Taxation Law Summary Notes PDF
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2025
Hemant Patil
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These summary notes provide an overview of Indian taxation law, tracing its history from ancient times to the modern era. They cover the key provisions of the Income Tax Act, 1961, and the Goods and Services Tax (GST), with a focus on defining and understanding taxation concepts. The notes also include a discussion on the evolution of tax law in India and case law examples.
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Taxation Law Summary Notes Hemant Patil. 1/4/25 GLC, 2025 Page 1 of 58 Contents PYQ Pattern....................................................................................................
Taxation Law Summary Notes Hemant Patil. 1/4/25 GLC, 2025 Page 1 of 58 Contents PYQ Pattern....................................................................................................... 2 1. Introduction to Taxation................................................................................ 3 A. History and Evolution of Tax Law in India........................................................... 3 B. Constitutional Provisions on Taxation................................................................. 4 C. Nature and Scope of Tax.................................................................................. 5 D. Key Definitions:........................................................................................... 7 a. Assessee, Person, Previous Year, Assessment Year, Financial Year.......................... 7 b. Income, Agricultural Income, Taxable Income..................................................... 8 c. Tax Evasion vs. Tax Avoidance.......................................................................... 9 2. Income Tax Act, 1961.................................................................................. 10 2.1 Residential Status and Tax Liability............................................................ 10 A. Residential Status Rules (Section 6)................................................................ 10 B. Impact on Tax Liability for Different Classes of Assessees................................... 12 C. Clubbing of Income (Sections 60-64)............................................................... 13 D. Exemptions and Deductions under Chapter VI-A (e.g., Sections 80C, 80D)........ 15 2.2 Heads of Income........................................................................................ 17 A. Detailed Provisions for Each Head:.................................................................. 17 a. Salary: Definition, Allowances, Perquisites, Deductions...................................... 17 b. House Property: Annual Value, Standard Deduction (Section 24)........................ 19 c. Business or Profession: Allowable Expenses and Depreciation............................. 20 d. Capital Gains: Short-term and Long-term Gains, Exemptions (e.g., Section 54).... 22 e. Other Sources: Dividends, Gifts, Interest Income.............................................. 24 2.3 Computation of Total Income..................................................................... 26 A. Gross Total Income vs. Taxable Income............................................................ 26 B. Set-Off and Carry Forward of Losses (Sections 70-80)....................................... 27 C. Calculation of Tax Liability and Rebate............................................................. 29 2.4 Special Provisions...................................................................................... 30 A. TDS (Tax Deduction at Source) and Advance Tax............................................... 30 3. Comparison Between TDS and Advance Tax................................................... 32 B. Speculative Business Loss Adjustments............................................................ 33 C. Mergers & Acquisitions Taxation...................................................................... 34 3. Assessment Procedures............................................................................... 36 A. Types of Assessment: Self-assessment, Regular Assessment, Best Judgment Assessment........................................................................................................ 36 B. Appeals and Revisions: Commissioner Appeals, ITAT (Income Tax Appellate Tribunal) 38 Page 2 of 58 C. Penalties and Prosecution under the Act........................................................... 40 D. Faceless Assessments and Advance Rulings................................................... 41 4. Goods and Services Tax (GST)...................................................................... 43 4.1 Overview of GST Laws................................................................................ 43 A. Central GST Act (CGST), Integrated GST Act (IGST), Maharashtra GST Act (MGST) 43 B. Dual GST Model: Features and Applicability...................................................... 45 4.2 Key Concepts in GST................................................................................... 47 A. Time of Supply, Place of Supply...................................................................... 47 B. Input Tax Credit Mechanism........................................................................... 48 C. Composition Scheme: Eligibility and Benefits.................................................... 50 D. Composite vs. Mixed Supply........................................................................ 51 4.3 GST Council................................................................................................ 52 A. Role, Functioning, and Constitutional Basis (Article 279A).................................. 52 5. Maharashtra State Taxes.............................................................................. 53 5.1 Maharashtra State Professional Tax Act, 1975........................................... 53 A. Applicability to Professions, Trades, Callings..................................................... 53 B. Exemptions under Section 27A (e.g., senior citizens above age 65)..................... 55 5.2 MVAT Act (Maharashtra Value Added Tax)................................................. 56 A. Definitions: Dealer, Sale Price......................................................................... 56 B. Audit Procedures under MVAT Act.................................................................... 57 Disclaimer........................................................................................................ 58 PYQ Pattern Average Topic Frequency Marks Residential Status and its Determination (IT Act, 1961) 6 times 6-12 marks Heads of Income under Income Tax Act (1961) 5 times 6-12 marks Deductions under Chapter VI-A 5 times 6-12 marks GST: Objectives, Features, and Implementation 5 times 6-12 marks Computation of Income under the Head "Salaries" 5 times 6-12 marks Capital Gains (Short-term and Long-term) Computation 4 times 6-12 marks Professional Tax under Maharashtra State Professional 4 times 6-12 marks Tax Act, 1975 Tax Deduction at Source (TDS) 4 times 2-6 marks Assessment Year vs. Previous Year 3 times 2-6 marks Clubbing of Income Provisions 3 times 6-12 marks Provisions for Agricultural Income (Exemptions) 3 times 6 marks Return Filing and Defective Returns under Income Tax 3 times 6 marks Act GST Council: Role and Functioning 3 times 6 marks Taxable Events under GST (Supply Definition) 3 times 6-12 marks Page 3 of 58 1. Introduction to Taxation A. History and Evolution of Tax Law in India The history of taxation in India can be traced back to ancient times and has evolved significantly over centuries. Below is a comprehensive yet concise overview of its development: 1. Ancient India Manusmriti (200 BCE – 200 CE): o One of the earliest sources of tax law in India. It emphasized fairness in taxation, stating taxes should not burden citizens. o Farmers paid 1/6 to 1/10 of their produce as tax, while merchants and artisans were taxed at 20% of their income. o Taxes were collected in kind (e.g., produce, gold, or silver) and were proportional to income or production. Arthashastra by Kautilya (3rd Century BCE): o A detailed treatise on governance, including taxation. o Advocated progressive taxation—wealthier individuals paid higher taxes than the less privileged. o Farmers paid a fixed rate of 1/6 of their yield as land tax. Import/export duties, tolls, and emergency taxes were also mentioned. 2. Medieval India During the Mughal era, land revenue was the primary source of income for the state. Akbar introduced the Zabt system, which standardized land revenue collection. 3. British Era Income Tax Act, 1860: o Introduced by Sir James Wilson to cover losses from the Revolt of 1857. o Divided income into four categories: 1. Landed property 2. Salaries and pensions 3. Profits from professions/trades 4. Income from securities o Agricultural income was exempted. This Act was temporary and lapsed after five years. Income Tax Act, 1886: o Marked the formal establishment of income tax laws in India. o Introduced separate taxation for individuals and companies. Income Tax Act, 1918: o Expanded taxable income to include casual receipts and deductions for professional/business expenses. Income Tax Act, 1922: o A landmark law that provided flexibility in tax rates based on government needs. o Established a structured system for tax administration with designated authorities (e.g., Commissioners, Income Tax Officers). o Remained in force until replaced by the Income Tax Act, 1961. 4. Post-Independence Era Income Tax Act, 1961: o Enacted after extensive consultation with the Law Commission and Ministry of Finance. o Came into force on April 1, 1962, and remains the primary legislation governing direct taxation in India. o Key Features: Page 4 of 58 Five heads of income: Salary, House Property, Business/Profession, Capital Gains, Other Sources. Introduced provisions for revenue audits and assessment procedures. Applicable across all Indian territories (including Jammu & Kashmir). 5. Modern Developments The Income Tax Act has undergone numerous amendments to adapt to changing economic conditions. The introduction of Goods and Services Tax (GST) in July 2017 replaced several indirect taxes like VAT and excise duty, simplifying India's complex tax structure. Case Law Example Chhotabhai Jethabhai Patel & Co. v. Union of India (1962 Supp (2) SCR 1): Principle: The Supreme Court upheld that retrospective amendments in tax laws are valid unless they impose unreasonable restrictions on fundamental rights such as carrying on business or holding property. Example A farmer in ancient India under Manusmriti would pay a tax rate between 1661 to 110101 of his agricultural produce depending on crop yield. In contrast, under the Income Tax Act of today, agricultural income is exempt from taxation. This historical progression reflects how India's taxation system has evolved from being agrarian-focused to one that addresses modern economic complexities while balancing fairness and administrative efficiency. B. Constitutional Provisions on Taxation The Indian Constitution provides a robust framework for taxation, ensuring a clear division of powers between the Union and State governments. These provisions are designed to maintain federal balance while enabling efficient tax collection. 1. Power to Levy and Collect Taxes Article 265: No tax shall be levied or collected except by the authority of law. o This ensures that taxation is lawful and authorized by legislation passed by the competent legislature. 2. Distribution of Taxing Powers The Constitution divides taxing powers between the Union and States through the Seventh Schedule, which contains three lists: 1. List I (Union List): Taxes Levied by the Central Government o Income tax (except agricultural income) [Entry 82]. o Customs duties [Entry 83]. o Excise duties (except on alcoholic liquor for human consumption) [Entry 84]. o Corporation tax [Entry 85]. o Taxes on capital value of assets, excluding agricultural land [Entry 86]. o Estate duty in respect of property other than agricultural land [Entry 87]. o Taxes on interstate trade or commerce (Central Sales Tax) [Entry 92A]. o Goods and Services Tax (GST) on supplies in interstate trade or commerce [Entry 92C]. 2. List II (State List): Taxes Levied by State Governments o Land revenue, including taxes on agricultural income [Entry 45, Entry 46]. o Taxes on vehicles suitable for use on roads [Entry 57]. o State Goods and Services Tax (SGST) on intra-state supplies of goods and services. 3. List III (Concurrent List): o No taxes are specified under this list; however, both Union and State legislatures can legislate on matters like contracts, bankruptcy, etc., which may have indirect tax implications. 3. Goods and Services Tax (GST) Page 5 of 58 The introduction of GST through the 101st Constitutional Amendment Act, 2016 streamlined indirect taxation in India. Key provisions include: Article 246A: Empowers both Parliament and State Legislatures to make laws regarding GST. Article 269A: Governs GST on inter-state supplies, collected by the Union but shared with States. Article 279A: Establishes the GST Council to recommend tax rates, exemptions, and policies. 4. Finance Commission Article 280: Provides for a Finance Commission every five years to recommend: o Distribution of taxes between the Union and States. o Principles governing grants-in-aid to States. 5. Restrictions on Taxation Article 286: Prohibits States from taxing sales or purchases outside their territory or in the course of import/export. Article 301: Ensures freedom of trade, commerce, and intercourse throughout India. Article 304: Allows States to impose reasonable restrictions on trade for public interest but prohibits discriminatory taxes against goods from other States. 6. Consolidated Funds Taxes collected are credited into: The Consolidated Fund of India for Union taxes. The Consolidated Fund of States for State taxes. 7. Case Law Example Union of India v. Harbhajan Singh Dhillon (1971 AIR SC 239): Principle: The Supreme Court upheld that Parliament has residuary powers under Article 248 read with Entry 97 of List I to levy taxes not enumerated in any list. 8. Example If a person earns income from agriculture, it is exempt from taxation under Entry 46 in List II. However, if income is derived from a business, it falls under Entry 82 in List I and is taxable by the Union Government. These constitutional provisions ensure a clear demarcation of taxing powers while maintaining fiscal federalism in India. C. Nature and Scope of Tax Nature and Scope of Tax Taxation is a fundamental tool used by governments to generate revenue for public expenditure, regulate economic activities, and promote social welfare. The nature and scope of tax can be understood through its characteristics, classification, and the extent of its application. A. Nature of Tax 1. Compulsory Contribution: o Tax is a mandatory payment imposed by the government under its sovereign authority. o It is not a voluntary payment or donation. 2. No Direct Benefit: o Taxes are not levied in exchange for specific services or benefits to the taxpayer. o For example, paying income tax does not guarantee any direct benefit to the individual taxpayer. 3. Imposed by Law: o Taxes must be authorized by legislation (e.g., Income Tax Act, 1961; GST Acts). o As per Article 265 of the Indian Constitution, no tax can be levied or collected except by the authority of law. Page 6 of 58 4. Source of Government Revenue: o Taxes are the primary source of revenue for governments to fund public services like healthcare, education, infrastructure, defense, etc. 5. Redistributive Mechanism: o Taxes are used to reduce income inequality by redistributing wealth through welfare schemes and subsidies. 6. Economic Regulation: o Taxes influence economic activities by encouraging or discouraging certain behaviors (e.g., higher taxes on tobacco to reduce consumption). 7. Progressive Nature: o Many taxes, like income tax, follow a progressive structure where higher income groups pay a larger proportion of their income as tax. B. Scope of Tax The scope of taxation refers to the extent and application of taxes within a jurisdiction: 1. Types of Taxes: o Taxes are broadly classified into: Direct Taxes: Levied directly on individuals or entities (e.g., Income Tax, Corporate Tax). Indirect Taxes: Levied on goods and services, ultimately borne by the consumer (e.g., GST). 2. Jurisdictional Application: o The power to levy taxes is divided between the Union and State governments in India as per the Seventh Schedule: Union List (e.g., Income Tax, Customs Duty). State List (e.g., Land Revenue, State GST). Concurrent List does not contain taxation powers. 3. Taxable Entities: o Includes individuals, Hindu Undivided Families (HUFs), companies, firms, associations of persons (AOPs), trusts, etc. 4. Taxable Events: o Taxes are imposed on specific events such as earning income (Income Tax), sale of goods/services (GST), or transfer of property (Stamp Duty). 5. Geographical Scope: o Taxes apply within defined territorial limits: For example, GST applies across India except Jammu & Kashmir before its reorganization in 2019. 6. Exemptions and Deductions: o Certain incomes or transactions are exempted from tax or eligible for deductions to encourage specific activities (e.g., Section 80C deductions under Income Tax Act for investments in PPF/LIC). 7. International Scope: o In cases involving cross-border transactions or foreign entities operating in India, international taxation principles like Double Taxation Avoidance Agreements (DTAAs) apply. C. Example Illustrating Nature and Scope of Tax A salaried individual earning ₹10 lakhs annually pays income tax as per the slabs defined under the Income Tax Act, 1961. This payment is compulsory under law without any direct benefit. The revenue collected is used for public welfare projects like building roads or schools. The scope extends to all residents earning above the basic exemption limit within India. D. Relevant Case Law Page 7 of 58 Kunnathat Thathunni Moopil Nair v. State of Kerala (AIR 1961 SC 552): Facts: A land tax was levied under the Travancore-Cochin Land Tax Act without considering the land's productivity. Principle: The Supreme Court held that taxation must not violate Article 14 (Equality before Law) and should be reasonable. Judgment: The law was struck down as it imposed an arbitrary burden without considering the capacity to pay. This structured understanding of the nature and scope of taxation ensures clarity in its principles and application while preparing for exams or practical legal scenarios. D. Key Definitions: a. Assessee, Person, Previous Year, Assessment Year, Financial Year Below are the verbatim definitions from the Income Tax Act, 1961, followed by their simplified explanations: 1. Assessee (Section 2(7)) Verbatim Definition: "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." Simplified Explanation: An assessee is anyone who: Is liable to pay tax or any amount under the Income Tax Act. Is involved in proceedings related to income assessment, losses, or refunds. Is considered an assessee by law (e.g., legal heirs paying tax on behalf of a deceased). Has failed to comply with tax obligations and is deemed "in default." 2. Person (Section 2(31)) Verbatim Definition: "Person" includes— (i) an individual, (ii) a Hindu Undivided Family (HUF), (iii) a company, (iv) a firm, (v) an association of persons (AOP) or a body of individuals (BOI), whether incorporated or not, (vi) a local authority, and (vii) every artificial juridical person not falling within any of the preceding sub-clauses. Simplified Explanation: The term person refers to all entities that can be taxed under the Income Tax Act. It includes: Individuals (e.g., salaried employees, business owners). HUFs (joint families as per Hindu law). Companies (private/public). Firms and partnerships. Groups like AOPs/BOIs (e.g., joint ventures). Local bodies like municipalities. Other legal entities like trusts or societies. 3. Previous Year (Section 3) Verbatim Definition: "Previous year" means the financial year immediately preceding the assessment year. Page 8 of 58 Simplified Explanation: The previous year is the financial year during which income is earned. For example: If income is earned between April 1, 2023, and March 31, 2024, this period is the previous year for Assessment Year 2024–25. 4. Assessment Year (Section 2(9)) Verbatim Definition: "Assessment year" means the period of twelve months commencing on the 1st day of April every year. Simplified Explanation: The assessment year is the financial year following the previous year when taxes are assessed and paid on income earned in the previous year. For instance: For income earned during April 1, 2023–March 31, 2024 (previous year), taxes are assessed in Assessment Year 2024–25. 5. Financial Year The term financial year is not explicitly defined in the Income Tax Act but is generally understood as: Simplified Explanation: The financial year refers to a period starting from April 1 and ending on March 31. It serves as both: The accounting period for businesses. The basis for determining "previous years" and "assessment years." Examples for Better Understanding 1. Assessee Example: If Mr. A earns ₹10 lakhs in FY 2023–24 and pays taxes on it in AY 2024–25, he is an assessee for AY 2024–25. 2. Person Example: A company like ABC Ltd., a local authority like Delhi Municipality, and an individual like Mr. B are all "persons" under tax law. 3. Previous Year Example: For income earned between April 1, 2023–March 31, 2024, this period is the previous year. 4. Assessment Year Example: Taxes for income earned in FY 2023–24 are assessed and filed during AY 2024–25. b. Income, Agricultural Income, Taxable Income 1. Income (Section 2(24)) Verbatim Definition: "Income" includes— (i) profits and gains; (ii) dividend; (iii) voluntary contributions received by a trust or institution for charitable or religious purposes; (iv) value of any perquisite or profit in lieu of salary taxable under Section 17; (v) any capital gains chargeable under Section 45; (vi) winnings from lotteries, crossword puzzles, horse races, card games, gambling, etc. Simplified Explanation: Income is broadly defined to include all monetary gains, whether recurring or non-recurring. It includes: o Profits from business or profession. o Salaries and perquisites. o Capital gains from the sale of property or investments. o Income from lotteries or gambling. It is not limited to cash receipts but also includes non-monetary benefits like rent- free accommodations. 2. Agricultural Income (Section 2(1A)) Verbatim Definition: "Agricultural income" means— (a) any rent or revenue derived from land situated in India and used for agricultural purposes; Page 9 of 58 (b) income derived from such land by agriculture or processes to make produce marketable; (c) income from buildings used for agricultural operations, provided they are on or near the land. Simplified Explanation: Agricultural income refers to: o Rent/revenue from land used for farming. o Income from cultivation or sale of crops after basic processing (e.g., cleaning or drying). o Income from farmhouses directly connected to agricultural operations. Exemption: Agricultural income is exempt from tax under Section 10(1), but it may be considered for rate purposes in certain cases. Example: If a farmer earns ₹5 lakhs from selling crops grown on agricultural land, this income is exempt. 3. Taxable Income Verbatim Definition: The term "taxable income" is not explicitly defined in the Act but refers to the total income of an assessee after allowing permissible deductions under the Act. Simplified Explanation: Taxable income is the portion of your total income on which tax is levied after deducting exemptions and deductions (e.g., under Sections 80C to 80U). It is computed by summing up all heads of income (Salary, House Property, Business/Profession, Capital Gains, and Other Sources) and subtracting eligible deductions. Example: If your total income is ₹10 lakhs and deductions under Section 80C are ₹1.5 lakhs, your taxable income will be ₹8.5 lakhs. Examples for Better Understanding 1. Income Example: A salaried employee earning ₹12 lakhs annually also wins ₹1 lakh in a lottery. Both amounts are considered "income." 2. Agricultural Income Example: Revenue earned by a farmer from selling rice grown on his land qualifies as agricultural income and is exempt. 3. Taxable Income Example: A person earning ₹15 lakhs with deductions of ₹2 lakhs under various sections will have ₹13 lakhs as taxable income. Relevant Case Law CIT v. Raja Benoy Kumar Sahas Roy (1957 AIR SC 768): Principle: The Supreme Court held that agricultural income must involve basic agricultural operations like tilling, sowing, and harvesting to qualify for exemption under Section 10(1). c. Tax Evasion vs. Tax Avoidance Tax evasion and tax avoidance are two distinct concepts in taxation, differing in legality, intent, and consequences. Below is a detailed explanation of both terms: 1. Tax Evasion Definition: Tax evasion refers to the illegal and deliberate act of not paying taxes that are legally due. It involves fraudulent practices to conceal income, inflate expenses, or misrepresent financial information to reduce tax liability. Key Features: Illegal Activity: Tax evasion violates the provisions of tax laws. Intentional Fraud: It involves deliberate acts such as: o Concealing income. o Falsifying accounts. o Claiming false deductions. Consequences: Tax evasion is punishable under the law with penalties, fines, and imprisonment. Page 10 of 58 Example: A business owner underreports their income by ₹10 lakhs in their tax return to reduce their tax liability. This constitutes tax evasion. Relevant Case Law: CIT v. S.V. Angidi Chettiar (1962 AIR SC 763): The Supreme Court held that deliberate concealment of income to evade taxes constitutes a punishable offense under the Income Tax Act. 2. Tax Avoidance Definition: Tax avoidance refers to the use of legal methods and loopholes within the framework of tax laws to minimize tax liability. While it is not illegal, it may be considered unethical or against the spirit of the law. Key Features: Legal Activity: Tax avoidance complies with the letter of the law but often exploits its loopholes. Strategic Planning: It involves actions like: o Structuring transactions to claim exemptions. o Using deductions or incentives provided by law. Consequences: Though legal, aggressive tax avoidance may attract scrutiny from tax authorities and lead to anti-avoidance measures like General Anti-Avoidance Rules (GAAR). Example: A company sets up operations in a Special Economic Zone (SEZ) to claim tax holidays under Section 10AA of the Income Tax Act. Relevant Case Law: McDowell & Co. Ltd. v. CTO (1985 AIR SC 809): The Supreme Court observed that while tax avoidance is technically legal, it is against public interest if it defeats the spirit of the law. The Court emphasized that tax planning should not lead to "colorable devices" for avoiding taxes. Comparison Between Tax Evasion and Tax Avoidance Aspect Tax Evasion Tax Avoidance Legality Illegal and punishable under law Legal but may be unethical or against the spirit of law Intent Fraudulent intent to evade taxes Strategic use of legal provisions to reduce taxes Methods Used Concealing income, falsifying accounts Exploiting loopholes, claiming exemptions Consequences Penalties, fines, imprisonment May attract scrutiny or anti-avoidance measures Example Underreporting income Setting up business in a tax-exempt zone General Anti-Avoidance Rule (GAAR) To curb aggressive tax avoidance practices, India introduced GAAR under Chapter X-A of the Income Tax Act. GAAR empowers tax authorities to recharacterize transactions if they lack commercial substance or are primarily aimed at obtaining a tax benefit. Understanding these distinctions ensures compliance with tax laws while enabling ethical and efficient tax planning. 2. Income Tax Act, 1961 2.1 Residential Status and Tax Liability A. Residential Status Rules (Section 6) The residential status of a person under the Income Tax Act, 1961, determines the scope of their tax liability in India. Section 6 lays down the rules for determining whether an individual, Hindu Undivided Family (HUF), firm, association of persons (AOP), or company is a resident or non-resident for a particular financial year. 1. Residential Status of an Individual An individual can be classified as: Page 11 of 58 Resident (Ordinary Resident or Not Ordinarily Resident) Non-Resident Tests for Residency: An individual is considered a resident in India if they satisfy any one of the following conditions: 1. They are in India for 182 days or more during the relevant financial year; OR 2. They are in India for 60 days or more during the relevant financial year and have been in India for 365 days or more in the preceding four financial years. Exceptions to the 60-Day Rule: The period of 60 days is extended to 182 days in the following cases: Indian citizens leaving India for employment abroad or as crew members of an Indian ship. Indian citizens or Persons of Indian Origin (PIOs) visiting India, provided their total income (excluding foreign income) does not exceed ₹15 lakhs. If it exceeds ₹15 lakhs, the 60-day rule applies. Resident but Not Ordinarily Resident (RNOR): A resident individual is classified as RNOR if they satisfy any one of these conditions: 1. They were non-resident in India for 9 out of the last 10 years preceding the current financial year; OR 2. They were in India for 729 days or less during the preceding seven financial years. 2. Residential Status of HUF, Firm, and AOP A HUF is considered a resident if its control and management are wholly or partly situated in India. A firm or AOP is considered a resident if its control and management are wholly or partly situated in India. If control and management are wholly outside India, it is treated as non-resident. 3. Residential Status of a Company A company can be: Resident: If it satisfies either of these conditions: 1. It is an Indian company; OR 2. Its place of effective management (POEM) is in India during that year. Non-Resident: If neither condition above is satisfied. Place of Effective Management (POEM): Defined as the place where key management and commercial decisions necessary for conducting business as a whole are made. 4. Tax Implications Based on Residential Status The scope of taxable income depends on residential status: 1. Resident (ROR): Global income (income earned in India and abroad) is taxable in India. 2. Resident but Not Ordinarily Resident (RNOR): o Income earned or received in India is taxable. o Income from a business controlled in or profession set up in India is also taxable. 3. Non-Resident: o Only income earned or received in India is taxable. Examples for Clarity 1. An Indian citizen working abroad visits India for 150 days during FY 2023–24 and has stayed in India for 370 days over the last four years. Since they satisfy the exception to the 60-day rule (employment abroad), they are classified as non- resident. Page 12 of 58 2. A foreign company has its board meetings and key decisions made outside India but earns income from operations within India. It will be classified as a non- resident, and only income sourced from India will be taxed. Case Law Example: Azadi Bachao Andolan v. Union of India (2003 AIR SC 2189): The Supreme Court clarified that residency rules must be applied strictly based on statutory provisions without considering subjective interpretations like intent to evade taxes. B. Impact on Tax Liability for Different Classes of Assessees The residential status of an assessee under Section 6 of the Income Tax Act, 1961, directly influences their tax liability. The scope of taxable income varies depending on whether the assessee is classified as a Resident (ROR or RNOR) or a Non-Resident (NR). Below is a detailed explanation of the tax liability for different classes of assessees: 1. Tax Liability Based on Residential Status: The scope of total income taxable in India depends on the residential status of the assessee: Residential Status Income Taxable in India Resident (ROR) Global income (income earned in India and abroad) is taxable in India. Resident but Not Income earned or received in India and income from Ordinarily business/profession controlled from India is taxable. Resident (RNOR) Non-Resident (NR) Only income earned or received in India is taxable. 2. Categories of Assessees and Their Tax Implications The Income Tax Act recognizes various classes of assessees, and their tax liabilities are determined based on their residential status: A. Individuals Residents (ROR): o Taxed on global income, including foreign earnings. o Eligible for deductions under Chapter VI-A (e.g., Section 80C). RNOR: o Taxed only on Indian income and foreign income derived from a business controlled or set up in India. Non-Residents: o Only Indian-sourced income is taxable. o Example: Salary earned for work done in India or rental income from property in India. B. Hindu Undivided Family (HUF) Residential status depends on the location of control and management. If control is wholly or partly in India, it is treated as a resident HUF. Tax liability follows rules similar to individuals. C. Firms, LLPs, and AOPs Considered resident if control and management are wholly or partly in India. Non-residents are taxed only on Indian-sourced income. D. Companies Indian Companies: o Always treated as residents; taxed on global income. Foreign Companies: o Treated as residents if their "Place of Effective Management" (POEM) is in India. o Non-resident companies are taxed only on Indian-sourced income. Page 13 of 58 E. Trusts and Charitable Institutions Residential status determines whether global or only Indian-sourced donations/income are taxable. 3. Special Provisions for Non-Residents Certain provisions apply specifically to non-residents to determine their tax liability: 1. Income Deemed to Accrue or Arise in India (Section 9): o Includes salaries, capital gains from assets located in India, royalties, fees for technical services, etc. 2. Tax Rates: o Non-residents are taxed at special rates for certain incomes: Royalty/technical services: 10% under Section 115A. Capital gains: Varies depending on short-term or long-term nature. 3. Double Taxation Avoidance Agreements (DTAAs): o Relief is provided through DTAAs to avoid double taxation on the same income. 4. Examples for Clarity 1. A resident individual earning ₹10 lakhs from a foreign job and ₹5 lakhs from rental property in India will pay tax on ₹15 lakhs as global income is taxable for residents. 2. A non-resident earning ₹5 lakhs from property rental in India will pay tax only on this ₹5 lakhs since foreign income is not taxable for non-residents. 5. Case Law Example Azadi Bachao Andolan v. Union of India (2003 AIR SC 2189): The Supreme Court upheld that non-residents can claim benefits under DTAAs even if they are structured to reduce tax liability, provided there is no violation of law. By understanding these principles, assessees can determine their tax liabilities accurately based on their residential status and class, ensuring compliance with the Income Tax Act while leveraging applicable exemptions and benefits. C. Clubbing of Income (Sections 60-64) The concept of clubbing of income under the Income Tax Act, 1961, ensures that taxpayers cannot reduce their tax liability by transferring their income to others. Sections 60 to 64 deal with situations where the income of another person is included in the total income of the assessee for taxation purposes. 1. Section 60: Transfer of Income Without Transfer of Asset If a person transfers only the income from an asset without transferring the ownership of the asset, such income is taxable in the hands of the transferor. Example: Mr. A owns a property and transfers its rental income to his friend without transferring ownership. The rental income will still be taxed in Mr. A's hands. 2. Section 61: Revocable Transfer of Assets If an asset is transferred under a revocable agreement, the income from such an asset will be taxed in the hands of the transferor. Revocable Transfer: A transfer where the owner retains control or can revoke the transfer. Example: Mr. B transfers shares to his son but retains the right to revoke the transfer. Any dividend earned on these shares will be taxed as Mr. B's income. 3. Section 62: Irrevocable Transfer for a Specified Period If an asset is transferred irrevocably for a specific period, the income arising during that period will not be clubbed with the transferor’s income. After the specified period, any income from the asset will again be taxable in the hands of the transferor. Example: Mr. C transfers his property irrevocably for five years to a trust. During this period, rental income will not be taxable in Mr. C's hands. 4. Section 63: Definitions of "Transfer" and "Revocable Transfer" Page 14 of 58 This section defines: o Transfer: Includes any arrangement or agreement that results in transferring an asset or its income. o Revocable Transfer: A transfer that can be cancelled by the transferor or where control over the asset is retained. 5. Section 64: Clubbing of Income in Special Cases This section specifies situations where certain incomes are clubbed with that of an individual: (a) Income of Spouse 1. Income from Assets Transferred to Spouse (Section 64(1)(iv)): o If an individual transfers an asset directly or indirectly to their spouse without adequate consideration, any income from that asset is clubbed with the transferor’s income. o Exception: This does not apply if assets are transferred as part of an agreement to live apart. o Example: Mr. D transfers ₹10 lakhs to his wife without consideration, and she earns ₹1 lakh interest on it. The interest will be taxed as Mr. D’s income. 2. Income from Substantial Interest in a Concern (Section 64(1)(ii)): o If a spouse receives remuneration from a concern in which the other spouse has substantial interest (20% or more voting power), such remuneration is clubbed unless it is due to professional qualifications. (b) Income of Minor Child (Section 64(1A)): Income earned by a minor child is clubbed with that of the parent whose total income is higher. Exceptions: o Income earned by a minor through manual work or special skills/talents. o Income of minors suffering from disability under Section 80U. A deduction of ₹1,500 per child is allowed for clubbed income. Example: Mrs. E’s minor child earns ₹20,000 as interest from a fixed deposit gifted by her. This amount will be added to Mrs. E’s taxable income. (c) Income from Assets Transferred to Son’s Wife (Section 64(1)(vi)): If assets are transferred directly or indirectly to a son’s wife without adequate consideration, any resulting income is clubbed with that of the transferor. (d) Income from Assets Transferred for Benefit of Spouse or Son’s Wife (Section 64(1)(vii) & (viii)): If assets are transferred indirectly for the benefit of: o Spouse (Section 64(1)(vii)). o Son’s wife (Section 64(1)(viii)). The resulting income is clubbed with that of the transferor. Examples for Better Understanding 1. Mr. F gifts ₹5 lakhs to his wife, who invests it and earns ₹50,000 as interest. This interest will be added to Mr. F's taxable income under Section 64(1)(iv). 2. Mrs. G transfers shares worth ₹3 lakhs to her minor child without consideration. Any dividend earned on these shares will be included in Mrs. G's total income under Section 64(1A). Case Law Example CIT v. Keshavji Morarji (1967 AIR SC 1800): Principle: The Supreme Court held that even if there is no formal agreement but control over assets remains with the transferor, it constitutes a revocable transfer under Section 61. Key Points to Remember Clubbing provisions aim to prevent tax evasion through artificial transfers. Page 15 of 58 Exemptions exist for genuine cases like minors earning through special skills or disabilities. Proper documentation and compliance are essential to avoid unintended clubbing. By understanding these provisions comprehensively, taxpayers can ensure compliance while structuring financial transactions efficiently! D. Exemptions and Deductions under Chapter VI-A (e.g., Sections 80C, 80D) Chapter VI-A of the Income Tax Act, 1961, provides a range of deductions that reduce an assessee's taxable income. These deductions are available to individuals, Hindu Undivided Families (HUFs), and other eligible taxpayers. Below is a detailed explanation of key provisions under this chapter: 1. Section 80C: Deduction for Investments and Payments Eligibility: Individuals and HUFs. Maximum Deduction: ₹1,50,000 per financial year. Qualifying Investments/Payments: o Life insurance premium (for self, spouse, or children). o Contribution to Public Provident Fund (PPF). o Employee’s contribution to Provident Fund (PF). o National Savings Certificates (NSC). o Principal repayment of home loan. o Tuition fees for up to two children. o Fixed deposits with a tenure of at least five years in scheduled banks. o Equity Linked Savings Schemes (ELSS). Example: If Mr. A invests ₹1,50,000 in PPF during the financial year, he can claim the full deduction of ₹1,50,000 under Section 80C. 2. Section 80CCC: Deduction for Pension Funds Eligibility: Individuals. Maximum Deduction: ₹1,50,000 (combined limit with Sections 80C and 80CCD(1)). Qualifying Payments: o Contributions to annuity plans of insurance companies (e.g., LIC Jeevan Akshay). 3. Section 80CCD: Deduction for Pension Schemes (a) Section 80CCD(1): Contribution by Individual Applicable for contributions to the National Pension System (NPS) or Atal Pension Yojana. Maximum Deduction: o For salaried individuals: Up to 10% of salary (basic + DA). o For others: Up to 20% of gross total income. Combined limit with Sections 80C and 80CCC is ₹1,50,000. (b) Section 80CCD(1B): Additional Deduction Additional deduction of ₹50,000 for contributions to NPS (over and above the ₹1,50,000 limit). (c) Section 80CCD(2): Employer’s Contribution Employer’s contribution to NPS is deductible up to: o 10% of salary (basic + DA). This is over and above the limits of Sections 80C and 80CCD(1). Example: If Mr. B contributes ₹50,000 to NPS under Section 80CCD(1) and his employer contributes ₹40,000 under Section 80CCD(2), he can claim both deductions. 4. Section 80D: Deduction for Health Insurance Premium Eligibility: Individuals and HUFs. Maximum Deduction: o For self/spouse/children: ₹25,000. o For senior citizens: ₹50,000. Page 16 of 58 o Additional ₹25,000 for parents or ₹50,000 if parents are senior citizens. o Preventive health check-up expenses: Up to ₹5,000 within the overall limit. Example: If Mr. C pays ₹30,000 as health insurance premium for his senior citizen parents and ₹20,000 for himself and his family, he can claim a total deduction of ₹50,000. 5. Section 80DD: Deduction for Disabled Dependents Expenses incurred on medical treatment or maintenance of a dependent with a disability. Deduction: o ₹75,000 for normal disability (40%-80% disability). o ₹1,25,000 for severe disability (above 80%). 6. Section 80DDB: Deduction for Medical Treatment of Specified Diseases Available for expenses incurred on treatment of specified diseases like cancer or chronic renal failure. Maximum Deduction: o ₹40,000 for individuals below age 60. o ₹1,00,000 for senior citizens. 7. Section 80E: Deduction for Education Loan Interest Available for interest paid on loans taken for higher education. No upper limit on the amount deductible. Deduction available for up to eight years from the year interest repayment begins. Example: If Ms. D pays ₹60,000 as interest on her education loan in a financial year, she can claim the entire amount as a deduction under Section 80E. 8. Section 80G: Donations to Charitable Institutions Donations made to specified funds or institutions are eligible for deduction. Categories: o Donations with a maximum limit (e.g., PM Relief Fund). o Donations without a maximum limit. Example: If Mr. E donates ₹20,000 to the PM Relief Fund and ₹30,000 to other charities eligible for a maximum limit of 10% of adjusted gross total income, he can claim deductions accordingly. 9. Other Important Deductions Section 80GG: Rent Paid For individuals not receiving HRA. Maximum deduction: a. Least of the following: a Rent paid minus 10% of total incomeb 5 000 per monthc Total income cappe d at 25% of total income. b. Least of the following: a Rent paid minus 10% of total incomeb 5 000 per monthc Total income cappe d at 25% of total income. Section 80TTA: Interest on Savings Account Deduction up to ₹10,000 on interest earned from savings accounts in banks/post offices. Section 80TTB: Interest Income for Senior Citizens Deduction up to ₹50,000 on interest earned from deposits by senior citizens. Section 80U: Deduction for Disabled Individuals Similar limits as Section 80DD: o Normal disability: ₹75,000. o Severe disability: ₹1,25,000. Examples for Better Understanding Page 17 of 58 1. If Mr. F invests in PPF (₹1 lakh), pays health insurance premium (₹20k), and donates to PM Relief Fund (₹15k), he can claim deductions under Sections 80C (₹1 lakh), 80D (₹20k), and part of his donation under Section 80G. 2. A senior citizen earning interest income from fixed deposits can claim up to ₹50k under Section 80TTB. 2.2 Heads of Income A. Detailed Provisions for Each Head: a. Salary: Definition, Allowances, Perquisites, Deductions Under the Income Tax Act, 1961, income under the head "Salaries" is governed by Sections 15 to 17. Below is a detailed explanation of the provisions: 1. Definition of Salary Section 17(1): Salary includes: Wages. Annuity or pension. Gratuity. Advance of salary. Leave encashment. Fees, commissions, perquisites, or profits in lieu of salary. Contribution by the employer to a recognized provident fund exceeding the prescribed limit. Any monetary benefit received from the employer. Simplified Explanation: Salary is any remuneration received by an employee from an employer for services rendered. It includes basic pay, allowances, perquisites, and other benefits. 2. Allowances Allowances are fixed monetary amounts paid by employers to employees to meet specific expenses. Some allowances are fully taxable, some are partially exempt, and others are fully exempt. A. Fully Taxable Allowances 1. Dearness Allowance (DA): Paid to offset inflation; fully taxable. 2. City Compensatory Allowance: Paid for working in high-cost cities; fully taxable. 3. Overtime Allowance: Paid for extra working hours; fully taxable. B. Partially Exempt Allowances (Section 10) 1. House Rent Allowance (HRA) [Section 10(13A)]: o Exemption is least of: Actual HRA received. 50% of salary (in metro cities) or 40% (in non-metro cities). Rent paid minus 10% of salary. o Example: If Mr. A earns ₹50,000/month and pays ₹15,000 rent in a metro city while receiving ₹20,000 as HRA: Exemption=min(Actual HRA 20 000,50 of salary 25 000,Rent paid 10 of salary 10 000) =₹10,000Exemption=min(Actual HRA 20 000,50 of salary 25 000,Rent paid 10 of salary 10 000)=₹10,000 2. Special Allowances [Section 10(14)]: o Examples: Transport allowance for commuting to work (exempt up to ₹1,600/month). Children’s education allowance (₹100/month per child for up to two children). C. Fully Exempt Allowances 1. Foreign allowance for government employees posted abroad. 2. Allowances paid to judges of High Courts and Supreme Court. Page 18 of 58 3. Perquisites Perquisites are non-monetary benefits provided by employers to employees. They may be taxable or exempt depending on their nature. A. Taxable Perquisites [Section 17(2)] 1. Rent-free accommodation provided by the employer. 2. Use of a motor car for personal purposes. 3. Employer's contribution to superannuation fund exceeding ₹7.5 lakhs annually. B. Exempt Perquisites 1. Medical reimbursement up to ₹15,000 annually for treatment in India. 2. Free medical facilities in employer-maintained hospitals. 3. Free education facilities provided to children in employer-owned schools (up to ₹1,000 per month per child). C. Valuation Rules for Perquisites Valuation is done as per rules prescribed under the Income Tax Rules: Rent-free accommodation: Based on population and lease value. Motor car usage: Depends on whether it is owned by the employer or employee and its usage. 4. Deductions from Salary Income Deductions under Section 16 are allowed before computing taxable salary income: A. Standard Deduction [Section 16(ia)] A flat deduction of ₹50,000 is allowed from salary income. B. Entertainment Allowance [Section 16(ii)] Deduction available only for government employees: o Least of: Actual entertainment allowance received. ₹5,000. 20% of basic salary. C. Professional Tax [Section 16(iii)] Professional tax paid by the employee is deductible. 5. Computation of Taxable Salary Income To compute taxable salary income: 1. Add all components of salary (basic pay + allowances + perquisites). 2. Subtract exempt allowances under Section 10. 3. Subtract deductions under Section 16. Example: If Mr. B earns: Basic pay: ₹6 lakhs/year, HRA: ₹2 lakhs/year, Rent paid: ₹1 lakh/year, Standard deduction: ₹50,000, Taxable income will be: Taxable Salary=(Basic Pay+HRA)−HRA Exemption−Standard DeductionTaxable Salary=( Basic Pay+HRA)−HRA Exemption−Standard Deduction =(₹6,00,000+₹2,00,000)−₹40,000(HRA exemption)−₹50,000=₹7,10,000=(₹6,00,000+ ₹2,00,000)−₹40,000(HRA exemption)−₹50,000=₹7,10,000 Case Law Example Vijay Kumar v. CIT (1975 AIR SC 175): The Supreme Court held that perquisites must have a direct nexus with employment and should be valued as per prescribed rules. This comprehensive explanation ensures clarity on income from salaries while covering all key provisions comprehensively for exam preparation and practical understanding! Page 19 of 58 b. House Property: Annual Value, Standard Deduction (Section 24) The Income Tax Act, 1961, under Sections 22 to 27, governs the taxation of income from house property. This head applies to income earned from owning a building or land appurtenant to it, provided it is not used for business or professional purposes. 1. Annual Value (Section 23) The annual value of a property is the basis for computing income under this head. It refers to the notional income that the property is expected to generate, irrespective of whether it is actually rented out or not. Determination of Annual Value: The annual value is determined as: 1. Self-Occupied Property: o If the property is used for self-residence, the annual value is considered nil. o If a loan is taken for construction or purchase, interest deduction is allowed (discussed below). 2. Let-Out Property: The annual value is the higher of: o Actual rent received or receivable. o Reasonable expected rent (determined based on municipal valuation, fair rent, or standard rent under rent control laws). 3. Deemed Let-Out Property: o If a person owns more than two self-occupied properties, only two can be treated as self-occupied (at the taxpayer's choice). o The remaining properties are treated as deemed let-out, and their annual value is calculated as if they were rented. 4. Vacancy Allowance: o If a property was vacant for part of the year and could not be rented out despite efforts, the actual rent received is considered as the annual value. 2. Deductions Under Section 24 Once the annual value is determined, deductions are allowed under Section 24: A. Standard Deduction [Section 24(a)]: A flat deduction of 30% of the net annual value (after deducting municipal taxes) is allowed. This deduction applies to all let-out or deemed let-out properties. No standard deduction is available for self-occupied properties since their annual value is nil. B. Interest on Borrowed Capital [Section 24(b)]: Deduction for interest paid on loans taken for acquisition, construction, repair, renewal, or reconstruction of property: o For self-occupied properties: Maximum deduction: ₹2 lakhs (if loan taken on or after April 1, 1999). Maximum deduction: ₹30,000 (if loan taken before April 1, 1999). Condition: Construction/purchase must be completed within five years from the end of the financial year in which the loan was taken. o For let-out or deemed let-out properties: No limit on interest deduction; entire interest paid during the year is deductible. 3. Computation Format for Income from House Property To compute taxable income under this head: Amount Particulars (₹) Page 20 of 58 Gross Annual Value (GAV) XXXX Less: Municipal Taxes Paid (XXXX) Net Annual Value (NAV) XXXX Less: Deductions under Section 24 a) Standard Deduction (30% of NAV) (XXXX) b) Interest on Borrowed Capital (XXXX) Income from House Property XXXX Examples for Better Understanding 1. Self-Occupied Property: Mr. A owns a house used for self-residence. He pays ₹1 lakh as interest on a home loan during the year. o Annual Value = Nil o Deduction under Section 24(b) = ₹1 lakh o Taxable Income = Nil 2. Let-Out Property: Mrs. B owns a property rented at ₹20,000/month and pays ₹50,000 as municipal taxes and ₹1 lakh as home loan interest. o GAV = ₹20,000 × 12 = ₹2,40,000 o NAV = ₹2,40,000 – ₹50,000 = ₹1,90,000 o Deduction under Section 24(a) = ₹57,000 (30% of NAV) o Deduction under Section 24(b) = ₹1 lakh o Taxable Income = ₹33,000 Case Law Example: CIT v. Podar Cement Pvt. Ltd. (1997 AIR SC 2523): The Supreme Court held that "owner" for tax purposes includes persons who have possession and control over a property even without legal ownership. This detailed explanation ensures clarity on provisions related to income from house property while covering all principles comprehensively! c. Business or Profession: Allowable Expenses and Depreciation Income under the head "Profits and Gains of Business or Profession" is governed by Sections 28 to 44 of the Income Tax Act, 1961. This head includes income earned from carrying on a business or profession. Below is a detailed explanation of allowable expenses and depreciation under this head. 1. Allowable Expenses (Sections 30 to 37) The Income Tax Act allows certain expenses incurred during the course of business or profession to be deducted from gross income to compute taxable income. These deductions ensure that only net profits are taxed. A. Rent, Rates, Taxes, Repairs, and Insurance for Buildings (Section 30) Deduction is allowed for: o Rent paid for premises used for business. o Repairs and maintenance (not capital in nature). o Insurance premiums for protecting the building. Example: If a business pays ₹1 lakh as rent and ₹20,000 for repairs, these amounts can be deducted. B. Repairs and Insurance of Machinery, Plant, and Furniture (Section 31) Deduction is allowed for: o Current repairs to machinery, plant, or furniture. o Insurance premiums for safeguarding machinery or equipment. Example: A factory owner incurs ₹50,000 on repairing machinery; this is deductible. C. Depreciation (Section 32) Depreciation is allowed as an expense for wear and tear of tangible and intangible assets used in business. Conditions: Page 21 of 58 o The asset must be owned wholly or partly by the assessee. o The asset must be used for business purposes during the relevant financial year. Rate of Depreciation: o As per the rates prescribed under the Income Tax Rules (e.g., buildings: 10%, machinery: 15%). Additional Depreciation: o Available at 20% on new machinery or plant acquired by manufacturing businesses (excluding second-hand assets). D. Expenditure on Scientific Research (Section 35) Deduction is allowed for: o Revenue expenditure incurred on scientific research related to the business. o Capital expenditure incurred on scientific research facilities (excluding land). E. General Business Expenses (Section 37) Expenses not covered under Sections 30 to 36 but incurred wholly and exclusively for business purposes are deductible. Examples: o Advertising costs. o Legal fees. o Office expenses. F. Specific Deductions: 1. Bad Debts (Section 36(1)(vii)): o Debts written off as irrecoverable in the books of accounts are deductible. 2. Employer Contributions to Provident Fund (Section 36(1)(iv)): o Employer’s contribution to recognized provident funds is deductible if paid within due dates. 3. Interest on Borrowed Capital (Section 36(1)(iii)): o Interest on loans taken for business purposes is deductible. 2. Depreciation (Section 32) Depreciation is a systematic allocation of the cost of a tangible or intangible asset over its useful life. It reduces taxable income by accounting for wear and tear on assets used in business. A. Block of Assets Concept Assets are grouped into blocks based on similar depreciation rates: o Buildings. o Machinery and plant. o Furniture and fittings. B. Conditions for Claiming Depreciation 1. The assessee must own the asset wholly or partly. 2. The asset must be used for business purposes during the financial year. C. Types of Depreciation 1. Normal Depreciation: o Allowed at prescribed rates based on the nature of assets. o Example: Machinery at a rate of 15%. 2. Additional Depreciation: o Available at an additional rate of 20% on new machinery or plant acquired by manufacturing businesses. 3. Unabsorbed Depreciation: o If depreciation cannot be fully set off against profits, it can be carried forward indefinitely. 3. Non-Allowable Expenses Certain expenses are expressly disallowed under Sections like Section 40 and Section 43B: Page 22 of 58 1. Payments made in cash exceeding ₹10,000 in a day are disallowed under Section 40A(3). 2. Statutory liabilities like GST or PF contributions must be paid within due dates; otherwise, they are disallowed under Section 43B. 4. Computation Format Amount Particulars (₹) Gross Receipts/Turnover XXXX Less: Allowable Expenses a) Rent, Repairs, Insurance XXXX b) Salaries XXXX c) Depreciation XXXX d) Other General Expenses XXXX Net Profit from XXXX Business/Profession Examples for Better Understanding 1. A manufacturing company purchases new machinery worth ₹10 lakhs during FY2023–24: o Normal depreciation @15% = ₹1,50,000. o Additional depreciation @20% = ₹2,00,000. o Total depreciation = ₹3,50,000. 2. A trader incurs ₹5 lakhs in advertising expenses and ₹2 lakhs in office rent: o Both amounts are deductible under Section 37 and Section 30 respectively. Case Law Example CIT v. Coimbatore Salem Transport Pvt Ltd (1966 AIR SC): The Supreme Court held that depreciation can only be claimed if the asset is owned by the assessee and used for business purposes during the relevant financial year. This comprehensive explanation ensures clarity on allowable expenses and depreciation while covering all principles comprehensively! d. Capital Gains: Short-term and Long-term Gains, Exemptions (e.g., Section 54) The Income Tax Act, 1961, governs taxation on capital gains under Sections 45 to 55A. Capital gains arise from the transfer of a capital asset and are classified as short- term or long-term based on the holding period of the asset. Below is a detailed explanation of the provisions: 1. Definition of Capital Gains Capital gains refer to the profit or gain arising from the transfer of a capital asset. Capital Asset (Section 2(14)): Includes property of any kind, whether movable or immovable, tangible or intangible, but excludes: o Stock-in-trade. o Personal effects (except jewelry, paintings, etc.). o Agricultural land in rural areas. 2. Classification of Capital Gains Capital gains are classified based on the holding period of the asset: A. Short-Term Capital Gains (STCG) Definition: Gains from the transfer of a capital asset held for a short period. Holding Period: o Listed equity shares and units of equity-oriented mutual funds: Held for 12 months or less. o Immovable property (land or building): Held for 24 months or less. o Other assets: Held for 36 months or less. B. Long-Term Capital Gains (LTCG) Definition: Gains from the transfer of a capital asset held for a longer period. Page 23 of 58 Holding Period: o Listed equity shares and units of equity-oriented mutual funds: Held for more than 12 months. o Immovable property (land or building): Held for more than 24 months. o Other assets: Held for more than 36 months. 3. Computation of Capital Gains The computation differs for STCG and LTCG: A. Short-Term Capital Gains (Section 48) STCG=Full Value of Consideration−(Cost of Acquisition+Cost of Improvement+Expenses on Transfer)STCG=Full Value of Consideration−(Cost of Acquisition+Cost of Improvemen t+Expenses on Transfer) B. Long-Term Capital Gains (Section 48) For LTCG, indexed cost is used to adjust for inflation: LTCG=Full Value of Consideration−(Indexed Cost of Acquisition+Indexed Cost of Improve ment+Expenses on Transfer)LTCG=Full Value of Consideration−(Indexed Cost of Acquisiti on+Indexed Cost of Improvement+Expenses on Transfer) Indexed Cost: Adjusted using the Cost Inflation Index (CII) notified by the government. 4. Tax Rates on Capital Gains 1. Short-Term Capital Gains: o STCG on listed securities (covered under Section 111A): Taxed at a flat rate of 15%. o Other STCG: Taxed at normal slab rates applicable to the assessee. 2. Long-Term Capital Gains: o LTCG on listed securities exceeding ₹1 lakh (covered under Section 112A): Taxed at a flat rate of 10%, without indexation. o Other LTCG: Taxed at a flat rate of 20%, with indexation benefits. 5. Exemptions on Capital Gains The Income Tax Act provides various exemptions to encourage reinvestment in specified assets: A. Section 54: Sale of Residential House Property Applicable when an individual or HUF sells a residential house and reinvests in another residential house. Conditions: o The new house must be purchased within one year before or two years after the sale or constructed within three years. Exemption Amount: Exemption=min(Capital Gain,Investment in New House)Exemption=min(Capital Gain,In vestment in New House) B. Section 54EC: Investment in Specified Bonds Applicable when LTCG is invested in bonds issued by NHAI or REC within six months of transfer. Conditions: o Maximum investment limit: ₹50 lakhs in a financial year. Lock-in Period: Five years. C. Section 54F: Sale of Any Asset Other Than Residential Property Applicable when LTCG from any asset is reinvested in purchasing/constructing a residential house. Conditions: o The assessee should not own more than one residential house on the date of transfer. Exemption Amount: Page 24 of 58 Exemption=Investment in New HouseNet Sale Consideration×Capital GainExemption=Ne t Sale ConsiderationInvestment in New House×Capital Gain D. Other Exemptions: 1. Section 54B: Exemption for capital gains from the sale of agricultural land if reinvested in another agricultural land. 2. Section 54EE: Exemption for investment in units of specified funds notified by the government. 6. Examples for Better Understanding 1. Mr. A sells a residential property for ₹50 lakhs, incurring LTCG of ₹10 lakhs, and invests ₹8 lakhs in another house: o Exemption under Section 54 = ₹8 lakhs. o Taxable LTCG = ₹2 lakhs. 2. Mrs. B sells listed shares after holding them for two years, earning LTCG of ₹1.5 lakhs: o First ₹1 lakh is exempt under Section 112A. o Remaining ₹50,000 taxed at 10%. 7. Case Law Example CIT v. T.N. Aravinda Reddy (1979 AIR SC): The Supreme Court held that reinvestment in property purchased even from relatives qualifies for exemption under Section 54 if all conditions are met. This explanation ensures clarity on capital gains taxation while covering all principles comprehensively! e. Other Sources: Dividends, Gifts, Interest Income Income under the head "Income from Other Sources" is governed by Sections 56 to 59 of the Income Tax Act, 1961. This head acts as a residual category for incomes that do not fall under other heads like Salaries, House Property, Business or Profession, or Capital Gains. 1. Dividends Dividends are taxable under Section 56(2)(i) unless specifically exempt under Section 10(34) or other provisions. A. Taxability of Dividends 1. Dividends from Domestic Companies: o Dividends distributed by domestic companies are taxable in the hands of shareholders if they exceed ₹10 lakhs in a financial year (Section 115BBDA). o Tax Rate: 10% (plus applicable surcharge and cess). 2. Dividends from Foreign Companies: o Fully taxable as "Income from Other Sources." o Taxed at the applicable slab rates of the recipient. 3. Deemed Dividends (Section 2(22)): o Certain distributions by companies (e.g., loans to shareholders holding substantial interest) are treated as dividends and taxed in the hands of shareholders. B. Exemptions for Dividends Dividends received from mutual funds and certain specified entities are exempt under Section 10(35). Example: If Mr. A receives ₹12 lakhs as dividends from a domestic company, ₹2 lakhs will be taxable at 10% under Section 115BBDA. 2. Gifts Gifts are taxable under Section 56(2)(x) if received without consideration or for inadequate consideration. A. Taxability of Gifts 1. Gifts include: o Money. Page 25 of 58 o Immovable property. o Movable property (e.g., jewelry, shares). 2. Taxable Amount: o If the aggregate value of gifts exceeds ₹50,000 in a financial year, the entire amount is taxable. 3. Exemptions: Gifts received in the following cases are not taxable: o From relatives (as defined under the Act). o On occasions like marriage. o Under a will or inheritance. o From local authorities or charitable trusts registered under Section 12A/12AB. Example: If Ms. B receives ₹70,000 as a gift from a friend, the entire amount is taxable since it exceeds ₹50,000 and is not covered under exemptions. 3. Interest Income Interest income is taxable under Section 56(2)(iii) unless it is specifically exempt under other provisions. A. Types of Interest Income 1. Interest on Savings Bank Accounts: o Fully taxable but eligible for deduction up to ₹10,000 under Section 80TTA (₹50,000 for senior citizens under Section 80TTB). 2. Interest on Fixed Deposits: o Fully taxable at applicable slab rates. o Deduction not available for fixed deposits except for senior citizens (Section 80TTB). 3. Interest on Securities: o Taxable as "Income from Other Sources." o Includes interest on government bonds, debentures, etc. 4. Interest on Refunds: o Interest received on income tax refunds is fully taxable. Example: If Mr. C earns ₹12,000 as interest on his savings account and ₹30,000 as interest on fixed deposits: Deduction under Section 80TTA: ₹10,000. Taxable Income = ₹12,000 + ₹30,000 – ₹10,000 = ₹32,000. 4. Deductions Under Section 57 Deductions are allowed for expenses incurred to earn income under this head: 1. Commission or remuneration paid to collect dividends or interest. 2. Repairs and insurance premiums for letting out machinery or furniture. 3. Depreciation on assets used to earn income. Note: No deduction is allowed for personal expenses or amounts disallowed under Sections like Section 40A. 5. Examples for Better Understanding 1. If Mr. D receives a gift worth ₹60,000 from a non-relative during the financial year: o Entire amount is taxable since it exceeds ₹50,000 and does not qualify for exemption. 2. If Mrs. E earns ₹15 lakhs as dividends from domestic companies: o Amount exceeding ₹10 lakhs (i.e., ₹5 lakhs) will be taxed at 10% under Section 115BBDA. Case Law Example CIT v. Groz Beckert Saboo Ltd (1979 AIR SC): The Supreme Court held that expenses directly incurred to earn income under "Other Sources" (e.g., commission paid to collect dividends) are allowable as deductions under Section 57. This Page 26 of 58 explanation covers all key aspects of income from dividends, gifts, and interest income comprehensively while ensuring clarity and relevance for practical application! 2.3 Computation of Total Income A. Gross Total Income vs. Taxable Income The computation of Gross Total Income (GTI) and Taxable Income is a crucial step in determining the tax liability of an assessee under the Income Tax Act, 1961. Below is a detailed explanation of the concepts, provisions, and distinctions between these terms: 1. Gross Total Income (GTI) Definition: As per Section 14, Gross Total Income is the aggregate of income computed under the following five heads of income, before allowing deductions under Chapter VI-A: 1. Income from Salaries (Section 15-17): Includes salary, allowances, perquisites, etc. 2. Income from House Property (Section 22-27): Includes rental income or deemed rental value. 3. Profits and Gains of Business or Profession (Section 28-44): Includes income from business or professional activities. 4. Capital Gains (Section 45-55): Includes profits from the transfer of capital assets. 5. Income from Other Sources (Section 56-59): Includes residual income like interest, dividends, gifts, etc. Computation of GTI: 1. Compute income under each head as per the relevant provisions. 2. Aggregate all heads of income to arrive at the GTI. 3. Adjust for clubbing provisions (Sections 60-64), aggregation rules, and set-off or carry-forward of losses (Sections 70-80). Example: If Mr. A earns: Salary: ₹10 lakhs, Rental income: ₹2 lakhs, Business profit: ₹3 lakhs, His GTI = ₹10 lakhs + ₹2 lakhs + ₹3 lakhs = ₹15 lakhs. 2. Taxable Income Definition: Taxable Income is the income on which tax is levied after allowing deductions under Chapter VI-A from the Gross Total Income. Deductions Under Chapter VI-A: 1. Section 80C: Investments in PPF, LIC premiums, etc. (Maximum: ₹1,50,000). 2. Section 80D: Health insurance premium for self and family. 3. Other deductions include: o Section 80G: Donations to specified funds. o Section 80TTA/80TTB: Interest on savings accounts/fixed deposits for senior citizens. Computation of Taxable Income: 1. Subtract eligible deductions under Chapter VI-A from GTI. 2. The resulting amount is the Taxable Income. Example: If Mr. A’s GTI is ₹15 lakhs and he claims deductions: Section 80C: ₹1,50,000, Section 80D: ₹25,000, Taxable Income = ₹15 lakhs - ₹1,75,000 = ₹13,25,000. 3. Key Differences Between GTI and Taxable Income Page 27 of 58 Aspect Gross Total Income (GTI) Taxable Income Aggregate income under all Income after deducting Chapter VI-A Definition five heads before deductions. deductions. Basis for computing Final amount on which tax is Purpose deductions and exemptions. calculated. Components All heads of income including Only net taxable income after Included exempt incomes (if taxable). deductions/exemptions. 4. Relevant Provisions 1. Section 14: Defines GTI as the sum of all heads of income. 2. Chapter VI-A (Sections 80C to 80U): Lists deductions to compute taxable income. 3. Section 288A & 288B: Rounding off GTI and taxable income to the nearest multiple of ten. Case Law Example CIT v. Harprasad & Co Pvt Ltd [1975 AIR SC]: The Supreme Court held that losses under specific heads must first be adjusted against incomes under other heads before arriving at the Gross Total Income. This comprehensive explanation ensures clarity in distinguishing between Gross Total Income and Taxable Income while covering all relevant principles! B. Set-Off and Carry Forward of Losses (Sections 70-80) The Income Tax Act, 1961, provides provisions for adjusting losses incurred under one head of income against income from other heads (set-off) or carrying forward such losses to future years for adjustment. These provisions ensure that taxpayers are not unduly burdened in years of financial loss and allow equitable tax computation. 1. Set-Off of Losses Set-off refers to the adjustment of losses incurred under one head or source of income against income from another head or source in the same assessment year. The rules for set-off are as follows: A. Intra-Head Set-Off (Section 70) Loss from one source of income can be set off against income from another source under the same head of income. Exceptions: o Loss from speculative business can only be set off against speculative business income. o Loss from specified businesses under Section 35AD can only be set off against income from specified businesses. o Long-term capital loss can only be set off against long-term capital gains. o Short-term capital loss can be set off against both short-term and long-term capital gains. Example: If Mr. A earns ₹5 lakhs from a textile business but incurs a ₹2 lakh loss in his furniture business, the loss can be adjusted against the textile business income. B. Inter-Head Set-Off (Section 71) Loss under one head of income can be set off against income under another head in the same assessment year. Exceptions: o Loss under "Capital Gains" cannot be set off against other heads of income. o Loss from speculative business cannot be set off against any other head. o Loss from "Income from House Property" can be set off up to ₹2 lakhs against any other head of income. Page 28 of 58 Example: If Mr. B incurs a ₹1 lakh loss under "Income from House Property" but earns ₹10 lakhs as salary, the house property loss can reduce his taxable salary to ₹9 lakhs. 2. Carry Forward and Set-Off of Losses If losses cannot be fully adjusted in the same assessment year, they may be carried forward to subsequent years for adjustment, subject to certain conditions: A. Business Losses (Section 72) Unadjusted business losses (except speculative losses) can be carried forward for 8 assessment years. They can only be set off against profits from business or profession in subsequent years. B. Speculative Business Losses (Section 73) Speculative losses can only be carried forward for 4 assessment years. They can only be adjusted against speculative business income. C. Capital Losses (Section 74) 1. Short-Term Capital Loss: Can be carried forward for 8 assessment years and adjusted against both short-term and long-term capital gains. 2. Long-Term Capital Loss: Can also be carried forward for 8 assessment years but adjusted only against long-term capital gains. D. Loss from House Property (Section 71B) Unadjusted house property loss can be carried forward for 8 assessment years. It can only be set off against "Income from House Property" in subsequent years. E. Losses in Specified Businesses (Section 73A) Losses incurred in specified businesses under Section 35AD (e.g., infrastructure projects) can only be set off against profits from such specified businesses. These losses can also be carried forward indefinitely. F. Other Sources (Section 74A) Losses arising from owning and maintaining racehorses can only be adjusted against similar income and carried forward for 4 assessment years. 3. Conditions for Carry Forward 1. The taxpayer must file a return of income within the prescribed time limit under Section 139(1). 2. The loss must have been determined and assessed by the Assessing Officer. 3. Carry-forward provisions are subject to restrictions in cases like changes in shareholding for companies (Section 79). 4. Special Provisions 1. Amalgamation or Demerger (Section 72A): o Accumulated losses and unabsorbed depreciation of amalgamating companies may be carried forward by the amalgamated company, subject to conditions. 2. Losses in Firms (Section 75): o Business losses incurred by a partnership firm are carried forward by the firm itself and cannot be distributed among partners. 3. Change in Ownership (Section 79): o In case of certain companies, carry-forward of losses is restricted if there is a change in shareholding exceeding 51% during the relevant year. 5. Examples for Better Understanding 1. If Mr. C incurs a ₹3 lakh short-term capital loss but earns ₹1 lakh as long-term capital gain: o Adjust ₹1 lakh against LTCG. o Carry forward remaining ₹2 lakhs as short-term capital loss for future adjustments. Page 29 of 58 2. If a company incurs a ₹5 lakh business loss but undergoes a change in shareholding exceeding 51%, it cannot carry forward the loss unless it meets conditions under Section 79. Case Law Example CIT v. Manmohan Das (1966 AIR SC): The Supreme Court held that carry-forward of losses is permissible only if they are determined by proper assessment and not merely declared by the assessee. This explanation ensures clarity on provisions related to set-off and carry-forward of losses while covering all principles comprehensively! C. Calculation of Tax Liability and Rebate The computation of tax liability under the Income Tax Act, 1961, involves determining the total income, applying applicable tax rates, and allowing rebates or reliefs as per the provisions of the Act. Below is a detailed explanation: 1. Steps for Calculation of Tax Liability A. Compute Total Income Total income is computed by aggregating income under all five heads: o Salaries o House Property o Business/Profession o Capital Gains o Other Sources Adjust for set-off and carry-forward of losses (Sections 70-80). Deduct eligible amounts under Chapter VI-A (Sections 80C to 80U). B. Apply Applicable Tax Rates Tax rates depend on the category of assessee: o Individuals (resident or non-resident), HUFs, firms, LLPs, companies, etc. For individuals: o Slab Rates for FY 2023–24 (AY 2024–25): Income Slab (₹) Tax Rate (%) Up to ₹2,50,000 Nil ₹2,50,001 – ₹5,00,000 5% ₹5,00,001 – 20% ₹10,00,000 Above ₹10,00,000 30% Higher exemption limits apply for senior citizens (₹3 lakhs) and super senior citizens (₹5 lakhs). C. Add Surcharge and Cess Surcharge: Levied on high-income individuals: o Income above ₹50 lakhs: 10% o Income above ₹1 crore: 15% Health and Education Cess: Additional 4% on total tax liability. D. Allow Rebate Under Section 87A Available to resident individuals with taxable income up to ₹7 lakhs. Maximum rebate: ₹25,000 or actual tax liability, whichever is lower. E. Compute Final Tax Liability Subtract TDS (Tax Deducted at Source), advance tax paid, or any other credits from the computed tax liability to arrive at the net payable/refundable amount. 2. Rebate Under Section 87A Eligibility: Available only to resident individuals. Applicable if taxable income does not exceed ₹7 lakhs. Quantum of Rebate: Page 30 of 58 Maximum rebate allowed is ₹25,000 or the total tax liability before cess, whichever is lower. Example: If Mr. A has a taxable income of ₹6.5 lakhs: 1. Tax on ₹6.5 lakhs: Tax=( 2 5L 5L×5 )+( 5L 6 5L×20 )=₹12,500+₹30,000=₹42,500Tax=( 2 5L 5L×5 )+( 5L 6 5L×20 )=₹12,500+₹30,000=₹42,500 2. Less Rebate under Section 87A = ₹25,000. 3. Final Tax = ₹42,500 – ₹25,000 = ₹17,500 + cess. 3. Example of Tax Calculation Scenario: Mr. B (aged below 60) has the following income for FY2023–24: Salary: ₹12 lakhs. Interest on savings account: ₹20,000. Deductions under Section 80C: ₹1.5 lakhs. Calculation: 1. Gross Total Income: Salary+Interest=₹12L+₹20K=₹12.2LSalary+Interest=₹12L+₹20K=₹12.2L 2. Less Deductions under Chapter VI-A: Section 80C Deduction=₹1.5LSection 80C Deduction=₹1.5L 3. Taxable Income: 12 2L 1 5L 10 7L 12 2L 1 5L 10 7L 4. Tax Liability: ( 2 5L 5L×5 )+( 5L 10L×20 )+(Above 10L×30 )( 2 5L 5L×5 )+( 5L 10L×20 )+(Above 10 L×30 ) =₹12,500+₹1lakh+₹21,000=₹1,33,500=₹12,500+₹1lakh+₹21,000=₹1,33,500 5. Add Health and Education Cess (4%): Cess=₹1,33,500×4 =₹5,340Cess=₹1,33,500×4 =₹5,340 6. Final Tax Payable: Total Tax Liability=₹1,33,500+₹5,340=₹1,38,840Total Tax Liability=₹1,33,500+₹5,340= ₹1,38,840 4. Relief Under Section 89 If arrears or advance salary are received in a financial year leading to a higher tax slab rate application than usual years of receipt: Relief can be claimed under Section 89 by recalculating tax liability for previous years. Case Law Example CIT v. K Srinivasan (1972 AIR SC): The Supreme Court clarified that surcharge and cess are integral parts of tax computation and must be applied after determining basic tax liability. This detailed explanation ensures clarity in calculating tax liability while covering all relevant principles comprehensively! 2.4 Special Provisions A. TDS (Tax Deduction at Source) and Advance Tax The provisions of Tax Deduction at Source (TDS) and Advance Tax under the Income Tax Act, 1961, are mechanisms to ensure timely collection of taxes by the government. These provisions reduce the burden of lump-sum tax payments at the end of the financial year. 1. Tax Deduction at Source (TDS) A. Concept TDS is a system where the payer deducts tax at the time of making specified payments (e.g., salary, rent, interest) and deposits it with the government on behalf of the payee. Page 31 of 58 Governed by Sections 192 to 196D under Chapter XVII-B. B. Key Provisions 1. Applicability: o TDS applies to payments such as salaries, interest, rent, professional fees, commission, etc. o Rates and thresholds are prescribed under various sections based on the nature of payment. 2. Important Sections: o Section 192: TDS on salary. o Section 194A: TDS on interest (other than securities). o Section 194C: TDS on payments to contractors. o Section 194H: TDS on commission or brokerage. o Section 194I: TDS on rent. o Section 194J: TDS on professional or technical services. 3. Threshold Limits: o No TDS if payment does not exceed prescribed limits (e.g., ₹2.5 lakhs for salaries, ₹40,000 for interest on fixed deposits). 4. Rates of TDS: o Rates vary depending on the type of payment and recipient (resident or non-resident). For example: Salary: As per applicable income tax slab rates. Interest: 10% for residents; 20% for non-residents (subject to DTAA). 5. Filing and Compliance: o The deductor must deposit TDS with the government within specified timelines. o Issue a TDS certificate (Form 16/16A) to the payee. o File quarterly TDS returns in Forms 24Q/26Q/27Q. 6. Consequences of Non-Compliance: o Interest under Section 201(1A) for late deduction or deposit. o Penalty under Section 271C for failure to deduct or pay TDS. 2. Advance Tax A. Concept Advance Tax is a system where taxpayers pay tax in installments during the financial year instead of a lump sum at year-end. Applicable to taxpayers whose estimated tax liability exceeds ₹10,000 in a financial year. B. Key Provisions 1. Applicability: o Individuals, HUFs, firms, companies, and other entities with taxable income exceeding ₹10,000 must pay advance tax. o Senior citizens not having business income are exempt from paying advance tax. 2. Due Dates and Installments (Section 211): Page 32 of 58 3. Computation of Advance Tax: o Estimate total income for the financial year. o Compute total tax liability after considering deductions and rebates. o Deduct TDS already deducted/expected to be deducted. o Pay remaining amount as advance tax in installments. 4. Interest for Default or Delay: o Section 234B: Interest for failure to pay advance tax (1% per month). o Section 234C: Interest for deferment of advance tax installments. 5. Mode of Payment: o Can be paid online through the Income Tax Department's website or via authorized banks using challan ITNS-280. 3. Comparison Between TDS and Advance Tax Aspect TDS Advance Tax Deducted by payer at Applicability Paid directly by taxpayer source In installments during financial Timing At the time of payment year Responsibility Payer deducts and deposits Taxpayer estimates and pays Relevant Sections 192–196D Sections 207–219 Sections 4. Examples for Better Understanding 1. TDS Example: If a company pays ₹5 lakhs as professional fees to a consultant during FY2023– 24: o Applicable TDS rate under Section 194J = 10%. o TDS deducted = ₹50,000. o The company deposits ₹50,000 with the government and issues Form 16A to the consultant. 2. Advance Tax Example: Mr. A estimates his total tax liability for FY2023–24 as ₹2 lakhs: o Total Advance Tax = ?