Basic Framework of Direct Taxation

BASIC
FRAMEWORK OF
DIRECT TAXATION
Module -
Dr.Ajaz Ahmed Khan

Professor
Govt. R.C. College, Bangalore.
aak175@gmail.com
Mob: 78 99 43 83 73
2020
INTRODUCTION:
In India, Constitution is the parent law. All other laws
should be enacted without exceeding the framework of
the constitution and subject to the norms laid down
therein. The Constitution of India empowers Central
Government to levy tax on income. By virtue of this
power and to achieve this objective, the Income-tax
Act, 1961 was enacted in the place of the Income-tax
Act, 1922. The Income-tax Act, 1961 came into force
on the 1st day of April 1962 i.e., from assessment year
1962-63 onwards. It extends to the whole of India. It
has been amended and re-amended from time to time
which brings in several changes since 1962.
CTP – Basic Concepts 2019 Dr. Ajaz Ahmed Khan (aak175@gmail.com) 2
Tax is one of the main sources of income to the central
government.
Every citizen of a country pays tax compulsorily in one

way or the other i.e. directly or indirectly.
Income tax is the tax paid for the income earned.

 What is Tax ? Tax derived from the Latin word taxo
mean “rate”. Tax may be defined as a charge, levy,
toll or tariff. A tax is a financial charge or other levy
imposed upon a taxpayer (an individual or legal entity)
by a state or the functional equivalent of a state to fund
various public expenditures. A failure to pay or
evasion of or resistance to taxation, is usually
punishable by law.
 Income Tax: Income tax may be defined as a charge
or levy on income earned by a person during a
previous year which exceeds certain minimum taxable
limit.
 Who is liable to pay income tax? Every person,
whose taxable income for the previous financial year
exceeds the minimum taxable limit is liable to pay to
the Central Government income tax during the current
financial year on the income of the previous financial
year at the rates in force during the current financial
year.
Income tax is a very important direct tax. It is an
important and most significant source of revenue of
the government which needs money to maintain law
and order, promoting peoples welfare and country’s
security.
CANONS OF TAXATION (Rules, Criterion or Principles)
Adam Smith has enumerated the following four canons
(ie. Rules, criterion or principles) of taxation which are
accepted universally:
 Canon of Equality: Equality means justice. The tax
may be levied according to the tax paying capacity of
the individuals.
 Canon of Certainty: Every tax-payer must know the
time of payment, manner and mode of payment of tax
so that he may adjust his expenditures accordingly to
pay tax.
CANONS OF TAXATION Contd…
 Canon of Convenience: Taxes should be imposed

and collected in such a manner that it provides the
maximum of convenience to the payers to pay their
taxes.
 Canon of Economy: The administrative cost of
collection of taxes should be minimum.

The other canons of taxation are:

(1) Canon of productivity – taxation should be imposed
in such a manner that they are encouraged to pay tax.
(2) Canon of Elasticity – the rates of the taxation may be
adjusted according to the needs of the government.
(3) Canon of Diversity – There should be a proper
mixture of direct and indirect taxes so that every
individual is made to contribute towards public
revenue.
(4) Canon of Expediency: All favourable and

unfavourable considerations should be taken into
account from the social, economic and political point of
view.
(5) Canon of Neutrality – Tax should not have any
inflationary or deflationary effect on the economy.
(6) Canon of Coordination – There should not be
overlapping of taxation from Central, State and local
bodies.
Taxes can be broadly classified into two:-
1) DIRECT TAXES:
When the incidence and impact is on the same
person, then it is called direct tax.
 Income tax
 Property tax
2) INDIRECT TAXES:
When the incidence & impact is on different persons,
then it is called indirect tax.
 Excise
 Sales tax
 Custom Duty
 GST

Basic Concepts
Agricultural income [Section 2(1A)]
Agricultural income means:
a. any rent or revenue derived from land which is situated
in India and is used for agricultural purposes, or
b. any income derived from such land by agriculture or by
the process employed to render the produce fit for the
market or by sale of such produce by a cultivator or
receiver of rent in kind;
c. Any income derived from any building, provided the
following conditions are satisfied –
i. The building is on or in the immediate vicinity of the
agricultural land;
Basic Concepts
Agricultural income [Section 2(1A)]
ii. It is occupied by the cultivator or receiver of rent or
revenue;
iii. It is used as a dwelling house or store-house or out-
house; and
iv. The land is assessed to land revenue in India or it is
not situated within the specified area.
Agricultural income is not taxable. However, if assessee is having any
other income, then, agricultural income will be included to calculate
tax on other income other than agricultural income.
Note: If the agricultural land situated outside India, then it is taxable in

the hands of a resident individual in India.
Basic Concepts
Assessee [sec 2 (7)]:
Assessee {U/s 2(7)} means a person by whom any tax or
any other sum of money is payable under the Income-
tax Act and includes ––
(a) every person in respect of whom any proceedings
under this Act have been taken for the assessment of
his income or of the income of any other person in
respect of which he is assessable or loss sustained by
him or by such other person or of the amount of refund
due to him or to such person;
(b) a person who is deemed to be an assessee under any
provisions of this Act;
Basic Concepts
(c) a person who is deemed to be an assessee-in-default
under any provision of this Act.

Assessee-in-default
A person is deemed to be 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 Govt. 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.

Basic Concepts
Deemed assessee
(a) In case of a deceased person who dies after writing
his will the executors of the property of deceased are
deemed as assessees.
(b) In case a person dies without writing his will, his eldest
son or other legal heirs are deemed as assessee.
(c) In case of a minor, lunatic or idiot having income
taxable under I.T. Act, their guardian is deemed as
assessee.
(d) In case of a non-resident having income in India, any
person acting on his behalf is deemed as assessee.

Basic Concepts
Assessment year (Sec 2 (9):
Assessment year means the period of twelve months starting
from April 1st every year & ending on march 31st next year. It is
the year in which Return of Income is filed
Previous year (Sec 3):

Generally a period of twelve months (may even be
lesser) and begins on 1st April and ends on 31-March of
following year. Also called income year. In other words, Income
earned in a year is taxable in the next year and the year in which
income is earned is known as previous year.

Basic Concepts
Exceptions to the General rule of Previous year:
In the following cases, income is charged to tax in the
previous year itself:
 Shipping business income of non-resident ship owners.(172)
 In case of persons leaving India with no intention of returning.
(Sec.174)
 Assessment of any association of persons, body of individuals
or artificial juridical person formed or established only for a
limited period. (Sec.174A)
 In case of persons who are likely to transfer their assets to
avoid tax (Sec.175)
 In case of discontinued business. (Sec.176).
Basic Concepts
Person sec2(31)
The term “Person” includes:
a) An individual.
b) A Hindu undivided family.
c) A company.
d) A firm.
e) An Association Person.
f) Local Authority.
g) Every artificial juridical person, not falling in the
above clauses from (a) to (f)
Basic Concepts
Income [Section 2(24)]
Income includes:
a. Profits and gains,
b. Dividends,
c. Voluntary contributions received by a charitable or

religious trust or institution or association or university
or educational institutions or hospitals or electoral
trusts;
d. The value of any perquisite or profit in lieu of salary,
e. Export incentives;

Basic Concepts
Income [Section 2(24)]
f. Any interest, salary, bonus, commission or
remuneration earned by a partner of a firm from such
firm;
g. Any capital gains chargeable u/s 45;
h. Profits and gains of any business of insurance carried
on by a mutual insurance company or by a co-
operative society;
i. Profits and gains of any business of banking carried on
by a co-operative society with its members;

Basic Concepts
Income [Section 2(24)] Contd…
j. Winnings from lotteries, crossword puzzles, races

including horse races, card games and other games of
any sort or from gambling or betting of any form or
nature whatsoever;
k. Any sum received by the assessee from his employees
towards welfare fund contributions such as provident
fund, superannuation fund etc;
l. Any sum received under a keyman insurance policy
including the sum allocated by way of bonus on such
policy;

Basic Concepts
Income [Section 2(24)] Contd…
m. Non-compete fee and any compensation for not

sharing of any intangible asset such as know-how,
patent, trademark;
n. Any sum of money, movable or immovable property
received as gifts as stipulated in section 56(2);
o. Any consideration received for issue of shares as
exceeds the fair market value of the shares referred to
under section 56(2)(viib).

Basic Concepts
Average Rate [Section 2(10)]
“Average rate of income-tax” means the rate arrived
at by dividing the amount of income-tax calculated
on the total income by such total income.
Total Tax
Average rate = ---------------- x 100
Total Income

Basic Concepts
Gross Total Income [G.T.I]
U/s 14 the term “Gross Total Income” [GTI] means aggregate
of incomes computed under the following five heads:
i. Income under the head “Salaries”.
ii. Income under the head “House Property”.
iii. Income under the head “Profits and gains of Business or

Profession”.
iv. Income under the head “Capital Gains”.
v. Income under the head “Other Sources”.
In other words, gross total income is sum of taxable incomes

from all the five heads of income before allowing any
deductions under section 80C to 80U.
Basic Concepts
Total Income / Taxable income:

Total income or taxable income is the balance of
gross total income less deductions under section
80CC to 80U. It is this income on which income tax
is payable by the assessee.

Basic Concepts
Block of assets [Section 2(11)]
It means a group of assets falling within a class of
assets comprising :
a) tangible assets being buildings, machinery, plant or
furniture.
b) Intangible assets being know-how, patents,
copyrights, trade marks licenses, franchises or any
other business or commercial rights of similar
nature.
in respect of which same percentage of depreciation
is prescribed.
Basic Concepts
Charitable purpose [Section 2(15)]
“Charitable purpose” includes relief of the poor,
education, medical relief and the advancement of
any other object of general public utility.
What is P.A.N ?
PAN or Permanent Account Number is a ten-digit unique
alphanumeric number issued by the Income Tax
Department. It enables the department to identify / link all
transactions of the PAN holder with the department like
TDS / TCS credits, returns of income, specified
transactions, correspondence and so on.
Basic Concepts
Colourable Devices
Those devices where statute is followed in strict
words but actually spirit behind the statute is
marred would be terms as colourable devises.


Basic Concepts
Components of Income-tax Act (or heads of
income)
According to Income-tax Act income of a person is
computed in five parts / components and each part
is known as head of income:
1. Income under the head ‘Salaries’. [Sec. 15 – Sec 17]
2. Income from House property. [Sec. 22 – Sec 27]
3. Income under the head Profits and gains of
business or profession. [Sec. 28 – Sec 44DB]
4. Income under the head Capital gains. [Sec. 45 – Sec 55A]
5. Income from Other Sources. [Sec. 56 – Sec 59]
Basic Concepts
Distinction between rounding off of income (Sec.
288A) and rounding off of tax (Sec. 288B).
The taxable income computed as per the provisions of I.T. Act
shall be rounded off to the nearest multiple of Rs.10. While
doing so, if the last figure of the total income of the assessee
is five or more, the figure shall be increased to the next
higher figure which should be the multiple of 10 and if the
last figure is less than five, it shall be reduced to next
lower amount which is multiple of 10.
While, the amount of tax including TDS or payable in advance,
interest, penalty, fine or any other sum payable and the
amount of refund shall be rounded off to the nearest
multiples of ten rupees.
Finance Act.
 The Finance Act contains necessary amendments in the

direct taxes (e.g. income tax) and indirect taxes (e.g.
excise duties, custom duties and service tax) signifying
the policy decisions of the Union Government.
 Finance Bill is presented usually in the last week of

February every year and this bill contains amendments in
direct as well as indirect taxes. It is usually presented in
the Parliament by the Finance Minister.

Finance Act.
 The finance bill is passed by both the houses of

Parliament after it is being tabled and necessary
recommendation / amendments have been made in it.
Once this bill has been passed by the Parliament, it
goes to the President for his assent. After President’s
assent, the finance bill becomes the Finance Act.

Finance Act.

Finance Act.
 The effective date of applicability of provisions of the

Finance Act is usually mentioned in the notification in
the official gazette or in the Act itself. Generally, the
amendments by the Finance Act are made applicable
from the first day of the next financial year e.g.
generally, amendments by Finance Act, 2015 are
effective from 1st April, 2016. Regarding indirect taxes,
the ad valorem tax rates (tax rates based on value) are
effective from the midnight of the date of presentation
of the Union Budget. .

Finance Act.

Finance Act.
First schedule to the annual Finance Act is divided

into four parts:
 Part I provides rates for current Assessment Year. For
example, Part I of the Finance Act, 2014 provides
income-tax rates for Assessment Year 2014-15;
 Part II provides rates of TDS for the current financial

year. For example, Part II of the Finance Act, 2014
provides rates of TDS for financial year 2014-15 (i.e.
Assessment Year 2015-16);

Finance Act.
First schedule to the annual Finance Act is divided

into four parts:
 Part III provides the rate of TDS under the head
Income from ‘Salaries’ and the rates of advance tax for
the current financial year. For example, Part III of the
Finance Act, 2014 provides rates of advance tax for
financial year 2014-15 (i.e. Assessment Year 2015-16).
 Part IV provides for rules for computation of net

agricultural income.

Tax Rates
Corporate Tax Rates for Assessment Year 2020-21
TAX RATES IN CASE OF DOMESTIC COMPANY
Income Rate of
Tax
i. On STCG on equity shares or units of equity oriented fund where such transaction is chargeable to securities transaction tax (STT)
u/s 111-A 15%
Ii On LTCG 20%
Iii On LTCG computed without claiming deduction of indexed cost in respect of listed securities or units of UTI or mutual fund (whether
listed or not) 10%
Iv On income from units purchased in foreign exchange or capital gain from their transfer (section 115AB) 10%
V On winnings from lotteries, races, crossword puzzles, card games and other games of any sort, gambling or betting of any form or
nature (section 115BB) 30%
Vi On income by way of dividend declared, distributed or paid by specified foreign company (Section 115 BBD)
15%
vii On any other income Where its total turnover or gross receipts of the previous year do not exceed Rs. 250 crore 25%
Where its total turnover or gross receipts of the previous year exceed Rs. 250 crore 30%
viii On profits declared, paid or distributed as dividend u/s 115-O 15%

Surcharge: No surcharge if income is upto Rs.1 crore. If total income of the company exceeds Rs. 1 crore but does not exceed Rs. 10
crore – surcharge is 7% of tax. Where total income of the company exceeds Rs. 10 crore – surcharge is 12% of tax.
Health and Education cess – 4% of tax and surcharge

Tax Rates
Corporate Tax Rates for Assessment Year 2020-21
TAX RATES IN CASE OF NON-DOMESTIC COMPANY (FOREIGN COMPANY)
Income Rate of Tax
i. On STCG on shares covered under STT 15%
ii On LTCG 20%
iii On income from units purchased in foreign exchange or capital gain from their transfer (section
115AB) 10%
iv On income from bonds or GDR’s purchased in foreign currency or gacpital gain arising on their 10%
transfer (section 115AC)
v On income of foreign institutional investors from securities or capital gain arising from their transfer
(section 115AD) 10%
vi On winnings from lotteries, races, crossword puzzles, card games and other games of any sort,
gambling or betting of any form or nature (section 115BB) 30%
vii On dividends, royalty and technical services fees (u/s 115UA) 10%
viii On any other income 40%

Surcharge: No surcharge if income is upto Rs.1 crore. If total income of the company exceeds Rs. 1 crore but does
not exceed Rs. 10 crore – surcharge is 2% of tax. Where total income of the company exceeds Rs. 10 crore –
surcharge is 5% of tax.

Health and Education cess – 4% of tax and surcharge
.
?
.
Thank U
Dr. Ajaz Ahmed Khan Ph.D.
Professor of Commerce,
Govt. R.C. College, Bengaluru
aak175@gmail.com
Mob: 78 99 43 83 73
2019

Basic Framework of Direct Taxation

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Basic Framework of Direct Taxation

Uploaded by

Copyright:

Available Formats

BASIC

Dr.Ajaz Ahmed Khan

Every citizen of a country pays tax compulsorily in one

Income tax is the tax paid for the income earned.

CTP – Basic Concepts 2019 Dr. Ajaz Ahmed Khan (aak175@gmail.com) 3

 Canon of Convenience: Taxes should be imposed

CTP – Basic Concepts 2019 Dr. Ajaz Ahmed Khan (aak175@gmail.com) 7

The other canons of taxation are:

(4) Canon of Expediency: All favourable and

CTP – Basic Concepts 2019 Dr. Ajaz Ahmed Khan (aak175@gmail.com) 10

Note: If the agricultural land situated outside India, then it is taxable in

CTP – Basic Concepts 2019 Dr. Ajaz Ahmed Khan (aak175@gmail.com) 14

CTP – Basic Concepts 2019 Dr. Ajaz Ahmed Khan (aak175@gmail.com) 15

Previous year (Sec 3):

CTP – Basic Concepts 2019 Dr. Ajaz Ahmed Khan (aak175@gmail.com) 16

c. Voluntary contributions received by a charitable or

CTP – Basic Concepts 2019 Dr. Ajaz Ahmed Khan (aak175@gmail.com) 19

CTP – Basic Concepts 2019 Dr. Ajaz Ahmed Khan (aak175@gmail.com) 20

j. Winnings from lotteries, crossword puzzles, races

CTP – Basic Concepts 2019 Dr. Ajaz Ahmed Khan (aak175@gmail.com) 21

m. Non-compete fee and any compensation for not

CTP – Basic Concepts 2019 Dr. Ajaz Ahmed Khan (aak175@gmail.com) 22

CTP – Basic Concepts 2019 Dr. Ajaz Ahmed Khan (aak175@gmail.com) 23

ii. Income under the head “House Property”.

iii. Income under the head “Profits and gains of Business or

v. Income under the head “Other Sources”.

In other words, gross total income is sum of taxable incomes

Total Income / Taxable income:

CTP – Basic Concepts 2019 Dr. Ajaz Ahmed Khan (aak175@gmail.com) 25

CTP – Basic Concepts 20198 Dr. Ajaz Ahmed Khan (aak175@gmail.com) 28

 The Finance Act contains necessary amendments in the

 Finance Bill is presented usually in the last week of

CTP – Basic Concepts 2019 Dr. Ajaz Ahmed Khan (aak175@gmail.com) 31

 The finance bill is passed by both the houses of

CTP – Basic Concepts 2019 Dr. Ajaz Ahmed Khan (aak175@gmail.com) 32

CTP – Basic Concepts 2019 Dr. Ajaz Ahmed Khan (aak175@gmail.com) 33

 The effective date of applicability of provisions of the

CTP – Basic Concepts 2019 Dr. Ajaz Ahmed Khan (aak175@gmail.com) 34

CTP – Basic Concepts 2019 Dr. Ajaz Ahmed Khan (aak175@gmail.com) 35

First schedule to the annual Finance Act is divided

 Part II provides rates of TDS for the current financial

CTP – Basic Concepts 2019 Dr. Ajaz Ahmed Khan (aak175@gmail.com) 36

First schedule to the annual Finance Act is divided

 Part IV provides for rules for computation of net

CTP – Basic Concepts 2019 Dr. Ajaz Ahmed Khan (aak175@gmail.com) 37

viii On profits declared, paid or distributed as dividend u/s 115-O 15%

Health and Education cess – 4% of tax and surcharge

CTP – Basic Concepts 2019 Dr. Ajaz Ahmed Khan (aak175@gmail.com) 38

You might also like