Income Tax Act, 1961

Chapter 1 – Basic Concepts

Topics covered in this Chapter:
 Overview of Income Tax Law
 Important Definitions
 Previous Year and Assessment Year
 Tax Rates

Overview of Income Tax Law:

 Article 265 of Constitution of India – “No tax shall be levied or collected except by authority
of Law.”
 Entry 82 of Union List (List 1) in the Seventh Schedule of Article 246 gives power to CG to
make law on taxes on income other than agricultural income.
 It extends to whole of India and came into force on 1st April 1962
 Section 1 to 298 and Schedule I to XIV
 Introduction to Finance Act and parts thereof.
 Income Tax Law = IT Act + Finance Act + IT Rules + Circulars + Notifications + Case Laws

General Rule of Taxation

Income of PY is assessed in the AY following the PY.

Exception (i.e., Income of PY is assessed in that PY itself) [LE TDS]

1. Shipping business of NR [Sec 44B and 172]
2. Person Leaving India (in opinion of AO)
3. AOP/BOI or Artificial Juridicial person formed for particular Event or purpose.
4. Person likely to Transfer property to avoid tax.
5. Discontinued business

Definitions:
1. Person (Section 2(31)):
Individual HUF Firm (incl. LLP) Company AOP/BOI

Artificial Juridicial Person Local Authority

HUF:
"Hindu undivided family" has not been defined under this Act. However, as per Hindu Law, it is
a family, which consists of all males lineally descended from a common ancestor and includes
their wives and daughters.

Note – There need not be more than 1 male member to form an HUF [Gowli Buddanna v. CIT]
2. Income (Section 2(24)
Income inter-alia includes:
Sub- Provision
clause
iia Voluntary contributions received by charitable or religious trusts, etc.
iii Value of perquisite or profit in lieu of salary taxable u/s 17(2) and (3)
ix Winning from lotteries, puzzles, races, card games or other sort of gambling or
betting
x Sum received by assessee from his employees as contribution to any PF or SAF or any
other employee welfare fund.
xi Sum received under Keyman insurance policy including sum allocated as bonus thereon
xvi Consideration received for issue of shares as exceeds FMV of shares u/s 56(2)(viib)
xviii Assistance in form of subsidy or grant or cash incentive or duty drawback or waiver or
concession or reimbursement by CG or SG or other auth. in cash or kind, other than:
 Subsidy or grant or reimbursement which is taken into account for determination
of actual cost of asset Explanation 10 to Section 43(1),
 Subsidy or grant by CG for purpose of corpus of a trust or institution established
by CG or SG as the case may be.
Few more will be added.

Salary and House Property Basic Deductions

Deductions under Salary Head:

Deductions: Sec 115BAC (Default) Normal Tax Regime
Standard Deduction u/s 16 50,000 50,000
Entertainment allowance N.A. Lower of:
(only for Government employees)  Rs. 5,000
 1/5th of basic salary
 Actual amount
Professional Tax N.A. Actual amount

Computation of House Property income:

Computation Sec 115BAC Normal Regime
Gross Annual Value: XX XX
Higher of:
 Expected Rent (Fair Rent or Municipal Value – Higher,
subject to Standard Rent)
 Actual Rent
Less: Municipal Taxes XX XX
Net Annual Value XX XX
Sec 24(a) – Standard Deduction 30% of NAV (XX) (XX)
Sec 24(b) – Interest on borrowed capital – Let out property Full amt. Full amt.
Sec 24(b) – Intt. on borrowed capital – Self occupied prop. Not allowed Max. Rs. 2 lakhs
Income from House Property XX XX
Notes
1. In case of Self Occupied Property, NAV = NIL (for upto 2 house properties)
2. In case of absence of info. of fair rent, municipal value, etc, GAV = Actual Rent.
 Undisclosed sources of Income:
(Sec 68 to 69D)
Section 68: Cash Credit:
Where any sum is credited to books of assessee, and assessee:
 Offers no explanation about nature and source thereof, or
 Explanation offered is not satisfactory in opinion of AO.
Such sum may be charged as income of assessee of that PY.

Unexplained loan or borrowing:

Where sum so credited consists of loan or borrowings, explanations offered shall be deemed to be
satisfactory only if:
(a) the lender of such loan offers explanation about nature and source of such sum, and
(b) In opinion of AO, such explanation is found to be satisfactory.

Unexplained share application money, share capital and share premium:

Where assessee is a closely held company, and sum so credited consists of share application money
or share capital or share premium, explanations offered shall be deemed to be satisfactory only if:
(a) Resident person in whose name such amt. is credited explains the nature and source, and
(b) In opinion of AO, such explanation is found to be satisfactory.

Above explanation of loans or share capital, etc. shall not apply in case where such sum is credited
in name of a VCF registered with SEBI.

Section 69: Unexplained investment

Where in any PY, assessee has made investment which are not recorded in books, and assessee:
 Offers no explanation about nature and source thereof, or
 Explanation offered is not satisfactory in opinion of AO,
value of such investments is taxed as deemed income of such PY.

Section 69A: Unexplained money, etc.

Where in any PY, assessee is found to be owner of any money, bullion, jewellery or other valuables
(MBJV) and same is not recorded in books and the assessee offer no explanation or unsatisfactory
explanation about nature and source thereof, value of such MBJV may be deemed to be income.

Note – Ownership is important. Mere possession is not enough.

Section 69B: Amounts of investments, etc. not fully disclosed in books

Where in any PY assessee has made investments or is found to be owner of MBJV and AO finds
that amount actually spent exceeds the amount recorded in books, and assessee offers no
explanation or unsatisfactory explanation, such excess may be deemed to be income of that PY.

Section 69C: Unexplained expenditure

Where in any PY, an assessee has incurred any expenditure and he offers no explanation or
unsatisfactory explanation about source of such expense, AO can treat it as income of that PY.
Note – Such unexplained expenditure shall not be allowed as deduction under any head.

Section 69D: Amounts borrowed or repaid on Hundi:

 Where any amount is borrowed on a hundi, or
 any amount due thereon is repaid otherwise through an A/C payee cheque drawn on bank,
 amount so borrowed or repaid = Deemed income.

Note – In case if amount borrowed is deemed income, the same amount shall not be assessed again
as income on repayment thereof.

Tax liability on such cash credits or unexplained income:

115BBE Tax rate = 60%.
No expense shall be allowed as deduction.
Mandatory surcharge @ 25% and cess @ 4%.
271AAC Penalty @ 10% of such tax amount (subject to certain exemption).

Income Tax Rates and Surcharge:

[Applicable w.e.f. AY 2024-25]

For Individuals, HUF, AOP, BOI and Artificial Juridicial Person:

I. Where the assessee opts out of the default tax regime u/s 115BAC:
(1) Individual [other than (2) and (3) below] or HUF or AOP or BOI or Artificial Juridicial
Person, whether Resident or not:
Where total income: Rate of Tax
<= Rs. 250,000 Nil
> 250,000 but <= 500,000 5%
> 500,000 but <= 10,00,000 20%
> 10,00,000 30%

(2) Resident Individual (age 60 years or more but less than 80 years):
Where total income: Rate of Tax
<= Rs. 300,000 Nil
> 300,000 but <= 500,000 5%
> 500,000 but <= 10,00,000 20%
> 10,00,000 30%

(3) Resident Individual (age 80 years or more):

Where total income: Rate of Tax
<= Rs. 500,000 Nil
> 500,000 but <= 10,00,000 20%
> 10,00,000 30%

Clarification – A person who has attained age of 60 years or 80 years on 1st April of 2023 shall be
eligible for higher basic exemption limit starting from PY 2022-23 itself i.e., AY 2023-24.
Therefore, if a person is born on 1st April 1964/1944, then he shall get slab benefit of Rs. 3
lakhs/Rs. 5 lakhs in PY 2023-24.

Concept Clarity Check:

For Mr. John aged 83 years, the basic exemption limit will be?
If Mr. John is a NR, then Rs. 250,000 but if Mr. John is R, then Rs. 500,000. Rates given in point
(1) above is applicable for both R and NR whereas rates given in point (2) and (3) applies only to R.

Surcharge:
Where total income (excluding Dividend Rate of Tax
Income, 111A, 112, 112A):
Upto 50 lakhs NIL
> 50 lakhs but <= 1 crore 10%
> 1 crore but <= 2 crores 15%
> 2 crores but <= 5 crores 25%
> 5 crores 37%
Note –
1. In case where the total income including dividend income, 111A, 112 or 112A exceeds Rs. 2
crores, the rate of surcharge shall be as follow:
Surcharge
On dividend income, 111A, 112 or 112A incomes 15%
On the balance income (excluding 111A etc.)
Upto 2 crores 15%
2 crores – 5 crores 25%
Above 5 crores 37%
Maximum rate of surcharge on dividend income, Sec 111A, 112 and 112A income shall be 15%.

2. In case of AOP consisting of ONLY companies as its member, surcharge shall not > 15%

3. Illustration for understand surcharge in case of special income:

Surcharge % on:
Case Special Income Normal Income Total Income
Special income Normal income
1 20L 20L 40L - -
2 80L 80L 1.60 cr. 15% 15%
3 1.20 cr. 1.10 cr. 2.30 cr. 15% 15%
4 1.30 cr. 2.30 cr. 3.60 cr. 15% 25%
5 1.40 cr. 70L 2.1 cr. 15% 15%
6 1.60 cr. 45L 2.05 cr. 15% 15%
7 50L 6.00Cr. 6.50Cr. 15% 37%

II. Where the assessee does not opt out of the default tax regime of Sec 115BAC:
Irrespective of the residential status and age of individual, the tax rate shall be:
Where total income: Rate of Tax
<= Rs. 300,000 Nil
> 300,000 but <= 600,000 5%
> 600,000 but <= 900,000 10%
 > 900,000 but <= 12,00,000 15%
> 12,00,000 but <= 15,00,000 20%
> 15,00,000 30%

Where assessee opts for Sec 115BAC, max surcharge shall be 25% (instead of 37%)

Note: W.e.f. FA 2023, Sec 115BAC is the default tax regime and assessee may chose to opt
out of the same to the normal tax regime.

For Co-operative society:

Where total income: Rate of Tax
<= 10,000 10%
> 10,000 but <= 20,000 20%
> 20,000 30%

Surcharge:
Where total income: Rate of Tax
> 1 crore but <= 10 crore 7%
> 10 crores 12%

Section 115BAE inserted w.e.f. FA 2023 for the benefit of manufacturing co-operative
society. Where co-op society opts for sec 115BAE, surcharge = Flat 10% [Discussed later]

For Firms:
On the whole of total income 30%

Surcharge:
Where total income: Rate of Tax
> 1 crore 12%

For Local Authority:

On the whole of total income 30%

Surcharge:
Where total income: Rate of Tax
> 1 crore 12%

For Companies:
(1) In case of a domestic company:
Where total turnover or gross receipt in PY 25%
2021-22 does not exceed Rs. 400 crores
Other cases 30%

(2) In case of company other than domestic company (foreign company):

On so much of total income consisting of: 50%
 (a) Royalties from Government or Indian concern in pursuance of agreement
made between 1/4/1961 to 31/3/1976.
(b) Fees for technical services received from Government or Indian concern
in pursuance of agreement made between 1/3/1964 to 31/3/1976
On the balance income 40%

Surcharge:
Where total income: Domestic Company Foreign Company
> 1 crore but <= 10 crore 7% 2%
> 10 crores 12% 5%

However, the rate of surcharge in case of a company opting for taxability u/s 115BAA or Section
115BAB shall be 10% irrespective of amount of total income. [Discussed Later]

Special Tax Rates:

Section Income Tax Rate
No.
112 LTCG (other than LTCG taxable u/s 112A) 20%
112A LTCG (in excess of Rs. 1 lakh) on transfer of: 10%
 Equity shares in a company
 Units of equity-oriented fund
 Units of business trust

Provided that, STT has been paid on such capital assets.

111A STCG on transfer of: 15%
 Equity shares in a company
 Units of equity-oriented fund
 Units of business trust

Provided that such sale is made on or after 01.10.2004

and STT has been paid on such capital assets.
115BB Winnings from Lotteries, crossword puzzles, race 30%
including horse races, card games, gambling, or betting of
any form.
115BBE Unexplained money, investment, expenditure, etc. 60%

Concept of Marginal Relief:

In case of surcharge:
Where total But does not
In case of: Surcharge shall be restricted to:
income exceeds exceed
(Tax on Rs. 50 lakhs) + (Total income –
Rs. 50 lakhs Rs. 1 crore
Rs. 50 lakhs)
Individual and HUF
(Tax on Rs. 1 crore with surcharge 10%)
(opting out of Sec Rs. 1 crore Rs. 2 crores
+ (Total income – Rs. 1 crore)
115BAC)
(Tax on Rs. 2 crores with surcharge
Rs. 2 crores Rs. 5 crores
15%) + (Total income – Rs. 2 crores)
 (Tax on Rs. 5 crores with surcharge
Rs. 5 crores -
25%) + (Total income – Rs. 5 crores)
Local authority and (Tax on Rs. 1 crore) + (Total income – Rs.
Rs. 1 crore
co-operative society 1 crore)
Domestic or Foreign (Tax on Rs. 1 crore) + (Total income – Rs.
Rs. 1 crore Rs. 10 crores
Co. 1 crore)
(Tax on Rs. 10 crores with surcharge
Domestic company Rs. 10 crores -
7%) + (Total income – Rs. 10 crore)
(Tax on Rs. 10 crores with surcharge
Foreign Company Rs. 10 crores -
2%) + (Total income – Rs. 10 crore)

Example of marginal relief:

Assume case of resident individual of age 32 years:
Case Total income Income Tax Surcharge Total Restricted to
1 50,00,000 13,12,500 - 13,12,500 -
2 50,10,000 13,15,500 1,31,550 14,47,050 13,22,500
3 51,00,000 13,42,500 1,34,250 14,76,750 14,12,500
4 52,00,000 13,72,500 1,37,250 15,09,750 -
5 1,00,00,000 28,12,500 2,81,250 30,93,750 -
6 1,01,00,000 28,42,500 4,26,375 32,68,875 31,93,750
7 1,03,00,000 29,02,500 4,35,375 33,37,875 -

Section 87A: Rebate in case of Individual Resident:

Resident Individual Only Limit on TI Rebate upto
Normal tax regime 5 lakhs Rs. 12,500
Default Tax Regime – 115BAC 7 lakhs Rs. 25,000
[FA 2023]
Marginal relief under new tax regime (u/s 115BAC)
Where total income exceeds Rs. 7 lakhs and the income tax payable on such total income exceeds
(Total income less Rs. 7 lakhs), the assessee shall be eligible for a deduction of:
[Tax payable – (Total income – Rs. 7 lakhs)]
[FA 2023]
Example:
Particulars Case 1 Case 2 Incremental
Total income 7,00,000 7,05,000 5,000
Tax Payable 25,000 25,500 -
Rebate u/s 87 25,000 0 -
Marginal Relief - 20,500 -
Net Tax Payable - 5,000 5,000
Note
1. Rebate is provided on income tax before adding cess.
2. Rebate is not available w.r.t. tax payable u/s 112A @ 10%.

Health and Education Cess: 4% of (Tax + Surcharge)

Rounding off: Taxable income and tax payable shall be rounded off to nearest multiple of 10.
Example= Rs. 10,004 becomes Rs. 10,000 and Rs. 11,205 becomes Rs. 11,210.
 Revenue Receipt vs Capital Receipt:
 Revenue receipts are considered as income and taxable under this Act. (E.g., Profit on sale of
goods, interest income, etc.)
 Capital receipts are taxable only to extent specifically mentioned in the Act (such as cap. gain)
 Other capital receipts not specifically mentioned are not taxable in this act.
Example – Compensation for delay in delivery of capital asset.

Note:
As all capital receipts are not taxable, all capital expenditures are not allowed as well.
For E.g., where expenditure is incurred for a project not related to the existing business and the
project was abandoned without creating a new asset, the expenses are capital in nature.

Application of income vs Diversion of income:

Income when diverted (by overriding title) at source is called as diversion of income, whereas when
the income is applied after it accrues to assessee, either due to contractual obligation or exercise
of discretion, it is called as application of income.

Note: Application of income is taxable in the hand of assessee whereas diversion of income is not.

Example:
1. I paid my first month salary to a relative – This is the case of application of income as there is
no contractual obligation.
2. R, A and M are partners in a firm. R was asked to resign. As per the terms of the resignation, it
was included in the deed that 10% of the profit of the firm will be given to Mrs. R. This is case
of diversion of income and such 10% shall not be taxable in hands of firm.
3. In case of a lottery, as per the lottery agreement certain percentage of the first prize is to be
paid to the state government and the lottery agent. In this case, the lottery income is suMect
to a legal obligation and therefore the amount paid to the state government and lottery agent is
on account of a legal obligation. Therefore, the said amount is not taxable in the hands of winner.

Significant case laws:

CIT vs Saurashtra Cement Ltd. (2010 – SC)
Issue Whether Liquidated damages received by company from supplier for failure to supply
machine within stipulated time is capital receipt or revenue receipt?
Decision  Damages are directly linked with capital assets (i.e., cement plant)
 It was not a receipt in course of profit earning process.
 Therefore, such receipt is not in OCOB hence it is a capital receipt.
AuthorÕs Section 28(ii)(e) shall not apply here as compensation is neither due to termination
Note nor due to modification of original contract. The original contract still holds good and
hence this compensation is not taxable.

Honda Siel Cars India Ltd. v CIT (2017 – SC)

Issue Whether technical fee paid under agreement for setting up JV in India is revenue or
capital expenditure where upon termination of agreement, JV would come to an end?
Decision It is capital expenditure in nature.
CIT v M. Venkateswara Rao (2015)
Issue Can capital contribution of individual partner in the books of firm be taxed as cash
credit in hands of firm where partners have admitted their contribution but failed to
explain the source of such receipts in individual hands?
Decision  Section 68 cannot be pressed against the firm.
 At most, enquiry can be made against individual partner and not firms when
partners have admitted capital contribution.
 In the absence of any material to indicate that they are profits of the firm, cash
credits cannot be assessed in hands of the firm though it may be assessed in
hands of the individual partner.