, he comes to India on September 1 and stays for a period of 20 days. During the
calendar year 2022 he does not visit India at all but comes to India on January 15, 2023. Determine the
residential status of Mr. Gatting for the assessment year 2023-2024.

PROBLEM NO 2
Ascertain the residential status of the assessees in the following cases for the assessment year 2023-
2024.
a. Ajay is a citizen of India. He left for Iran on 18 th April 2022 and could not return to India till the end of
the financial year 2022-2023.
b. Preetam left for USA on 10th March, 2020 after having lived in India for 20 years. He returned to India
on 10th Sept. 2022.
c. Subhash is a citizen of India. He left on 15 th May 2022 for London for higher studies. He came back to
India on 25 May, 2022. He maintained a dwelling place in India during his absence.

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PROBLEM NO 3
Mr. Vinayaka came to India from USA for the first time on 30 th September 2015 to join an American
concern as general manager. After reporting for duly he left for Japan on 2 nd October 2016 to finalize the
company’s transaction. He returned to India on 10 th October 2016 and stayed in India till 31st July, 2021 when
he went back to the USA. He came back to join duty on 10 th November 2022. What is his residential status for
the previous year 2022-23? Give reasons.

PROBLEM NO 4
Dr.K.S. Sharma, an Indian national is working in USA. Every year he comes to India on leave and stays
with his parents who are staying in Calicut. What would be the residential staus of Dr. K.S.Sharma during the
assessment year 2023-2024 under the following circumstances?
a. He came to India on 19 th December 2022 and stayed upto 5 th February 2023. His total stay during the
preceding 7 years was 300 days.
b. He came to India on 20th Dept. 2022 and stayed upto 31st March 2023. his total stay during the preceding
7 years was 500 days. He had left India on 31.3.2015.

PROBLEM NO 5
a. Mr. Misra an Indian citizen, who is appointed as a taxation advisor by the government of Uganda,
leaves India for the first time on March 25,2020 for joining his duties in Uganda. He is not maintaining
any residential house in India. During the previous year 2022-2023 he comes to India on leave for 85
days. Determine his residential status for the assessment year 2023-2024.
b. X came to India for the first time from USA on 30 th June, 2016. He stayed in India for 3 years and left
for Japan on 1st July 2019. He returned to India on 1st April 2020 and remained in India till 31 st July
2022 when he went back to USA. He again came to India taking up an employment with an American
concern, on 21st January 2023. What is his residential status for the previous year ended 31 st March
2023?
c. An individual left India for Iran on 15th July 2020 for taking up a job in engineering from there. He
returned to India on 15th September 2022. He was never out of India in the past. State giving reasons,
what his residential status will be for previous year 2022-2023.

PROBLEM NO 6
Mr. Ford an American national was appointed as senior scientific officer in India on 1 st April 2014. On
st
31 January, 2020 he went to Sri Lanka on deputation for a period of three years but left his wife and children,
in India. On 1st May 2021 he came to India and took with him his family to Sri Lanka on 30 th June 2021. He
returned to India and joined his original job on 20 th Dec 2022. What would be the status of Mr. Ford for income
tax purposes for the assessment years 2020-2021, 2021-2022, 2022-2023 and 2023-2024?

PROBLEM NO 7
Mr Prashant went to W.Germany for diploma course on 5 th August 2022 and came back to India on 25 th
February 2023. His family(wife and children) remained in India. He had never been out of India before. What is
his residential status for the year ending on 31st March 2023?

PROBLEM NO 8
Velan of Madurai left India on 12th Sept 2022 as an employee in ‘Jalausha’ an Indian ship and was back
in Madurai on 20th Sept 2023. Determine his residential status for the assessment year 2023-2024.

PROBLEM NO 9
Rajesh an Indian citizen employed in UK came to India for a visit in 2020 on 4 th August and left again
on 4 January 2021. He was in India again from 31st Dec 2022 till 4th April 2023. you are required to determine
th

the residential status for the previous year 2022-2023.

PROBLEM NO 10
Mr Vishal an MBA in IB, who is engaged in export business, visits France very frequently. From
particular given below determine his residential status for the previous year 2022-2023.
Previous year Stay in France ( In Days) Previous year Stay in France ( In Days)

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 2015-16 187 2019-20 70
2016-17 140 2020-21 225
2017-18 305 2021-22 306
2018-19 65 2022-23 283

PROBLEM NO 11
X is a foreign citizen. During the financial year 2009-2010 he was in India for 101 days. Determine his
residential status for the assessment year 2010-2011 on the assumption that during the financial years 1995-96
to 2008-09 he was present in India as follows.
Previous year Stay in India ( In Days) Previous year Stay n India ( In Days)
2008-09 85 2015-16 16
2009-10 310 2016-17 160
2010-11 106 2017-18 281
2011-12 174 2018-19 305
2012-13 20 2019-20 165
2013-14 280 2020-21 210
2014-15 265 2021-22 220

PROBLEM NO 12
What is the residential status of an individual for the assessment year 2023-24 who came to India for the
first time in 2020-21 was in India as follows.
Previous year Stay in India ( In Days)
2022-23 185
2021-22 15
2020-21 26

INCIDENCE OF TAX (SCOPE OF TOTAL INCOME)

Q. EXPLAIN THE SCOPE OF TOTAL INCOME OR

EXPLAIN THE CONCEPT OF RESIDENCE AND TAX LIABILITY OR
WRITE SHORT NOTE ON TAX INCIDENCE. ( 5/10 Marks)
The tax is levied on total income of a person. The total income is based upon the residential status of
an assessee. Section 5 provides the scope of total income which varies on the basis of status. Provisions of
section 5 can be expressed in following manner:

SCOPE OF TOTAL INCOME OF ‘A RESIDENT’ [SECTION 5(1)]

a) Income received or deemed to be received in India during the relevant accounting year. The place and date
of accrual is immaterial.
b) Income which accrues or arises or is deemed to accrue or arise in India during the relevant accounting year
irrespective of the date and place of its receipt.
c) Income accruing during the relevant accounting year outside India whether it is brought or not in India
during the year.

Scope of income = Indian income + Foreign income

SCOPE OF TOTAL INCOME OF ‘NOT ORDINARILY RESIDENT’ [SECTION 5(1)]

a) Income received or deemed to be received in India during the relevant accounting year. The
date and place of accrual is immaterial.
b) Income which accrues or arises or is deemed to accrue or arise in India during the relevant
accounting year irrespective of the date and place of its receipt.
c) Income accruing or deemed to accrue or deemed to be received outside India during the
relevant accounting year from a business set up in and controlled from India.

11
 Scope of income = Indian income + One particular type of foreign income

SCOPE OF TOTAL INCOME OF ‘NON-RESIDENT’ [SECTION 5(2)]

a) Income received or deemed to be received in India during the relevant accounting year. The date and
place of accrual is immaterial.
b) Income which accrues or arises or is deemed to accrue or arise in India during the relevant accounting
year irrespective of the date and place of its receipt.

Scope of income = Indian income

Summarized chart
Different types of status
S.No Different kinds of incomes Resident Not ordinarily Non
resident resident
1 Income received or deemed to be received in India. It is Taxable Taxable Taxable
immaterial whether it is earned in India or in a foreign country.
2 Income earned in India whether received, paid in India or Taxable Taxable Taxable
outside India.
3 Income earned and received outside India from a business Taxable Taxable Not
controlled or profession set up in India. Income may or may not Taxable
be remitted to India
4 Income earned or received outside India from a business Taxable Not Taxable Not
controlled or profession set-up outside India. Taxable
5 Income earned and received outside India from any other Taxable Not Taxable Not
source (except income under point 3). Taxable
6 Income earned and received outside India in the years preceding Not Not Taxable Not
the previous year in question and if the same is remitted to India Taxable Taxable
during the current precious year.
Note
1. Gift received from a person other than relative is taxable provided the amount is above Rs.50, 000. [The
whole amount should be taxed] Sec 56(2) (vi). If it is received outside India, it is taxable only for OR. If
it is received in India, it is taxable for all.
2. Dividend from an Indian company is not taxable u/s 10(34).
3. Salary drawn outside India from an Indian company is taxable only for residents. But if service is
rendered in India, then that portion is taxable to all.

Q. EXPLAIN THE DIFFERENT TYPES OF INCOME

Broadly income can be divided into two categories:
a) Indian income
b) Foreign income
INDIAN INCOME
Indian income is called by various words and names. These are:
 Income earned in India.
 Income accrues and arises in India.
 Income received or deemed to be received in India.
 Income payable in India. Income may have been earned in a foreign country but it is payable in India.
 Income earned (or accrues) in India but it is received or payable outside India.

FOREIGN INCOME
Following types of incomes are called foreign incomes:
 Income earned (or accrues) outside India and also received outside India.
 Any income which is not earned or accrues or arises in India.

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Q. EXPLAIN THE INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME
Section 10 of the income tax act deals with exempted incomes. Exempted incomes are those incomes,
which do not form part of the total income. In other words, these incomes are not included in the total income
of an assessee for income-tax purposes.

S.No Section Exempted incomes

.
1. 10(1) Agricultural income
2. 10(2) Receipt from Hindu undivided family
3. 10(2A) Partner’s share in the firm
4. 10(4)(i) Interest on securities / bonds for non-residents
5. 10(4)(ii) Interest on external account of a non-resident
6. 10(4B) Interest on specific saving certificates
7. 10(5) Value of leave travel concession
8. 10(6A) Tax paid on behalf of a foreign company
9. 10(6B) Tax paid on behalf of non-residents / foreign companies in respect of other incomes.
10. 10(6C) Royalty or free for technical services
11. 10(7) Allowances or perquisites for services rendered outside India
12. 10(8B) Income in connection under a technical assistance programmee
13. 10(10) Gratuity
14. 10(10A) Commuted pension
15. 10(10AA) Leave encashment
16. 10(10B) Any compensation to an employee
17. 10(10BB) Payment under Bhopal gas leak disaster (processing of claims) act 1985
18. 10(10C) Voluntary retirement payment
19. 10(10CC) Tax paid by employer on income by way of perquisites on behalf of an employee
20. 10(11) Provident fund payment including interest
21. 10(12) Accumulated balance of recognized provident fund
22. 10(13) Superannuation fund payment
23. 10(13A) House rent allowance
24. 10(15)(iib) Interest on capital investment bonds
25. 10(15)(iiic) Interest payable to European investment bank
26. 10(15)(iv) Interest on retirement benefits
(i)
27. 10(15)(v) Interest on securities and deposits
28. 10(15)(vi) Interest on gold deposit bonds, 1999
29. 10 (17) Allowances to MPs and MLAs not exceeding Rs.2,500 p.m. [W.e.f. AY 2007-08,
constituency allowance received is also exempted without any limit]
30. 10(17A) Amount in connection with cash or kind award instituted by central or state government.

PROBLEMS ON SCOPE OF TOTAL INCOME

PROBLEM NO 13
Show how the following incomes are to be assessed in the hands of an assessee who is a) Resident, b)
Non resident, c) Not ordinarily resident.

Amount in Rs.
Salary drawn during the year for employment outside India from Government of India 93,500
Salary drawn for employment in London office of an Indian company for three months. 18,000
Profits earned abroad and received in India. 25,000
Profit earned from business transactions outside India and kept in bank there. 18,000
Dividend received from an Indian company. 3,000

PROBLEM NO 14

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 Following are the incomes of Sri Amarnath for the financial year 2022-2023.

Amount in Rs.
Interest on saving bank deposit in Allahabad bank, Delhi 1,200
Income from agriculture in Africa invested in Nepal 10,000
Dividend received in UK from an American company, a part of which Rs. 2,000
remitted to India. 10,000
Pension received in Belgium for services rendered in India with a limited company 20,000
You are required to compute his gross total income for the assessment year 2023-2024 if he is a a)
Resident, b) Non resident, c) Not ordinarily resident.

PROBLEM NO 15
Following are the incomes of Sri Rathnam for the previous year 2022-203.

Amount in Rs.
Profit from the business in Bangalore. 10,000
Income accrued in India but received in Japan 4,000
Profit from business in Canada but received in India. 5,000
Income from house property in Karachi received in Bombay. 4,000
Profit from business established in England and deposited there, the business being 20,000
controlled from India.
Income from house property in America and deposited there. 2,000
Past untaxed income brought into India during the previous year. 10,000
Compute the total income of Shri Rathnam for the assessment year 2023-2024 if he is a) Resident, b)
Non resident, c) Not ordinarily resident.

PROBLEM NO 16
The following are the incomes of Mr. Salman for the previous year 2022-2023.

Amount in Rs.
Profit on sale of machinery in Bangalore but received in Australlia. 30,000
Profit from business in Canada, the business being controlled from India (one third is 42,000
received in India)
Income from house property in Iran. 20,000
Agricultural income in England and was received there but later brought in to India. 8,000
Past untaxed foreign income brought into India during the previous year 2022-2023 6,000
Compute the total income of Mr. Salman for the assessment year 2010-2011 if he is a) Resident, b) Non
resident, c) Not ordinarily resident.

PROBLEM NO 17
Following are the particulars of income of Mr. RTM for the assessment year 2023-24.

Amount in Rs.
Income from business in Mumbai. 80,000
Income from house property in Pune. 20,000
Pension from former employer for service rendered in India but received in UK. 24,000
Profit from business in UK but controlled from Mumbai . 1,60,000
Out of this Rs. 20,000 were received in India.
Dividend from an Indian company but received in UK. 18,000
Income from agriculture in Nepal : received there but later on remitted to India. 60,000
Interest on bonds issued by UK Government out of which 50% is received in India 40,000
Past untaxed income of 2019-20 to 2021-0922rought in to India during 2022-2023 4,00,000
Income from house property in UK and donated there to a notified charitable 20,000
institution
Compute the total income for the assessment year 2023-2024 if Mr RTM is a) Resident, b) Non resident,
c) Not ordinarily resident.

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PROBLEM NO 18
For the previous year ended on 31st March 2023 Mr Z had the following incomes

Amount in Rs.
Honorarium received from Govt of India(Expenses incurred Rs.5,000) 10,000
Profits earned from a business in Kerala controlled from Canada 5,000
Profits earned from a business in USA controlled from West Bengal 6,000
Profits earned from a business in Bangladesh controlled from Karachi and credited to his 4,000
personal account in the bank there
Dividend from an Italian company credited to his account in Switzerland 2,000
Agriculture income from Thailand not remitted to India 6,000
Compute gross total income of Mr Z for the assessment year 2023-2024 if he is a)Resident, b)Not
Ordinarily Resident, C)Non Resident

PROBLEM NO 19
From the following particulars of Mr. K. Kumar for the previous year 2022-2023 You are requested to
compute his taxable income assuming he as a)Resident, b)Not Ordinarily Resident, C)Non Resident

Amount in Rs.
Profit earned from business in Delhi 44,000
Profit of a business established in UK but controlled from India -Amount deposited in 20,000
bank there
Salary received in UK for services rendered in India 10,000
Profits from business in Nepal and controlled from there but received in India 12,000
Income from house property in UK received in India 4,000
Income from house property in Nepal 5,000
Past untaxed foreign income brought in to India during the year 5,000

PROBLEM NO 20
From the following particulars compute total income of Mr Amar for the assessment year 2023-2024 if
he is a)Resident, b)Not Ordinarily Resident, C)Non Resident
Amount in Rs.
Income from house property in India (Computed) 32,000
Loss from house property in France (-)60,000
Income from house property in England received there and deposited in bank there 90,000
Business income in India 2,60,000
Loss from business in England (-)1,20,000
Profit from business in England which is controlled from there 1,00,000
Interest on debentures of an Indian company 10,000
Income from profession set up in India received in England for services rendered in India 2,00,000

PROBLEM NO 21
Mr Ashwin a foreign national furnishes the following particulars of his income relevant for the previous
year 2022-2023. Compute his gross total income for the assessment year 2023-2024 if he is a) Resident, b) Not
Ordinarily Resident, C)Non Resident

15
 Amount in Rs.
Profit on sale of plant at London(One-half is received in India) 1,46,000
Profit on sale of plant at Delhi(One-half is received in London) 1,02,000
Salary from an Indian company received in London (One-half is paid for services rendered 60,000
in India)
Interest on UK development bonds (Entire amount is received in London) 40,000
Income from property in London received there 30,000
Profit from a business in Delhi managed from India 49,000
Income from agriculture in London received there, half of which is used for meeting hostel
expenses of Mr Ashwin’s son in England and remaining amount is later on remitted to 25,000
India
Dividend(Gross) received in London on May 6,2022 from a company registered in India 17,000
but mainly operating in UK
Rental income from a property in Nepal deposited by the tenant in a foreign branch of an 12,000
Indian bank operating there
Gift from a relative in foreign currency(one-third of which is received in India and 3,70,000
remaining amount is used for meeting education expenses of Mr Ashwin’s son in USA)

PROBLEM NO 22
Mr. Anand furnishes the following particulars of his income earned during the previous year relevant to
the assessment year 2023-2024. Compute his gross total income if he is a) Resident, b) Not Ordinarily Resident,
C) Non Resident
Amount in Rs.
Interest on German Development bonds (One third is received in India) 51,000
Income from agriculture in Bangladesh, remitted to India 31,000
Income from property in Canada received in USA 1,10,000
Income earned from business in Kuwait, business being controlled from Mumbai (Rs.
25,000 is received in India) 65,000
Dividend from an Indian company 15,000
Royalty received in Singapore from Mr. David, a resident in India for technical services
provided for a business carried on in Singapore. 25,000
Profit from a business in Chennai; this business is controlled from Singapore. 1,25,000
Profit on sale of a building in India, but received in Nepal 2,50,000
Income from agriculture in Punjab, received in Mumbai 30,000
Profit from business in Indonesia; this business is controlled from Delhi (60% of the profit
deposited in a bank there and 40% is remitted to India) 40,000
Interest received from Mr. Dayal, a non resident on the loan provided to him for a business
in India 28,000

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