Unit 1
Income Tax Act- 1961- Important Definitions and Concepts
Income tax refers to direct tax imposed by the government on income of the citizens of India. It is levied on income of individuals from salary, business, business, profession and other income.
FEATURES OF INCOME TAX-
Some of the features of income tax are-
- It is a direct tax.
- It is charged on the total income of a person.
- It is charged on the income of the income year at the rate applicable in assessment year.
- It is payable in the year following the income year.
- It is generally charged on revenue income of a person.
- It is a tax charged on a person for income that comes within the preview of relevant income tax law.
- Whether the income is permanent or temporary, it is immaterial from the tax point of view. Even temporary income is taxable.
- If a person receives tax—free income on which tax is paid by the person making payment on behalf of the recipient, it has to be grossed up for inclusion in his total income.
SCOPE OF INCOME TAX ACT-
The scope of Total Income depends on the category of a taxpayer and his residential status in India. For example, a person resident in India is liable to pay income tax in India on his total world income. On the other hand, a person non-resident in India is liable to pay tax in India only on his Indian income. Under Income-tax Act, there are five heads of income - Salary, House Property, Business or Profession, Capital Gains and Other Sources. Total income consists of income computed under these heads. The tax on total income is computed as per the tax rates specified for the year in which income is earned.
IMPORTANCE OF INCOME TAX PAYMENT FOR DEVELOPMENT OF COUNTRY-
Governments impose charges on their citizens and businesses as a means of raising revenue, which is then used to meet their budgetary demands. This includes financing government and public projects as well as making the business environment in the country conducive for economic growth.
Importance of Taxes in Society
Without taxes, governments would be unable to meet the demands of their societies. Taxes are crucial because governments collect this money and use it to finance social projects.
Some of these projects include:
• Health
Without taxes, government contributions to the health sector would be impossible. Taxes go to funding health services such as social healthcare, medical research, social security, etc.
• Education
Education could be one of the most deserving recipients of tax money. Governments put a lot of importance in development of human capital and education is central in this development. Money from taxes is channelled to funding, furnishing, and maintaining the public education system.
• Governance
Governance is a crucial component in the smooth running of country affairs. Poor governance would have far reached ramifications on the entire country with a heavy toll on its economic growth. Good governance ensures that the money collected is utilized in a manner that benefits citizens of the country. This money also goes to pay public servants, police officers, members of parliaments, the postal system, and others. Indeed, with a proper and functioning form of government, there will be no effective protection of public interest.
Other important sectors are infrastructure development, transport, housing, etc.
Apart from social projects, governments also use money collected from taxes to fund sectors that are crucial for the wellbeing of their citizens such as security, scientific research, environmental protection, etc.
Some of the money is also channelled to fund projects such as pensions, unemployment benefits, childcare, etc. Without taxes it would be impossible for governments to raise money to fund these types of projects.
Furthermore, taxes can affect the state of economic growth of a country. Taxes generally contribute to the gross domestic product (GDP) of a country. Because of this contribution, taxes help spur economic growth which in turn has a ripple effect on the country’s economy; raising the standard of living, increasing job creation, etc.
Governments also use taxes as a deterrent for undesirable activities such as the consumption of liquor, tobacco smoking, etc. To achieve this, governments impose high excise levies on these products and as a result, raise the cost of these products to discourage people from buying or selling them.
Importance of Tax to Businesses
For business to flourish in the country, there has to be good infrastructure such as roads, telephones, electricity, etc. This infrastructure is developed by governments or through close involvement of the government. When governments collect money from taxes, it ploughs this money into development of this infrastructure and in turn promotes economic activity throughout the country.
The concept of taxation is also important to businesses because governments can fund this money back into the economy in the form of loans or other funding forms.
Taxes help raise the standard of living in a country. The higher the standard of living, the stronger and higher the level of consumption most likely is. Businesses flourish when there is a market for their product and services. With a higher standard of living, businesses would be assured of a higher domestic consumption as well. Taxes are essential and every citizen is meant to reap benefits of these taxes. This is why it is important that citizens endeavour to pay taxes and understand that it is meant to be more than just a “money grab” from the government.
Income Section 2(24)
Income includes—
(i) profits and gains;
(ii) dividend;
(iii) voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes or by an association or institution referred to in clause (21) or clause (23), or by a fund or trust or institution referred to in sub-clause (iv) or
(iv) the value of any benefit or perquisite, whether convertible into money or not, obtained from a company either by a director or by a person who has a substantial interest in the company, or by a relative of the director or such person, and any sum paid by any such company in respect of any obligation which, but for such payment, would have been payable by the director or other person aforesaid;
(v) any sum chargeable to income-tax under clauses (ii) and (iii) of section 28 or section 41 or section 59;
(vi) any capital gains chargeable under section 45;
(vii) the profits and gains of any business of insurance carried on by a mutual insurance company or by a co-operative society, computed in accordance with section 44 or any surplus taken to be such profits and gains by virtue of provisions contained in the First Schedule;
(viii) any 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.
Person [Section 2(31)]
According to section 2(31) of person includes:
- Partnership Firms
- Company
- Association of person or body of individuals whether incorporated or not
- Local authorities
- Any other artificial judicial person not falling under any of the above sub sections.
Assessee
According to section 2(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;
Deemed Assessee
An individual might be assigned the responsibility of paying taxes by the legal authorities and such individuals are called deemed assesses. Deemed assessees can be:
- The eldest son or a legal heir of a deceased person who has expired without writing a will.
- The executor or a legal heir of the property of a deceased person who has passed on his property to the executor in a writing.
- The guardian of a lunatic, an idiot, or a minor.
- The agent of a non-resident Indian receiving income from India
Assessment Year
According to section 2(9), assessment year means the period of twelve months commencing on the 1st day of April every year.
Previous Year
Section 2(3) previous year means the financial year immediately preceding the assessment year:
Provided that, in the case of a business or profession newly set up, or a source of income newly coming into existence, in the said financial year, the previous year shall be the period beginning with the date of setting up of the business or profession or, as the case may be, the date on which the source of income newly comes into existence and ending with the said financial year.
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;
(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 receiver 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.
Exempted Income
Exempted income is that income on which income tax is not chargeable. Such
Incomes are classified as under:
i) Incomes which do not form part of total income nor is income tax payable on them. They are called fully exempted incomes.
Ii) Incomes which are included in the total income but are exempt from income tax at the average rate of income tax applicable to the total income. They are called partially exempted incomes.
Iii) Incomes of certain Institutions or authorities are exempted subject to fulfilment of the required conditions
Gross Total Income
Gross Total Income is the aggregate of all the income earned by the individuals during a specified period. According to Section 14 of the Income Tax Act 1961, the income of a person or an assessee can be categorised under these five heads,
- Income from Salaries
- Income from House Property
- Profits and Gains of Business and Profession
- Capital Gains
- Income from Other Sources
Specimen of calculation of gross total income
Income From Salary | Xx |
Add: Income Under the Head House Property | Xx |
Add: Profits and Gains of Business and Profession | Xx |
Add: capital gains Income | Xx |
Add: Income from Other Sources | Xx |
Gross Total Income | Xxx |
Less: Deductions under Section 80C to 80U | Xx |
Total Income | Xxx |
Total taxable income
Taxable income is the income of an individual or organization, minus any allowable tax deductions. It is the amount of income an entity makes every year upon which the government levies taxes. In simpler words, it is the amount of one's income which is subject to income tax.
Total tax makes up all the taxes you owe over a year. Total tax is how the IRS figures out to see if you need a refund or if you owe the government money. Deductions lower your taxable income.
Residential status of an Asesssee
Section 4(6) of the income tax act provides provisions for residential status of person in India. According to the Income Tax Act, 1961, residential status of a person is one of the important criteria in determining the tax implications. The residential status of a person can be categorised into-
a) Resident and Ordinarily Resident (ROR)
b) Resident but Not Ordinarily Resident (RNOR)
Non- Resident (NR)
Such types are discussed below-
a) Resident and Ordinarily Resident (ROR)
A resident taxpayer is an individual who satisfies any one of the following conditions:
- Resides in India for a minimum of 182 days in a year, or
- Resided in India for a minimum of 365 days in the immediately preceding four years and for a minimum of 60 days in the current financial year.
b) Resident but Not Ordinarily Resident (RNOR)
If an individual qualifies as a resident, the next step is to determine if he/she is a Resident ordinarily resident (ROR) or an RNOR. He will be a ROR if he meets both of the following conditions:
- Has been a resident of India in at least 2 out of 10 years immediately previous years and
- Has stayed in India for at least 730 days in 7 immediately preceding years
c) Non- Resident (NR)
An individual satisfying neither of the conditions stated above conditions would be a non-resident for the year.
PAN
Permanent Account Number (PAN) is a ten-digit alphanumeric number, issued in the form of a laminated card, by the Income Tax Department, to any "person" who applies for it or to whom the department allots the number without an application.
PAN enables the department to link all transactions of the "person" with the department. These transactions include tax payments, TDS/TCS credits, returns of income, specified transactions, correspondence, and so on. PAN, thus, acts as an identifier for the "person" with the tax department.
PAN was introduced to facilitates linking of various documents, including payment of taxes, assessment, tax demand, tax arrears etc. relating to an assessee, to facilitate easy retrieval of information and to facilitate matching of information relating to investment, raising of loans and other business activities of taxpayers collected through various sources, both internal as well as external, for detecting and combating tax evasion and widening of tax base.
A typical PAN is AFZPK7190K.
First three characters i.e., "AFZ" in the above PAN are alphabetic series running from
AAA to ZZZ
Fourth character of PAN i.e., "P" in the above PAN represents the status of the PAN holder. "P" stands for Individual, "F" stands for Firm, "C" stands for Company, "H" stands for HUF, "A" stands for AOP, "T" stands for TRUST etc.
Fifth character i.e., "K" in the above PAN represents first character of the PAN holder's last name/surname.
Next four characters i.e., "7190" in the above PAN are sequential number running from 0001 to 9999.
Last character i.e., "K" in the above PAN is an alphabetic check digit.
WHY IS IT NECESSARY TO HAVE PAN?
It is mandatory to quote PAN on return of income, all correspondence with any income tax authority. From 1 January 2005 it has become mandatory to quote PAN on challans for any payments due to Income Tax Department.
It is also compulsory to quote PAN in all documents pertaining to the following financial transactions: -
1) Sale or purchase of a motor vehicle or vehicle other than two wheeled vehicles.
2) Opening an account [other than a time-deposit referred at point No. 12 and a Basic Savings Bank Deposit Account] with a banking company or a co-operative bank
3) Making an application for issue of a credit or debit card.
4) Opening of a demat account with a depository, participant, custodian of securities or any other person with SEBI
5) Payment in cash of an amount exceeding Rs. 50,000 to a hotel or restaurant against bill at any one time.
6) Payment in cash of an amount exceeding Rs. 50,000 in connection with travel to any foreign country or payment for purchase of any foreign currency at any one time.
7) Payment of an amount exceeding Rs. 50,000 to a Mutual Fund for purchase of its units
8) Payment of an amount exceeding Rs. 50,000 to a company or an institution for acquiring debentures or bonds issued by it.
9) Payment of an amount exceeding Rs. 50,000 to the Reserve Bank of India for acquiring bonds issued by it.
10) Deposits of cash exceeding Rs. 50,000 during any one day with a banking company or a co-operative bank.
11) Deposits of cash aggregating to more than Rs. 2,50,000 during the period of 09th November 2016 to 30th December 2016 with a banking company, cooperative bank or post office.
12) Payment in cash for an amount exceeding Rs. 50,000 during any one day for purchase of bank drafts or pay orders or banker's cheques from a banking company or a co-operative bank.
13) A time deposit of amount exceeding Rs. 50,000 or aggregating to more than Rs. 5 lakhs during a financial year with -
(i) a banking company or a co-operative bank
(ii) a Post Office;
(iii) a Nidhi referred to in section 406 of the Companies Act, 2013 or
(iv) a non-banking financial company
14) Payment in cash or by way of a bank draft or pay order or banker's cheque of an amount aggregating to more than Rs. 50,000 in a financial year for one or more pre-paid payment instruments, as defined in the policy guidelines for issuance and operation of pre-paid payment instruments issued by Reserve Bank of India under section 18 of the Payment and Settlement Systems Act, 2007 to a banking company or a co-operative bank or to any other company or institution.
15) Payment of an amount aggregating to more than Rs. 50,000 in a financial year as life insurance premium to an insurer
16) A contract for sale or purchase of securities (other than shares) for amount exceeding Rs. 1 lakh per transaction
17) Sale or purchase, by any person, of shares of a company not listed in a recognized stock exchange for amount exceeding Rs. 1 lakh per transaction.
18) Sale or purchase of any immovable property for an amount exceeding Rs. 10 lakh or valued by stamp valuation authority referred to in section 50C of the Act at an amount exceeding ten lakh rupees.
19) Sale or purchase of goods or services of any nature other than those specified above for an amount exceeding Rs. 2 lakh per transaction.
TAN
Tax Deduction Account Number or Tax Collection Account Number is a 10-digit alphanumeric number issued by the Income-tax Department (we will refer to it as TAN). TAN is to be obtained by all persons who are responsible for deducting tax at source (TDS) or who are required to collect tax at source (TCS).
TAN or Tax Deduction and Collection Account Number is a 10 digit alpha numeric number required to be obtained by all persons who are responsible for deducting or collecting tax. Under Section 203A of the Income Tax Act, 1961, it is mandatory to quote Tax Deduction Account Number (TAN) allotted by the Income Tax Department (ITD) on all TDS returns.
Since last few years ITD has revised the structure of TAN. It is a unique 10-digit alphanumeric code. Accordingly, they have issued TAN in this new format to all existing TAN holders.
To facilitate diductors find their new TAN, ITD has now introduced a search facility in their website (www.incometaxindia.gov.in). Through this facility diductors can search on their name and old TAN to find the new TAN. Diductors are advised to find the new TAN from this site before it is incorporated in their e-TDS return file to avoid any inconvenience at the time of furnishing e-TDS return.
Types of TAN Applications
There are two types of TAN applications:
- Application for issuance of new TAN (Form 49B)
This application form should be used when the deductor has never applied for a TAN or does not have a TAN.
- Form for Change or Correction in TAN data for TAN Allotted
How to apply for TAN Number
TAN Number can be applied for online as well as offline. A Payment of Rs. 62 is required to be made for application of TAN No. The Payment can be made by Demand Draft/Cheque/ Credit Card/Debit Card/Net Banking. For making a TAN Application online, a person shall file his application in Form No. 49B on the following website of NSDL
Https://tin.tin.nsdl.com/tan/form49B.html
On submission of particulars, an acknowledgement screen would appear which would consist of a
- 14-Digit acknowledgement number
- Status of Application
- Name of Applicant
- Contact Details (Address, Email ID & Phone No.)
- Payment Details
- Space for Signature
This acknowledgement duly signed along with Cheque/Demand Draft (if payment is not made through Credit Card/ Debit Card/ Net-banking) shall be sent to NSDL at National Securities Depositories Limited, 3rd Floor, Sapphire Chambers, Near Baner Telephone Exchange, Baner, Pune – 411045
Application for TAN can also be applied by procuring the Form from the TIN-FC Centres. On submission of the TAN Application, the applicant would receive a 14-digit unique acknowledgement number from the TIN-FC. Form 49B for TAN Application can also be downloaded online from the following link and then printed: -
Http://law.incometaxindia.gov.in/DITTaxmann/IncomeTaxRules/pdf/49B.PDF
For any other queries regarding TAN Number, the assessee shall contact the TIN Support Desk at 022-24994650 or at tininfo@nsdl.co.in
On allotment of the TAN Number, NSDL will ensure intimation of new TAN at the address indicated in the Form 49B or against the acknowledgement in case of online applications for TAN.
Capital receipts are those receipts which either create liability or reduce an asset. Capital Receipts are non-recurring in nature. And these sorts of receipts are also not received every now and then.
From the above definition, it’s clear that a receipt can be called capital receipt if it adheres to at least one of the following conditions –
- It must create a liability. For example, if a company takes a loan from a bank or a financial institution, then it would create a liability. That’s why it is a capital receipt in nature. But if a company received a commission for using its expertise in producing a special type of product for another company, it would not be called a capital receipt because it didn’t create any liability.
- It must reduce the assets of the company. For example, if a company sells out its shares to the public, it would help reduce the asset, which could create more money in the future. That means it should be treated as a capital receipt.
Types of Capital Receipts
Capital Receipts can be classified into three types.
- Borrowing funds
When a company takes loans from banks or financial institutions, then it would be called borrowing funds. Borrowing funds from a financial institution is one of three forms of capital receipts.
2. Recovery of loans
To recover loans, often, the company needs to set aside one part of assets, which reduces the value of assets. This is the second type of capital receipts.
3. Other Capital Receipts
There’s a third type of receipts that we call “other capital receipts.” Under this, we include disinvestment and small savings. Disinvestment means selling off one part of the business. Disinvestment is called capital receipt because it reduced the asset of the company. Small savings are called capital receipts because they create a liability for the business.
REVENUE RECEIPTS-
Revenue Receipts are those receipts that neither reduce the assets of the company, nor they create any liability. They are always recurring in nature, and they are earned during the normal course of business.
From the definition, it is clear that any type of receipt needs to satisfy one of the two conditions to be called as revenue receipt –
- First, it must not reduce the assets of the company.
- Second, it must not create any liability for the company.
Features of Revenue Receipts
Since revenue receipts seem to be the opposite of capital receipts, it makes perfect sense to look at different features of revenue receipts so that we can understand the meaning of revenue receipts and can compare to the features of capital receipts.
- Means for survival: A business starts its operations because it expects to receive money as a result of their service to their customers. Either they can sell a bunch of products, or they can offer services. No matter what they do, without revenue receipts, they can’t survive for long because revenue receipts are collected from the direct operations of the business.
- Applicable for a short term: Revenue receipts are money received for a short period. The benefit of revenue receipts can only be enjoyed for one accounting year and not more.
- Recurring: Since revenue receipts offer benefits for a short period, the revenue receipts must be recurring. If revenue receipts don’t recur, the business wouldn’t be able to perpetuate for long.
- Affects the profit/loss: Receiving revenue directly affects the profit/loss of the business. When the revenue is received, either profit is increased, or loss is decreased.
- A small amount (volume): Compared to capital receipts, the number of revenue receipts is usually smaller. That doesn’t mean all revenue receipts are smaller. For example, if a company sells 1 million products in a given year, the revenue receipts could be huge and could also be more than its capital receipts during the year.
CAPITAL EXPENDITURE-
Capital expenditures are funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment. Capital Expenditure is often used to undertake new projects or investments by a company. Making capital expenditures on fixed assets can include repairing a roof, purchasing a piece of equipment, or building a new factory. This type of financial outlay is made by companies to increase the scope of their operations or add some economic benefit to the operation.
REVENUE EXPENDITURE
Revenue expenditures are short-term expenses that are also known as revenue expenses and operational expenses (OPEX). Revenue expenditure is generally spoken to in relation to fixed assets as it records the expenses which have occurred in connection to a fixed asset. For example, if you have a piece of equipment that requires monthly maintenance then the expense will be termed under revenue expenditure. It involves all costs that are required for the successful running of a business such as salaries for employees and property taxes. Revenue expenditure is recorded during an accounting period or a single year.
Revenue expenditure types
Revenue expenditure can be divided into two categories; direct expenses and indirect expenses.
Direct expenses
Direct expenses are those costs that are incurred when goods and services are in the process of being produced. The costs that are incurred during the day-to-day operations that take place in the business are also direct expenses. For manufacturing companies, examples of direct expenses include the costs that are incurred for the conversion of raw materials to finished products or goods. Direct expenses also include costs such as electricity used during the production, wages paid to workers, legal expenses, rent, shipping-related costs, and freight charges.
Indirect expenses
Indirect expenses are the second type of revenue expenditure. These types of expenses are usually incurred when the finished goods and services are being sold and distributed. These expenses include taxes, salaries for employees, depreciation, and interest among others. Indirect expenses also include repairs and maintenance costs. Although these costs aren’t directly linked to the finished products, they are required to ensure the proper functioning of the asset which in turn supports the proper functioning of the business.
References:
1. Ahuja, Giri & Gupta, Ravi: Systematic Approach to Incomes Tax
2. Agrawal, B.K.: Income Tax law and practice
3. Agrawal, B.K.: Ayakar Vidhan Avam lekhe
4. Chandra, Mahesh & Shukla, D.C.: Income Tax Law and practices
5. Chandra, Girish: Income Tax
Unit 1
Income Tax Act- 1961- Important Definitions and Concepts
Income tax refers to direct tax imposed by the government on income of the citizens of India. It is levied on income of individuals from salary, business, business, profession and other income.
FEATURES OF INCOME TAX-
Some of the features of income tax are-
- It is a direct tax.
- It is charged on the total income of a person.
- It is charged on the income of the income year at the rate applicable in assessment year.
- It is payable in the year following the income year.
- It is generally charged on revenue income of a person.
- It is a tax charged on a person for income that comes within the preview of relevant income tax law.
- Whether the income is permanent or temporary, it is immaterial from the tax point of view. Even temporary income is taxable.
- If a person receives tax—free income on which tax is paid by the person making payment on behalf of the recipient, it has to be grossed up for inclusion in his total income.
SCOPE OF INCOME TAX ACT-
The scope of Total Income depends on the category of a taxpayer and his residential status in India. For example, a person resident in India is liable to pay income tax in India on his total world income. On the other hand, a person non-resident in India is liable to pay tax in India only on his Indian income. Under Income-tax Act, there are five heads of income - Salary, House Property, Business or Profession, Capital Gains and Other Sources. Total income consists of income computed under these heads. The tax on total income is computed as per the tax rates specified for the year in which income is earned.
IMPORTANCE OF INCOME TAX PAYMENT FOR DEVELOPMENT OF COUNTRY-
Governments impose charges on their citizens and businesses as a means of raising revenue, which is then used to meet their budgetary demands. This includes financing government and public projects as well as making the business environment in the country conducive for economic growth.
Importance of Taxes in Society
Without taxes, governments would be unable to meet the demands of their societies. Taxes are crucial because governments collect this money and use it to finance social projects.
Some of these projects include:
• Health
Without taxes, government contributions to the health sector would be impossible. Taxes go to funding health services such as social healthcare, medical research, social security, etc.
• Education
Education could be one of the most deserving recipients of tax money. Governments put a lot of importance in development of human capital and education is central in this development. Money from taxes is channelled to funding, furnishing, and maintaining the public education system.
• Governance
Governance is a crucial component in the smooth running of country affairs. Poor governance would have far reached ramifications on the entire country with a heavy toll on its economic growth. Good governance ensures that the money collected is utilized in a manner that benefits citizens of the country. This money also goes to pay public servants, police officers, members of parliaments, the postal system, and others. Indeed, with a proper and functioning form of government, there will be no effective protection of public interest.
Other important sectors are infrastructure development, transport, housing, etc.
Apart from social projects, governments also use money collected from taxes to fund sectors that are crucial for the wellbeing of their citizens such as security, scientific research, environmental protection, etc.
Some of the money is also channelled to fund projects such as pensions, unemployment benefits, childcare, etc. Without taxes it would be impossible for governments to raise money to fund these types of projects.
Furthermore, taxes can affect the state of economic growth of a country. Taxes generally contribute to the gross domestic product (GDP) of a country. Because of this contribution, taxes help spur economic growth which in turn has a ripple effect on the country’s economy; raising the standard of living, increasing job creation, etc.
Governments also use taxes as a deterrent for undesirable activities such as the consumption of liquor, tobacco smoking, etc. To achieve this, governments impose high excise levies on these products and as a result, raise the cost of these products to discourage people from buying or selling them.
Importance of Tax to Businesses
For business to flourish in the country, there has to be good infrastructure such as roads, telephones, electricity, etc. This infrastructure is developed by governments or through close involvement of the government. When governments collect money from taxes, it ploughs this money into development of this infrastructure and in turn promotes economic activity throughout the country.
The concept of taxation is also important to businesses because governments can fund this money back into the economy in the form of loans or other funding forms.
Taxes help raise the standard of living in a country. The higher the standard of living, the stronger and higher the level of consumption most likely is. Businesses flourish when there is a market for their product and services. With a higher standard of living, businesses would be assured of a higher domestic consumption as well. Taxes are essential and every citizen is meant to reap benefits of these taxes. This is why it is important that citizens endeavour to pay taxes and understand that it is meant to be more than just a “money grab” from the government.
Income Section 2(24)
Income includes—
(i) profits and gains;
(ii) dividend;
(iii) voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes or by an association or institution referred to in clause (21) or clause (23), or by a fund or trust or institution referred to in sub-clause (iv) or
(iv) the value of any benefit or perquisite, whether convertible into money or not, obtained from a company either by a director or by a person who has a substantial interest in the company, or by a relative of the director or such person, and any sum paid by any such company in respect of any obligation which, but for such payment, would have been payable by the director or other person aforesaid;
(v) any sum chargeable to income-tax under clauses (ii) and (iii) of section 28 or section 41 or section 59;
(vi) any capital gains chargeable under section 45;
(vii) the profits and gains of any business of insurance carried on by a mutual insurance company or by a co-operative society, computed in accordance with section 44 or any surplus taken to be such profits and gains by virtue of provisions contained in the First Schedule;
(viii) any 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.
Person [Section 2(31)]
According to section 2(31) of person includes:
- Partnership Firms
- Company
- Association of person or body of individuals whether incorporated or not
- Local authorities
- Any other artificial judicial person not falling under any of the above sub sections.
Assessee
According to section 2(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;
Deemed Assessee
An individual might be assigned the responsibility of paying taxes by the legal authorities and such individuals are called deemed assesses. Deemed assessees can be:
- The eldest son or a legal heir of a deceased person who has expired without writing a will.
- The executor or a legal heir of the property of a deceased person who has passed on his property to the executor in a writing.
- The guardian of a lunatic, an idiot, or a minor.
- The agent of a non-resident Indian receiving income from India
Assessment Year
According to section 2(9), assessment year means the period of twelve months commencing on the 1st day of April every year.
Previous Year
Section 2(3) previous year means the financial year immediately preceding the assessment year:
Provided that, in the case of a business or profession newly set up, or a source of income newly coming into existence, in the said financial year, the previous year shall be the period beginning with the date of setting up of the business or profession or, as the case may be, the date on which the source of income newly comes into existence and ending with the said financial year.
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;
(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 receiver 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.
Exempted Income
Exempted income is that income on which income tax is not chargeable. Such
Incomes are classified as under:
i) Incomes which do not form part of total income nor is income tax payable on them. They are called fully exempted incomes.
Ii) Incomes which are included in the total income but are exempt from income tax at the average rate of income tax applicable to the total income. They are called partially exempted incomes.
Iii) Incomes of certain Institutions or authorities are exempted subject to fulfilment of the required conditions
Gross Total Income
Gross Total Income is the aggregate of all the income earned by the individuals during a specified period. According to Section 14 of the Income Tax Act 1961, the income of a person or an assessee can be categorised under these five heads,
- Income from Salaries
- Income from House Property
- Profits and Gains of Business and Profession
- Capital Gains
- Income from Other Sources
Specimen of calculation of gross total income
Income From Salary | Xx |
Add: Income Under the Head House Property | Xx |
Add: Profits and Gains of Business and Profession | Xx |
Add: capital gains Income | Xx |
Add: Income from Other Sources | Xx |
Gross Total Income | Xxx |
Less: Deductions under Section 80C to 80U | Xx |
Total Income | Xxx |
Total taxable income
Taxable income is the income of an individual or organization, minus any allowable tax deductions. It is the amount of income an entity makes every year upon which the government levies taxes. In simpler words, it is the amount of one's income which is subject to income tax.
Total tax makes up all the taxes you owe over a year. Total tax is how the IRS figures out to see if you need a refund or if you owe the government money. Deductions lower your taxable income.
Residential status of an Asesssee
Section 4(6) of the income tax act provides provisions for residential status of person in India. According to the Income Tax Act, 1961, residential status of a person is one of the important criteria in determining the tax implications. The residential status of a person can be categorised into-
a) Resident and Ordinarily Resident (ROR)
b) Resident but Not Ordinarily Resident (RNOR)
Non- Resident (NR)
Such types are discussed below-
a) Resident and Ordinarily Resident (ROR)
A resident taxpayer is an individual who satisfies any one of the following conditions:
- Resides in India for a minimum of 182 days in a year, or
- Resided in India for a minimum of 365 days in the immediately preceding four years and for a minimum of 60 days in the current financial year.
b) Resident but Not Ordinarily Resident (RNOR)
If an individual qualifies as a resident, the next step is to determine if he/she is a Resident ordinarily resident (ROR) or an RNOR. He will be a ROR if he meets both of the following conditions:
- Has been a resident of India in at least 2 out of 10 years immediately previous years and
- Has stayed in India for at least 730 days in 7 immediately preceding years
c) Non- Resident (NR)
An individual satisfying neither of the conditions stated above conditions would be a non-resident for the year.
PAN
Permanent Account Number (PAN) is a ten-digit alphanumeric number, issued in the form of a laminated card, by the Income Tax Department, to any "person" who applies for it or to whom the department allots the number without an application.
PAN enables the department to link all transactions of the "person" with the department. These transactions include tax payments, TDS/TCS credits, returns of income, specified transactions, correspondence, and so on. PAN, thus, acts as an identifier for the "person" with the tax department.
PAN was introduced to facilitates linking of various documents, including payment of taxes, assessment, tax demand, tax arrears etc. relating to an assessee, to facilitate easy retrieval of information and to facilitate matching of information relating to investment, raising of loans and other business activities of taxpayers collected through various sources, both internal as well as external, for detecting and combating tax evasion and widening of tax base.
A typical PAN is AFZPK7190K.
First three characters i.e., "AFZ" in the above PAN are alphabetic series running from
AAA to ZZZ
Fourth character of PAN i.e., "P" in the above PAN represents the status of the PAN holder. "P" stands for Individual, "F" stands for Firm, "C" stands for Company, "H" stands for HUF, "A" stands for AOP, "T" stands for TRUST etc.
Fifth character i.e., "K" in the above PAN represents first character of the PAN holder's last name/surname.
Next four characters i.e., "7190" in the above PAN are sequential number running from 0001 to 9999.
Last character i.e., "K" in the above PAN is an alphabetic check digit.
WHY IS IT NECESSARY TO HAVE PAN?
It is mandatory to quote PAN on return of income, all correspondence with any income tax authority. From 1 January 2005 it has become mandatory to quote PAN on challans for any payments due to Income Tax Department.
It is also compulsory to quote PAN in all documents pertaining to the following financial transactions: -
1) Sale or purchase of a motor vehicle or vehicle other than two wheeled vehicles.
2) Opening an account [other than a time-deposit referred at point No. 12 and a Basic Savings Bank Deposit Account] with a banking company or a co-operative bank
3) Making an application for issue of a credit or debit card.
4) Opening of a demat account with a depository, participant, custodian of securities or any other person with SEBI
5) Payment in cash of an amount exceeding Rs. 50,000 to a hotel or restaurant against bill at any one time.
6) Payment in cash of an amount exceeding Rs. 50,000 in connection with travel to any foreign country or payment for purchase of any foreign currency at any one time.
7) Payment of an amount exceeding Rs. 50,000 to a Mutual Fund for purchase of its units
8) Payment of an amount exceeding Rs. 50,000 to a company or an institution for acquiring debentures or bonds issued by it.
9) Payment of an amount exceeding Rs. 50,000 to the Reserve Bank of India for acquiring bonds issued by it.
10) Deposits of cash exceeding Rs. 50,000 during any one day with a banking company or a co-operative bank.
11) Deposits of cash aggregating to more than Rs. 2,50,000 during the period of 09th November 2016 to 30th December 2016 with a banking company, cooperative bank or post office.
12) Payment in cash for an amount exceeding Rs. 50,000 during any one day for purchase of bank drafts or pay orders or banker's cheques from a banking company or a co-operative bank.
13) A time deposit of amount exceeding Rs. 50,000 or aggregating to more than Rs. 5 lakhs during a financial year with -
(i) a banking company or a co-operative bank
(ii) a Post Office;
(iii) a Nidhi referred to in section 406 of the Companies Act, 2013 or
(iv) a non-banking financial company
14) Payment in cash or by way of a bank draft or pay order or banker's cheque of an amount aggregating to more than Rs. 50,000 in a financial year for one or more pre-paid payment instruments, as defined in the policy guidelines for issuance and operation of pre-paid payment instruments issued by Reserve Bank of India under section 18 of the Payment and Settlement Systems Act, 2007 to a banking company or a co-operative bank or to any other company or institution.
15) Payment of an amount aggregating to more than Rs. 50,000 in a financial year as life insurance premium to an insurer
16) A contract for sale or purchase of securities (other than shares) for amount exceeding Rs. 1 lakh per transaction
17) Sale or purchase, by any person, of shares of a company not listed in a recognized stock exchange for amount exceeding Rs. 1 lakh per transaction.
18) Sale or purchase of any immovable property for an amount exceeding Rs. 10 lakh or valued by stamp valuation authority referred to in section 50C of the Act at an amount exceeding ten lakh rupees.
19) Sale or purchase of goods or services of any nature other than those specified above for an amount exceeding Rs. 2 lakh per transaction.
TAN
Tax Deduction Account Number or Tax Collection Account Number is a 10-digit alphanumeric number issued by the Income-tax Department (we will refer to it as TAN). TAN is to be obtained by all persons who are responsible for deducting tax at source (TDS) or who are required to collect tax at source (TCS).
TAN or Tax Deduction and Collection Account Number is a 10 digit alpha numeric number required to be obtained by all persons who are responsible for deducting or collecting tax. Under Section 203A of the Income Tax Act, 1961, it is mandatory to quote Tax Deduction Account Number (TAN) allotted by the Income Tax Department (ITD) on all TDS returns.
Since last few years ITD has revised the structure of TAN. It is a unique 10-digit alphanumeric code. Accordingly, they have issued TAN in this new format to all existing TAN holders.
To facilitate diductors find their new TAN, ITD has now introduced a search facility in their website (www.incometaxindia.gov.in). Through this facility diductors can search on their name and old TAN to find the new TAN. Diductors are advised to find the new TAN from this site before it is incorporated in their e-TDS return file to avoid any inconvenience at the time of furnishing e-TDS return.
Types of TAN Applications
There are two types of TAN applications:
- Application for issuance of new TAN (Form 49B)
This application form should be used when the deductor has never applied for a TAN or does not have a TAN.
- Form for Change or Correction in TAN data for TAN Allotted
How to apply for TAN Number
TAN Number can be applied for online as well as offline. A Payment of Rs. 62 is required to be made for application of TAN No. The Payment can be made by Demand Draft/Cheque/ Credit Card/Debit Card/Net Banking. For making a TAN Application online, a person shall file his application in Form No. 49B on the following website of NSDL
Https://tin.tin.nsdl.com/tan/form49B.html
On submission of particulars, an acknowledgement screen would appear which would consist of a
- 14-Digit acknowledgement number
- Status of Application
- Name of Applicant
- Contact Details (Address, Email ID & Phone No.)
- Payment Details
- Space for Signature
This acknowledgement duly signed along with Cheque/Demand Draft (if payment is not made through Credit Card/ Debit Card/ Net-banking) shall be sent to NSDL at National Securities Depositories Limited, 3rd Floor, Sapphire Chambers, Near Baner Telephone Exchange, Baner, Pune – 411045
Application for TAN can also be applied by procuring the Form from the TIN-FC Centres. On submission of the TAN Application, the applicant would receive a 14-digit unique acknowledgement number from the TIN-FC. Form 49B for TAN Application can also be downloaded online from the following link and then printed: -
Http://law.incometaxindia.gov.in/DITTaxmann/IncomeTaxRules/pdf/49B.PDF
For any other queries regarding TAN Number, the assessee shall contact the TIN Support Desk at 022-24994650 or at tininfo@nsdl.co.in
On allotment of the TAN Number, NSDL will ensure intimation of new TAN at the address indicated in the Form 49B or against the acknowledgement in case of online applications for TAN.
Capital receipts are those receipts which either create liability or reduce an asset. Capital Receipts are non-recurring in nature. And these sorts of receipts are also not received every now and then.
From the above definition, it’s clear that a receipt can be called capital receipt if it adheres to at least one of the following conditions –
- It must create a liability. For example, if a company takes a loan from a bank or a financial institution, then it would create a liability. That’s why it is a capital receipt in nature. But if a company received a commission for using its expertise in producing a special type of product for another company, it would not be called a capital receipt because it didn’t create any liability.
- It must reduce the assets of the company. For example, if a company sells out its shares to the public, it would help reduce the asset, which could create more money in the future. That means it should be treated as a capital receipt.
Types of Capital Receipts
Capital Receipts can be classified into three types.
- Borrowing funds
When a company takes loans from banks or financial institutions, then it would be called borrowing funds. Borrowing funds from a financial institution is one of three forms of capital receipts.
2. Recovery of loans
To recover loans, often, the company needs to set aside one part of assets, which reduces the value of assets. This is the second type of capital receipts.
3. Other Capital Receipts
There’s a third type of receipts that we call “other capital receipts.” Under this, we include disinvestment and small savings. Disinvestment means selling off one part of the business. Disinvestment is called capital receipt because it reduced the asset of the company. Small savings are called capital receipts because they create a liability for the business.
REVENUE RECEIPTS-
Revenue Receipts are those receipts that neither reduce the assets of the company, nor they create any liability. They are always recurring in nature, and they are earned during the normal course of business.
From the definition, it is clear that any type of receipt needs to satisfy one of the two conditions to be called as revenue receipt –
- First, it must not reduce the assets of the company.
- Second, it must not create any liability for the company.
Features of Revenue Receipts
Since revenue receipts seem to be the opposite of capital receipts, it makes perfect sense to look at different features of revenue receipts so that we can understand the meaning of revenue receipts and can compare to the features of capital receipts.
- Means for survival: A business starts its operations because it expects to receive money as a result of their service to their customers. Either they can sell a bunch of products, or they can offer services. No matter what they do, without revenue receipts, they can’t survive for long because revenue receipts are collected from the direct operations of the business.
- Applicable for a short term: Revenue receipts are money received for a short period. The benefit of revenue receipts can only be enjoyed for one accounting year and not more.
- Recurring: Since revenue receipts offer benefits for a short period, the revenue receipts must be recurring. If revenue receipts don’t recur, the business wouldn’t be able to perpetuate for long.
- Affects the profit/loss: Receiving revenue directly affects the profit/loss of the business. When the revenue is received, either profit is increased, or loss is decreased.
- A small amount (volume): Compared to capital receipts, the number of revenue receipts is usually smaller. That doesn’t mean all revenue receipts are smaller. For example, if a company sells 1 million products in a given year, the revenue receipts could be huge and could also be more than its capital receipts during the year.
CAPITAL EXPENDITURE-
Capital expenditures are funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment. Capital Expenditure is often used to undertake new projects or investments by a company. Making capital expenditures on fixed assets can include repairing a roof, purchasing a piece of equipment, or building a new factory. This type of financial outlay is made by companies to increase the scope of their operations or add some economic benefit to the operation.
REVENUE EXPENDITURE
Revenue expenditures are short-term expenses that are also known as revenue expenses and operational expenses (OPEX). Revenue expenditure is generally spoken to in relation to fixed assets as it records the expenses which have occurred in connection to a fixed asset. For example, if you have a piece of equipment that requires monthly maintenance then the expense will be termed under revenue expenditure. It involves all costs that are required for the successful running of a business such as salaries for employees and property taxes. Revenue expenditure is recorded during an accounting period or a single year.
Revenue expenditure types
Revenue expenditure can be divided into two categories; direct expenses and indirect expenses.
Direct expenses
Direct expenses are those costs that are incurred when goods and services are in the process of being produced. The costs that are incurred during the day-to-day operations that take place in the business are also direct expenses. For manufacturing companies, examples of direct expenses include the costs that are incurred for the conversion of raw materials to finished products or goods. Direct expenses also include costs such as electricity used during the production, wages paid to workers, legal expenses, rent, shipping-related costs, and freight charges.
Indirect expenses
Indirect expenses are the second type of revenue expenditure. These types of expenses are usually incurred when the finished goods and services are being sold and distributed. These expenses include taxes, salaries for employees, depreciation, and interest among others. Indirect expenses also include repairs and maintenance costs. Although these costs aren’t directly linked to the finished products, they are required to ensure the proper functioning of the asset which in turn supports the proper functioning of the business.
References:
1. Ahuja, Giri & Gupta, Ravi: Systematic Approach to Incomes Tax
2. Agrawal, B.K.: Income Tax law and practice
3. Agrawal, B.K.: Ayakar Vidhan Avam lekhe
4. Chandra, Mahesh & Shukla, D.C.: Income Tax Law and practices
5. Chandra, Girish: Income Tax
Unit 1
Income Tax Act- 1961- Important Definitions and Concepts
Income tax refers to direct tax imposed by the government on income of the citizens of India. It is levied on income of individuals from salary, business, business, profession and other income.
FEATURES OF INCOME TAX-
Some of the features of income tax are-
- It is a direct tax.
- It is charged on the total income of a person.
- It is charged on the income of the income year at the rate applicable in assessment year.
- It is payable in the year following the income year.
- It is generally charged on revenue income of a person.
- It is a tax charged on a person for income that comes within the preview of relevant income tax law.
- Whether the income is permanent or temporary, it is immaterial from the tax point of view. Even temporary income is taxable.
- If a person receives tax—free income on which tax is paid by the person making payment on behalf of the recipient, it has to be grossed up for inclusion in his total income.
SCOPE OF INCOME TAX ACT-
The scope of Total Income depends on the category of a taxpayer and his residential status in India. For example, a person resident in India is liable to pay income tax in India on his total world income. On the other hand, a person non-resident in India is liable to pay tax in India only on his Indian income. Under Income-tax Act, there are five heads of income - Salary, House Property, Business or Profession, Capital Gains and Other Sources. Total income consists of income computed under these heads. The tax on total income is computed as per the tax rates specified for the year in which income is earned.
IMPORTANCE OF INCOME TAX PAYMENT FOR DEVELOPMENT OF COUNTRY-
Governments impose charges on their citizens and businesses as a means of raising revenue, which is then used to meet their budgetary demands. This includes financing government and public projects as well as making the business environment in the country conducive for economic growth.
Importance of Taxes in Society
Without taxes, governments would be unable to meet the demands of their societies. Taxes are crucial because governments collect this money and use it to finance social projects.
Some of these projects include:
• Health
Without taxes, government contributions to the health sector would be impossible. Taxes go to funding health services such as social healthcare, medical research, social security, etc.
• Education
Education could be one of the most deserving recipients of tax money. Governments put a lot of importance in development of human capital and education is central in this development. Money from taxes is channelled to funding, furnishing, and maintaining the public education system.
• Governance
Governance is a crucial component in the smooth running of country affairs. Poor governance would have far reached ramifications on the entire country with a heavy toll on its economic growth. Good governance ensures that the money collected is utilized in a manner that benefits citizens of the country. This money also goes to pay public servants, police officers, members of parliaments, the postal system, and others. Indeed, with a proper and functioning form of government, there will be no effective protection of public interest.
Other important sectors are infrastructure development, transport, housing, etc.
Apart from social projects, governments also use money collected from taxes to fund sectors that are crucial for the wellbeing of their citizens such as security, scientific research, environmental protection, etc.
Some of the money is also channelled to fund projects such as pensions, unemployment benefits, childcare, etc. Without taxes it would be impossible for governments to raise money to fund these types of projects.
Furthermore, taxes can affect the state of economic growth of a country. Taxes generally contribute to the gross domestic product (GDP) of a country. Because of this contribution, taxes help spur economic growth which in turn has a ripple effect on the country’s economy; raising the standard of living, increasing job creation, etc.
Governments also use taxes as a deterrent for undesirable activities such as the consumption of liquor, tobacco smoking, etc. To achieve this, governments impose high excise levies on these products and as a result, raise the cost of these products to discourage people from buying or selling them.
Importance of Tax to Businesses
For business to flourish in the country, there has to be good infrastructure such as roads, telephones, electricity, etc. This infrastructure is developed by governments or through close involvement of the government. When governments collect money from taxes, it ploughs this money into development of this infrastructure and in turn promotes economic activity throughout the country.
The concept of taxation is also important to businesses because governments can fund this money back into the economy in the form of loans or other funding forms.
Taxes help raise the standard of living in a country. The higher the standard of living, the stronger and higher the level of consumption most likely is. Businesses flourish when there is a market for their product and services. With a higher standard of living, businesses would be assured of a higher domestic consumption as well. Taxes are essential and every citizen is meant to reap benefits of these taxes. This is why it is important that citizens endeavour to pay taxes and understand that it is meant to be more than just a “money grab” from the government.
Income Section 2(24)
Income includes—
(i) profits and gains;
(ii) dividend;
(iii) voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes or by an association or institution referred to in clause (21) or clause (23), or by a fund or trust or institution referred to in sub-clause (iv) or
(iv) the value of any benefit or perquisite, whether convertible into money or not, obtained from a company either by a director or by a person who has a substantial interest in the company, or by a relative of the director or such person, and any sum paid by any such company in respect of any obligation which, but for such payment, would have been payable by the director or other person aforesaid;
(v) any sum chargeable to income-tax under clauses (ii) and (iii) of section 28 or section 41 or section 59;
(vi) any capital gains chargeable under section 45;
(vii) the profits and gains of any business of insurance carried on by a mutual insurance company or by a co-operative society, computed in accordance with section 44 or any surplus taken to be such profits and gains by virtue of provisions contained in the First Schedule;
(viii) any 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.
Person [Section 2(31)]
According to section 2(31) of person includes:
- Partnership Firms
- Company
- Association of person or body of individuals whether incorporated or not
- Local authorities
- Any other artificial judicial person not falling under any of the above sub sections.
Assessee
According to section 2(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;
Deemed Assessee
An individual might be assigned the responsibility of paying taxes by the legal authorities and such individuals are called deemed assesses. Deemed assessees can be:
- The eldest son or a legal heir of a deceased person who has expired without writing a will.
- The executor or a legal heir of the property of a deceased person who has passed on his property to the executor in a writing.
- The guardian of a lunatic, an idiot, or a minor.
- The agent of a non-resident Indian receiving income from India
Assessment Year
According to section 2(9), assessment year means the period of twelve months commencing on the 1st day of April every year.
Previous Year
Section 2(3) previous year means the financial year immediately preceding the assessment year:
Provided that, in the case of a business or profession newly set up, or a source of income newly coming into existence, in the said financial year, the previous year shall be the period beginning with the date of setting up of the business or profession or, as the case may be, the date on which the source of income newly comes into existence and ending with the said financial year.
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;
(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 receiver 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.
Exempted Income
Exempted income is that income on which income tax is not chargeable. Such
Incomes are classified as under:
i) Incomes which do not form part of total income nor is income tax payable on them. They are called fully exempted incomes.
Ii) Incomes which are included in the total income but are exempt from income tax at the average rate of income tax applicable to the total income. They are called partially exempted incomes.
Iii) Incomes of certain Institutions or authorities are exempted subject to fulfilment of the required conditions
Gross Total Income
Gross Total Income is the aggregate of all the income earned by the individuals during a specified period. According to Section 14 of the Income Tax Act 1961, the income of a person or an assessee can be categorised under these five heads,
- Income from Salaries
- Income from House Property
- Profits and Gains of Business and Profession
- Capital Gains
- Income from Other Sources
Specimen of calculation of gross total income
Income From Salary | Xx |
Add: Income Under the Head House Property | Xx |
Add: Profits and Gains of Business and Profession | Xx |
Add: capital gains Income | Xx |
Add: Income from Other Sources | Xx |
Gross Total Income | Xxx |
Less: Deductions under Section 80C to 80U | Xx |
Total Income | Xxx |
Total taxable income
Taxable income is the income of an individual or organization, minus any allowable tax deductions. It is the amount of income an entity makes every year upon which the government levies taxes. In simpler words, it is the amount of one's income which is subject to income tax.
Total tax makes up all the taxes you owe over a year. Total tax is how the IRS figures out to see if you need a refund or if you owe the government money. Deductions lower your taxable income.
Residential status of an Asesssee
Section 4(6) of the income tax act provides provisions for residential status of person in India. According to the Income Tax Act, 1961, residential status of a person is one of the important criteria in determining the tax implications. The residential status of a person can be categorised into-
a) Resident and Ordinarily Resident (ROR)
b) Resident but Not Ordinarily Resident (RNOR)
Non- Resident (NR)
Such types are discussed below-
a) Resident and Ordinarily Resident (ROR)
A resident taxpayer is an individual who satisfies any one of the following conditions:
- Resides in India for a minimum of 182 days in a year, or
- Resided in India for a minimum of 365 days in the immediately preceding four years and for a minimum of 60 days in the current financial year.
b) Resident but Not Ordinarily Resident (RNOR)
If an individual qualifies as a resident, the next step is to determine if he/she is a Resident ordinarily resident (ROR) or an RNOR. He will be a ROR if he meets both of the following conditions:
- Has been a resident of India in at least 2 out of 10 years immediately previous years and
- Has stayed in India for at least 730 days in 7 immediately preceding years
c) Non- Resident (NR)
An individual satisfying neither of the conditions stated above conditions would be a non-resident for the year.
PAN
Permanent Account Number (PAN) is a ten-digit alphanumeric number, issued in the form of a laminated card, by the Income Tax Department, to any "person" who applies for it or to whom the department allots the number without an application.
PAN enables the department to link all transactions of the "person" with the department. These transactions include tax payments, TDS/TCS credits, returns of income, specified transactions, correspondence, and so on. PAN, thus, acts as an identifier for the "person" with the tax department.
PAN was introduced to facilitates linking of various documents, including payment of taxes, assessment, tax demand, tax arrears etc. relating to an assessee, to facilitate easy retrieval of information and to facilitate matching of information relating to investment, raising of loans and other business activities of taxpayers collected through various sources, both internal as well as external, for detecting and combating tax evasion and widening of tax base.
A typical PAN is AFZPK7190K.
First three characters i.e., "AFZ" in the above PAN are alphabetic series running from
AAA to ZZZ
Fourth character of PAN i.e., "P" in the above PAN represents the status of the PAN holder. "P" stands for Individual, "F" stands for Firm, "C" stands for Company, "H" stands for HUF, "A" stands for AOP, "T" stands for TRUST etc.
Fifth character i.e., "K" in the above PAN represents first character of the PAN holder's last name/surname.
Next four characters i.e., "7190" in the above PAN are sequential number running from 0001 to 9999.
Last character i.e., "K" in the above PAN is an alphabetic check digit.
WHY IS IT NECESSARY TO HAVE PAN?
It is mandatory to quote PAN on return of income, all correspondence with any income tax authority. From 1 January 2005 it has become mandatory to quote PAN on challans for any payments due to Income Tax Department.
It is also compulsory to quote PAN in all documents pertaining to the following financial transactions: -
1) Sale or purchase of a motor vehicle or vehicle other than two wheeled vehicles.
2) Opening an account [other than a time-deposit referred at point No. 12 and a Basic Savings Bank Deposit Account] with a banking company or a co-operative bank
3) Making an application for issue of a credit or debit card.
4) Opening of a demat account with a depository, participant, custodian of securities or any other person with SEBI
5) Payment in cash of an amount exceeding Rs. 50,000 to a hotel or restaurant against bill at any one time.
6) Payment in cash of an amount exceeding Rs. 50,000 in connection with travel to any foreign country or payment for purchase of any foreign currency at any one time.
7) Payment of an amount exceeding Rs. 50,000 to a Mutual Fund for purchase of its units
8) Payment of an amount exceeding Rs. 50,000 to a company or an institution for acquiring debentures or bonds issued by it.
9) Payment of an amount exceeding Rs. 50,000 to the Reserve Bank of India for acquiring bonds issued by it.
10) Deposits of cash exceeding Rs. 50,000 during any one day with a banking company or a co-operative bank.
11) Deposits of cash aggregating to more than Rs. 2,50,000 during the period of 09th November 2016 to 30th December 2016 with a banking company, cooperative bank or post office.
12) Payment in cash for an amount exceeding Rs. 50,000 during any one day for purchase of bank drafts or pay orders or banker's cheques from a banking company or a co-operative bank.
13) A time deposit of amount exceeding Rs. 50,000 or aggregating to more than Rs. 5 lakhs during a financial year with -
(i) a banking company or a co-operative bank
(ii) a Post Office;
(iii) a Nidhi referred to in section 406 of the Companies Act, 2013 or
(iv) a non-banking financial company
14) Payment in cash or by way of a bank draft or pay order or banker's cheque of an amount aggregating to more than Rs. 50,000 in a financial year for one or more pre-paid payment instruments, as defined in the policy guidelines for issuance and operation of pre-paid payment instruments issued by Reserve Bank of India under section 18 of the Payment and Settlement Systems Act, 2007 to a banking company or a co-operative bank or to any other company or institution.
15) Payment of an amount aggregating to more than Rs. 50,000 in a financial year as life insurance premium to an insurer
16) A contract for sale or purchase of securities (other than shares) for amount exceeding Rs. 1 lakh per transaction
17) Sale or purchase, by any person, of shares of a company not listed in a recognized stock exchange for amount exceeding Rs. 1 lakh per transaction.
18) Sale or purchase of any immovable property for an amount exceeding Rs. 10 lakh or valued by stamp valuation authority referred to in section 50C of the Act at an amount exceeding ten lakh rupees.
19) Sale or purchase of goods or services of any nature other than those specified above for an amount exceeding Rs. 2 lakh per transaction.
TAN
Tax Deduction Account Number or Tax Collection Account Number is a 10-digit alphanumeric number issued by the Income-tax Department (we will refer to it as TAN). TAN is to be obtained by all persons who are responsible for deducting tax at source (TDS) or who are required to collect tax at source (TCS).
TAN or Tax Deduction and Collection Account Number is a 10 digit alpha numeric number required to be obtained by all persons who are responsible for deducting or collecting tax. Under Section 203A of the Income Tax Act, 1961, it is mandatory to quote Tax Deduction Account Number (TAN) allotted by the Income Tax Department (ITD) on all TDS returns.
Since last few years ITD has revised the structure of TAN. It is a unique 10-digit alphanumeric code. Accordingly, they have issued TAN in this new format to all existing TAN holders.
To facilitate diductors find their new TAN, ITD has now introduced a search facility in their website (www.incometaxindia.gov.in). Through this facility diductors can search on their name and old TAN to find the new TAN. Diductors are advised to find the new TAN from this site before it is incorporated in their e-TDS return file to avoid any inconvenience at the time of furnishing e-TDS return.
Types of TAN Applications
There are two types of TAN applications:
- Application for issuance of new TAN (Form 49B)
This application form should be used when the deductor has never applied for a TAN or does not have a TAN.
- Form for Change or Correction in TAN data for TAN Allotted
How to apply for TAN Number
TAN Number can be applied for online as well as offline. A Payment of Rs. 62 is required to be made for application of TAN No. The Payment can be made by Demand Draft/Cheque/ Credit Card/Debit Card/Net Banking. For making a TAN Application online, a person shall file his application in Form No. 49B on the following website of NSDL
Https://tin.tin.nsdl.com/tan/form49B.html
On submission of particulars, an acknowledgement screen would appear which would consist of a
- 14-Digit acknowledgement number
- Status of Application
- Name of Applicant
- Contact Details (Address, Email ID & Phone No.)
- Payment Details
- Space for Signature
This acknowledgement duly signed along with Cheque/Demand Draft (if payment is not made through Credit Card/ Debit Card/ Net-banking) shall be sent to NSDL at National Securities Depositories Limited, 3rd Floor, Sapphire Chambers, Near Baner Telephone Exchange, Baner, Pune – 411045
Application for TAN can also be applied by procuring the Form from the TIN-FC Centres. On submission of the TAN Application, the applicant would receive a 14-digit unique acknowledgement number from the TIN-FC. Form 49B for TAN Application can also be downloaded online from the following link and then printed: -
Http://law.incometaxindia.gov.in/DITTaxmann/IncomeTaxRules/pdf/49B.PDF
For any other queries regarding TAN Number, the assessee shall contact the TIN Support Desk at 022-24994650 or at tininfo@nsdl.co.in
On allotment of the TAN Number, NSDL will ensure intimation of new TAN at the address indicated in the Form 49B or against the acknowledgement in case of online applications for TAN.
Capital receipts are those receipts which either create liability or reduce an asset. Capital Receipts are non-recurring in nature. And these sorts of receipts are also not received every now and then.
From the above definition, it’s clear that a receipt can be called capital receipt if it adheres to at least one of the following conditions –
- It must create a liability. For example, if a company takes a loan from a bank or a financial institution, then it would create a liability. That’s why it is a capital receipt in nature. But if a company received a commission for using its expertise in producing a special type of product for another company, it would not be called a capital receipt because it didn’t create any liability.
- It must reduce the assets of the company. For example, if a company sells out its shares to the public, it would help reduce the asset, which could create more money in the future. That means it should be treated as a capital receipt.
Types of Capital Receipts
Capital Receipts can be classified into three types.
- Borrowing funds
When a company takes loans from banks or financial institutions, then it would be called borrowing funds. Borrowing funds from a financial institution is one of three forms of capital receipts.
2. Recovery of loans
To recover loans, often, the company needs to set aside one part of assets, which reduces the value of assets. This is the second type of capital receipts.
3. Other Capital Receipts
There’s a third type of receipts that we call “other capital receipts.” Under this, we include disinvestment and small savings. Disinvestment means selling off one part of the business. Disinvestment is called capital receipt because it reduced the asset of the company. Small savings are called capital receipts because they create a liability for the business.
REVENUE RECEIPTS-
Revenue Receipts are those receipts that neither reduce the assets of the company, nor they create any liability. They are always recurring in nature, and they are earned during the normal course of business.
From the definition, it is clear that any type of receipt needs to satisfy one of the two conditions to be called as revenue receipt –
- First, it must not reduce the assets of the company.
- Second, it must not create any liability for the company.
Features of Revenue Receipts
Since revenue receipts seem to be the opposite of capital receipts, it makes perfect sense to look at different features of revenue receipts so that we can understand the meaning of revenue receipts and can compare to the features of capital receipts.
- Means for survival: A business starts its operations because it expects to receive money as a result of their service to their customers. Either they can sell a bunch of products, or they can offer services. No matter what they do, without revenue receipts, they can’t survive for long because revenue receipts are collected from the direct operations of the business.
- Applicable for a short term: Revenue receipts are money received for a short period. The benefit of revenue receipts can only be enjoyed for one accounting year and not more.
- Recurring: Since revenue receipts offer benefits for a short period, the revenue receipts must be recurring. If revenue receipts don’t recur, the business wouldn’t be able to perpetuate for long.
- Affects the profit/loss: Receiving revenue directly affects the profit/loss of the business. When the revenue is received, either profit is increased, or loss is decreased.
- A small amount (volume): Compared to capital receipts, the number of revenue receipts is usually smaller. That doesn’t mean all revenue receipts are smaller. For example, if a company sells 1 million products in a given year, the revenue receipts could be huge and could also be more than its capital receipts during the year.
CAPITAL EXPENDITURE-
Capital expenditures are funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment. Capital Expenditure is often used to undertake new projects or investments by a company. Making capital expenditures on fixed assets can include repairing a roof, purchasing a piece of equipment, or building a new factory. This type of financial outlay is made by companies to increase the scope of their operations or add some economic benefit to the operation.
REVENUE EXPENDITURE
Revenue expenditures are short-term expenses that are also known as revenue expenses and operational expenses (OPEX). Revenue expenditure is generally spoken to in relation to fixed assets as it records the expenses which have occurred in connection to a fixed asset. For example, if you have a piece of equipment that requires monthly maintenance then the expense will be termed under revenue expenditure. It involves all costs that are required for the successful running of a business such as salaries for employees and property taxes. Revenue expenditure is recorded during an accounting period or a single year.
Revenue expenditure types
Revenue expenditure can be divided into two categories; direct expenses and indirect expenses.
Direct expenses
Direct expenses are those costs that are incurred when goods and services are in the process of being produced. The costs that are incurred during the day-to-day operations that take place in the business are also direct expenses. For manufacturing companies, examples of direct expenses include the costs that are incurred for the conversion of raw materials to finished products or goods. Direct expenses also include costs such as electricity used during the production, wages paid to workers, legal expenses, rent, shipping-related costs, and freight charges.
Indirect expenses
Indirect expenses are the second type of revenue expenditure. These types of expenses are usually incurred when the finished goods and services are being sold and distributed. These expenses include taxes, salaries for employees, depreciation, and interest among others. Indirect expenses also include repairs and maintenance costs. Although these costs aren’t directly linked to the finished products, they are required to ensure the proper functioning of the asset which in turn supports the proper functioning of the business.
References:
1. Ahuja, Giri & Gupta, Ravi: Systematic Approach to Incomes Tax
2. Agrawal, B.K.: Income Tax law and practice
3. Agrawal, B.K.: Ayakar Vidhan Avam lekhe
4. Chandra, Mahesh & Shukla, D.C.: Income Tax Law and practices
5. Chandra, Girish: Income Tax