UNIT I

Basic Concepts

Q1) What is income?

A1) While the Income Tax Act does not define the term income, Section 2 (24) of the Act describes the various receipts contained under the income range.

Q2: What is agricultural income?

A2) Agricultural income is rent or income in cash or in kind derived from the land, which is used for agricultural purposes and the land must be located in India. Income from agriculture should be produced by the cultivator or the beneficiary of the spot rent of its agricultural products, which is suitable for incorporating it into the market.

The income should be obtained from the sale by the cultivator or the rental recipient of its products produced or received by him and cannot carry out any process other than the process of adapting it to the market.

Q3) What is casual income?

A3) Casual income means an income which is casual in nature, i.e., which is unplanned, uncertain, accidental, sudden income which occurs just by chance and the person cannot depend upon it to produce income in future.

Example: Winning from lotteries, gambling, betting, etc.,

Apart from these, any incomes which are unanticipated and non-recurring in nature are called Casual incomes.

Similarly, capital gains, receipt from a business or an occupation and one-time benefits like bonus given to employees are not casual incomes.

Q4) What is assessment year?

A4) Assessment Year is the year in which one file income tax returns of the year prior to it (i.e. Financial Year). It is the year in which the income that one has earned in the financial year that is just ended is evaluated.

E.g. For Financial Year 2014-15 the Assessment Year will be 2015-16.

Q5) What is previous year?

A5) As per the Income Tax law the income earned in current year is taxable in the next year. The year in which income is earned is known as the previous year.

In layman language the current financial year is known as the previous year. The financial year starts from 1st April and end on 31st March of the next year.

For Instance, for the salary income earned from 1 April 2017 - 31st March 2018 .The previous year would be 2017-18.

All the assessee’s are required to follow the financial year( April 1 to March 31) as previous year for all types of incomes. In case, of a newly set-up business/profession or first job then your first previous year may be less than 12 months. Though from subsequent years your previous year will always be your financial year.

Q6)  What is Gross Total Income?

A6) Gross total income (GTI) is the sum of incomes computed under the five headsof income i.e. salary, house property, business or profession, capital gain and other sources after applying clubbing provisions and making adjustments of set off and carry forward of losses.

GTI = Salary Income + House Property Income + Business or Profession Income + Capital Gains + Other Sources Income + Clubbing of Income - Set-off of Losses.

Q7) What are the types of Gross Total income (GTI)?

A7) Gross total income is to be categorized in 2 parts

Other GTI includes:

Q8) Who is a Person under Income Tax Act?

A8) Person [Section 2(31)] : Definition under I.Tax

Person includes :

Q9) What is Tax Evasion?

A9) Tax evasion is illegal action in which a individual or company to avoid paying tax liability. It involves hiding or false income, without proof of inflating deductions, not reporting cash transaction etc. Tax evasion is serious offense comes under criminal charges and substantial penalties.

Rooting for taxes is never an easy thing because most people question that concept of giving away part of their earning to a government but the fact is that taxes are an important source of income for the government. This is the money that is invested in various development projects that are meant to improve the company's situation. But the country has been facing a massive problem with tax evasion. People who should be paying taxes have found ways not to pay them and, as a result, it may be said that the income of the country has been suffering. So let's take a look at what are the ways in which people are avoiding taxes and what are the penalties for it.

Q10) Differentiate between Tax Evasion, Tax Avoidance and Tax Planning.

A10) Difference between Tax Evasion, Tax Avoidance and Tax Planning

 1. Nature: Tax planning and Tax avoidance is legal whereas Tax evasion is illegal

2. Attributes: Tax planning is moral. Tax avoidance is immoral. Tax evasion is illegal and objectionable.

3. Motive:  Tax planning is the method of saving tax .However tax avoidance is dodging of tax. Tax evasion is an act of concealing tax.

4. Consequences: Tax avoidance leads to the deferment of tax liability. Tax evasion leads to penalty or imprisonment.

5. Objective: The objective of Tax avoidance is to reduce tax liability by applying the script of law whereas Tax evasion is done to reduce tax liability by exercising unfair means. Tax planning is done to reduce the liability of tax by applying the provision and moral of law.

6. Permissible: Tax planning and Tax avoidance are permissible whereas Tax evasion is not permissible.

Tax liability of an individual can be reduced through 3 different methods- Tax Planning, Tax avoidance and Tax evasion. All the methods are different and interchangeable.

Tax planning and Tax avoidance are the legal ways to reduce tax liabilities but Tax avoidance is not advisable as it manipulates the law for one’s own benefit whereas tax planning is an ideal method.

Q11) Explain the scope of Total income.

A11) Section -5 of Income Tax Act, 1961 provides Scope of total Income in case of of person who is a resident, in the case of a person not ordinarily resident in India and person who is a non-resident which includes. Income can be Income from any source which (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year ; or (c) accrues or arises to him outside India during such year .

Table explaining Scope of total Income under section 5 of Income Tax Act, 1961

Note-

a)     Residential status is as per section 6 of Income Tax Act, 1961.

b)    Deemed income is not actually accrued but is supposed to be accrued notionally.

c)     The income accrued is when the assessee obtains the rights to receive it.

d)    Previous year means the financial year immediately preceding the assessment year.

Q12) What do you mean by Residential Status?

A12) Residential status is a term coined under Income Tax Act, 1961, and has nothing to do with nationality or domicile of a person. An Indian, who is a citizen of India can be non-resident for Income-tax purposes, whereas an American who is a citizen of America can be resident of India for Income-tax purposes, as per the Income Tax Act, 1961. Residential status of a person depends upon the territorial connections of the person with this country, i.e., for how many days he has physically stayed in India in any particular Financial Year.

Further it is to be note that the residential status of different types of persons viz an individual, a firm, a company etc is determined differently.

Q13) How is the residential status of an individual determined?

A13) Determining the Residential Status of an Individual

Under the Act, Residential Status of an individual is either Resident of India or Non-Resident of India. The first thing that needs to be kept in mind is that the residential status is determined with respect to the previous financial year – hence, an individual may be a resident in one year and a non-resident in the next year.

As per Section 6(a) of the Act which mandates that an individual is said to be resident of India in any previous year, if he satisfy any of the following primary conditions, otherwise the person become Non-Resident of India, if an individual-

i. Is in India in previous year for 182 days or more; or

ii. Is in India in previous year for 60 days or more and 365 days or more in the immediate 4 preceding Financial Year.

Further Act provides certain exemption to following persons to comply only clause (i) to become resident in India:

a. Citizen of India who leaves India for taking up employment outside India;

b. Indian Citizen who leaves India as a member of the crew of Indian Ship;

c. Citizen of India or to a person of Indian origin who visit India ;

Further, Clause (a) of Section 6 of the Act, a Resident of India can be termed as Resident-Ordinary Resident of India, if an individual satisfy all the following two conditions, otherwise he can be termed as Resident-Not Ordinary Resident of India, if

i. An individual is a resident in India for 2 years out of 10 previous years preceding current financial year; and

ii. An individual is in India for 730 days or more in 7 previous years preceding current financial year.

Q14) What are the incomes which do not form a part of total income?

A14) Various categories of income are exempt from income tax under section 10. The assessee has to establish that his case clearly and squarely falls within the ambit of the said provisions of the act.

1. Agriculture Income:

2. Share Of Profit From A Firm:

3. Leave Travel Concession:

4. Allowance Or Perquisite Paid Outside India [Sec. 10(7)]:

5. Death-Cum-Retirement-Gratuity [Sec. 10(10)]:

6. Compensation For Any Disaster [Sec. 10(10bc)]

7. Sum Received Under A Life Insurance Policy [Sec. 10(10d)]:

8. Payment From National Pension Trust [Sec. 10(12a) & 10(12b)]:

9. Payment From Approved Superannuation Fund [Sec. 10(13)]:

10. Income Of Mutual Fund [Sec. 10(23D)].

11. Income Of Business Trust [Sec 10(23FC)]:

12. Income Of Specified Boards [Sec. 10(29A)]:

13. Subsidy Received From Tea Board [Sec. 10(30)]:

14. Awards And Rewards [Sec. 10(17A)]:

15. Income Of Scientific Research Association [Sec. 10(21)]:

16. Expenditure Related To Exempted Income [Sec. 14A]:

Q15) What are the basic or primary conditions for an individual to become a resident in India?

A15) As per Section 6(a) of the Act which mandates that an individual is said to be resident of India in any previous year, if he satisfy any of the following primary conditions, otherwise the person become Non-Resident of India, if an individual-

i. Is in India in previous year for 182 days or more; or

ii. Is in India in previous year for 60 days or more and 365 days or more in the immediate 4 preceding Financial Year.

Q16) When can a Resident be termed as Resident and ordinarily resident?

A16) Clause (a) of Section 6 of the Act, a Resident of India can be termed as Resident-Ordinary Resident of India, if an individual satisfy all the following two conditions, otherwise he can be termed as Resident-Not Ordinary Resident of India, if

i. An individual is a resident in India for 2 years out of 10 previous years preceding current financial year; and

ii. An individual is in India for 730 days or more in 7 previous years preceding current financial year.

Q17) What are the particulars relating to deductions under Sec 80C?

A17) Deduction under Section 80C

Applicable to: An Individual or a Hindu Undivided Family (whether resident or non-resident)

Condition to be satisfied: Assessee has made a deposit or an investment in any one or more of the listed items (as given below) during the previous year.

Various options under 80C:

Maximum Premium allowed is 20% of Sum Assured

2.     Investment/Contribution in Public Provident Fund (PPF)

3.     Investment in National Savings Certificate (NSC)- VIII or IX issue

4.     Contribution for participating in the Unit-linked Insurance Plan (ULIP) of Unit Trust of India (UTI) or ULIP of LIC Mutual fund u/s 10(23D) formerly known as Dhanraksha 1989.

5.     Sum paid to effect or keep in force a contract for notified annuity plan of the LIC or any other insurer.

6.     Subscription to notified units of a specified Mutual fund u/s 10(23D)/ administrator or the specified company as referred in sec. 2 of UTI (ELSS, 2005).

7.     Any sum paid as subscription to Home Loan Account Scheme or notified pension fund of the National Housing Bank.

8.     Any sum paid as subscription to a notified deposit scheme of Public sector companies or Any authority constituted in India for the purpose of satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns, villages or for both.

9.     Repayment of Principal amount of Housing Loan.

10. Investment in Debentures/Equity shares of a Public Financial Institution.

11. Subscription to units of any mutual fund u/s 10(23D) provided amount of subscription to such units is subscribed only in the eligible issue of capital.

12. Investment as term deposit for a period of 5 years or more with a scheduled bank.

13. Notified Bonds issued by the National Bank for Agriculture and Rural Development (NABARD).

14. Senior Citizens Savings Scheme Rules, 2004

15. 5 year time deposit in an account under the Post Office Time Deposit Rules, 1981

Deductions only for Individuals:

Quantum of Deduction:

Deduction under this section shall be minimum of the following:

● Aggregate of the eligible contributions, expenditure or investments (discussed above)

● Rs 1,50,000

Q18) To whom Sec 80DD and 80U is applicable?

A18)  Sec 80DD And Sec 80U is applicable to: A resident individual (irrespective of citizenship) or a resident HUF

Q19) What are the conditions to be satisfied to get deduction under Sec 80CCC?

A19) Condition to be satisfied

1. Amount paid under an annuity plan: During the previous year, assessee has paid or deposited a sum under an annuity plan of the Life Insurance Corporation of India (LIC) or any other insurer for receiving pension from the fund referred to in Sec. 10(23AAB).

2. Payment out of taxable income: The amount must be paid out of income which is chargeable to tax. However, it is not necessary that such income relates to current year.

Q20) What is the Quantum of deduction available under Sec 80CCD?

A20) Quantum of Deduction

Deduction u/s 80CCD(1)

A. In case of salaried individual

Lower of the following         Rs

● Amount so paid or deposited        ***

● 10% of his salary in the previous year       ***

***

Add: The whole of the contribution made by the employer to such

account to the maximum of 10% of his salary1 in the previous year.  ***

Amount of Deduction         ***

B. In case of other individual

Lower of the following

● Amount so paid or deposited

● 20% of his gross total income in the previous year

Additional Deduction u/s 80CCD(1B)

Lower of the following shall also be eligible for deduction    Rs

● Contribution to the scheme by any individual [Other than amount

claimed and allowed as deduction u/s 80CCD(1)]     ***

● Rs 50,000

*Salary means Basic + DA