SPC Taxation Chapter 1 Marking PDF

CHAPTER - 1 BASIC CONCEPT CONCEPTS OF CHAPTER R1 R2 R3 C1. – Basic Concepts C2.- Components of Income Tax C3.- Some Important Sections of the Act C4.- So what exactly are we going...

CHAPTER - 1 BASIC CONCEPT CONCEPTS OF CHAPTER R1 R2 R3 C1. – Basic Concepts C2.- Components of Income Tax C3.- Some Important Sections of the Act C4.- So what exactly are we going to learn? C5.- Some Important Definitions in the Income-Tax Act, 1961 C6.- Cases where Income of previous year will be assessed in the previous year itself C7.- Definition of Income & its concept under Income Tax Act C8.- Rates of Tax for individuals C9.- Lets have a look at the tax liability of other persons C10.- Concept of Marginal Relief C11.- Some Important Points C12.- Special Tax Rates Concept 1 : Basic concepts : 1.1) What is Tax and Why are taxes levied? Tax is your contribution to Government from your Income. It is a fee charged by the Government on a product, income or activity. There are two types of taxes –direct and indirect taxes. Article 366(28) of the Constitution of India defines the term “Taxation” as follows – “Taxation includes the imposition of any tax or impost, whether general or local or special, and tax shall be construed accordingly.” Taxes are considered to be the “cost of living in a society”. Taxes constitute the basic source of revenue to the Government. Revenue raised is used to meet the expenses of the government like defense, providing education, infrastructure facilities. Swapnil Patni Classes 1.1  BASIC CONCEPT 1.2) Different types of taxes: Direct Tax and Indirect Tax a) Direct Tax : It is levied directly on the income of the person b) Indirect Tax : It is levied on the price of a good or service c) Difference between Direct & Indirect tax: Types of Taxes in India Direct Tax Indirect Tax 1) The person paying the tax 1) The person paying the tax to to the Government directly the Government collects the same bears the incidence of the tax. from the ultimate consumer. Thus, 2) Progressive in nature-high incidence of the tax is shifted to rate of taxes for people having other person. ability to pay. 2) Regressive in nature – All the consumers equally bear the burden, irrespective of their ability to pay. 1.2 Swapnil Patni Classes  BASIC CONCEPT Goods and Services Tax Indirect Taxes Customs Duty Major Direct & Indirect Taxes Income Tax (Tax on income) Direct Tax Other (Tax on undisclosed foreign income & assets) 1.3) How and who derives its power to levy tax from the Constitution of India Article 246 of the Constitution empowers the State and Union Government to levy taxes. The Constitution contains the following three lists under which the Union and State Government have the authority to make laws for the purpose of levy of taxes The following are the lists contained in Article 246: i) Union List: Central Government has the exclusive power to make laws on the matters contained in Union List. ii) State List: State Government has the exclusive power to make laws on the matters contained in the State List. iii) Concurrent List: Both Central and State Governments have the power to make laws on the matters contained in the Concurrent list. Entry No 82 of the Union List has given the power to the Central Government to levy taxes on Income i.e. Income Tax 1.4) Since When ?- History of Income Tax: 1) Kings Levied Taxes on Artists, Farmers & Traders etc. Taxes were to be paid in form of gold coins, cattle, grains and raw material. 2) Income tax was first introduced in 1860 by James Wilson who was the then Finance Member of British Government. 3) The levy of income-tax in India is governed by the Income-tax Act 1961. In this book we shall briefly refer to this as the Act. Swapnil Patni Classes 1.3  BASIC CONCEPT a) It came into force on 1st April, 1962. b) It contains 298 sections and XIV schedules. 4) Every year, the Finance Minister of the Government of India introduces the Finance Bill in the Parliament’s Budget Session. When the Finance Bill is passed by both the houses of the Parliament and gets the assent of the President, it becomes the Finance Act. Amendments are made every year to the Income-tax Act, 1961 and other tax laws by the Finance Act. 1.5) Who will pay Income tax? Every person who earns income will pay Income Tax (subject to some conditions) Concept 2: Components of Income Tax 2.1) Components of income Tax Law Components of Income Tax law INCOME TAX FINANCE INCOME CIRCULARS/ LEGAL ACT ACT TAX RULES NOTIFICATION DECISIONS Income-tax Act The levy of Income tax in India is governed by the Income-tax Act, 1961. This Act came into force on 1st April 1962. The Act contains 298 sections and XIV schedules. These sections and schedules undergo changes every year with additions and deletions brought about by the Finance Act passed by the Parliament. Finance Act Part A of the budget speech given by the finance minister every year contains the proposed policies of the government in the Fiscal areas. Part B of the budget speech contains detailed tax proposals. Once the Finance Bill is approved by the Parliament and gets the assent of the President, it becomes The Finance Act. 1.4 Swapnil Patni Classes  BASIC CONCEPT Income Tax Rules The Central Board of Direct Taxes (CBDT) is empowered to make rules for carrying out the purposes of the Act. These rules which are framed from time to time for the proper administration of the Income Tax Act are known as the Income tax rules, 1962. Circulars and Notifications Circulars are issued by the CBDT to address certain problems and clarify doubts regarding the Scope and meaning of the provisions. Circulars are issued for the guidance of the officers and/or Assessees. Circulars are not binding on the assessees, but they can take advantage of beneficial Circulars. Notifications are issued by the Central Government to give effect to the provisions of the Act. The CBDT is also empowered to make and amend rules for the purposes of the Act by issue of notifications. Case Laws The judiciary hears cases of disputes between assessees and the department and gives decisions on various issues. These are known as case laws and can be referred in future disputes. The law laid down by the Supreme Court is the law of the land. Decisions made by High courts will apply to the Specific States. 2.2) About Income Tax Act, 1961 Income Tax Act, 1961 298 Sections Section XIV Schedules Sub-Sections Proviso Clauses Explanation Sub Clauses Swapnil Patni Classes 1.5  BASIC CONCEPT 2.3) Examples I) Section 2: defines terms used in Income Tax Act. 1) Clause 1A of Section 2:- Defines agricultural Income 2) Clause 1B of Section 2:- Defines amalgamation II) Section 10: Exemption 1) Clause 1 of section 10-10(1):- exempts agricultural Income 2) Clause 2 of section10-10(2):- exempts scheme of Income of member from HUF III) Sections can have sub sections 1) When each part of the section is independent of each other and one is not related with other, such parts are called a “Clause”. “Sub section”, on the other hand refers to such parts of a section where each part is related with other MAY 18 IV) Proviso and Explanation: 1) The proviso to a section/sub-section/clause spells out the exception to the provision contained in the respective section/sub-section/clause 2) The Explanation to a section/sub-section/clause gives a clarification relating to the Provision contained in the respective section/sub-section/clause Concept 3: Some Important Sections of the Act Section 1 The Act shall be called as Income Tax Act 1961 It shall come into force from 1st April 1962 It Extends to whole of India Section 4 This is the charging section of the Act Charging 1. Income Tax is Payable For Section 2. Any Assessment Year 3. At the rate specified in Annual Finance Act 4. In respect of total income of 5. Any person In the previous year Section 2 It has many subsections and it defines some important terms 1.6 Swapnil Patni Classes  BASIC CONCEPT Concept4: So what exactly are we going to learn? 4.1) Income tax is levied on assessee’s total income. Such total income has to be computed as per the provisions contained in the Income Tax Act, 1961. 4.2) Income Tax Act prescribes five heads of income (Whereas you have unlimited sources of earning income) The First Schedule to the Finance Act 2023 contains four parts which specify the rates of tax 1) Part I of the First Schedule to the Finance Act 2023 specifies the rates applicable for the Assessment year 2023-24 2) Part II specifies the rate at which tax is to be deducted at source for the current financial year 2023-24. 3) Part III gives the rates for calculating income tax for deducting tax from income chargeable under the head “Salaries” and computing advance tax for the financial year 2023-24. Note: Part III of the First Schedule to the Finance Act, 2024 will become Part I of the First Schedule to the Finance Act, 2024 and so on. 4) Part IV gives the rules for computing the net agricultural income. Swapnil Patni Classes 1.7  BASIC CONCEPT 4.3) Computation of Total Income Gross Total Income XXX Net Taxable Income XXX Tax XX Less: Rebate if any u/s 87A / Add: Surcharge XX Tax less rebate / Tax plus Surcharge XX Add: Health & Education Cess Tax liability XX Less : Tax payable / refundable XX Total tax liability XXX Computation of Total Income Gross Total Income XXX Net Taxable Income XXX Tax XX Less: Rebate if any u/s 87A / Add: Surcharge XX Tax less rebate / Tax plus Surcharge XX Add: Health & Education Cess Tax liability XX Less : Tax payable / refundable XX Total tax liability XXX 1.8 Swapnil Patni Classes  BASIC CONCEPT 4.4) What about legal Income? What about illegal Income? BETTING 4.5) Who will pay Income tax? Every person who earns income will pay Income Tax (subject to some conditions) The definition of person is inclusive i.e. a person includes 1) An Individual 2) A Hindu Undivided Family (HUF) 3) A company 4) A firm 5) An AOP or a BOI, whether incorporated or not 6) A local authority, and 7) Every artificial juridical person e.g. an idol or deity Lets understand point 4.5 in detail 1) Individual i. ‘Individual’ means only a natural person, i.e. human being. ii. It includes both males and females. iii. It also includes a minor or a person of unsound mind. In such a case assessment is made on the guardian or the manager of the minor or the lunatic person. 2) HUF 1. Under the income-tax Act, 1961, a Hindu undivided family (HUF) is treated as a separate entity. 2. Therefore, income-tax is payable by a HUF. 3. HUF has not been defined under the Income-tax Act. 4. It means a family, which consist of all males lineally descended from a common ancestor and includes their wives and daughter. 5. Some members of the HUF are called co-parceners. They are related to each other and head of the family. Swapnil Patni Classes 1.9  BASIC CONCEPT 6. HUF may contain many members, but members within four degrees including the head of the family (Karta) are called co-parceners. A Hindu Coparcenary includes those persons who acquire an interest in joint family property by birth. 7. Earlier, only male descendents were considered as coparceners. With effect from 6th September, 2005, daughters have also been accorded coparcenary status. It may be noted that only the coparceners have a right to partition. 8. A daughter of coparcener by birth shall become a coparcener in her own right in the same manner as the son. Being a coparcener, she can claim partition of assets of the family. The rights of a daughter in coparcenary property are equal to that of a son. However, other female members of the family, for example, wife or daughter in- law of a coparcener are not eligible for such coparcenary rights. 9. The relation of a HUF does not arise from a contract but arises from status. 10. There need not be more than one male member or one female coparcener w.e.f. 6th September, 2005 to form a HUF. 11. Under the Income-tax Act, 1961, Jain undivided families and Sikh undivided families would also be assessed as a HUF. School of Hindu Law Dayabaga School Mitakshara School West Bengal and Rest of India except West Assam Bengal and Assam Dayabaga School Mitakshara School of Hindu Law Prevalent in West Bengal and Assam Prevalent in Rest of India. Nobody acquires the right; share in the property One acquires the right to the family property by by birth as long as the head of family is living. his birth and not by succession irrespective of the fact that his elders are living. Thus, the children do not acquire any right, share Thus, every child born in the family acquires a in the family property, as long as his father is alive right/share in the family Property. and only on death of the father; the children will acquire right/share in the property. Hence, the father and his brothers would be coparceners of the HUF. 1.10 Swapnil Patni Classes  BASIC CONCEPT 3) Company (Definition) 1. Company means, any Indian company as defined in sec 2(26); 2. Any body corporate incorporated by or under the laws of country outside India, i.e., any Foreign company; or 3. Any institution, association or body, whether incorporated or not and whether Indian or non-Indian; which is declared by a general or special order of the CBDT to be a company for such assessment years as may be specified in the CBDT’s order Classes of Companies and their Definition Indian company or any company which has made arrangements for payments Domestic Company of dividends A company registered under Indian Companies Act and having the registered Indian Company office in India Foreign company It means a company which is not a domestic company 4) Firm i) A firm means a firm as defined in the Indian Partnership Act 1932 and also includes LLP. Swapnil Patni Classes 1.11  BASIC CONCEPT 5) Association of persons (AOP) i) When persons combine together for promotion of joint enterprise they are assessable as an AOP when they do not in law constitute a partnership. ii) Co-heirs, co-legatees or co-donees joining together for a common purpose or action would be chargeable as an AOP. 6) Body of Individuals (BOI) i) It denotes the status of persons like executors or trustees who merely receive the income jointly and who may be assessable in like manner and to the same extent as the beneficiaries individually. Thus, co-executors or co-trustees are assessable as a BOI as their title and interest are indivisible. ii) Income-tax shall not be payable by an assessee in respect of the receipt of share of income by him from BOI and on which the tax has already been paid by such BOI. 7) Local Authority This term means a municipal committee, district board, body of port commissioners or other authority legally entitled to or entrusted by the Government with the control or management of a municipal or local fund. Note - 1. Local authority earns income from any business of supply of any commodity or service outside its jurisdiction then it will be taxable. 2. However, Income arising from the supply of water and electricity even outside the local authority’s own jurisdictional area is exempt from tax. Point of Difference AOP BOI 1) Members Any person can be member eg Only Individual are members. company firm but not BOI. 2) Formation Members voluntarily come together Common will may not be present. with a common will for a common intention or purpose. 1.12 Swapnil Patni Classes  BASIC CONCEPT 8) Artificial Persons This category could cover every Artificial Juridical Person not falling under other heads. An idol, Or deity would be assessable in the status of an artificial juridical person. Concept 5: SOME IMPORTANT DEFINITIONS IN THE INCOME-TAX ACT, 1961. Previous Year It means the financial year immediately preceding the assessment year. The [Section 3] income earned in the previous year is taxed in the assessment year. Business or profession newly set up during the financial year – In such as case, the previous year shall be the period beginning on the date of setting up of the business or profession and ending with 31st March of the said financial year. If a source of income comes into existence in the said financial year, then the previous year will commence from the date on which the source of income newly comes into existence and will end with 31st March of the financial year. Assessment Assessment year means a period of 12 months commencing on 1st April Year every year. [Section 2(9)] The year in which tax is paid is called the assessment year while the year in respect of income of which the tax is levied is called the previous year. Assessee Assessee means a person by whom any tax or any other sum of money is payable [Section 2(7)] under this Act. It Includes: 1) Every person in respect of whom any proceeding has been taken for the NOV. 13 assessment of his income or assessment of fringe benefits. MAY 16 2) A person who is assessable in respect of income of some other person. 3) Every person who is deemed to be an assessee or an assessee in default under the provisions of this Act. Person The definition of person is inclusive i.e. a person includes [Section 2(31)] 1) An Individual 2) A Hindu Undivided Family (HUF) 3) A company 4) A firm 5) An AOP or a BOI, whether incorporated or not 6) A local authority, and 7) Every artificial juridical person e.g. an idol or deity. Swapnil Patni Classes 1.13  BASIC CONCEPT Gross Total Under section 14, income of a person is computed under the following five Heads: Income 1) Income from Salary(Sec 15 to Sec 17) 2) Income from House Property(Sec 22 to Sec 27) 3) Income from Business or Profession(Sec 28 to Sec 44) 4) Capital Gains(Sec 45 to Sec 55) 5) Income from Other Sources.(Sec 56 to Sec 59) India The term India means i) The territory of India as per article 1 of the constitution, ii) Its territorial waters, seabed and subsoil underlying such waters, iii) Continental shelf iv) Exclusive economic Zone v) Any other specified maritime zone and the air space above its territory and territorial waters. vi) Specified Maritime zone means the maritime zone as referred to in the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act. Net Taxable Total income is income after reducing the deduction under chapter VI-A from the Income gross total income. This income is also called taxable income on which tax has to be imposed. Exemption Every income of the assessee is charged to tax unless specifically (Sec 10 of The Exempted under the Act. Sec 10 provides list of incomes which are not to be IT Act) included in the total income of the assessee for tax purpose. In other words, these incomes are out of the purview of income tax and for tax purpose, total income is computed without taking these incomes into consideration. Deduction From the gross total income of the assessee, deductions are allowed on fulfillment of conditions as prescribed in the various sections of chapter VIA. Chapter VI A of the Act (comprises of sections 80C to 80U) provides for various deductions from gross total income. Relief Income tax liability of assessee is computed on the total income after allowing various exemption & deductions under several sections of the Act. Relief is reduced from the amount of income tax liability so computed on fulfillment of conditions as prescribed in Sec. 86, 89, etc. 1.14 Swapnil Patni Classes  BASIC CONCEPT Lets understand the concept of PY and AY Examples of PY and AY: 1) A is running business from 1998 onwards. Determine the previous year for the assessment Year 2024-25 Ans: The previous year will be from __________________to_______________________ 2) A Chartered Accountant sets up his profession on 1st July, 2023. Determine the previous year for the assessment year 2024-25 Ans: The previous year will be from _______________to_______________________ Concept 6: Cases where Income of a previous year will be assessed in the previous year 1. Shipping business of a non-resident [Section 172] Exceptional Case NOV. 12 a) Where a ship belonging to or chartered by a non-resident carries passengers, livestock, mail or goods shipped at a port in India. b) The ship is allowed to leave the port only when the tax has been paid or satisfactory arrangement for payment thereof has been made. c) 7.5% of the freight paid or payable to the owner or the charterer or to any other person on his behalf, whether in India or outside India on account of such carriage is deemed to be his income. d) This income is charged to tax in the same year in which it is earned. 2. Persons leaving India [Section 174] a) Where it appears to the assessing officer that any individual may leave India during the current assessment year or shortly thereafter and has no intention of returning. b) The total income of such individual for the period from the expiry of the respective previous year to the probable date of his departure from India is chargeable to tax in that Assessment Year. Swapnil Patni Classes 1.15  BASIC CONCEPT Eg: Mr X is leaving India for USA on 10.6.2023 and it appears to the Assessing Officer that he has no intention to return. Before leaving India, Mr X may be asked to pay income tax on the income earned during the PY 2022-23 as well as on the total income earned during the period 01.04.2023 to 10.06.2023. 3. AOP/BOI/ Artificial Judicial person formed for a particular event or purpose [Section 174A] a) In case that an AOP/BOI etc. is formed or established for a particular event or purpose. b) The assessing officer apprehends that the AOP/BOI is likely to be dissolved in the same year or in the next year. c) The assessing officer can make assessment of income up to the date of dissolution as income of the relevant assessment year. 4. Persons likely to transfer property to avoid tax [Section 175] a) If it appears to the assessing officer that a person is likely to charge, sell, transfer, dispose of or otherwise part with any of his assets to avoid payment of any liability under this Act. b) The total income of such assessee for the period from the expiry of the previous year to the date when the assessing officer commences proceedings under this section is chargeable to tax in that assessment year. 5. Discontinued business [Section 176] a) Where any business or profession is discontinued in any assessment year. b) The income of the period from the expiry of the previous year up to the date of such discontinuance may, at the discretion of the assessing officer, be charged to tax in that assessment year. C) In this case it is at the discretion of the AO Concept 7: Definition of Income and its concept under Income tax Act 7.1) Definition of Income 1. Income This definition of income is inclusive and not exclusive. Income includes: Profits and Gains 2. Dividends 3. Voluntary contributions received by a trust/institution wholly or partly created for charitable or religious purposes or by an association or institution referred to in section 10(21) or section 23C. 4. The value of any perquisite or profit in lieu of salary taxable under section 17. 1.16 Swapnil Patni Classes  BASIC CONCEPT 5. Any special allowance or benefit other than perquisite given to the employee to meet Expenses wholly, necessarily and exclusively for the performance of the duties of an office or Employment of profit. 6. Any allowances granted to the assessee to meet his personal expense at the place where the duties of his office or employment of profit are ordinarily performed by him or at a place where he ordinarily resides or to compensate him for increased cost of living. 7. The value of any benefit or perquisite whether convertible into money or not, obtained from The company either by the director or by a person who has substantial interest in the company or by a relative of the director or such person and any such sum paid by any such company in respect of any obligation which, but for such payment would have been payable by the director or other person aforesaid. 8. The value of any benefit or perquisite whether convertible into money or not, which is obtained by any representative assessee mentioned under section 160(1)(iii) and (iv), or by any beneficiary or any amount paid by the representative assessee for the benefit of the beneficiary which the beneficiary would have ordinarily been required to pay. 9. Deemed profits chargeable to tax under section 41 or section 59. 10. Profits and Gains of business or profession chargeable to tax under section 28. 11. Any Capital Gains chargeable under section 45. 12. The profits and gains of any insurance business carried on by Mutual Insurance Company or by A cooperative society, computed in accordance with section 44 or any surplus taken to be such profits and gains by virtue of the provisions contained in the first schedule to the Act. 13. The profits and gains of any business of banking (including providing credit facilities) carried On by a cooperative society with its members. 14. Any winnings from lotteries, cross-word puzzles, races including horse races, card games or Any other games of any sort or from gambling, or betting of any form or nature whatsoever. 15. Any sum received by an assessee from his employees as contributions to any provident fund or superannuation fund or Employees State Insurance Fund or any other fund for the welfare of such employees. 16. Any sum received under a Keyman Insurance policy including the sum allocated by the way Of bonus on such policy will constitute income. 17. Any sum referred to clause (va) of section 28. Thus any sum, whether received or receivable In cash or in kind, under an agreement for not carrying out an activity in relation to any business, or not sharing any know how, patent, copy right, trade-mark, licence, franchise or any other business or commercial right of any nature, or information or technique likely to assist in the Manufacture or processing of goods or provision of services, shall be chargeable to income tax under the head ‘profits and gains of business or profession’. Swapnil Patni Classes 1.17  BASIC CONCEPT 18. Any sum related to in section 56(2)(x) Gifts received by any person from non-relatives or on or after 1.4.2006, if the aggregate value of such gifts exceed Rs.50,000 during a year. 19. As per Finance Act 2015 the income shall include assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement by the Central government or the State government or any other authority. As per Finance act 2016 amended to exclude subsidy or grant or reimbursement which has been taken into account for determination of actual cost of depreciable asset 20. (The fair market value of inventory referred to in Section 28) in case of conversion of inventory into capital asset. (Wef AY 19-20.) 21. Any compensation or other payment referred to in Section 56(2)(xi). (Wef AY 19-20) 7.2) Some Concepts: a) Regular Income/Casual Receipt Regular Income Casual Income 1) It is a periodic monetary return 1) It does not arise regularly 2) It accrues regularly from definite Sources 2) It has no definite source 3) It is treated as Income for tax purpose 3) It is also treated as income for tax Purpose E.g. Salary Income E.g. Winning from lotteries b) Revenue/Capital Receipt Revenue Receipt Capital Receipt 1) It is recurring receipt 1) It is a one time receipt 2) Revenue Receipt are generally taxable unless 2) Capital receipts are generally exempt unless specifically made exempt specifically made taxable. Capital receipts are sometimes included in the definition of income in Income Tax. E.g. Business Income E.g. Capital gains i.e. gains on sale of a capital Salary Income assets like land 3) It is receipt referable to circulating capital. The 3) It is a receipt referable to fixed Capital Tangible circulating capital is one which is turned over and intangible asset which the owner keeps in and yields income or loss in the process his possession for making profits in the nature of fixed capital 1.18 Swapnil Patni Classes  BASIC CONCEPT 4) Income arising from the sale of a Trading asset 4) Profits arising from sale of a capital asset is revenue in nature and taxable as business are capital receipt. It is taxable as capital gains income because it is covered in the definition of income 5) Transaction entered in the courses of business 5)Whereas for a trader in computer, building will yield business Income and land would be a capital asset E.g. traders of Computer sells computer (computer will be stock in trade) 6) Even a single transaction can constitute 6) These are usually one time receipts. business. Repetition of such transactions is not E.g. Liquidated damages linked with procurement necessary. of a capital asset is a capital Receipt. E.g. compensation on termination of Agency business is capital receipt. Eg. Profit from Sale of Shares & Securities As investor’s point Acquired in course of view of business Capital Gains Dealer / Trader of shares Shares are stock in trade PGBP c) Net/Gross Receipt Net Receipt Gross Receipt 1) Income means Net Receipt and not Gross 1) Gross receipt cannot be treated as Income. Receipt 2) Net receipts are arrived at after deducting 2) Gross receipt are the total receipts without expenditure incurred. deducting expenses Swapnil Patni Classes 1.19  BASIC CONCEPT d) Method of accounting 1) Assessee can maintain books on basis of cash system or mercantile system 2) In cash system expenses are recorded on payment basis and Income on receipt basis. 3) In mercantile system income and expenses are recorded on due basis 4) However only in case of PGBP and IOS income is calculated either on due or receipt basis i.e It is dependent on assessee’s method of accounting. e) Application and diversion of Income Application of Income Diversion of Income Application of income means to discharge Where by virtue of an obligation by overriding an obligation after such income reaches the title, income is diverted before it reaches the assessee. assessee, it is known as diversion of income. The income would be taxable in the hands of the It is not taxable (i.e., even if the assessee were person who applies it. to collect the income he does so on behalf of the person to whom it is payable). Concept 8: RATES OF TAX for Individuals/HUF/AOP/BOI/AJP Tax Rates = Income Tax Concessional Rates Regular Provision Default tax regime u/s 115 BAC Optional tax regime forgo some benefits No need to forgo any (Deductions / Exemptions) Benefits (Deductions / Exemptions) I. Optional Method Optional tax regime for A.Y 2024-25 are as follows: 1) For Ind/HUF/AOP/BOI/AJP 1.20 Swapnil Patni Classes  BASIC CONCEPT a. Resident Individual – 60 Years & above – Basic Exemption Limit Rs. 3,00,000 b. Resident Individual – 80 Years & above – Basic Exemption Limit Rs. 5,00,000 c. The tax rates mentioned above are also applicable to all non-resident individuals irrespective of their age. i.e. for all non-residents the basic exemption limit shall be 2,50,000. Accident Spot 2) Write down the slabs for Resident Individual - Senior Citizen 3) Write down the slabs for Resident Individual - Very Senior Citizen 4) Surcharge & Heath Education Cess & Rebate 1) Surcharge a. It is additional tax payable over and above Income tax. b. Also higher rates of surcharge are prescribed for higher thresholds of income. NTI Rate Above 50 lakhs upto 1 Cr 10% Above 1 Cr upto 2 Cr 15% Above 2 Cr upto 5 Cr 25% Above 5 Cr 37% Note: The enhanced rate of surcharge of 25% and 37% is not applicable for STCG u/s 111A and LTCG u/s 112A,LTCG u/s 112 and on dividend income. Refer chart on next page. 2) HEC - Health and Education Cess a. It is levied @ 4% on Income tax plus surcharge (if applicable). It is leviable to fulfill the commitment of the Government to provide and finance, quality health services, basic education, secondary education and higher education. 1.21 Swapnil Patni Classes 1.21  BASIC CONCEPT b. Health and education cess @ 4% (W.E.F AY 19-20) 2% - towards primary education 1% - towards secondary & higher education 1% - health cess c. Always applicable irrespective of income. 3) Rebate a. It is a tax relief. b. Applicable to Resident Individuals whose total income is upto 5,00,000 c. Rebate = Income Tax or Rs 12,500 whichever is less. For AOP separate surcharge rules are there wef FA 2022 (refer page 24) 5) Special provisions of surcharge on some incomes, surcharge on dividend, LTCG u/s 112, LTCG u/s 112A, STCG u/s 111A cannot exceed 15%. Particulars Rate Examples Components of Total Income Applicable rate of surcharge i) Total income 10% Dividend – 10 lakhs; Surcharge would be levied @ > 50 Lakhs STCG u/s 111A– 20 lakhs ; 10% on income tax computed ≤ 1 Cr LTCG u/s 112– 15 lakhs ; on total income of 90 lakhs (incl. dividend LTCG u/s 112A – 20 lakhs ; & capital gains) other income – 25 lakhs ii) Total income 15% Dividend – 10 lakhs ; Surcharge would be levied @ >1 Cr ≤ 2 Cr STCG u/s 111A – 40 lakhs ; 15% on income tax computed (incl. dividend LTCG u/s 112 – 55 lakhs ; on total income of 1.90 Crores. & capital gains) LTCG u/s 112A – 35 lakhs ; other income – 50 lakhs 1.22 Swapnil Patni Classes  BASIC CONCEPT iii) Total income > 25% Dividend – 51 lakhs; Surcharge @ 15% would be 2 Cr ≤ 5Cr STCG u/s 111A – 44 lakhs; levied on income tax on: (excl. dividend LTCG u/s 112 – 42 lakhs ; Dividend– 60lakhs & capital gains) LTCG u/s 112A – 55 lakhs ; STCG – 54 lakhs chargeable to other income – 3 crores tax. LTCG – 55 lakhs Surcharge @25% would be leviable on income tax computed on the other income of 3 Crores included in total income. iv) Total income > 5 37% Dividend – 60 lakhs; Surcharge @ 15% would be Cr STCG u/s 111A – 50 lakhs ; levied on income –tax on (excluding LTCG u/s 112 – 42 lakhs ; Dividend – 60 lakhs dividend income LTCG u/s 112A – 65 lakhs; STCG u/s 111A– 50 lakhs and capital gains other income – 6 Crores LTCG u/s 112 – 42 lakhs LTCG u/s 112A – 65 lakhs Surcharge @ 37% would be leviable on the income tax computed on other income of 6 crores included in total income Rate of surcharge on income tax payable on the portion of dividend income and capital gains chargeable to tax u/s 111A and 112A.- (NOT EXCEEDING 15%) v) Total income > 2 15% Dividend – 55 lakhs; Surcharge would be levied Cr (In cases not STCG – 60 lakhs ; @15% on income tax computed covered under LTCG – 42 lakhs on total income of 3.22 Crore. (iii) and (iv) LTCG u/s 112A – 55 lakhs (including other income – 1.10 Crores dividend income and capital gains) Swapnil Patni Classes 1.23  BASIC CONCEPT 6) For AOP separate surcharge rules are there w.e.f. FA 2022 W.E.F. FA 2022 Surcharge for AOP Other AOP AOP - Only companies are members NTI Rate NTI – above 50 NTI – above Above 50 lakhs to 1 Cr 10% lakhs upto 1 crore 1 crore Above 1 Cr to 2 Cr 15% Above 2 Cr to 5 Cr 25% Surcharge @ 10% Surcharge @ 15% Above 5 Cr 37% 7) Let’s calculate tax liability: How much tax should I pay, help me out in calculating tax liability Let’s calculate tax liability in case of Individuals if the total income is (assuming assesse has opted out of Section 115BAC ) 1. Rs. 4,53,400 2. Rs. 7,42,000 3. Rs. 10,83,400 4. Rs. 3,04,000 5. Rs 55,00,000 6. If total income of MS Dhoni is Rs 7 crore 7. If NTI of Rishabh Pant is 1.5 crore 1.24 Swapnil Patni Classes  BASIC CONCEPT II. Concessional tax regime for Ind/HUF/AOP/BOI/AJP 1. Individuals and HUF’s have an option to pay tax in respect of their total income (other than income chargeable to tax at special rates under chapter XII) at following concessional rates, if they do not avail certain exemptions/deductions. Income Tax Rates Upto 3,00,000 Nil From 3,00,001 to 6,00,000 5% From 6,00,001 to 9,00,000 10% From 9,00,001 to 12,00,000 15% From 12,00,001 to 15,00,000 20% Above 15,00,001 30% Individuals and HUF’s exercising option u/s 115BAC are not liable to alternate minimum tax u/s 115JC. We will study this Section in detail in Chapter of “Combined Questions” “Chapter 13” 2. Surcharge NTI Surcharge Above 50L upto 1 Crore 10% Above 1 Crore upto 2 Crore 15% Above 2 Crore 25% 3. HEC @ 4% 4. Rebate Applicable for resident Individual whose NTI is upto 7,00,000 = 25,000 or tax Let’s calculate tax liability in case of Individuals if the total income is (assuming assesse has opted for Section 115BAC ) 1. Mr. Raghav (26 Years) Total income = Rs. 6,50,000 2. Mr. Pavan (35 Years) Total Income = Rs. 7,15,000 3. Mr. Baburao (65 Years) Total Income = Rs. 14,00,000 4. Mr. Kashyap (aged 35) Total Income = Rs. 51,75,000 5. Miss. Chameli (30 Years) Total Income = Rs. 55,00,000 6. Mr. Raju (45 Years) Total Income = Rs. 5,35,00,000 Swapnil Patni Classes 1.25  BASIC CONCEPT III. Let’s Summarise Important for tax calculation of Ind / HUF / AOP / BOI / AJP Option I Option II – 115BACC Optional Tax Regime Concessional or default Tax Regime OR 0 to 3 L - 0% 0 to 2.5 L - 0% Senior Same for BEL = 3 L 3 L to 6 L - 5% 2.5 L to 5 L -5% 6 L to 9 L - 10% all senior 5 L to 10 L - 20% V. Senior 9 L to 12 L -15% & V Above 10 L - 30% BEL = 5 L 12 L to 15 L -20% senior Above 15 L @ 30% AMT ( If 10AA, 35AD, 80RRB, 80QQB, 80JJAA) No AMT Same Special Rates Special Rates Rebate u/s 87A Rebate u/s 87A R-Ind, NTI upto 5 Lakhs R-Ind, NTI upto 7 Lakhs Rebate = Tax or 12500 Rebate = Tax or 25000 Surcharge Surcharge NTI Surcharge NTI Surcharge Above 50L to 1 Crore 10% Above 50L to 1 Crore 10% Above 1 Crore to 2 Crore 15% Above 1 Crore to 2 Crore 15% Above 2 Crore to 5 Crore 25% Above 2 Crore 25% Above 5 Crore 37% HEC @ 4% HEC @ 4% 1.26 Swapnil Patni Classes  BASIC CONCEPT Concept 9: Lets have look at the Tax liability of other persons 1. Firm/ LLP/ Local Authority Income Tax 30%(no BEL) Surcharge Total Income>1 crore 12% HEC 4% Concessional Tax Regime NA Marginal relief Applicable 2. Co-operative Society Income Tax Total Income (in Rs.) Rate of Tax Upto 10,000 10% Rs 10,001 to 20,000 20% Above 20,000 30% Surcharge Total income > ` 1 crore but is 7% ≤ ` 10 crore Total income is > ` 10 crore 12% HEC 4% Concessional Tax Regime Section 115BAD or section 115BAE (Final) Marginal relief Applicable Concessional Tax Rates for Co-operative Society Concessional Tax Rates for Co-operative Society (learn this in Final) Resident and Other Resident Co- Manufacturing operative Society 115BAE 115BAD Income Tax-15% Income Tax-22% Surcharge @10%(fixed) Surcharge @10%(fixed) HEC @4% HEC @4% Forgo some benefits Forgo some benefits Swapnil Patni Classes 1.27  BASIC CONCEPT Company Domestic Foreign Company Company A. Domestic Company Income Tax Tax Rate a. Total turnover or gross receipts in the P.Y. 2021-22 ≤ 25% ` 400 crore - b. Other domestic companies 30% Surcharge Total income > ` 1 crore but is ≤ ` 10 crore 7% Total income is > ` 10 crore 12% HEC 4% Concessional Tax Regime Final (Section 115BAA/115BAB) Marginal Relief Applicable B. Foreign Company Income Tax 40% Surcharge a. Total income > ` 1 crore but is ≤ ` 10 crore 2% Total income is > ` 10 crore 5% HEC 4% Concessional Tax Regime NA. Marginal Relief Applicable Concessional Tax Regime for Domestic Companies Following two options are available to the domestic company (they can exercise the option anytime before filing return for AY 2020-21 or in any subsequent years ) FInal 1.28 Swapnil Patni Classes  BASIC CONCEPT Sections 115BAA 115BAB Type of Company Domestic New Domestic Companies engaged in manufacturing research, Companies distribution in relation to manufactured article Option to Tax @ 22% 15% Surcharge 10% 10% Cess 4% 4% Conditions 1. The company has been set-up & registered on/after the 1st day of October, 2019, and has commenced manufacturing on or before the 31st March, 2024 (wef FA 2022) Should forgo 1)10AA-relating to SEZ these benefit 2) Additional depreciation (applicable for 3)32AD-Deduction for investment in new plant and machinery in 4 States both 115BAA & 4) 33AB-Tea/Coffee/Rubber development allowance. 115 BAB) 5) 33ABA-Site restoration fund. 6)35- certain expenses of scientific research 7)35AD-Deduction in respect of expenditure on 14 specified Business 8) 35CCC-Expenditure on agricultural extension project. 9) 35CCD-Expenditure on skill development project. 10)Deduction under Part C of Chapter VIA other than Section 80JJAA of the Act 11) No Set off of Losses allowed from earlier years due to the above mentioned benefits (Point 1 to 10) Concept 10 : Concept of Marginal Relief 1. The purpose of marginal relief is to ensure that the increase in amount of tax payable (including surcharge) due to increase in total income of an assessee beyond the prescribed limit should not exceed the amount of increase in total income 2. Marginal relief is available for all assessees. 3. It is available under default tax regime u/s 115BAC as well as old tax regime (optional) 4. Calculate the increase in Income and the respective increase in Tax plus surcharge. If the increase in tax plus surcharge exceeds the increase in Income then there will be marginal relief. 5. For calculations refer the notebook. Swapnil Patni Classes 1.29  BASIC CONCEPT EG 1) Tax liability of Mr. A (42 Years) income 51 lakh A.Y. 2024-25. Total Income comprises of salary/HP and interest EG 2) Mr. A (42 years) Income= 1,01,00,000 EG 3) Mr. A (42 years) Income= 2,01,00,000 EG 4) Mr. A (42 years) Income= 5,01,00,000 EG 5) Calculate tax liability for Motabhai Ltd, a Domestic Company whose total income is 1,01,00,000. Turnover of PY 2021-22 is 380 Cr. Assuming in all the above questions assessee has opted out of 115BAC. Marginal Relief under default tax regime EG 1) Mr. A (42 years) Income= 5,01,00,000 Concept 11: Some Important Points 1. Rounding off Sec. 288A Round off of Total Income r/off to nearest rupee multiple of Rs. 10 Sec. 288B Round off of Total Tax r/off to nearest rupee multiple of Rs. 10 2. Some special points - Birthday on 1st April A resident individual whose 60th birthday falls on 1st April, 2024 would be treated as having attained the age of 60 years in the P.Y. 2023-24 and would be eligible for higher basic exemption limit of Rs. 300000 in computing his tax liability for A.Y. 2024-25. Likewise, resident individual Accident Spot whose 80th birthday falls on 1st April 2024 would be treated as having attained the age of 80 years in the P.Y. 2023-24, and would be eligible for higher basic exemption limit of Rs. 500000 in computing his tax liability. Particulars Status Mr. X 60th birthday on 10/09/2023 Mr. Y 60th birthday on 02/04/2024 Mr. Z 60th birthday on 01/04/2024 1.30 Swapnil Patni Classes  BASIC CONCEPT 3. “Average Rate of Tax” (AR) means the rate arrived at by dividing the amount of Income- tax calculated on the total income, by such total income. 4. “Maximum Marginal rate” (MMR) means the rate of income-tax (including surcharge on the income tax, if any) applicable in relation to the highest slab of income in the case of an individual, AOP or BOI, as the case may be, as specified in Finance Act of the relevant year. Concept 12: SPECIAL TAX RATES (i.e. RATES SPECIFIED BY THE INCOME-TAX ACT) FOR ASSESSMENT YEAR 24-25 Section Income Rate Of Tax 112 Long term capital gains (other than LTCG taxable as per sec 112A) 20% (shall be dealt with in detail in chapter “Capital Gains”) 112A Long term capital gains on transfer of- equity share in a company, 10%(LTCG > Unit of equity oriented fund(ULIP policy), unit of business trust. 1,00,000) Condition for availing the benefit of this concessional rate is that Securities transaction tax should have been paid--- In case of capital asset Equity Time of payment of STT Both at shares in a company the time of transfer & acquisition Unit of equity oriented fund or Unit of business trust. Note: LTCG upto 1,00,000 is exempt. LTCG exceeding 1,00,000 is taxable @ 10%. (shall be dealt with in detail in chapter “Capital Gains”) 111A Long term capital gains on transfer of- equity share in a company, 15% Unit of equity oriented fund, (ULIP policy), unit of business trust. Conditions for availing the benefit of this concessional rate are - Transaction of sale of such equity share or unit should be entered on or after 1-10-2004. And such transaction should be chargeable into securities transaction tax(shall be dealt with in detail in chapter “Capital Gains”) Swapnil Patni Classes 1.31  BASIC CONCEPT 115BB Winning from lotteries,crossword puzzles, races including horse 30% races Card games or other games of any sort, gambling, betting, of any form or nature(shall be dealt with in detail in chapter of IOS) 115BBJ Net winnings from Online games 30% 115BBE Unexplained money, investment, expenditure, etc deemed as income 60% u/s 68 or sec 69 or sec 69A or Sec 69B or sec 69C or sec 69D (shall be dealt with in detail in chapter PGBP) Some Questions : - 1. Who is an “Assessee”? Explain 2. State any four instances where the income of the previous year is assessable in the previous year itself instead of the assessment year. 3. What are the two schools of Hindu law and where are they prevalent? Explain. Also, mention the difference between the two schools of Hindu Law. 4. What is the difference between an Association of Persons and Body of Individuals? 5. The Jain HUF in Assam comprises of Mr. Suresh Jain, his wife Mrs. Sapna Jain, his son Mr. Sarthak Jain, his daughter-in-law Mrs. Preeti Jain, his daughter Miss Seema Jain and his unmarried brother Mr. Pritam Jain. Which of the members of the HUF are eligible for coparcenary rights? Module Questions :- 1.32 Swapnil Patni Classes 1.32  BASIC CONCEPT Budget Quotes (1st February 2023) Personal Income Tax for the hardworking middle class. Currently, those with an Income of `5 Lakhs do not pay Income tax and I propose to increase the rebate limit to `7 Lakhs in the new tax regime. -Nirmala Sitharaman 1.33 Swapnil Patni Classes 1.33