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Law of Taxation 2
Law of Taxation 2
There are two types of taxes. Direct taxes and indirect taxes.
Direct tax
If tax is levied directly on the income or wealth of a person, then it is a direct tax e.g. income-tax, wealth
tax.
Indirect tax
Taxes that are indirectly imposed on the public through goods and services are called indirect taxes.
Various indirect taxes which were imposed by the central and state government are incorporated by
GST.
Article 265 of the Constitution of India says that "No tax shall be levied or collected except by authority
of law".
List 1 in the 7th schedule to the constitution has the powers of the Central Government listed in
Entries 82-92B.
List 2 in the schedule has the powers of the State Government listed in Entries 45-63.
Entry 97 of List 1 in the 7th Schedule contains residuary powers of taxation belonging only to the
centre.
The definition of income as per the Income-tax Act begins with the words “Income includes”.
Such a definition does not confine the scope of income but leaves room for more inclusions within the
ambit of the term.
The CBDT administers the Income Tax Department, which is a part of the Department of Revenue under
the Ministry of Finance, Govt. of India.
The Income Tax Law consists of :
(7) "assessee" means a person by whom any tax or any other sum of money is payable
under this Act, and includes—
(a) every person in respect of whom any proceeding under this Act has been
taken for the assessment of his income or assessment of fringe benefits or of
the income of any other person in respect of which he is assessable, or of the
loss sustained by him or by such other person, or of the amount of refund due
to him or to such other person;
(b) every person who is deemed to be an assessee under any provision of this Act;
(c) every person who is deemed to be an assessee in default under any provision
of this Act
(9) "assessment year" means the period of twelve months commencing on the 1st day of April every
year
Assessment year is the financial year (commencing on the 1st April and ending on 31st March) following
the previous year.
Capital receipts are generally not included within the scope of income.
However, certain capital receipts are considered as income and taxable under
the head Capital gains
e.g. gains on sale of commercial land
The Income Tax Act has not discussed the concept of capital and revenue therefore we have to depend
upon the accounting principles and judicial pronouncements.
What Are Capital Receipts?
Capital receipts are payments received by a company that are not income in nature and
enhance the company's overall capital. These are funds generated by a company's non-
operating operations and appear on the balance sheet rather than the income statement.
They are non-recurring, meaning they do not occur regularly. They end up increasing a
company's obligations or decreasing its assets. These types of receipts have no impact on an
organization's total profit or loss.
Net receipts are arrived at after deducting the expenditure incurred in connection with earning such
receipts.
Taxable Income
An exempt income is not charged to tax, i.e., Income-tax Law specifically grants exemption
from tax to such income.
Agricultural income
Agricultural income is not taxable. However, if you have non-agricultural income too, then
while calculating tax on non-agricultural income, your agricultural income will be taken into
account for rate purpose.
Under the Constitution Parliament has no power to levy tax on agricultural income.
Only the State Governments are empowered to levy tax on agricultural income.
Therefore according to S 10(1) of the IT Act agricultural income is exempt from central income
tax.
But wef assessment year 1974-75 agricultural income become a factor in determination of tax
on non agricultural income.
S 2 (1A) defines agricultural income.
3 basic conditions which must be satisfied before a particular income may be treated as agricultural
income are as follows
The definition of income as per the Income-tax Act begins with the words “Income includes”.
Therefore, it is an an inclusive definition of income and not an exhaustive one.
Such a definition does not confine the scope of income but leaves room for more inclusions
within the ambit of the term.
The word income includes not only those things which are included in S 2(24) but will also
include within its import such things as the word signifies according to its natural or
literal meaning.
It was held that even if a receipt does not fall within the ambit of any of the sub
clauses in S 2(24) it still be income if it partakes of the nature of income.
The idea behind providing inclusive definition in S 2(24) is not to limit its meaning
but to widen its net.
The word income is of widest amplitude and it must be given its natural and grammatical
meaning.
Its ambit should be the same as that of the word income occuring in entry 82 of list 1 of the 7th
schedule to the constitution.
Thus the following general principles emerge regarding the concept of income
Regularity of income
Income is a periodical monetary return coming with some sort of regularity or expected
regularity from definite sources.
However recurring nature is not an absolute necessity in order that an item may be designated
as income for the purposes of income tax.
Thus income may not necessarily be recurring in nature though it is generally of that character.
Form of income
It is not necessary that the income must be received in the form of money.
Receipts in kind or service having money equivalent can also be income.
The income arises either on receipt basis or accrual basis but the substance of the matter is
income.
If an assessee has earned income but has not actually received it it will be treated as income of
assessee because he is entitled to receive it.
Illegal income
Income earned by unlawful means is also assessable if it satisfies the prescribed conditions of
receipt or deemed receipt, accrual or deemed accrual as the case may be.
However any expense or loss incurred by an assessee in carrying on such business is not
deductible as per S 37(1).
Money received by a women from husband for private use or household expenses shall not
be considered as her income for the purposes of income tax.
Any property acquired with such money or savings would be the capital asset belonging to
woman -RBNJ Naidu V CIT 1956.
Compensation from insurance company against injuries sustained in a road accident is not
income.
Court observed that the determinative factor is the nature and effect of assessee’s
obligation in regard to the amount in question.
Where such obligation entitles a third person to receive the amount before the
assessee could lay a claim to receive the same as his income there is Diversion of
income by an overriding title.
But where after the receipt of income by the assessee the same is passed on to a
third person in discharge of an obligation that would be a case of application of
income not Diversion of income.
Section 6 of the Income Tax Act deals with the Residential status
The term residential status has been coined under the income tax laws of
India and must not be confused with an individual’s citizenship in India.
To determine the residential status of an individual, the first step is to ascertain whether he
is resident or non-resident.
If he turns to be a resident, then the next step is to ascertain whether he is resident and
ordinarily resident or is a resident but not ordinarily resident.
Resident
an individual will be treated as a resident in India for a year if he satisfies any of the
following conditions:
Same provisions are applicable for a citizen of India, or a person of Indian origin within the meaning
of Explanation to clause (e) of section 115C, who, being outside India, comes on a visit to India in
any previous year
The Finance Act, 2020, w.e.f., Assessment Year 2021-22 has amended the above exception
to provide that the period of 60 days as mentioned in (2) above shall be substituted with
120 days, if an Indian citizen or a person of Indian origin whose total income, other than
income from foreign sources, exceeds Rs. 15 lakhs during the previous year.
Income from foreign sources means income which accrues or arises outside India (except
income derived from a business controlled in or a profession set up in India).
However, such individual shall be deemed to be Indian resident only when he is not liable to
tax in any country or jurisdiction by reason of his domicile or residence or any other criteria
of similar nature.
Thus, from Assessment Year 2021-22, an Indian Citizen earning total income in excess of Rs.
15 lakhs (other than from foreign sources) shall be deemed to be resident in India if he is
not liable to pay tax in any country.
Note: The Finance Act, 2020 has introduced new Section 6(1A) to the Income-tax Act, 1961.
The new provision provides that an Indian citizen shall be deemed to be resident in India if
his total income, other than income from foreign sources, exceeds Rs. 15 lakhs during the
previous year.
Step 2: Determining whether resident and ordinarily resident or resident but not
ordinarily resident
2. Has stayed in India for at least 730 days in 7 immediately preceding years
Therefore, if any individual fails to satisfy even one of the above conditions, he
would be an RNOR.
From FY 2020-21, a citizen of India or a person of Indian origin who leaves
India for employment outside India during the year will be a resident and
ordinarily resident if he stays in India for an aggregate period of 182 days or
more.
However, this condition will apply only if his total income (other than foreign
sources) exceeds Rs 15 lakh.
If the individual does not satisfy any of the conditions specified at step one, then he will
become non-resident.
Taxability
Resident:
A resident will be charged to tax in India on his global income i.e. income
earned in India as well as income earned outside India.
NR and RNOR:
Their tax liability in India is restricted to the income they earn in India.
They need not pay any tax in India on their foreign income.
Income Tax Exemption on
Gratuity
Basics of Gratuity
Gratuity is a monetary benefit given by the employer
The provisions of gratuity are governed by the Payment of Gratuity Act, 1972.
Exemptions on Gratuity
For the purposes of exemption under Section 10(10) of the Income Tax Act
the employees have been divided into the following 3 categories –
When private sector employees are covered under the Act under Section
10(10) (ii)
under the Payment of Gratuity Act The least of the following is exempt from
tax:
Rs. 20 lakhs (which has been hiked from Rs. 10 Lakh as per the
amendment);
Sr.
Particulars As Amended
No.
Taxable gratuity –
When private sector employees are not covered under the Act