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Questions and Answers
Define income tax.
Income tax is a direct tax levied by the Central Government on the income earned during the previous year by individuals, Hindu Undivided Families, firms, and corporate bodies.
Income tax is considered an indirect tax in India.
False
Who is responsible for the administration of the Income Tax Act in India?
The First War of Independence in 1857 led to financial difficulties for the English Government, resulting in the introduction of _______ in India in 1860 by Sir James Wilson.
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Match the following terms with their definitions:
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What is the popular name given to the estimate of income and expenditure presented by the Finance Minister of the Government of India to the Parliament?
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How many heads of income are identified by the Income Tax Act?
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All receipts are considered as income for tax purposes.
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According to the Income Tax Act, the term 'Person' is defined in Section 2(31) and includes individuals, Hindu Undivided Family, Company, Firm, Association of Persons, Local Authority, and ____________.
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Assessment year is the financial year in which the ________ takes place.
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Assessment year ends on _______ every year.
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Previous year is the ________ immediately preceding the assessment year.
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Total income is _______ income in respect of which income tax is payable.
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Income of discontinued business is taxed in the _________ year.
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Explain the process of determining the total income for taxation purposes.
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What are the three types of accounting methods accepted in the accounting world?
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Income tax is:
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Budget of the country is presented to the Parliament in the month of:
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Income tax rules are framed by:
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Casual income is exempted up to Rs. 10,000.
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A PAN number stands for:
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Define the term Person.
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Who is an 'Assessee in default'?
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What is agricultural income defined as under Section 2(1A) of the Income Tax Act, 1961?
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What are the conditions that need to be fully satisfied for rent or revenue to be considered agricultural income?
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Income from the sale of forest trees growing naturally without human intervention can be considered agricultural income.
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What percentage of income from the sale of latex or canex manufactured and processed by the assessee is considered agricultural income under Rule 7A?
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Match the following instances with their classification as non-agricultural income:
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What is the distinction between capital receipts and revenue receipts in terms of tax liability?
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Net Casual income is included under the head ________.
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According to judicial pronouncements, the nature of receipt in the hands of the receiver is the key factor in determining its tax treatment.
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For the assessment year 2020-21, what is Mr. Mayank's residential status?
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What residential status is assigned to an individual who does not satisfy any of the basic conditions of Part I?
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According to the Income Tax Act, what is the taxable nature of capital income?
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Revenue income received as a matter of routine by way of sale of goods or services is not taxable.
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Define the term 'capital gain' in relation to income tax.
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The scope of total income of a person is determined by reference to his residence in India in the __________ year.
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Match the following categories of residential status with their descriptions:
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Explain the conditions for an individual to be considered a Resident and Ordinarily Resident in India.
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Why is 60% of income from coffee sold after curing treated as agricultural income?
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What conditions need to be satisfied for partial integration of agricultural income with non-agricultural income?
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Income from the sale of plants from a nursery is tax-exempt.
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Casual income shall be taxable at __% rate.
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Match the following casual income examples with their category:
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Study Notes
Fundamentals of Income Tax
- Income tax in India is governed by the Indian Income Tax Act, 1961, which is amended every year through a Finance Bill passed by the Parliament.
- The main objective of this course is to familiarize students with the Income Tax law and practice.
Broad Mechanism of Income Tax in India
- Income tax was first introduced in India in 1860 by Sir James Wilson to meet financial necessities.
- The first War of Independence in 1857 led to the imposition of income tax in India.
- The Income Tax Act of 1922 was replaced by the new Income Tax Act of 1961, which came into force with effect from 1.4.1962.
- The administration of the Income Tax Act, 1961 is done by the Central Board of Direct Taxes (CBDT), which works under the supervision of the Ministry of Finance.
Concept of Income
- Income tax is levied on the income of an entity, and it is essential to know what income is and how it is computed.
- Section 2(24) of the Income Tax Act indicates the inclusion of certain items, such as:
- Profits and Gains
- Dividend
- Income from voluntary contributions received by certain trusts or institutions
- Perquisites or profits in lieu of salary to employees
- Any special allowance or benefit besides perquisites to employees
- Income from units of Unit Trust of India and Mutual Fund
- Income from Marketing Association
- Any allowance granted to meet increased cost of living
- Value of any benefit or perquisites received by directors or persons with substantial interest in a company
- Value of benefit or perquisites received by a representative assessee
- Profits generated from any business or profession
- Capital gain
- Recovery of bad debts allowed in the past
- Refund of excise duty
- Balancing charge
- Any interest, salary, bonus, commission, and other remuneration received by partners of a firm
- Amount received from winning lottery, crossword puzzles, play cards, and horse race
- Amount received from employees for contribution to certain funds
- Profits from sale of license received under import control order
- Cash subsidy in respect of export under any scheme of the Government of India
- Sum received exceeding Rs. 50,000 from a non-relative without consideration
- Sum received under Keyman Insurance Policy
- Income from business of banking carried on by a co-operative society with its members
- Casual income exceeding Rs. 10,000 is taxable under the head "Income from other sources"
Assessment Year and Previous Year
- Assessment Year is the year in which the income of the previous year is assessed.
- Previous Year is the year in which the income is earned.
- The income of the previous year is assessed in the assessment year.
Total Income and Accounting Method
- Total income is the sum of income from all sources.
- Accounting method refers to the method of maintaining books of account.
- The Income Tax Act, 1961, provides for two methods of accounting:
- Cash system
- Mercantile system### Basic Principles of Income
- Income is not defined in the Act, but it states what amounts are to be included in the term 'Income'
- The word "income" has been given a very wide meaning
- The Income Tax Department and taxpayers rely on judgments of the High Courts and the Supreme Court to determine what constitutes income
Characteristics of Income
- Income is a periodical monetary receipt coming from a definite source with some sort of regularity
- Income is a periodical yield measurable in terms of money or money's worth, arising from the use of real or personal property
- Periodicity or regularity is an important element of income, but a single receipt can still be considered income
- Income includes money that has become due, even if it has not been received
- A receipt that is considered income will continue to be so, even if it is exempt from tax
- Income means real income, not fictional or technical income
- Income must come from an outside source, and does not include pocket money received from a family member
Definition of Person
- The term "person" is defined in Section 2(31) of the Income Tax Act, 1961
- It includes:
- An individual
- A Hindu Undivided Family
- A company
- A firm
- An association of persons or a body of individuals, whether incorporated or not
- A local authority
- Every artificial judicial person not falling within any of the above categories
Definition of Assessee
- The term "assessee" is defined in Section 2(7) of the Income Tax Act, 1961
- It includes:
- Every person in respect of whom proceedings have been started for the assessment of his income
- Every person who is assessable in respect of income of any other person
- Every person to whom a refund of tax is due
- Every person who is deemed to be an assessee under the Act
- Every person who is deemed to be an assessee in default under the Act
Permanent Account Number (PAN)
- PAN is a number that identifies a particular assessee to the Income Tax Department
- It will not change even if the assessee changes their place of residence
- Every person who is required to pay tax, either on their own behalf or on behalf of another person, is required to have a PAN
- Every person carrying on a business and whose sales turnover in any previous year is likely to exceed Rs. 50,000 is also required to apply for a PAN
Assessment Year
- Assessment Year (AY) is defined in Section 2(9) of the Income Tax Act, 1961
- It means the period of 12 months commencing on April 1 of each year and ending on March 31 next
- The assessment year is the financial year in which the assessment takes place
- An assessee is required to pay tax in the AY on the income earned by him in the previous year
Previous Year
- Previous Year is defined in Section 3 of the Income Tax Act
- It is the year in which the income is earned and received
- The previous year is the financial year immediately preceding the assessment year
- It is essential to end the previous year prior to April 1 or by March 31 every year
- For example, the period of previous year related to the assessment year 2020-21 ended on March 31, 2020
Taxation of Previous Year's Income During the Same Year
- There are certain incomes for which the tax is paid in the same year
- Exceptions to the previous year include:
- Income of non-resident shipping companies
- Income of persons leaving India
- Income of an association of persons or body of individuals or artificial juridical person formed for a particular event or purpose
- Income of persons trying to alienate their assets
- Income of discontinued business
Concept of Total Income
- The term "total income" is defined in Section 2(45) of the Income Tax Act, 1961
- It means the total amount of income, profits, and gains
- The total income is computed in the manner laid down in the Act
- It includes:
- Compute taxable income under various heads of income
- Net result of adding taxable incomes from various heads of income
- Make deductions allowed under the Act
- Net income after allowing deductions is the total income
Accounting Method
- There are three types of accounting methods:
- Cash system
- Accrual system
- Mix of cash and accrual system### Income Tax Fundamentals
Agricultural Income
- Not taxed under the Income Tax Act, 1961, because agriculture is a State subject
- Exempted income under Section 10(I)
- Definition: Rent or revenue derived from land situated in India and used for agricultural purposes
- Conditions:
- Rent or revenue is derived from land
- Land is situated in India
- Land is used for agricultural purposes
- Conditions:
- Kinds of agricultural income:
- Rent or revenue derived from land
- Income derived from agriculture
- Income derived from marketing process performed by cultivator or receiver of rent in kind
- Income from farm building
- Income not considered agricultural income:
- Annuity payable to vendor of agricultural land
- Commission for selling agricultural produce
- Income from dairy farms, fisheries, ginning of cotton, etc.
Casual Income
- Exempted income under the Income Tax Act, 1961
- Definition: Income from sudden and non-recurring transactions
- Examples:
- Winning a prize in a competition
- Lottery winnings
- Income from sale of old books
- Income not considered casual income:
- Regular income from a business or trade
- Income from sale of goods produced or manufactured
Key Concepts
- Assessment Year (AY): The financial year in which income earned in the previous year is taxed
- Previous Year (PY): The financial year immediately preceding the assessment year
- Gross Total Income: The total income from all sources before deductions
- Total Income: The income on which tax is payable after deductions
- Accrual Basis of Accounting: Income is accounted for when it is earned, regardless of when it is received
- Cash Basis of Accounting: Income is accounted for when it is received
Important Terms
- Assessee: A person by whom any tax or other sum is payable under the Income Tax Act, 1961
- Permanent Account Number (PAN): A 10-digit number allotted to every assessee
- Casual Income: Income from sudden and non-recurring transactions
- Agricultural Income: Rent or revenue derived from land situated in India and used for agricultural purposes
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Description
This quiz covers the basics of income tax in India, including its administration, history, and related concepts. Test your knowledge of income tax in India.
