GIBS INCOME TAX LAW & PRACTICE BBA INTRODUCTION TO INCOME TAX

UNIT-I
CHAPTER1 INTRODUCTION TO INCOME TAX

Income Tax: Income tax is tax on income. Income tax is a central subject according to the
Constitution of India. Income tax is a very important direct tax. It is an important and most significant
source of revenue of the Government. The government needs money to maintain law and order in
the country; safeguard the security of the country from foreign powers and promote the welfare of
the people. It is the foremost duty of the government to bring out such welfare and development
programmes which will bridge the gap between the rich and the poor. For this purpose, mobilization
of funds from various sources is required. These sources may be direct or indirect. Income tax is
one of the most important tools to achieve balanced socio-economic growth.

Objectives/Need of Income Tax: The objectives of income tax may be –

1. To reduce inequalities in the distribution of income and wealth.
2. To bring out equity between classes of tax payers.
3. To accelerate the economic growth and development of country.
4. To make available of funds for economic development.
5. To encourage investment in new capital goods.
6. To channelize investment into those sectors which contribute the most economic growth.
Features of Income Tax:
1. Income tax is charged on the income of previous year, at a rate which is prescribed by the Finance
Act for the relevant Assessment year.
2. The Finance Act is passed every year by the parliament in the form of ‘Budget’.
3. Income tax is levied on a person in relation to his income of the previous year.
4. The tax payer’s liability is determined with reference to his residential status in the previous year
or accounting year.
5. Liability to income tax arises only where the total income in the accounting year exceeds the
maximum tax free amount prescribed by the Finance Act to that relevant year.
6. The rates of income tax are progressive and incidence of tax increases with the rise of income.
7. It is compulsory to deduct the tax at source and to pay it to the Government.

INCOME TAX ACT, 1961

Short Title: This may be called the Income Tax Act, 1961.
Extent: It extends to whole of India. (It also means people of Jammu and Kashmir earning income
is required to pay income tax to Government of India).
Commencement: This act comes into force on 1st day of April, 1962

SCHEME OF TAXATION: BASIS OF CHARGES

• Under the Income –tax Act, 1961
• Every person,
• Who is an assessee and
• Whose total income
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GIBS INCOME TAX LAW & PRACTICE BBA INTRODUCTION TO INCOME TAX

• Exceeds the maximum exemption limit

• Shall be chargeable to Income-tax
• at the rate prescribed in the Finance Act.
• Such Income-tax shall have to be paid
• On total income of the previous year
• In the relevant assessment year.

Person [Section 2(31)]: Person includes:-

1. An individual
2. A Hindu Undivided Family(HUF)
3. A company
4. A firm(partnership)
5. An Association of Persons (AOP) or a Body of Individual (BOI), whether incorporated or
not e.g. clubs, co operative societies etc.
6. A local authorities e.g. MCD, DDA etc.
7. Every artificial judicial person not falling within any of the preceding sub-clauses e.g.
Delhi University.

Assessee [Section 2(7)]

Assessee means a person by whom any tax or any other sum of money is payable as per
this Act.

A Deemed Assessee
A person who is deemed to be an assessee for some other person, is called Deemed
Assessee. For example, (i) after the death of a person, his legal representative (ii) a person
representing a foreigner or a minor or a lunatic

Assessee in Default
When a person is responsible for doing any work under the Act and he fails to do so, he is
called an assessee in default. For example- if a person is liable to deduct income tax while
making any payment to another person & he does not deduct or does not deposit it in the
Govt. Treasury.

Assessment Year [Section 2(9)]

It is the period of 12 months commencing on first day of April of every year. In simple words,
this is the year in which the tax liability of the assessee is calculated and is paid by assessee
on the income earned in previous year.

Previous year [Section 2(34) & 3]

It is the financial year immediately preceding the assessment year. Therefore, the income
earned during the previous year 2022-23 will be assessed or charged to tax in the
assessment year 2023-24.

First Previous year for a business/profession newly set-up during the financial year
or for a new source of income:
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GIBS INCOME TAX LAW & PRACTICE BBA INTRODUCTION TO INCOME TAX

From the date of setting up of the business or from the date of the new source came to
existence To the last date of that financial year i.e. 31st of March.

Cases where income of previous year is assessed in the same year

As a normal rule, the income earned during any previous year is assessed or charged to tax
in the immediately succeeding year. However, in the following cases the income istaxed
in the same previous year:-
1) Non- resident shipping business (Section 172): If a non-resident owns a ship or ship
is chartered by him & the ship carries passengers, livestock, mail or goods shipped at a
port in India, 7.5% of amount paid/payable on a/c of such carriage to the non-resident
shall be deemed to be income of the taxpayer. The master of the ship shall submit a
return of income before the departure of the ship from the Indian port. Such return may
be submitted within 30 days of the departure of the ship, if the Assessment Officer is
satisfied that it will be difficult to submit the return before departure & if satisfactory
arrangement for payment of tax has been made.

2) Assessment of Persons Leaving India(Section 174): When it appears to the

Assessing Officer that any individual may leave India during the current assessment year
and that he has no intention of returning to India, the total income of the individual for the
period noted below is charged to tax in that assessment year:
❖ Commencing from first day of assessment year
❖ To the probable date of his departure from India

3) AOP/BOI formed for short duration (Section 174A): If it appears to the Assessing
Officer that any AOP/BOI is likely to be dissolved in the assessment year in which it
was formed, the total income of such AOP/BOI for the period from first day of that year
to the date of its dissolution shall be chargeable to tax in that assessment year.

4) Assessment of Persons likely to Transfer Property to Avoid Tax (Section 175): If

it appears to the Assessing Officer that any person is likely to sell, transfer, dispose off
any of his assets with a view to avoid the tax, the total income of such person for the
period from first day of that year to the date when he is likely to do so shall be
chargeable to tax in that assessment year.

5) Discontinued Business (Section 176): The income for the period commencing from
the first day of the assessment year to the date of discontinuance, is taxed in the
assessment year of discontinuance.
Note
It may be noted that in first four cases, it is mandatory for the AO to charge the tax in the
same P/Y. But in last case, there is a choice for the AO i.e. if he wishes he can case or he
can wait till the A/Y.

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GIBS INCOME TAX LAW & PRACTICE BBA INTRODUCTION TO INCOME TAX

COMPUTATION OF TOTAL INCOME (TAXABLE INCOME)

As per section 14, all the incomes shall be classified in following five heads:-
1. Income from Salaries (Section 15-17) XXX
2. Income from House Property (Section 22-27) XXX
3. Profits & gains from business & profession (Section 28-44D) XXX
4. Capital Gains (Section 45-55A) XXX
5. Income from other sources(Section 56-59) XXX
(Income from interest, lotteries, gifts etc.)
Total (1+2+3+4+5) XXX
Less: Adjustment on account of set-off & carry forward of losses XXX
GROSS TOTAL INCOME (GTI) XXX
Less:Deduction U/S 80C to 80U XXX
TOTAL INCOME/TAXABLE INCOME (*Rounded Off U/S 288A) XXX

Computation of Tax Liability

Tax on Total Income XXX
Less: Rebate U/S 87A (**Resident individual having total income XXX
not exceeding Rs.5 lakh)
Income Tax after rebate U/S 87A XXX
Add: Surcharge (if applicable) XXX
Tax after surcharge XXX
Add: Health & Education Tax (4% of tax after surcharge) XXX
Less: Rebate U/S 86,89,90,90A & 91 (if applicable) XXX
Tax Payable XXX
Less: Pre Paid Taxes if any-
• Tax paid on self-assessment
• TDS
• Advance tax paid
Tax Liability (*Rounded off U/S 288B) XXX

*Rounded Off U/S 288A/288B

As per these sections, total income/tax liability is rounded off to the nearest multiple of 10.
Up to Rs. 4.99 is ignored. If last figure is 5 or more than it is rounded off to next multiple of
10.e.g. If net income is 2, 45,234.99, it shall be 2, 45,230. But if it is 2, 45,235, it shall be 2,
45,240.

**Rebate u/s 87A

The amount of rebate is income tax on total income or Rs.12,500 whichever is less.

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GIBS INCOME TAX LAW & PRACTICE BBA INTRODUCTION TO INCOME TAX

Difference between Gross Total Income and Total Income

S. NO. Gross Total Income Total Income

1. Aggregate of various heads of income is After deduction U/s 80C to 80U, the balance is
called Gross Total Income. called Total Income.
2. Gross Total Income is not rounded off. Total Income is rounded off to the nearest multiple
of ten rupees.
3. Tax is not levied on Gross Total Income. Tax is levied on the Total Income at the prescribed
rates.
4. Gross Total Income is not less than the Total Income can be equal to Gross Total Income
Total Income. or less than Gross Total Income.
5. Agricultural income is not included in Gross If agricultural income excess Rs. 5,000/-, it is
Total Income. included in the total income of an individual or
HUF to determine the tax payable by the
assessee.

Tax Rates for A/Y 2023-24 (Under Regular Tax Regime)

(A) For Resident Senior Citizen (age 60 years but less than 80 years Men/Women )
Total income up to Rs.3, 00,000 Nil
Total income above Rs.3,00,000 to Rs.5,00,000 5% of excess of Rs. 3, 00,000
Total income above Rs.5,00,000 to Rs. 10, 20% of excess of Rs. 5, 00,000
00,000
Total income above Rs. 10, 00,000 30% of excess of Rs.10, 00,000

* Health &Edu. Cess(H & EC) @4% of Tax

Surcharge
10% of the Income Tax, where total taxable income is more than Rs. 50,00,000 and 15% of
Income Tax if total income exceeds Rs. 1 crore.

(B) For Resident Senior Citizen (age 80 years or above Men/Women)

Total income up to Rs. 5, 00,000 Nil

Total income above Rs. 5, 00,000 to Rs. 20% of excess of Rs. 5, 00,000
10, 00,000
Total income above Rs. 10, 00,000 30% of excess of Rs.10, 00,000

*Health &Edu. Cess(H & EC) @4% of Tax

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GIBS INCOME TAX LAW & PRACTICE BBA INTRODUCTION TO INCOME TAX

Surcharge
10% of the Income Tax, where total taxable income is more than Rs. 50,00,000 and 15% of
Income Tax if total income exceeds Rs. 1 crore.

(C) For Other Individuals (men/women)/AOP/BOI etc. (other than Firm &Company)

Total income up to Rs. 2, 50,000 Nil

Total income above Rs. 2, 50,000 to Rs. 5,
00,000
Total income above Rs.5,00,000 to Rs. 10,
00,000
Total income above Rs. 10, 00,000
5% of excess of Rs. 2, 50,000
20% of excess of Rs. 5, 00,000
30% of excess of Rs.10, 00,000

Surcharge
10% of the Income Tax, where total taxable income is more than Rs. 50,00,000 and 15% of
Income Tax if total income exceeds Rs. 1 crore.

Tax Rates for A/Y 2023-24 (Under Alternative Tax Regime U/S 115BAC)
An individual/HUF can opt for the alternative tax regime where tax rates are lower than
the regular rates. However, a few tax incentives are blocked. So, taxable income is
calculated without availing these blocked incentives.

Total Income (computed after ignoring blocked Tax Rates

incentives)
Up to Rs. 2, 50,000
Above Rs. 2, 50,000 to Rs. 5, 00,000
Above Rs. 5, 00,000 to Rs. 7, 50,000
Above Rs. 7, 50,000 to Rs. 10, 00,000
Above Rs. 10, 00,000 to Rs. 12, 50,000
Above Rs. 12, 50,000 to Rs. 15, 00,000
Above Rs. 15, 00,000
Nil
5% of excess of Rs. 2, 50,000
10% of excess of Rs. 5, 00,000
15% of excess of Rs. 7, 50,000
20% of excess of Rs. 10, 00,000
25% of excess of Rs. 12, 50,000
30% of excess of Rs.15, 00,000

*Exemption limit is Rs.2,50,000 even in case of senior citizens and super senior citizens.
*Rebate U/S 87A is available.
*Surcharge and education cess are applicable same as under regular tax regime.

Blocked Incentives under Alternative Tax Regime

- Leave travel concession [sec. 10(5)]

- House rent allowance [sec. 10(13A)]
- Special allowances other than (a) travelling allowances (b) transfer allowance (c)
conveyance allowance for official purposes (d) transport allowance of Rs.3200 per month
to employee who is blind or deaf dumb or orthopedically handicapped. [sec. 10(14)]
- Allowance to MPs/MLAs [sec. 10(17)]

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GIBS INCOME TAX LAW & PRACTICE BBA INTRODUCTION TO INCOME TAX

- Exemption up to Rs.1500 available in the case of clubbed income of minor child [sec.
10(32)]
- Special economic zone [sec. 10(AA)]
- Exemption of perquisite in respect of free food and non-alcoholic beverage i.e., Rs.50
per meal provided through paid voucher [sec. 17(2)]
- Standard deduction [sec. 16(ia)]
- Entertainment allowance deduction [sec. 16(ii)]
- Professional tax deduction [sec. 16(iii)]
- Interest on housing loan in the case of one or two self occupied properties [sec. 24(b)]
- Additional depreciation [sec. 32(1)(iia)]
- Site restoration fund [sec. 33ABA]
- Tea/coffee/rubber development account [sec. 33AB]
- Deduction for scientific research [sec. 35(1)(ii)/(iia)/(iii), 35(2AA)]
- Capital expenditure pertaining to specified business [sec. 35AD]
- Agriculture extension project [sec. 35CCC]
- Standard deduction in case of family pension [sec. 57(iia)]
- Deduction U/S 80C to 80U except employer’s contribution towards NPS u/s 80CCD(2),
deduction u/s 80JJAA and deduction u/s 80LA(1A).

How to Find Out Whether Alternative Tax Regime is Better or Not

Alternative Tax Regime u/s 115BAC is an optional scheme. One can find out net income and
tax liability under the regular tax regime and alternative tax regime. By comparing the tax
liability under the both tax regimes, one can find out whether alternative tax regime is better
or not.

*NOTE: If the amount of blocked incentives is Rs.2,50,000 or more, regular regime is better.
If this amount is less than Rs.2,50,000 then one must separately calculate tax liability under
both regimes and compare where it is less.

Some Important Principle Which Explain The Concept Of Income For

Income Tax Purpose

1) Regularity of Income
a) To be taxed it is not necessary a source of income is regular
b) Thus even casual income like lotteries, winning from races etc. are taxable

2) Form of income : Income can be received in cash or in kind

3) Legal Vs. Illegal Income

a) For income tax purpose, there is no difference b/w legal & illegal income
b) For example income from smuggling would also be taxable

4) Disputed Income
a) Any dispute regarding the title of income cannot hold up the assessment of the
income

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GIBS INCOME TAX LAW & PRACTICE BBA INTRODUCTION TO INCOME TAX

b) In such case it is AO who decides regarding the taxability of such disputed income.

5) Lump sum Receipt: If a receipt is an income whether it is received in lump sum or in

installments would not affect its taxability.

SAMPLE PRACTICAL QUESTIONS

Question1: Mr. X (35 years) is an individual. His net income under regular tax regime is
Rs.18,20,000. It is calculated after claiming a few deductions/incentives (i.e., standard
deduction: Rs.50,000, deduction u/s 80C: Rs. 1,50,000, and deduction u/s 80G: Rs.70,000).
Find the tax liability of Mr. X for A/Y 2023-24 under both regular and alternative tax regime.
Also suggest which tax regime should he opt?

Solution: The quantum of blocked incentives is Rs.2,70,000 (i.e., Rs.50,000 + Rs.1,50,000

+ Rs.70,000). Whenever the quantum of blocked incentives is higher than Rs.2,50,000,
regular tax regime is better than the alternative tax regime. To verify it, let us calculate the
tax liabilities under both regimes:
Particulars Regular Tax Alternative Tax
Regime (Rs.) Regime (Rs.)
Net Income under regular tax regime 18,20,000 18,20,000
Add: Blocked incentives --- 2,70,000
Net income under regular/alternative tax 18,20,000 20,90,000
regime
Income tax under regular/alternative tax 3,58,500 3,64,500
regime (WN 1 & 2)
Add: Health & education cess @ 4% 14,340 14,580
3,72,840 3,79,080

Tax liability is lower under the regular tax regime. X should not opt for the alternative tax
regime.

Working Notes:

1. Income tax under regular tax regime:

Income Tax
First Rs.2,50,000 Nil
Above Rs.2,50,000 to Rs. 5,00,000 Rs.12,500 (5% of 2,50,000)
Above Rs.5,00,000 to Rs.10,00,000 Rs.1,00,000 (20% of 5,00,000)
Above Rs.10,00,000 Rs.2,46,000 (30% of 8,20,000)
Total Rs. 3,58,500

2. Income tax under alternative tax regime:

Income Tax
First Rs.2,50,000 Nil
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GIBS INCOME TAX LAW & PRACTICE BBA INTRODUCTION TO INCOME TAX

Above Rs.2,50,000 to Rs. 5,00,000 Rs.12,500 (5% of 2,50,000)

Above Rs.5,00,000 to Rs.7,50,000
Above Rs.7,50,000 to Rs.10,00,000
Above Rs.10,00,000 to Rs.12,50,000
Above Rs.12,50,000 to Rs.15,00,000
Above Rs.15,00,000
Total
Rs.25,000 (10% of 2,50,000)
Rs.37,500 (15% of 2,50,000)
Rs.50,000 (20% of Rs. 2,50,000)
Rs.62,500 (25% of Rs.2,50,000)
Rs.1,77,000 (30% of Rs.5,90,000)
Rs. 3,64,500

Question2: Mr. Y (23 years) is an individual. His net income under regular tax regime is
Rs.22,50,000. It is calculated after claiming a few deductions/incentives (i.e., standard
deduction: Rs.50,000 and deduction u/s 80C: Rs. 10,000).
Find the tax liability of Mr. Y for A/Y 2023-24 under both regular and alternative tax regime.
Also suggest which tax regime should he opt?

Solution: The quantum of blocked incentives is Rs.60,000 (i.e., Rs.50,000 + Rs.10,000).

Since the quantum of blocked incentives is lower than Rs.2,50,000, tax liability should be
calculated separately under both tax regimes as follows:
Particulars Regular Tax Alternative Tax
Regime (Rs.) Regime (Rs.)
Net Income under regular tax regime 22,50,000 22,50,000
Add: Blocked incentives --- 60,000
Net income under regular/alternative tax 22,50,000 23,10,000
regime
Income tax under regular/alternative tax 4,87,500 4,30,500
regime (WN 1 & 2)
Add: Health & education cess @ 4% 19,500 17,220
5,07,000 4,47,720

Working Notes:
1. Income tax under regular tax regime:

Income Tax
First Rs.2,50,000 Nil
Above Rs.2,50,000 to Rs. 5,00,000 Rs.12,500 (5% of 2,50,000)
Above Rs.5,00,000 to Rs.10,00,000 Rs.1,00,000 (20% of 5,00,000)
Above Rs.10,00,000 Rs.3,75,000 (30% of 12,50,000)
Total Rs. 4,87,500

2. Income tax under alternative tax regime:

Income Tax
First Rs.2,50,000 Nil
Above Rs.2,50,000 to Rs. 5,00,000 Rs.12,500 (5% of 2,50,000)
Above Rs.5,00,000 to Rs.7,50,000 Rs.25,000 (10% of 2,50,000)

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GIBS INCOME TAX LAW & PRACTICE BBA INTRODUCTION TO INCOME TAX

Above Rs.7,50,000 to Rs.10,00,000 Rs.37,500 (15% of 2,50,000)

Above Rs.10,00,000 to Rs.12,50,000 Rs.50,000 (20% of Rs. 2,50,000)
Above Rs.12,50,000 to Rs.15,00,000 Rs.62,500 (25% of Rs.2,50,000)
Above Rs.15,00,000 Rs.2,43,000 (30% of Rs.8,10,000)
Total Rs. 4,30,500

QUESTIONS FOR PRACTICE

1. Total income of Mrs. Neha, aged 50 a resident of India is Rs.13, 94,000. It is calculated
after claiming a few deductions/incentives (i.e., Blocked incentives of Rs.2,30,000). Compute
hertax liability for A/Y 2023-24 under both regular and alternative tax regime. Also suggest
which tax regime should he opt?

2. Total income of Mr. Malhotra, aged 56 is Rs. 3, 26,500. It is calculated after claiming
a few deductions/incentives (i.e., Blocked incentives of Rs. 50,000). Compute his tax
liability for A/Y 2023-24 under both regular and alternative tax regime. Also suggest which
tax regime should he opt?

3. Total income of Mr. Sarna, aged 70 a resident of India for assessment year 2023-24 is12,
90,450. It is calculated after claiming a few deductions/incentives (i.e., Blocked incentives of
Rs.2,80,000). Compute his tax liability for A/Y 2023-24 under both regular and alternative tax
regime. Also suggest which tax regime should he opt?

4. Total income of Mr. Arora, aged 45 a resident of India is Rs. 18, 94,000. Compute his tax
liability for A/Y 2023-24 under regular tax regime.

5. Total income of Mrs. Arora, aged 75 a non-resident of India is Rs. 17, 46,300. Compute
her tax liability for A/Y 2023-24 under regular tax regime.

6. Total income of Mrs. Arora, aged 55 a non-resident of India is Rs. 18, 46,300. Compute
her tax liability for A/Y 2023-24 under regular tax regime.

7. Total income of Mr. Sharma, aged 60 a resident of India for assessment year 2023-24 is
18, 90,460. Compute his tax liability under regular tax regime.

8. Total income of Mrs. Sharma, aged 54 a resident of India for assessment year 2023-24 is
27, 45,640. Compute her tax liability under regular tax regime.

9. Total income of Mr. Shyam, aged 70 a resident of India for assessment year 2023-24 is
19, 54,430. Compute his tax liability under regular tax regime.

10. Total income of Mr. Vipin, aged 80 a resident of India for assessment year 2023-24 is
18, 94,000. Compute his tax liability under regular tax regime.

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