BCO-06 Income Tax Law and Practice PDF

BCO-06/OSOU  BCO- 06/OSOU BCO 06: INCOME TAX LAW AND PRACTICE Brief Contents Block Block Unit Unit No. N...

BCO-06/OSOU  BCO- 06/OSOU BCO 06: INCOME TAX LAW AND PRACTICE Brief Contents Block Block Unit Unit No. No. 1 Basic Concepts 1 Basic Concepts and 2 Residential Status and Tax Liability Definitions under IT 3 Exempted Incomes Under Section 10 Act 4 Agricultural Income Block Block Unit Unit No. No. 5 Income from Salary 2 Heads of Income 6 Income from House Property 7 Profits and Gains of Business and Profession 8 Capital Gains and Income from Other Sources Block Block Unit Unit No. No. 9 Income of other Persons 3 Assessee’s Total 10 Set Off and Carry Forward of Losses Income and Deduction 11 Deductions from Gross Total Income 12 Rebate u/s 87 A Block Block Unit Unit No. No. 13 Computation of Tax Liability of an Individual 4 Computation of 14 Provision for Filing of Return Total Income and 15 Concept of Advance Tax Tax Payable 16 TDS Provisions  BCO- 06/OSOU ODISHA STATE OPEN UNIVERSITY, SAMBALPUR Programme Name: Bachelor of Commerce (B.Com) Programme Code: BCO Course Name: Income Tax Law and Practice Course Code: BCO-06 Semester: III Credit: 6 Block No. 1 to 4 Unit No. 1 to 16 Pages: 1 to 188 This study material has been developed by Odisha State Open University as per the State Model Syllabus for Under Graduate Course in Commerce (Bachelor of Commerce Examinations) under Choice Based Credit System (CBCS). COURSE WRITERS Dr. Priyabrata Panda (Blocks 1 & 3) Dr. Abhijit Kundu (Block 4) Assistant Professor (Commerce), Assistant Professor (Commerce), Gangadhar Meher University, Barrackpore Rastraguru Surendranath College, Sambalpur, Odisha. West Bengal State University. C.A. Rahul Agrawal (Block 2: Units 5 & 6) C.A. Radha Gopal Tibrewal (Block 2: Units 7 & 8) R.N.Agrawal & Associates (Proprietor), CAT & Associates LLP (Partner), Sambalpur, Odisha. Sambalpur, Odisha. EDITORIAL COMMITTEE C.A. Rahul Agrawal (Block 1) C.A. Radha Gopal Tibrewal (Blocks 3 & 4) R.N.Agrawal & Associates (Proprietor), CAT & Associates LLP (Partner), Sambalpur, Odisha. Sambalpur, Odisha. Dr. Priyabrata Panda (Block 2: Units 6 to 8) Dr. Sanjay Kumar Patel (Block 2: Unit 5) Assistant Professor (Commerce), Assistant Professor (Commerce), Gangadhar Meher University, Central University of Rajasthan, Kishangarh, Sambalpur, Odisha. Ajmer, Rajasthan. MATERIAL PRODUCTION Registrar Odisha State Open University, Sambalpur (cc) OSOU, 2022. Income Tax Law and Practice is made available under a Creative Common Attribution-ShareAlike4.0 http://creativecommons.org/licences/by-sa/4.0 Printers by:  BCO- 06/OSOU BCO 06: INCOME TAX LAW AND PRACTICE Contents BLOCKS/UNITS Page No. BLOCK-1: BASIC CONCEPTS AND DEFINITIONS UNDER IT ACT 1-33 Unit-1: Basic Concepts - Introduction, Evolution of tax system in India, Assessee, Maximum Marginal Rate, Dividend, Person, Previous Year, Concept of Tax. Unit-2: Residential Status and Tax Liability -Introduction, Residential Status: Individual, HUF, Company, Firm, AOP, and BOI ; Incidence of Tax / Scope of Total Income. Unit-3: Exempted Incomes Under Section 10 -Introduction, Exempted Incomes or tax free incomes. Unit-4: Agricultural Income -Introduction, Definition of agricultural income and its example, Segmentation in Certain Operations Under Rule 7,7a,7b and 8, Assessment of Agricultural Income (Integration Scheme). BLOCK-2: HEADS OF INCOME 34-113 Unit-5: Income from Salary – Introduction, Meaning, charging section, Rebate u/s 89 For Arrears of Salary, Rule 9D: Calculation of taxable interest relating to contribution in a SPF or RPF exceeding the specified limit, Taxability of Employee Stock Option Plans (ESOPs). Unit-6: Income from House Property – Introduction, Section 22 - Charging Section, Types of House Property, Computation of Income of House Property, Rent Amount, Concept of Partly Let Out Property, Deemed Owner, Amendment. Unit-7: Profits and Gains of Business and Profession – Introduction, Meaning of ‘Business’ And ‘Profession’, Section 28: Charging Section, Compute PGBP, Rent Rates, Taxes, Repairs & Insurance of Building, Repairs and Insurance of Machinery, Plant And Furniture, Depreciation, Expenditure on Scientific Research, Allowable Deduction in Computing PGBP, Bonus & Commission, Residuary Expenses, Inadmissible Deductions. Unit-8: Capital Gains and Income from Other Sources – Introduction, Section 45(1) – Charging Section, Definition of Transfer, Nature of Capital Assets, Type of Capital Gains, Computation of Capital Gain, Advance Money Received & Forfeited, Deemed Cost of Acquisition, Exemption of Capital Gains, Capital Gains in Cases of Investment in Residential House, Tax on Short Tem Capital Gain on Shares/Units, Tax on Long Term Capital Gains (LTCG) Other Than Those Covered Under Section 112a, Treatment of Securities Transaction Tax, Income from Other Sources: Introduction, Taxation of Gift, Shares Issued on Premium.  BCO- 06/OSOU BLOCK-3: ASSESSEE’S TOTAL INCOME AND DEDUCTIONS 114-139 Unit-9: Income of Other Persons -- Introduction, Incomes due to other persons are included in the assessee's total income. Unit-10: Set Off and Carry Forward of Losses -- Introduction, Meaning of Set off of Losses and Carry Forward, Different ways of Set off of Losses, Carry forward of Unadjusted Loss for adjustment in Next Year. Unit-11: Deductions from Gross Total Income -– Exemptions vs. Deductions, General Provisions for deductions, Deductions in respect of payments. Unit-12: Rebate u/s 87A - Meaning of rebate of tax, Rebate of tax u/s 87A- Old and New Regime. BLOCK-4: COMPUTATION OF TOTAL INCOME AND TAX PAYABLE 140-188 Unit-13: Computation of Tax Liability of an Individual – Introduction, Computation of Total Income and Tax Liability of Individuals, Income Tax Rates (Slab Rates) for Individuals, New Tax Regime for Individuals Under Section 115BAC, Some Special Rates of Income Tax, Problems and Solutions. Unit-14: Provision for Filing of Return –Introduction, Compulsory Filing of Return of Income, Due Dates of Furnishing Return of Income, Consequences for Late Filing of Return, Different Types of Return Filing, Return of Income by Whom to be Verified in Case of Individual Assessee, Forms for Furnishing Return of Income, Permanent Account Number. Unit-15: Concept of Advance Tax --Introduction, Liability to Pay Advance Tax, Computation and Payment of Advance Tax, Due Dates and Instalments of Advance Tax, Consequences for Failure to Pay Advance Tax. Unit-16: TDS Provisions -- Introduction, Tax Deduction from Salary, Tax Deduction from Interest on Securities, Tax Deduction from Dividends, Tax Deduction from Interest Other than Interest on Securities, Tax Deduction from Winnings from Lotteries or Puzzles or Card Games, Tax Deduction from Winnings from Horse Races, Miscellaneous Provisions.  BCO-06/OSOU BLOCK 1: BASIC CONCEPTS AND DEFINITIONS UNDER IT ACT UNIT 1: BASIC CONCEPTS UNIT 2: RESIDENTIAL STATUS AND TAX LIABILITY UNIT 3: EXEMPTED INCOME UNDER SECTION 10 UNIT 4: AGRICULTURAL INCOME 1  BCO-06/OSOU UNIT 1: BASIC CONCEPTS Learning Objectives After studying this unit, you should be able to know:  The evolution of tax system in India.  Different types of Assessee by whom income tax or super tax or any other sum of money is payable under this Act.  Different types and meaning of person include v/s 2(31)  Ascertainment of previous year v/s 2(34) etc. Structure 1.1 Introduction 1.2 Evolution of Tax system of India 1.3 Assessee [Section 2(7)] 1.4 Maximum Marginal Rate [Section 2(29c)] 1.5 Dividend [Section 2(22)] 1.6 Person [Section 2(31b)] 1.7 Previous year [Section 2(34) refer to section 3] 1.8 Concept of Tax 1.9 Let Us Sum Up 1.10 Review Questions 1.1 INTRODUCTION Income tax is one of the direct taxes levied by the Central Government. It is considered direct as it is payable in the Assessment Year, directly by the Individual, Hindu Undivided Family, Firms and Corporate Bodies on the income earned during the previous year (Accounting /Financial Year). Therefore, any student of income tax must know the meaning of the terms income, previous year, assessment year, total income and who are the persons liable to income tax in India. In this unit we have traced the history of income tax in India and we have also defined all these terms as per the provisions of the Income Tax Act as amended up to date. 1.2 EVOLUTION OF TAX SYSTEM OF INDIA The Mahabharata, Manusmriti, Arthasatra, and Sukranitican can all be linked to India's tax system. To fill their rulers' treasuries, these books offer a thorough methodology. These treaties undoubtedly provide a model for taxation that covers tax rates, administration, manner of revenue collection, etc. Ancient Indian taxation was invented by individuals like Byasa, Manu, Koutilya, and Sukra. The British India Government's financial stability was destroyed by the Sepoy Mutiny in 1857. From only 17 crores in 1856–57, the military budget climbed to 32 crores in 1858–59. The British Government established the first Income Tax Act in February, 1860, to address this severe financial 2  BCO-06/OSOU problem. The Act, designated Act No. XXXI of 1860, was approved by the Indian Legislative Council and obtained the Governor General's assent on July 24, 1860. This Act was sponsored by James Wilson, who eventually served as the first finance member of (British) India. India's first income tax went into effect. The birth of India's tax system was attributed to the force of war. The British government experimented with several measures to fill its treasury and some of them were successful. British tax reforms were implemented to increase income rather than to advance the economy. With the adoption of the Income Tax Act of 1961, independent India drastically altered its income tax structure. The government then established various committees and implemented regular changes. 1.3 ASSESSEE [SECTION 2(7)] Basic Concepts under Income Tax Act 1961 The section defines “assessee” as a “person by whom income-tax or super-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 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;” The definition can be simplified and segregated as below: (i) Ordinary Assessee/Normal Assessee An ordinary assessee includes  any person who is liable to pay taxes on his/her income of the current financial year or income of any prior financial years;  Any person against whom any proceedings under the Act is going on irrespective payment of taxes;  Any person who has filed return u/s 139(3) on losses;  Any person against whom any penalty or interest or fees are payable under the Act;  Any person who has claimed any refund as per the provisions of the Act. (ii) Representative Assessee/Deemed Assessee In some circumstances, a person is liable to pay taxes for the other person. As the person represents another person in regard to payment of taxes and will be assessed is called representative or deemed assessee. Like a guardian of a minor, financial caretaker of a lunatic, agent of a principal etc. Following are some circumstances where an assessee is treated as a representative assessee or deemed to be an assessee.  In case of a person who dies after writing the will for the properties, the executor of the will is a deemed or representative assessee.  In case of a person dies withing executing the will, the eldest son or other legal heirs will act as deemed or representative assesses. 3  BCO-06/OSOU  The guardian of a minor, lunatic or idiot are called deemed assesses if they are assessable for income tax.  Similarly, an agent or any person acting on behalf of a non-resident is called deemed or representative assesses. (iii) Assessee-in-default An assessee-in-default is a person who failed to pay any taxes levied on him or failed to fulfil any statutory obligation as imposed by the Act. The employer is liable to deduct tax from the source of his employees and deposit it in the government treasury, if he failed to do so, he can be called as an assessee-in-default. 1.4 MAXIMUM MARGINAL RATE [SECTION 2(29C)] Maximum Marginal Rate (MMR) is the highest rate of income tax including surcharge when applicable for individuals, AOPs or BoIs in a particular financial year as specified by the Finance Act. The MMR for an Individual assessee is presented below. Table 1: Maximum Marginal Rates for Individual Assesses Surcharge and Health and Education Income Level MMR Cess Total Income < ₹ 50 lakhs Surcharge @ Nil and Health & 31.2% Education Cess @ 4% Total Income ₹ >50 lakhs < ₹1 Surcharge @ 10% and Health & 34.32% crore Education Cess @ 4% Total Income ₹ > 1 crore < ₹2 Surcharge @ 15% and Health & 35.88% crores Education Cess @ 4% Total Income > 2 crores but < ₹5 Surcharge @ 25% and Health & 39% crores Education Cess @ 4% Total Income > 5 crore Surcharge @ 37% and Health & 42.74% Education Cess @ 4% Source: Compiled Note: 31.2% = 30%+ 4% of 30%; 34.32% = 30%+ 4% of 30% = 31.2% + 10% of 31.2% Accordingly, 35.88%, 39% and 42.74% can also be computed. 1. Average Rate of Income Tax [Section 2 (10)] As per Section 2(10), average rate of income-tax means “the rate arrived at by dividing the amount of income-tax calculated on the total income, by such total income”. Average Rate Income Tax = (Total tax / Total Income) x 100 2. Average Rate of Super Tax [Section 2 (11)] As per Section 2(10), the average rate of super-tax means “the rate arrived at by dividing the amount of super-tax calculated on the total income, by such total income”. Average Rate of Super Tax = (Total super tax / Total Income) x 100 3. Business [Section 2(13)] 4  BCO-06/OSOU As per Section 2(13), the business can be defined as “any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture”. 4. Capital Asset [Section 2 (14)] Capital assets include any kind of property held by the assessee to generate income, may or may not be connected with the business or profession. However, it does not include (i) Stock in trade, consumable stores, raw materials etc. held for manufacturing or selling. (ii) Property held for personal use like wearing apparel, jewellery, furniture etc. (iii) Agricultural income situated in India. 5. Charitable Purpose [Section 2(15)] As per Section 2(15), charitable purpose includes “relief of the poor, education, medical relief, and the advancement of any other object of general public utility not involving the carrying on of any activity for profit”. 6. Company [Section 2(17)] Company in general means an artificial person formed by the operation of law with a separate legal entity and perpetual succession. Section 2(17)) of IT Act 1961 replicates company as (i) any Indian company (ii) any association whether Indian or not but assessable under the IT Act. 7. Co-operative Society (Section 2(19)). As per the Section co-operative society is defined as a “co-operative society registered under the Co-operative Societies Act, 1912 (2 of 1912), or under any other law for the time being in force in any State for the registration of co-operative societies”. 1.5 DIVIDEND [SECTION 2(22)] The meaning of dividend is summarised below. i. Any distribution by the company of accumulated profit whether capitalised or not when such distribution requires the release of all or a portion of assets to shareholders. ii. Any distribution of debentures, debenture-stock, or deposit certificates by a company to its shareholders, whether with or without interest and distribution of bonus shares to its preference shareholders, to the extent that the company has accumulated profits, whether capitalised or not; iii. Any distribution to the shareholders at the time of liquidation to the extent accumulated profits can be distributed whether capitalised or not prior to liquidation. iv. Any distribution to the shareholders by a company at the time of capital reduction whether the profit is capitalised or not. v. Any distribution to the shareholders in the way of advance or loan to the shareholders by the company in which the public are substantially interested. However, dividend does not include the following distributions: i. Any distribution to the shareholders in the way of advance or loan to the shareholders by the company where such lending is part of the substantial operations of the company. ii. Any distribution to the shareholders in the way of the issue of shares in full cash consideration where such shareholder is not entitled to participate in the surplus at the time of liquidation. 5  BCO-06/OSOU iii. Any distribution made in the name of dividend now being set off wholly or partly by the company against any sum paid earlier. Firm, Partner and Partnership [Section 2(23)] IT Act 1961 has referred to the Partnership Act, 1932 for the definition of “Firm”, “Partner” and “Partnership” however such Act allowed a minor as partner for the benefit of the partnership. Income [Section 2(24)] Income is the return or compensation of a person for the sacrifice in terms of work, services, investments, etc. It is also called revenue for business assesses which are earned by selling goods and services. Under Income Tax Act 1961, it is defined under section 2(24) as Income includes profits, gains, dividends, the value of any perquisite or profit in lieu of salary, any sum chargeable to income-tax, capital gains, etc. 1.6 PERSON [SECTION 2(31B)] A person is not confined to an individual but a taxpayer or deemed to be a taxpayer or having any direct or indirect relationship with the government in regard to income tax. The term “Person” is broad in terms of its meaning and scope. As separate set of rules and rates are applicable to different persons for income tax purpose, determining and defining such a person become indefensible. Interestingly, the ambit of person includes both individual and non-individuals. According to Section 2 (31) "person" includes— (i) an individual, (ii) a Hindu undivided family, (iii) a company, (iv) a firm, (v) an association of persons or a body of individuals, whether incorporated or not, (vi) a local authority, and (vii) every artificial juridical person, not falling within any of the preceding sub-clauses; (i) Individual An individual is a natural human being whether male or female, citizen or not. An individual is responsible to pay taxes on his or her income. Tax rates depend on the levels of income. Tax incentives, exemptions, and deductions are specified for such persons. (ii) Hindu Undivided Family (HUF) A HUF is a relationship between the members and the head of the family which was created by the virtue of Hindu Law. An HUF comprises of all members who are called coparceners and the head of the family is called the Karta. The coparceners include the descendants of a common ancestors and include their wives as well. (iii) Companies A company is an artificial and separate legal entity that is registered under Indian Companies, 2013 or any other law. Taxes are levied at a flat rate under different schemes for a corporate assessee. (iv) Firm 6  BCO-06/OSOU A firm or partnership firm is a form of business that is created by an agreement between or among persons to carry the business and share profit. Income Tax Act 1961 treats partnership firm as a separate legal entity for the payment of tax purpose. Under Income Tax Act, 1961, a partnership firm can be of two types which are as follows: 1. a firm that fulfils the conditions mentioned u/s 184. 2. A firm that does not fulfil the conditions prescribed u/s 184. It is worth mentioning that a limited liability partnership (LLP) formed under the Limited Liability Partnership Act, 2008 is also treated as a firm in Income Tax Act 1961. (v) Association of Persons (AoPs) or Body of Individuals (BoI) AoPs or BoIs are in the nature of cooperative societies that are combined by persons to carry an enterprise jointly but cannot be connoted as a partnership firm. Members work for a common purpose other than profit and receive income jointly. Co-operative societies, MARKFED, NAFED etc. are examples of such persons. As its name suggests firms, companies, and individuals can be a member of an AoP. But in BoI, nonindividuals cannot be its members. Only natural human beings can be its members. AoPs and BoIs are taxed as separate entities from its members. (vi) Local Authority Municipalities, Panchayats, Cantonment Boards, Port Trusts, etc. are entitled as local authorities. (vii) Artificial Juridical Person Artificial Judicial Persons are incorporated by virtue of a special Act of the legislature with a juristic personality. A University is a popular example of such kind of person. Taxes are levied on these persons at the same rates as applicable to individuals. 1.7 PREVIOUS YEAR [SECTION 2(34) REFER TO SECTION 3] The concept of previous is quite pertinent and relevant for the assessee as it determines the scope of income and its taxability. Previous year is the financial year preceding the assessment year. The current assessment year ranges from 1 st April 2023 to 31st March 2024 and the current previous has started from 1st April 2022 and ended on 31 st March 2023. The income of the previous year is charged to tax in the assessment year. It is not necessarily connoted that the previous should always consists of twelve months. In the following cases the previous years may not be having twelve months: i. A newly set up business could have started on any day of the previous year. ii. Similarly, a newly source of income, such income may be earned on any day of the previous year. Examples  If a business was set up on 1 st December 2022, the previous year starts from 1 st December and ended on 31 st March consisting of only 4 months.  Likewise, if a business discontinued from 31 st January 2023, the previous year in this case ranges from 1st April 2022 to 31st January 2023 consisting of 10 months. Exceptions to the rule of Previous Year The rule of previous year substantiates that the income of the previous year is computed and charged to tax in the assessment year. However, in some circumstances, such rule is not applicable. 7  BCO-06/OSOU It infers that the income of the previous year is assessed to tax in the same previous year and not carried over to the assessment year for computation of tax in the following cases: i. Shipping business income of non-residents [Section 172] Non-resident shipping companies which have no representatives or agents in India when earn income by carrying passengers, goods or live stocks are not permitted to leave India without paying taxes on such income. A flat tax rate of 7.5% is levied on the amount received or levied by them. ii. In case of persons leaving India [Section 174] If the concern authorities of income tax department perceive in any manner that the assessee is leaving India with no intention to return, his/her income during the period of staying in India will be taxed in the same previous in which such income is generated. iii. Association of Persons, Body of Individuals or Artificial Juridical person formed or established only for a limited period [Section 174A] Any association of people, group of people, or artificial juridical person that has been formed or established only temporarily or for a specific purpose may be assessed in the same year if the Assessing Officer determines that it is likely to dissolve or cease operations in that year a fter the accomplishment of the intended purpose or event. iv. In case of persons who are likely to transfer their assets to avoid tax [Section-175] If the income tax officer has reason to believe that someone will likely sell, transfer, dispose of, or otherwise part with any of their assets in order to avoid paying any tax obligations, he may start proceedings to assess the income for the time period between the end of the previous fiscal year and the date of such proceedings. v.In case of discontinued business [Section-176] During an assessment year, a business or profession may be ceased. Depending on the circumstances, the assessing officer may decide to tax the revenue from the end of the preceding assessment year to the date of discontinuance in the current assessment year. 1.8 CONCEPT OF TAX Tax is a compulsory levy on citizens of the country on their incomes or transactions. Tax is the major source of revenue for the government. Taxes are levied on individuals and corporations as a mandatory financial charge. According to Section 2(43) of Income Tax 1961, tax means “income- tax and super-tax chargeable under the provisions of this Act”. In India, there are two types of taxes viz. Direct Tax and Indirect Tax. Direct tax is paid directly to the government by the taxpayer. Incidence of income and levy of tax lie on the same person. In other words, tax is paid by the person who earns income, and tax liability arises only when income is earned or accrued. Income tax and corporate tax are examples of direct taxes. On the other hand, in indirect tax, the incidence of income and arising tax liability does not lie on one person. Tax liability arises when goods or services are supplied. The supplier of goods and services pays such tax to the government. Such tax is consumption-based. In India, a dual model of Goods and Services Tax (GST) has been executed for the administration of indirect taxes. 8  BCO-06/OSOU 1.9 LET US SUM UP Income tax is a direct tax and is administered by the Government of India through the Ministry of Finance and Central Board of Direct Taxes. The student is expected to have firsthand knowledge of the Income Tax Act, 1961,Income Tax Rules, 1962, the latest- Finance Act.and the landmark decisions of the High Courts and Supreme Court. The term income is not exhaustively defined and the Act simply enumerates certain items which are included in the tern1 'income'. Similarly the term 'person' is also inclusively defined. Assessment year is the current financial year in which income earned in the immediately preceding financial year (known as previous year) is put to tax. However, there are certain situations when income earned in a particular financial year is put to talc in the same year and the IT0 does not wait for the next financial year. Gross total income is arrived at by adding up taxable income from various heads. Out of gross total income certain deductions are allowed to arrive at Total Income which is put to tax. The assessee can adopt either cash or accrual basis of accounting. However once the method is adopted it cannot be changed without the satisfaction of the Assessing Officer. 1.10 REVIEW QUESTIONS Q1) "The income of the previous year is taxed in the current year". Explain. Q2) Distinguish between: i) Gross total income and total income. ii) Previous year and Assessment year. iii) Tax Avoidance and Tax Evasion Q3) Are the following incomes as defined under the Income Tax Act, 1961: i) Pagdee realised by the landlord from tenants for letting out shops. ii) Prize received in a state lottery. iii) Stakes won in a horse race. iv) Tips received by a waiter in a hotel. v) Gift of a sum of Rs. 10,000 by a husband to his wife on her birthday. vi) Amount received on sale of old books. vii) Lump sum payment for supplying technical know-how. viii) Lurnp sum paid for waiver of royalty. ix) Lump sum payment in consideration of cancelling service agreement. x) Lump sum payment on reduction of remuneration. xi) Lumps urn payment on termination of employment xii) Damages awarded by Court to company for breach of contract. xiii) Compensation for relinquishing the rights of a partner.. xiv) Profit from a solitary transaction of purchase and sale of land. xv) Unclaimed balance distributed to partners. (Answers) i) No ii) Yes iii) Yes iv) Yes v) No vi) No vii) Yes viii) Yes ix) Yes x).Yes xi) Yes xii) Yes xiii) No xiv) Yes xv) No 9  BCO-06/OSOU UNIT 2: RESIDENTIAL STATUS AND TAX LIABILITY Learning Objectives After studying this unit, you should be able to :  Identify categories of assessees on the basis of residential status,  Determine the residential status of assessees,  Explain different types of incomes and  Determine the tax liability. Structure 2.1 Introduction 2.2 Residential Status of an Individual 2.3 Residential Status of Hindu Undivided Family (HUF)Section 6(2) 2.4 Residential Status of a Company 2.5 Residential Status of a Firm and AOP, or BOI [Section 6(2)] 2.6 Residential Status of Every Other Person [Section 6(4)] 2.7 Incidence of Tax / Scope of Total Income [Section 5] 2.8 Let us sum up 2.9 Review Questions 2.1 INTRODUCTION Determination of residential status is quite relevant as the tax liability solely depends on such status. According to IT Act 1961 “The tax liability of a person under the Act depends upon his residential status in the financial year in which the income accrues or arises to him or is received by him”. Residential status has no link with the domicile or citizenship. A citizen of India may not be a resident of India. Similarly, a foreign citizen may be a resident of India. Further, the concept of residential status under the IT Act 1961 is different from the concept of residential status under the Citizenship Act, FEMA, Aadhar Act, and other relevant Acts. A person may be a resident of different countries in the same financial year depending on the tax laws of the concerned country. 2.2 RESIDENTIAL STATUS OF AN INDIVIDUAL The residential status of an Individual depends on the number of days of staying of the concerned individual within the geographical territory of the country. The physical presence of the individual is counted in terms of number of days. An individual in India enjoys three types of residential status which are as follows: 2.2.1 Resident 2.2.2 Resident and Ordinarily Resident/Not ordinarily Resident 2.2.3 Deemed to be a Resident 2.2.4 Non-resident It is noteworthy that a particular type of income may not be equally taxable for the above three types of the status. 10  BCO-06/OSOU Fig 1: Resident and Non-resident Status of an Individual Source: https://incometaxindia.gov.in/ 2.2.1 Resident: An individual is said to be a resident when he or she satisfies any one of the following two conditions. i. He has stayed in India for 182 days or more in the relevant previous year. Or ii. He has stayed 60 days or more in the relevant previous year and 365 days or more in four previous years preceding the relevant previous year. The criteria for a person to be considered a resident, i.e., staying in India for 182 days or more in the relevant year, or staying for 60 days or more in the relevant year and 365 days in the four preceding years, is accurate as per the Act. The additional provision for the financial year 2020-21, the period of 182 days in condition i above is reduced to 120 days for an individual who is a citizen of India and whose total income (except foreign sources) is less than 15 lakhs and leaves India only for employment. 2.2.2 Resident and Ordinarily Resident or Not Ordinarily Resident: When the assessee qualifies as resident, then next step is to test whether the individual is ordinarily resident or not ordinarily resident. The individual will be called resident and ordinarily resident only when both the following conditions are satisfied. i. He has been a resident of India in at least 2 out of 10 previous years immediately preceding the relevant previous year. And ii. He has stayed in India for at least 730 days in 7 previous years immediately preceding the relevant previous year. 11  BCO-06/OSOU If the individual fails to qualify any one of the above two conditions, he will be termed as a not ordinarily resident. 2.2.3 Deemed to be a Resident: From the financial year 2020-21, if an individual who is a citizen of India, is not liable to pay taxes any other country except in India and whose total income (except foreign income) exceeds Rs 15 Lakh. 2.2.4 Non-resident: If the individual failed to qualify as a resident, he is called as a non-resident. It implicates that the individual has stayed less than 60 days in the relevant previous year, he or she can be termed as non-resident of India. 2.3 RESIDENTIAL STATUS OF HINDU UNDIVIDED FAMILY (HUF)SECTION 6(2) A HUF enjoys all three residential status like an Individual. A HUF can be a resident with ordinarily resident or not-ordinarily resident and non-resident. 2.3.1 Ordinary Resident [Section 6 (2) r.w. Section 6(6)(a) & (b)] A HUF is said to be a resident when it is wholly or partially controlled from India. In other words, if the control and management of the HUF is governed from India, it is termed as a resident of India. Control and management means the power to direct, influence and regulate the major affairs of the family. Resident of HUF = Control and Management from India wholly or partially. 2.3.2 Ordinarily Resident A resident HUF can be termed as an ordinarily resident if the Karta of the HUF satisfies the following two conditions. i. The Karta must be a resident of India in at least 2 out of 10 previous years immediately preceding the relevant previous year. And ii. The Karta must have stayed in India for at least 730 days in 7 previous years immediately preceding the relevant previous year. Ordinary Resident of HUF = Control and Management from India wholly or partially. + Fulfilment both the conditions [Section 6 (2) r.w. Section 6(6)(a) & (b)] 2.3.3 Not-ordinarily Resident [Section 6 (2) r.w. Section 6(6)(a) & (b)] The HUF can claim the not-ordinarily resident status if the Karta 12  BCO-06/OSOU i. The Karta has not been a resident of India in at least 2 out of 10 previous years immediately preceding the relevant previous year. And ii. The Karta has not stayed in India for at least 730 days in 7 previous years immediately preceding the relevant previous year. Non-resident [Section 2(30)] A HUF is considered as a non-resident if the control and management of affairs wholly situated outside India. 2.4 RESIDENTIAL STATUS OF A COMPANY A company form of organisation can only be resident or non-resident. Ordinarily resident or not ordinarily resident is not applicable to it. The provisions are as follows. 2.4.1 Resident [Section 6(3)] An Indian company is always termed as a resident. A company is said to be Indian when it is registered under the Companies Act of India or under any other such Acts. A foreign company can also enjoy the resident status if its turnover is more than ₹ 50 cr and its Place of Effective Management (POEM) is from India. 2.4.2 Non-Resident [Section 2(30)] A foreign company having a turnover of less than ₹ 50 crores is always deduced as a non-resident. In addition, if the POEM of a foreign company is outside of India, the company only can avail of non-residential status. The residential status of a company is summarised below. Residential Status of a Company Section 6(3) Section 2(30) Resident [Section 6(3)] Non-Resident [Section 2(30)] i. An Indian Comany: Always i. A Foreign Company having turnover < ₹ 50 crore: Always ii. A Foreign Company having turnover> ₹ 50 Cr -- if POEM is in ii. AForeign Company -- If POEM India is not in India Fig 1: Residential Status of a Company Source: Compiled 13  BCO-06/OSOU Place of Effective Management (POEM) It is defined as a location where important management and commercial decisions that are necessary for the conduct of an entity's business as a whole are, in substance, made. 2.5 RESIDENTIAL STATUS OF A FIRM AND AOP, OR BOI [SECTION 6(2)] A firm, an Association of Persons (AoP), and a Body of Individuals (BoI) can avail resident or Non-resident [Section 2(30)] i. A firm can be a resident if the control and management of affairs in India wholly or partially. ii. Similarly, a firm can be a non-resident if the control and management of affairs are situated outside of India. 2.6 RESIDENTIAL STATUS OF EVERY OTHER PERSON [SECTION 6(4)] Every other person includes local authority, artificial judicial person, etc. They can claim either resident or non-resident by the following provisions. i. Resident: If Control and management is wholly or partially located in India, they can avail resident as their status. ii. Non-resident: If control and management is situated outside India, they can claim non-resident as their status. 2.7 INCIDENCE OF TAX / SCOPE OF TOTAL INCOME [SECTION 5] Meaning of Incidence of Tax The calculation of a person's tax liability, which is subject to the final tax assessment is known as the incidence of tax. When taxable income arises or the income level crosses the exemption limit, tax will be levied on the income of the person, and tax liability arises. Then, the assessment procedure begins for the assessee. It is the process of assessment of income computation of tax thereon. Such computation and assessment solely depend on the residential status and scope of total income. Hence, the scope of total income for resident, ordinarily resident, and not ordinarily resident is the essence of the determination of tax liability which is discussed below: (A). Scope of total income of a Resident in India (resident and ordinarily resident in case of individual or HUF) [Section 5(1)]: i. any income received or deemed to have been received by or on behalf of such a person in India in the relevant previous year. The date and place of the accrual of the income is immaterial. ii. any income accrued or arising or being deemed to have arisen in India during the relevant previous year. The date and place of the accrual of the income is immaterial. iii. any income accruing or arising outside of India during the relevant previous year whether it is remitted to India or not. (B) Scope of total income of a Resident but not Ordinarily Resident in India (In the case of individuals and HUF only) [Section 5(1) and its proviso]: i. any income which is received or is deemed to be received in India in the relevant previous year by or on behalf of such person. The date and place of the accrual of the income is immaterial. ii. any income which accrues or arises or is deemed to accrue or arise to him during the relevant previous year. The date and place of the accrual of the income is immaterial. iii. any income which accrues or arises to him outside India during the relevant previous year if it is derived from a business controlled in or a profession set up in India. 14  BCO-06/OSOU (C) In the case of Non-Resident [Section 5(2)]: i. any income which is received or is deemed to be received in India during the relevant previous year by or on behalf of such person. The date and place of the accrual of the income is immaterial. ii. any income which accrues or arises or is deemed to accrue or arise to him in India during the relevant previous year. The provisions regarding the incidence of tax are replicated in the following table: Table 1: Incidence of Income Taxability Resident Not- Non- Particulars of Income and Ordinarily Resident Ordinarily Resident Resident 1. Income received or deemed to be received in India Yes Yes Yes whether earned in India whether accrued in India or not. 2. Income which accrues or arises or is deemed to Yes Yes Yes accrue or arise in India during the previous year, whether received in India or outside India. 3. Income that accrues or arises or earns from outside Yes Yes No India and is received outside India from a business controlled from India or a profession set up in India.. 4. Income which accrued or arises outside India and Yes No No received outside India in the previous year from any other source. (Except Point 3) 5. Income which accrues or arises outside India and is No No No received outside India during any previous years preceding the previous year and the same is remitted to India during the previous year. Source: Compiled Illustration 1 Calculate the income of Mr X from the following information by treating him Resident, Not Ordinarily Resident and Non-resident. Particulars Amount (₹) Income from sale of a property in Singapore and received there 21000 Income from house property in Dubai 9000 Income from agricultural land in Tokyo 17000 Income from a profession in China which was set up in India 19000 Dividend income from Indian Company 7000 Income from a business in New Delhi which is managed from USA 24000 15  BCO-06/OSOU Solution Amount in ₹ Not- Non- Types of Incomes Resident ordinarily resident Resident Income from sale of a property in Singapore and received there 21000 NIL NIL Income from house property in Dubai 9000 NIL NIL Income from agricultural land in Tokyo 17000 NIL NIL Income from a profession in China which was set up in India 19000 19000 Dividend income from Indian Company 7000 7000 7000 Income from a business in New Delhi which is managed from USA 24000 24000 24000 Total Income 97000 50000 31000 Illustration 2 Mr Abakash has furnished following information for the assessment year 2023-24. Particulars Amount (₹) Profit from business from America but received in India 100000 Profit from business in Kolkata 30000 Dividend from Indian Company 10000 Interest received from a non-resident 15000 Income from house property in India but received in Japan 24000 Income earned in Singapore and received there 21000 Share of profit from a partnership firm 8000 Compute his income as (a) Resident (b) Not Ordinarily Resident and (c) Non-resident Solution Amount in ₹ Not-ordinarily Types of Incomes Resident Non-resident Resident Profit from business from America but 100000 100000 100000 received in India Profit from business in Kolkata 30000 30000 30000 Dividend from Indian Company 10000 10000 10000 Interest received from a non-resident 15000 15000 15000 Income from house property in India but 24000 24000 24000 received in Japan Income earned in Singapore and 21000 NIL NIL received there 16  BCO-06/OSOU Share of profit from a partnership firm Exempted Exempted Exempted Total Income 200000 179000 179000 Illustration 3 Particulars Amount (₹) Income from house property in Sri Lanka and received there 18000 Salary from Indian company received in UK. Out of which 1/3 is paid for rendering services in India. 90000 Profit on sale of building in Japan. Out of which 1/2 is received in India. 100000 Interest on USA Govt Bonds and received there 25000 Rental income from China and deposited there 12000 The above particulars are furnished by Mr Jojo. Compute his income by treating him (a) Resident (b) Not Ordinarily Resident (c) Non-resident Solution Amount in ₹ Not Non- Types of Incomes Resident Ordinarily resident Resident Income from house property in Sri Lanka and 18000 NIL NIL received there Salary of Indian company received in UK 1/3 services rendered in India 30000 30000 30000 2/3 services rendered in UK 60000 NIL NIL Profit on sale of building in Japan 50000 50000 50000 1/2 received in India NIL 50000 NIL 1/2 received in Japan Interest on USA Govt Bonds and received there 25000 NIL NIL Rental income from China and deposited there 12000 NIL NIL Total Income 245000 80000 80000 2.8 LET US SUM UP On the basis of residence, the persons are divided into three categories 'namely' (a) Resident (b) Not ordinarily resident (c) Non-resident. Further the categories of persons for tax liability have been classified into four groups 'namely' (a) Individual (b) Noncompany plural entities (c) Company (d) Any other person. The rules for determining the residential status are not the same for all the groups. Different conditions are to be satisfied by the concerned assessee to be a resident in India. 17  BCO-06/OSOU An Individual and a Hindu Undivided Family can be resident, not ordinarily resident and non- resident. A firm and other association of persons, a company and any other person can never be a not ordinarily resident. They can only be either resident or nonresident. The incidence of tax depends on the residential status of an assessee. In case of a resident except income earned and received outside India hut later on remitted to India, every other income attracts tax, and the tax incidence is the highest. On the other hand, tax incidence is the lowest in the case of non-resident, as only income which is accrued or received or deemed to accrue or deemed to be received in India, is liable to tax. Not ordinarily resident in India attracts tax on every income except on 'Income received and accrued outside India from a business controlled from outside India or a profession set up outside India' and on 'Income earned and received outside India but later on remitted to India', The incidence of tax is relatively higher when compared with 'nonresident'. 2.9 REVIEW QUESTIONS Q1) Explain the provisions of income tax act for an individual if he is a a) resident b) not ordinarily resident c) non-resident Q2) What are the different categories into which the assessee are divided on the basis of residence? Q3) State the conditions which a Hindu Undivided Family has to fulfill in order to be called a resident in India. Q4) Explain the scope of total income under the income-tax 1961. Q5) What are the criteria for determining the residence of a firm and a company? Q6) What is the basis of charge of income tax? Give the rules for determining this? Q7) Mr. Ram, an Indian citizen, left India on 22.09.2022 for the first time to work as an officer of a company in Germany. Determine the residential status of Ram for the assessment year 2023-24. 18  BCO-06/OSOU UNIT 3: EXEMPTED INCOME UNDER SECTION 10 Learning Objectives After studying this unit, you should be able to  Explain what is exempted income and give reasons for the same,  Prepare the list of exempted incomes under Section 10, Structure 3.1 Introduction 3.2 Exempted Incomes (Tax Free Incomes) 3.3 Let Us Sum Up 3.4 Review Questions 3.1 INTRODUCTION In the earlier lessons you have been familiarised with the important concepts that are commonly used in income tax. You have seen the impact of residential status on the scope of total income of the assessee. The nature of income also has an impact on the total income because certain incomes are exempt under the Income Tax Act. The exemption is granted with various objectives in mind. Some incomes are exempted for social reasons, others to attract foreign investment and foreign exchange earnings, still others are granted to encourage talent, braver etc. certain incomes are excluded because their inclusion would amount to taxing the same income twice. In this unit you will study the incomes which are exempted from income tax. You will also learn in detail the exempted incomes of an individual and the provisions regarding the income of charitable and religious trust and political parties. 3.2 EXEMPTED INCOMES (TAX-FREE) UNDER SECTION 10 Exemptions are allowed under Section 10 of the Income Tax Act 1961 subject to the fulfilment of some conditions. Such exemptions help the assesses to make better tax planning to reduce the tax. Some exemptions are specifically mentioned in this chapter whereas some of the exemptions are discussed in the corresponding chapter. 1. Agricultural Income [Section 10(1)] A taxpayer's agricultural income earned in India is free from taxation according to section 10(1). 2. Amount received by a member of the HUF from the income of the HUF, or in case of the impartible estate out of the income of family estate [Section 10(2)] According to section 10(2), any money obtained from family income or, in the event of an impartible estate, money received from family estate income is free from taxation for any member of such a HUF. 3. Share of profit received by a partner from the firm [Section 10(2A)] According to section 10(2A), a partner's share of the firm's profits is not subject to tax in the partner's hands. Additionally, the portion of profits received by an LLP partner from the LLP 19  BCO-06/OSOU will be tax-free in that partner's hands. This exemption only applies to the partner's share of profits; it does not include interest on capital or compensation received from the firm/LLP. 4. Certain interest to non-residents [Section 10(4)] According to section 10(4)(i), any income from interest on specified notified securities or bonds (including income from premiums on the redemption of such bonds) is free from taxation in the case of a non-resident. According to section 10(4)(ii), an individual is free from paying taxes on any interest income earned on funds held to his credit in a non-resident (external) account at any bank in India in compliance with the Foreign Exchange Management Act, 1999, and the rules promulgated thereunder. Only those who fall under the definition of "person resident outside India" found in section 2's clause (w) or who have been given permission by the Reserve Bank of India to keep the aforementioned Account are eligible for exemption under section 10(4)(ii). 5. Interest on notified savings certificates [Section 10(4B)] According to section 10(4B), any income received in the form of interest on notified savings certificates issued by the Central Government prior to the first day of June 2002 and subscribed in convertible foreign currency is exempt from taxation for individuals who are Indian citizens or persons of Indian ancestry and who are non-residents. 6. Interest on Rupee Denominated bonds [(Section 10(4C)] Any interest received or due by a non-resident or foreign firm in connection with a rupee- denominated bond (as defined in Section 194LC) issued by an Indian company or business trust between September 17, 2018, and March 31, 2019, is exempt from tax. 7. Income from transfer of GDRs, Rupee Denominated Bonds or Derivatives by Category-III AIFs [(Section 10(4D)] In relation to income accruing, arising, or received by it that is attributable to units held by a non-resident (not being a PE in India) or to the investment division of offshore banking unit, certain funds shall be eligible to claim exemption. Following incomes are exempted in this regard: i. Income from the sale of a capital asset as defined in Section 47(viiab) on a recognised stock exchange housed in an international financial services centre (IFSC), where the purchase price was paid in "convertible foreign exchange"; ii. Income from a securitization trust that is chargeable under the heading "Profits and gains from business or profession," iii. Income from a securitization trust that is chargeable under the head "Income attributable to the investment division of offshore banking unit," iv. Income from a transfer of securities (other than shares in a company resident in India); Income from securities issued by a non-resident (not being a PE of a non-resident in India); 8. Income of a non-resident from transfer of non-deliverable forward contracts, offshore derivative instrument, over-the-counter derivatives or income distributed on the offshore derivative instruments [Section 10(4E)] Any income accrued or arisen to, or received by a non-resident as a result of: (a) The transfer of non- deliverable forward contracts or offshore derivative instruments or over – the counter 20  BCO-06/OSOU derivative; or (b) Distribution of income on offshore derivative instruments, entered into with an offshore banking unit of an IFSC referred to in Section 80LA(1) shall be exempt from tax. 9. Royalty income of non-resident on leasing of aircraft to an IFSC unit [Section 10(4F)] If an IFSC unit qualifies for a deduction under section 80LA in that year and started operating on or before the 31st March 2024 as a business or profession, royalties received by a non- resident on account of leasing an aircraft or ship to that unit in a prior year are exempt from tax. 10. Income of non-resident from Portfolio Services and specified activities [Section 10(4G)] Any income, a non-resident receives through a portfolio of assets, financial products, or funds that a portfolio manager manages or oversees on their behalf. Only if income is generated in an account held with an offshore banking unit in any international financial services centre will qualify for this exemption. The CBDT may also give notice of a specific activity carried out by a specific individual that will qualify for the exemption under section 10(4G). 11. Remuneration received by specified diplomats and their staff [Section 10(6)(ii)] In accordance with section 10(6)(ii), compensation earned by a person who is not an Indian citizen while serving as an official (by whatever title named) of an embassy, high Commission, legation, Commission, consulate, or trade representative of a foreign State, or as a member of the staff of any of these institutions, If a comparable Indian official in the foreign country receives a tax exemption, that official is exempt from paying taxes. 12. Salary of a foreign employee and non-resident member of crew [Section 10(6)(vi), (viii)] According to section 10(6)(vi), remuneration received by a foreign national while working for a foreign enterprise is exempt from tax as long as the following criteria are met: (a) the foreign enterprise is not involved in any trade or business in India; (b) his stay in India does not exceed 90 days in total during that year; and (c) such remuneration is not liable to be deducted from the income tax. 13. Tax paid on behalf of foreign company deriving income by way of royalty or fees for technical services [Section 10(6A)] If a foreign company receives royalties or fees for technical services in accordance with an agreement made after March 31, 1976, but before June 1, 2002, tax paid by the Central Government, a State Government, or an Indian concern on behalf of the foreign company will be exempt from tax in the hands of the foreign company provided the agreement is in line with the industrial policy of the Indian Government or it is approved by the Central Government. 14. Tax paid on behalf of foreign company or non-resident in respect of other income [Section 10(6B)] If any income (other than salaries, royalties, or fees for technical services) is received in accordance with an agreement entered into before June 1, 2002 by the Central Government with the Government of a foreign State, or, any tax paid by Central Government, State 21  BCO-06/OSOU Government, or an Indian concern on behalf of a foreign company or non-resident in respect of such income will be exempt from tax in the hands of such foreign company or non-resident. 15. Tax paid on behalf of foreign Government or foreign enterprise deriving income by way of lease of aircraft or aircraft engine [Section 10(6BB)] If the lease rental is received under a contract that is approved by the Central Government and entered into during the period from 31-3-1997 to 1-4-1999, or after 31-3-2007, then the foreign government or foreign enterprise receiving the benefit of the lease rental will not be subject to taxation in the hands of that foreign government or foreign enterprise. 16. Technical fees received by a notified foreign company [Section 10(6C)] According to Section 10(6C), a notified foreign company is exempt from tax on income derived from royalties or fees for technical services received in accordance with an agreement entered into with that Government for the provision of services inside or outside of India in projects related to the security of India. 17. Allowance/perquisites to Government employee outside India [Section 10(7)] Any allowances or perquisites granted or permitted as such outside India by the Government to an Indian citizen doing service outside India are exempt from tax, according to section 10(7). 18. Income of foreign Government employee under co-operative technical assistance programme [Section 10(8)] According to Section 10(8), any compensation that a person receives directly or indirectly from a foreign government in connection with a project or programme that is part of a cooperative technical assistance agreement between the Central Government and the foreign government in question is exempt from taxation. Additionally, if a person is compelled to pay income tax or social security tax to a foreign government, they are excluded from paying taxes on any additional income they may have that is earned or derived outside of India and is not considered to be earned or derived in India. 19. Income of a family member of an employee serving under co-operative technical assistance programme [Section 10(9)] According to section 10(9), the income of any family member of any such individual as is described in sections 10(8), (8A), or (8B) accompanying him to India, which accrues or arises outside India and is not deemed to accrue or arise in India, and in relation to which such member is required to pay any income or social security tax to the Government of that foreign State or country of origin of such member, as the case may be, is exempt from tax. 20. Compensation for Bhopal Gas Leak Disaster [Section 10(10BB)] The victims of the Bhopal gas leak catastrophe are not required to pay taxes on the compensation they receive [under the Bhopal Gas Leak catastrophe (Processing of Claims) Act, 1985]. However, money received in exchange for expenses that can be deducted from taxable income is not exempt. 21. Compensation on account of any disaster [Section 10(10BC)] An individual or his legal successors are not required to pay taxes on any compensation they get from the federal, state, or local governments or a local authority due to a disaster. 22  BCO-06/OSOU To the extent that such a person or his legal heirs have already been granted a deduction under the Act for loss or damage incurred as a result of such disaster, however, no deduction is available in relation to the amount received or due. Disaster in this context refers to any event that results in a significant loss of life, damage to property, or degradation of the environment and whose scope exceeds the capacity of the affected community to cope with it. It can be caused by natural disasters, human-made disasters, accidents, or human error. 22. Tax on perquisites paid by the employer [Section 10(10CC)] The term "perquisites to employees" refers to any facility provided by the employer to the employees; there are two types of perquisites, namely, monetary and non-monetary. The value of a perquisite is subject to tax in the hands of the employees, but the employer may, at his discretion, pay tax (on behalf of employees) on such perquisites. In such a case, the amount of tax paid by the employer on behalf of the employees will be considered income of the employees 23. Payment from account opened in accordance with the Sukanya Samriddhi Account Rules, 2014 [Section 10(11A)] Any payment made under the Government Savings Bank Act of 1873 from an account formed in line with the Sukanya Samriddhi Account Rules, 2014 is exempt from tax under section 10(11A). In other words, under section 10(11A), interest and withdrawals from such an account will not be subject to taxation. 24. Payment from the National Pension System Trust to an employee [Section 10(12A)] Any payment made by the National Pension System Trust to an assessee in connection with the closure of an account or his decision to leave the pension plan covered by section 80CCD is exempt from taxes insofar as it does not exceed 40% of the total amount due to him at the time of closure or his decision to leave the plan. With effect fromApril 01, 2020, 60 % of the amount payable shall be exempt from tax. 25. Partial withdrawal from NPS [Section 10(12B)] To offer help to a worker who is taking a partial withdrawal from the National Pension System (NPS) Trust. With effect from assessment year 2018–19, a new clause (12B) is added to section 10 to state that the withdrawal from NPS will not be subject to tax if the following criteria are met:1. The withdrawal amount cannot be more than 25% of an employee's total NPS contributions. 2. Partial withdrawals must be conducted in accordance with the requirements outlined in the Pension Fund Regulatory and Development Authority Act, 2013, and any regulations adopted in compliance with that act. 26. Lease rent of an aircraft [Section 10(15A)] If the payment is made in accordance with an agreement (approved by the Central Government) made before April 1, 1997 or after March 31, 1999 but before April 1, 2007, then the lease rent of an aircraft or an aircraft engine paid to a foreign government or to a foreign enterprise by an Indian company engaged in the business of operating aircraft is not taxable in the hands of such foreign government or non-resident concern. This agreement is not exempt under section 10(15A) if it was signed between April 1, 1997, and March 31, 1999, or after March 31, 2007. However, if the payer is responsible for paying the tax associated with such payments, the tax is excluded in this situation. 23  BCO-06/OSOU 27. Educational scholarship [Section 10(16)] Any money obtained as a scholarship for education (i.e., a scholarship to cover the expense of education) free from tax in the recipient's possession). 28. Daily allowance to a Member of Parliament [Section 10(17)] The following benefits are free from taxes in the hands of members of the state legislature and of parliament: Daily allowance received by members of the state legislature or of parliament, or by members of any committee thereof. Any other payment obtained by a Member of Parliament under the Members of Parliament (Constituency payment) Rules, 1986. Any Constituency allowance received by a Member of State Legislature. 29. Awards [Section 10(17A)] Cash or in-kind payments made in accordance with the following are tax-exempt: any prize created in the public interest by the federal government, a state government, or another organisation with the central government's blessing. Finance Act of 2023 amendments apply. Any reward by the Central Government or any State Government for a cause that may be approved in this regard by the Central Government in the interest of the public. 30. Pension to gallantry award winner [Section 10(18)] Pension payments made to someone who worked for the federal government or a state government and who received the Param Vir Chakra, Maha Vir Chakra, Vir Chakra, or any other recognised gallantry medal are tax-exempt. Any member of such an individual who receives family pension is also excluded. 31. Family pension received by the family members of armed forces [Section 10(19) From the assessment year 2005–2006, family pension received by the widow, children, or designated heirs of a member of the Union's armed forces (including paramilitary forces) is exempt from tax in their possession if the death of the member of the armed forces occurred during the performance of operational duty under prescribed circumstances and subject to prescribed conditions (see rule 2BBA for a list of the prescribed circumstances and conditions). 32. Annual value of one palace [Section 10(19A)] Section 10(19A) exempts any one palace that was occupied by a former tsar from taxation. 33. Income of a news agency [Section 10(22B)] A local government may not charge taxes on the following income: Income from a trade or business carried out by it that accrues or arises from the supply of a good or service (other than water or electricity) within its own jurisdictional area, or b) Income from business of supply of water or electricity within or outside its own jurisdictional area. Income that is chargeable under the head "Income from house property," "Capital gains," or "Income from other sources." 34. Income of research association [Section 10(21)] Any income earned by a notified news organisation established in India with the sole purpose of gathering and disseminating news is exempt from taxation, provided that the 24  BCO-06/OSOU organisation uses or accumulates its income exclusively for gathering and disseminating news and does not distribute it in any way to its members. However, as of now, there will be no exceptions. Assessment Year 2024-25 35. Income of a professional association [Section 10(23A)] If the following criteria are met, any income of a professional institution or association is exempt from taxation (apart from revenue from real estate and income from performing any specialised service or income by way of interest or dividend on investments). 1) In India, a professional institution has been created with the goal of regulating, promoting, or directing the practise of law, medicine, accounting, engineering, or any other notified profession. 2) The institution uses its income exclusively for the purposes for which it was founded, or accumulates it for those purposes. 3) The Central Government has given the institution its general or specific approval. 36. Income received on behalf of Regimental Fund [Section 10(23AA)] Any income that a person receives on behalf of a Regimental Fund or Non-Public Fund that the Union's military forces created for the benefit of former and current members of those forces or their dependents is free from taxes. 37. Income of a fund established for welfare of employees [Section 10(23AAA)] Any income received on behalf of a fund established for the welfare of employees or their dependents and of which those employees are members is exempt from tax if the fund applies or accumulates its income for exclusive application towards its objects, invests its funds in the ways specified in section 11(5), and the fund is approved by the Principal Commissioner. 38. Income of pension fund [Section 10(23AAB)] Any income earned by a fund established by the Life Insurance Corporation of India on or after August 1, 1996, or by another insurer to which a contribution is made by a person in exchange for receiving a pension from such a fund, and which has been approved by the Controller of Insurance or the Insurance Regulatory and Development Authority, is exempt from tax. 39. Income from Khadi or village industry [Section 10(23B)] If the following criteria are met, income of an organisation founded as a public charitable trust or society that is created for the development of khadi and village industries (not for profit purpose) is exempt from tax: 1) Khadi or other items from village industries are produced, sold, or marketed in order to generate income. 2) Institution uses its money, or saves it up for use, exclusively for the growth of the khadi or village industries, or both. 3) The Khadi and Village Industries Commission has given the institution its approval. 40. Income of European Economic Community [Section 10(23BBB)] Any income from investments made with its funds under a notified programme that the European Economic Community receives in India in the form of interest, dividends, or capital gains is tax-exempt. 25  BCO-06/OSOU 3.3 LET US SUM UP Exempted income is that income on which income tax is not chargeable. There are  Agricultural income is exempt under section 10(1).  Since the HUF is taxed in respect of its income, the share income is exempt from tax in the hands of the member. u/s 10(2)  The partner’s share in the total income of the firm or LLP is exempt from tax. 10(2A)  Income by way of interest on moneys standing to his credit in a Non-resident (External) Account (NRE A/c), is exempt in the hands of an individual, being a person resident outside India as per the FEMA, 1999 or in the hands of an individual who has been permitted by the RBI to maintain such account 10(4)  Remuneration received by an individual, who is not a citizen of India, as an official of an embassy, high commission, legation, consulate or the trade representation of a foreign State or as a member of the staff of any of these officials would be exempt 10 (6)  Income arising to non-corporate non-resident and foreign companies, by way of royalty from or fees from technical services rendered in or outside India to, the National Technical Research Organisation (NTRO) is exempt 10(6D)  Payment to Bhopal Gas Victims is exempt. 10(10BB) Compensation received or receivable from the Central Government, State Government or local authority by an individual or his legal heir on account of any disaster is exempt except to the extent of loss or damage allowed as deduction under the Act. 10(10BC)  Any payment from Sukanya Samriddhi Account 10(11A) The value of scholarship granted to meet the cost of education would be exempt from tax in the hands of the recipient irrespective of the amount or source of scholarship. 10(16)  Daily allowance received by any Member of Parliament or of State Legislatures or any Committee thereof are exempt. 10(17)  Awards for literary, scientific and artistic works and other awards by the Government are exempted. u/s 10(17A)  Pension received by individual who has been in service of Central or State Government and has awarded “ParamVir Chakra” or “MahaVir Chakra” or “Vir Chakra” such other gallantry award as the Central Government notifies is exempt from tax. 10(18)  Income from any source in the specified areas or States in which member of a Scheduled Tribe is residing or income by way of dividend or interest on securities is exempt in the hands of member of the Scheduled Tribe. 10(26)  Income from any source in the state of Sikkim, dividend income and interest on securities is exempt in the hands of a Sikkimese individual. This exemption is not available to a Sikkimese woman who, on or after 1st April, 2008, marries a non-Sikkimese individual. 10(26AAA)  The amount of any subsidy received by any assessee engaged in the business of growing and manufacturing tea in India through or from the Tea Board will be wholly exempt from tax. 10(30) 26  BCO-06/OSOU  The amount of any subsidy received by an assessee engaged in the business of growing and manufacturing rubber, coffee, cardamom or other specified commodity in India from or through the Rubber Board, Coffee Board, Spices Board or any other will be exempt. 10(31)  Any income received in respect of units from the Administrator of the specified undertaking/ specified company/ Mutual Fund shall be exempt. However, income arising from transfer of such units would not be exempt. 10 (35) 3.4 REVIEW QUESTIONS Q1: Explain the following briefly a) Provisions of Sec. 10 (2) b) Exempted incomes in the hands of non-residents. Q2: Discuss the provisions of Income Tax Act dealing with the exemption of income of compensation received from central /state government. Q3: Explain the provisions of Income Tax Act applicable to amount received from HUF. Q4: What do you mean by exempted income? List the incomes which don not form a part of total income. 27  BCO-06/OSOU UNIT 4: AGRICULTURAL INCOME Learning Objectives After studying this unit, you should be able to know:  The meaning agricultural income,  The ways agricultural income may arise and  Taxability of Agricultural Income Structure 4.1 Introduction 4.2 Definition of Agricultural Income 4.3 Examples of Agricultural Incomes 4.4 Segmentation in Certain Operations Under Rule 7,7a,7b and 8 4.5 Assessment of Agricultural Income (Integration Scheme) 4.6 Let Us Sum Up 4.7 Review Questions 4.1 INTRODUCTION Agricultural income is not taxed under the Income Tax Act, 1961 because agriculture being a State subject, it is the State Government alone which is competent to tax income there from. The exemption to this income is provided under Section 10 (1) of the Act. Since it is not faxed, the definition thereof has assumed significance. The assessee would naturally be interested in classifying his income as agricultural, incomes how so ever distantly it might have been related to agriculture. On the other hand, the tax authorities would like to interpret the turn conservatively and thus there is a possibility of some dispute between the parties as regards the meaning of the term. The Income Tax Act, 1961, has defined the term 'agricultural income' under Section 2(1A) exhaustively. Agriculture income is the entire income derived from sources such as land farming, commercial production from horticultural land, and structures on designated agricultural property. 4.2 DEFINITION OF AGRICULTURAL INCOME As per section 2(1A) of the Income Tax Act 1961, agricultural income is replicated as: i. Any rent or income from land located in India that is used for agricultural purposes. ii. Any income generated from agricultural activities on the land, such as the selling of agricultural products or processing them to make them marketable. iii. Any revenue related to a farmhouse, provided the requirements outlined in section 2(1A) are met. iv. Any money earned from saplings or seedlings raised in nurseries is regarded as agricultural income. Agricultural income in India is exempted from tax under section 10(1). 28  BCO-06/OSOU 4.3 EXAMPLES OF AGRICULTURAL INCOMES Table 1: Examples of Agricultural Incomes and Non-Agricultural Incomes Agricultural Income Non-Agricultural Income  Income from the sale of seeds.  Income from poultry farming  Income from the sale of replanted  Income from agricultural income trees. held for stock in trade  Interest on capital received by a  Any dividend paid from an partner from a firm engaged in organisation’s agricultural income agricultural operations.  Income from dairy farming  Income from growing flowers and  Income from bee hiving creepers.  Income from cutting and selling timber trees  Rent received for agricultural land.  Income from butter and cheese making  Income from shooting of TV serial in the farmhouse. Source: https://cleartax.in/s/agricultural-income 4.4 SEGMENTATION IN CERTAIN OPERATIONS UNDER RULE 7,7A,7B AND 8 In certain industries, both agricultural and non-agricultural operations are carried out. In such industries, agricultural output is used as industrial input or raw material. Like in sugar manufacturing industry, sugar cane is used as raw material which is an agricultural output. Thus, separation becomes essential for the levy of tax on non-agricultural income and exempts the agricultural income. The Act specifies the share of Agricultural Income from Non-Agricultural Income from composite income in regard to the growing and manufacturing of Tea, Rubber, and Coffee. Splitting up of such incomes from the composite income is specified under rules 7, 7A, 7B, and 8. 3.1 Rule 7: General Rule (Applicable to all cases except Tea, Coffee, and, Rubber) Non- Sale proceeds of Market Value of agricultural Industrial agricultural = - - industrial products produce used as raw material expenses Income Agricultural Market Value of Agricultural Cost of cultivation used as raw = - Income Produce material. 3.2 Rule 7A: Growing and Manufacturing of Rubber in India Composite Sale proceeds of Cost of Cultivation Industrial Income/Total = Rubber (Industrial - (Agricultural - expenses Income products) expenses) Out of the composite income, Agricultural Income = 65% of the composite income 29  BCO-06/OSOU Non-agricultural Income = 35% of the composite income Such non-agricultural income is charged to tax under the head “Profit and Gains of Business and Profession.” 3.3 Rule 7A: Growing and Manufacturing of Coffee in India Composite Sale proceeds of Cost of Cultivation Industrial Income/Total = Coffee (Industrial - (Agricultural - expenses Income products) expenses) The above total income is segmented in the following manner. Case 1: Rule 7B(I): If Coffee is grown by the seller Out of the composite income, Agricultural Income = 75% of the composite income Non-agricultural Income = 25% of the composite income Case 2: Rule 7B(IA): If Coffee is grown, cured, roasted, and grinded by the seller with or without mixing or other flavoring ingredients. Out of the composite income, Agricultural Income = 60% of the composite income Non-agricultural Income = 40% of the composite income The 25% of the composite income in case 1 and 40% of the composite income in case 2 are levied to tax under the head “Profit and Gains of Business and Profession.” 3.4 Growing and Manufacturing of Tea in India. Composite Cost of Cultivation Sale proceeds of Tea Industrial Income/Total = - (Agricultural - (Industrial products) expenses Income expenses) Out of the composite income, Agricultural Income = 60% of the composite income Non-agricultural Income = 40% of the composite income The 40% of the composite income is levied to tax under the head “Profit and Gains of Business and Profession.” Table 2: Share of agricultural and non-agricultural Income in certain operations Rules Agricultural Non-agricultural Operation Income Income Growing and Manufacturing Tea 8 60% 40% Manufacturing Rubber 7A 65% 35% Growing and curing Coffee 7B(I) 75% 25% Coffee grown, cured, roasted, and grounded 7B(IA) 60% 40% with or without mixing chicory or other Source: Compiled 30  BCO-06/OSOU Illustration 1 Mention whether the following incomes are agricultural income or non-agricultural income. 1. Sale of standing crops by a cultivator. 2. Interest on capital of a partner engaged in agricultural activities. 3. Income from sale of wild grass. 4. Income from fisheries. 5. Income from growing flowers. 6. Royalty income from mines or brick making. 7. Interest received by a money lender by way of agricultural produce. 8. Remuneration received for managing a business related to agricultural activities. 9. Interests on arrears of rent of agricultural land. 10. Income from the sale of fruits of trees spontaneously grown. Solution 1. Agricultural Income 2. Agricultural Income 3. Non-agricultural Income 4. Non-agricultural Income 5. Agricultural Income 6. Non-agricultural Income 7. Non-agricultural Income 8. Non-agricultural Income 9. Non-agricultural Income 10. Agricultural Income 4.5 ASSESSMENT OF AGRICULTURAL INCOME (INTEGRATION SCHEME) An integration scheme for the assessment of the agricultural income was proposed in the assessment year 1974-75 when the assessee has both agricultural and non-agricultural income. Table 3: Application and non-application of Integration Scheme Application of the Integration Scheme Non-Application of the Integration Scheme 1. The scheme is applicable to (i) 1. The scheme is not applicable to (i) firms, Individuals, (ii) Hindu Undivided (ii) Companies (iii) Cooperative Families, (iii) Associations of Persons, societies, and (iv) local authorities. (iv) Bodies of Individuals, and (v) 2. Such a scheme is not allowed if the non- Artificial Judicial Persons. agricultural income of the persons does 2. Integration is allowed when the non- not exceed the exemption limit of ₹ agricultural income of the eligible 2,50,000, ₹ 3,00,000 or ₹ 5,00,000 lakh in persons exceeds the exemption limit of ₹ the case may be. 2,50,000, ₹ 3,00,000 or ₹ 5,00,000 lakh in 3. No integration is allowed when the net the case may be. agricultural income of the persons does not exceed ₹ 5000. 31  BCO-06/OSOU 3. Integration is allowed only when the net agricultural income of the persons exceeds ₹ 5000. Source: Complied Such an integration process is undertaken in the following steps. Table 4: Process of Integration Steps Particulars Step 1 Calculating an income by adding of Net Agricultural income with Non- agricultural Income by verifying the applicability of the scheme Step 2 Calculation of Tax on the above income as per the current rates Step 3 Calculating an income by adding the Net Agricultural Income with the exempted limit i.e., ₹ 2,50,000, ₹ 3,00,000, or ₹ 5,00,000 lakh in the case may be Step 4 Calculation of Tax on the above income as per the current rates Step 5 The tax calculated in Step 4 is deducted from the tax calculated in Step 2 Step 6 Less: Rebate u/s 87 Step 7 Add: Surcharge on the tax as per the rates Step 8 Add: Health and Education cess @4% on tax and surcharge Step 9 The total tax payable is arrived. Step 10 Such tax can be rounded off to the nearest multiple of ten Source: Complied Illustration 2 Mr. Xen furnished the following information: Agricultural Income ₹ 50,000 Non-agricultural Income ₹ 5,00,000 Calculate the tax liability of Mr. X for the assessment year 2023-24. Solution 1. Addition of Agricultural Income with 5,50,000 Non-agricultural Income (50,000 + 5,00,000) 2. Tax on 5,50,000 Up to 2,50,000 Nil 2, 50,000 to 5,00,000 @ 5% 12,500 On balance 50,000 @ 20% 10,000 22,500 3. Addition of Net Agricultural Income with Exempted Limit 3,00,000 (50,000 + 2,50,000) 4. Tax on 3,00,000 Up to 2,50,000 Nil 2,500 On balance 50,000 @ 5% 2500 32  BCO-06/OSOU 5. Deduct tax at step 4 from tax at 22,500 - 2500 22,250 step 2 6. Less: Rebate 12500 12500 9750 7. Add: Cess NA NIL 8. Add: Health and Education Cess 9750 @ 4% 390 9. Tax Payable 10,140 4.6 LET US SUM UP Agricultural income exempt from tax, it is necessary to comprehend the meaning correctly. Section 2(1) of the Income Tax Act defines it as any rent or revenue derived from land which is situated in India and which is being used For agricultural purposes, Income from house property situated on or in the immediate vicinity of agricultural land is also treated as agricultural income provided the house is being used by the agriculturist as outhouse, or for storing of agricultural produce, agricultural implements or cattle etc. It is exempted from tax u/s 10 (1) of the Income Tax Act because agriculture being a State subject, Central Government cannot impose tax on income. derived there from. Income from manufacture of sugar will be partly agricultural in nature if the sugar mill grows sugarcane on its own farms. similarly income from sale of tea will also be partly agricultural in nature where the tea company grow