BMS Tax Laws & Procedures PDF 2024

1 TAX LAWS AND PROCEDURES Semester: V PROGRAMME: BMS Study Materials Edition: 2024...

1 TAX LAWS AND PROCEDURES Semester: V PROGRAMME: BMS Study Materials Edition: 2024 #44/4, District Fund Road, Behind Big Bazaar, Jayanagar 9th Block, Bengaluru, Karnataka 560069 FOR PRIVATE CIRCULATION ONLY Page 1 2 Course: BMS Semester: V No. of Hours: 45 Hours Credits: 03 Subject: TAX LAWS AND PROCEDURES Course Objectives: The course aims to provide the regulatory outline under which the direct law functions. It inculcates the practice of applying tax concepts for practical scenarios. The course unifies the students to solve problems on the application of deductions available and extends the pros of tax planning for efficient decision making. MODULE 1 08 Hours Overview of Taxation Brief history of Indian Taxation – Legal Frame work – Cannons of Taxation – Finance Bill – Scheme of Income Tax- Meaning of Assessee – Person – Assessment year – Previous year – Income – Gross Total Income – Total Income- Agricultural income- Capital and Revenue- Exempted Incomes. Income tax authorities: CBDT – powers and functions; Commissioner of Income Tax – powers and functions MODULE 2 06 Hours Residential Status and Incidence of Tax Residential status of an Individual – Determination of Residential status - Incidence of Tax MODULE 3 10 Hours Heads of Income Tax - I Income from Salary Basic Salary- Allowance - Types – Perquisites – Types section 89(1) – Tax Rebate U/S 88 - Problems. (Restricted to Individual Assessee) Allowance – Leave Encashment – Pension –Gratuity – Perquisites compensation received on termination of the service. (Simple problems only) Income from House Property Introduction – Annual value under different situations (self-occupied – Let out – Partly self- occupied partly let out – Portion wise and time wise) – Deductions (u/s 24) (Simple problems only). MODULE 4 12 Hours Heads of Income Tax - II Profits and Gains From Business And Profession Meaning of business, profession, profits of business or profession, features of assessment of profits and gains, rules for adjustment of profit and loss account- Depreciation u/s 32. (Simple problems only) Capital Gains Meaning and kinds of capital asset, transfer, transactions not regarded as transfer, full value of consideration, cost of acquisition, cost of improvement, capital gains exempt from tax, exemptions from capital gains u/s 54. Problems on computation of short term and long term capital gains. (Simple problems only) Income from Other Sources FOR PRIVATE CIRCULATION ONLY Page 2 3 General income, specific incomes, treatment of specific incomes, deduction of tax at source with respect to interests, winnings, prizes etc. Problems on computation of taxable income from other sources and deduction u/s 57 and amounts expressly disallowed u/s 58. (Simple problems only) MODULE 5 09 Hours Assessment of Individuals Deduction in respect of certain payments and deduction in respect of certain incomes 80C – 80U, Carry forward and set off of losses - Computation of total taxable income and tax liability of an individual. Reference Books : 1. Vinod K Singhania and Monica Singhania, Students’ (2024) Guide to Indirect Taxes, Taxmann Publications Pvt. Ltd., Delhi. 2. Swamynathan. C, Abhirami.D, Srinivas. G, Income tax (2024) – Kalyani Publications – Bangalore. 3. B.B. Lal Income Tax Law and Practice. (2024) Konark Publications, New Delhi. B.Com Program CBCS Department of Commerce, University of Delhi, Delhi. 4. Dr. Mehrora and Dr. Goyal:(2024) Direct taxes – Law and practice, Taxmann publication. 5. Gaur and Narang: Income Tax (2024) CO NO COURSE OUTCOME BTL At the end of the course, the students will be able to Outline the basic principles underlying the provisions of 1 direct tax laws and to develop a broad insight of the tax 2 laws and procedures. Interpret basic tax concepts to simple fact situations and 2 communicate potential income tax ramifications in 3 writing. Demonstrate different types of incomes and their taxability and expenses and their deductibility and will 3 3 be able to learn various direct taxes and their implication in practical situations Use of various deductions to reduce the taxable income 4 and will be able to Research, analyses and evaluate 3 income tax information and issues Examine practical aspects of tax planning as an important managerial decision-making process and to 5 4 apply critical thinking and problem solving skills to resolve income tax issues. Reference Books: 1. Vinod K Singhania and Monica Singhania, Students’ (2024) Guide to Indirect Taxes, Taxmann FOR PRIVATE CIRCULATION ONLY Page 3 4 Publications Pvt. Ltd., Delhi. 2. Swamynathan. C, Abhirami.D, Srinivas. G, Income tax (2024) – Kalyani Publications – Bangalore. 3. B.B. Lal Income Tax Law and Practice. (2024) Konark Publications, New Delhi. B.Com Program CBCS Department of Commerce, University of Delhi, Delhi. 4. Dr. Mehrora and Dr. Goyal:(2024) Direct taxes – Law and practice, Taxmann publication. Course Outcomes (CO) CO Outline the basic principles underlying the provisions of direct tax laws and to 1 develop a broad insight of the tax laws and procedures. CO Interpret basic tax concepts to simple fact situations and communicate potential 2 income tax ramifications in writing. Demonstrate different types of incomes and their taxability and expenses and CO their deductibility and will be able to learn various direct taxes and their 3 implication in practical situations CO Use of various deductions to reduce the taxable income and will be able to 4 Research, analyses and evaluate income tax information and issues Examine practical aspects of tax planning as an important managerial decision- CO making process and to apply critical thinking and problem solving skills to 5 resolve income tax issues. FOR PRIVATE CIRCULATION ONLY Page 4 5 INDEX SL Module Name Page No No 1 Overview of Taxation 2 Computation of Taxable Income under the different heads of Income 3 Heads of Income Tax - I 4 Heads of Income Tax - II 5 Assessment of Individuals Model Question Paper FOR PRIVATE CIRCULATION ONLY Page 5 6 Module 1: Overview of Taxation Module – I INTRODUCTION Module 1: Overview of Taxation Brief history of Indian Taxation – Legal Frame work – Cannons of Taxation – Finance Bill – Scheme of Income Tax- Meaning of Assessee – Person – Assessment year – Previous year – Income – Gross Total Income – Total Income- Agricultural income- Capital and Revenue- Exempted Incomes. Income tax authorities: CBDT – powers and functions; Commissioner of Income Tax – powers and functions OBJECTIVES OF THIS MODULE:  To understand the basic concepts of tax.  To know various terminologies used.  To give a clear idea about, how individuals are treated under taxing system.  To be familiar with the authorities related to income tax and their functioning. Tax is levied by the government to form a pool of resources to be used for the collective benefit of the public. Taxes collected would be used by the government for public welfare programs, maintenance of law and order in the country, running public sector undertakings etc. There are two types of taxes – Direct and Indirect. Direct tax is a type of tax where the tax is imposedon a person and it is paid by the same person. That means the incidence and the impact of tax are on the same person. 1.1 Brief History of Income Tax: The concept of income tax was introduced in India for the first time by Sir James Wilson in the year 1860 in order to recover the expenditure incurred by the Government on account of Sepoy Munity in 1857(First war of Indian Independence). Thereafter several amendments were made in 1918, 1921 etc. In 1961,based on the recommendation of the Direct Tax Committee and in consultation withthe Law Ministry a Billwas framed and introduced in the Parliament on 1st September 1961 and the same came to force with effectfrom 1st April 1962. The comprehensive Income Tax Act 1961 includes 14 section and sub section running into thousands and many amendments which were made since 1961. Finance minister presents budget every year in the parliament with a view to change rates and laws of income tax if any needed in the interest of the nation building. Income tax is levied by the Central Government and administered by Central Board of Direct Taxes(CBDT). Income tax shall be levied only on those persons whose income exceeds certain limit. Total tax revenue collected by the Central Government is shared by Central and State Government on the basis of recommendation of finance commission. FOR PRIVATE CIRCULATION ONLY 7 1.2 Legal framework: Income tax is a direct tax. It is levied and collected from the public who have income more than the exempted limit for a given financial year. Income tax is a central subject and it is levied, collected, administered, regulated and monitored by the Central Board of Direct Taxes (CBDT) under the Ministry of Finance, Government of India. The scope of Income tax subject covers the following aspects. Viz 1. Income Tax Act,1961 (Bare Act – subjected to many amendments from time to time till date) 2. Income Tax Rules 1962 3. Finance Act (passed in the Parliament every year) 4. Judicial pronouncements relating to various issues in Income Tax. 1.3 Tax: It is compulsory levy under certain conditions and it is meant for the general purposes of the state. 1.3.1 Features of tax: 1) It is compulsory payment to be paid by the citizens who are liable to pay it, hence refused to pay tax is a punishable offence. 2) It is levied to meet public expenditure incurred by the government in the common interest of the nation. 3) The payment of tax by a person does not entitle him to receive any direct benefits from thegovernment in return for the tax. 4) There is no direct relationship between the tax paid by the person and the benefits that he mayreceive as a result of government expenditure. 5) It has to be paid regularly and periodically as determined by the tax authority. 1.3.2 Types of taxes: Difference between Direct tax and Indirect Tax Particul Direct Tax Indirect Tax ars Meaning It is a kind of tax where in It is a kind of tax where in incidence and impact is on the ‘incidence’ and‘impact’ is on two same person. different persons. Nature of Progressive in nature. Regressive in nature. Tax Taxable Taxable income of the Assessee Purchase/Sale/Manufacture of event goods and or rendering of services. Levy and Levied and collected from the Levied and collected from the Collectio Assessee. consumer but paid or deposited n to the exchequer bythe Assessee or Dealer. FOR PRIVATE CIRCULATION ONLY 8 Shifting Tax burden is borne by the Tax burden is shifted to the ofBurden person on whom it is levied. subsequent or ultimate user. Hence, the burden cannot be shifted. Tax Tax is collected on the income for At the time of sale or Collectio a year is purchase or n earned. rendering of services. Example Income Tax, Wealth Tax, Excise Duty, Customs Duty, s Property Taxetc. Sales Tax, Service Tax etc. 1.4. Principles or Canons of taxation: 1) Canon of Equality: According to this canon taxes imposed should be in accordance with an individual’s ability to pay. That is it should be impartial and based on one’s ability to pay. 2) Canon of Certainty: The amount to be paid, the time and the method of payment should beclear and certain for the tax payers to adjust his/her income and expenditure accordingly. 3) Canon of Convenience: This canon says that the time of payment and the manner payment should be convenient to the tax payer. 4) Canon of Economy: Every tax involves a collection cost. It is important that the cost of collection should be the minimum possible. The tax is economical, in the sense that the cost of collection is very small. 5) Canon of Productivity: The tax system should sufficiently yield the revenue needed to meet the requirements of the state. Productivity again means that the government should not depend upon deficits. 6) Canon of Elasticity: Elasticity is closely connected with fiscal adequacy. This canon implies that yield from taxation should grow along with increase in population and development of economy. 7) Canon of Simplicity: Calculation of taxable income and taxable liability should be simple and understandable to the tax payer. 8) Canon of Flexibility: Income tax authorities should revise the tax structure at the right time in order to meet the changing needs of the economy. 1.5 Finance Bill The Finance Bill, an essential part of the Union Budget, encompasses taxation, government spending, and broader financial legislation. It is a comprehensive document that outlines the government's fiscal policies for the year. Finance bill consists of the following elements:  Tax Law Changes: Adjustments to existing tax structures, including rates, exemptions, and rebates.  Government Spending Adjustments: Modifications in the allocation and distribution of government funds across various sectors.  Fiscal Law Amendments: Revisions to existing financial legislation to address current economic conditions and policy objectives.  Financial Regulation Updates: Updates and changes to regulations governing financial markets, banking laws, and other financial sector policies. FOR PRIVATE CIRCULATION ONLY 9 Finance bill is passed in the following steps: 1. Preparation and Introduction: The Finance Bill is prepared as part of the Union Budget. It contains the government's financial proposals, including taxation changes. This bill is introduced in the Lok Sabha (the lower house of Parliament) immediately after the Union Budget is presented. It requires the prior recommendation of the President of India to be introduced. 2. First Reading (Presentation Stage): The Bill is presented with the Budget. At this stage, there's no detailed discussion on the Bill. 3. Second Reading (Consideration Stage): This stage involves a detailed clause-by-clause discussion of the Bill. Members of the Lok Sabha debate the provisions of the Bill. Amendments can be proposed and voted upon during this stage. 4. Third Reading (Passing Stage): After the discussions and voting on amendments during the second reading, the Bill is taken up for the third reading. At this stage, there is no detailed discussion on the Bill, only a general discussion followed by voting. This bill must be passed by a simple majority of members present and voting. 5. Passage in the Rajya Sabha (Upper House): Once it is passed by the Lok Sabha, this bill is sent to the Rajya Sabha for its consideration. The Rajya Sabha can suggest amendments to the Bill. However, it cannot vote on the demands for grants (which is a part of the Budget).The Rajya Sabha needs to return the Bill to Lok Sabha within 14 days, either with or without recommendations. 6. Consideration of Rajya Sabha's Recommendations: Lok Sabha takes the decision to accept or reject some or the all recommendations of Rajya Sabha. The Bill is then passed in its final form by the Lok Sabha. 7. Presidential Assent: After being passed by both houses, the Bill is presented to the President for assent. The President can give assent, withhold assent, or return the Bill for reconsideration. However, if the Bill is presented again after reconsideration, the President is obliged to give assent. 8. Enactment into Law: Once the President gives assent, the Finance Bill becomes law. 1.6 BASIC TERMINOLOGIES UNDER INCOME TAX: Income Tax: It is a tax on the income earned by an assessee during the previous year and the tax is payable in the assessment year at the rates prescribed by the relevant Finance Act. It is a tax levied by the Central Government on the income earned by an assessee every year. Assessment U/S 2(8): According to section 2(8) of Income Tax Act, 1961 the term assessment means- 1) Computation of total income or taxable income 2) Computing the tax on the income and FOR PRIVATE CIRCULATION ONLY 10 3) Imposition of tax liability Assessment Year U/S 2(9): Assessment year is defined as “the period of twelve months starting from 1st of April and ending of 31st March every year”. The current Assessment year is 2024-25. Previous Year U/S 2 (34) It is the financial year immediately preceding the Assessment year. In other words, the year in which income is earned is known as previous year. The previous year for the assessment year 2024-25 is 2023- 24. Difference between Previous year and Assessment year Previous year Assessment year The year in which income is The year in which the income of earned. theprevious year is assessed to tax. It always precedes the assessment It always succeeds the previous year. year. It may be either a full year or It is always a full year part of the year. The present previous year is 2023- The present assessment year is 2024- 24. 25. Exception to the General Rule Previous Year: Normally all the incomes of the P.Y are assessed to tax in the A.Y. But there are certain exceptionsto this rule. In these cases, the income of a financial year is assessed to tax in the same year. They are: 1) Sec. 172 – Income of non-resident from shipping business. 2) Sec. 174 – Income of persons leaving India either permanently or for a long period of time. 3) Sec. 174 (A) – Income of bodies formed for short duration. 4) Sec. 175 – Income of a person trying to transfer his/her assets to avoid the payment of tax. 5) Sec. 176 – Income of a discontinued business. Assessee U/Sec 2(7): An assessee means a person by whom any tax or any other sum is payable under the Income TaxAct of1961, it includes: a) Every person in respect of whom any proceeding under this Act has been taken for theassessment ofincome or any refund due to him or to such other person. b) Deemed Assessee. c) Deemed Assessee in default. Deemed Assessee: A person may be liable not only for his own income but also on the income of other persons. A personwho is liable to pay any tax or file return of income for the income earned by a minor, agent of non- resident or by any other person is called Deemed Assessee. Deemed assessee is a person who is assessable for the income of any other person under this act and includes the following. FOR PRIVATE CIRCULATION ONLY 11 1) The executors or the legal heirs of a deceased person 2) The guardian of a minor, lunatic or idiot having taxable income 3) The agent of any non – resident Indian having income in India. Assessee in Default: When a person is responsible for doing any work under the Income TaxAct and fails to do it, he is called as assessee in Default. E.g. A company is treated as assessee in default for non-deduction of TDS. Person Sec 2(31): The term person includes: a) An individual b) A Hindu Undivided Family c) A Firm d) A Company e) An association of persons/body of individuals f) A Local Authority g) Artificial Juridical Person Income Sec 2(24):The term income means and includes Profit and gains of business Dividends Voluntary contribution received by a Trust or an Institutions Perquisites of profit in lieu of salary/Allowance Capital Gains Winning from Lottery/ Cross word Puzzle/ Race Sum received under Keyman insurance policies including bonus thereon Gifts as per section 56 Any consideration received for issue of share as exceeds the fair market value of shares as referred in clause of (vii)(b) of section 56(2) Any sum of money referred to in section 56(2)(ix) sum of money received as an advance or otherwise in course of negotiations for transfer of Capital Asset, if it is forfeited and negotiations do not result intransfer of such capital asset. Casual Income: An income becomes casual income, if it contains the following feature: It is unanticipated, it is non- recurring in nature, it arises from an unknown source, no specific efforts were put in to earn such income. For example, 1) Winning from lottery 2) Income from cross word Puzzles and card games 3) Tips given to taxi drivers 4) Prize awarded for coin or stamp collection Heads of Income: FOR PRIVATE CIRCULATION ONLY 12 Different heads of income are: 1) Income from Salary 2) Income from House Property 3) Profits and gains from Business or Profession 4) Capital Gains 5) Income from Other Sources Gross Total Income: It is the aggregate of the income computed under various heads of income after allowing set-off of losses according to the provision of Income Tax Act. Section 14 deals with the Gross Total Income and it includes: 1) Income from Salary 2) Income from House Property 3) Profits and gains from Business or Profession 4) Capital Gains 5) Income from Other Sources Total Income Sec 5: Total income of an assessee is Gross Total Income after making deductions u/s 80C to 80U.This is also called as taxable income. 1.6.1 Agriculture income According to Sec 2 (IA) Agriculture income means: 1) Any rent or revenue received from land which is used for agricultural purpose and situated in India. 2) Any income derived from such land by agricultural operations including processing of agricultural produce, raised or received as rent in kind so as to render it fit for the market, or sale of such produce. 3) Income attributable to a farm house subject to the condition that building is situated on or in immediate vicinity of the land and is used as a dwelling house, store house etc. Examples of Agricultural Income: 1) Income from sale of replanted trees. 2) Rent received from agricultural land. 3) Income from growing flowers and creepers. 4) Share of profit of a partner from a firm engaged in agricultural operations. 5) Interest on capital received by a partner from a firm engaged in agricultural operations. 6) Income derived from sale of seeds, straw, dried Tobacco leaves. 7) Land leased for grazing of animals required for agriculture purpose. 8) Insurance money received for destruction of agricultural produce. FOR PRIVATE CIRCULATION ONLY 13 Examples of Non- Agricultural Income: 1) Income from sale of earth for brick making. 2) Income from stone quarries and fishing 3) Income from sale of spontaneously grown trees. 4) Income from dairy farming, poultry farming. 5) Interest received by a money lender in the form of agriculture products. 6) Income of salt produced by flooding the land with sea water. 7) Royalty income from mines. 8) Income from butter and cheese making. 9) Maintenance allowance charged on agriculture land. 10)Remuneration received as an employee of an agriculture farm. 11)Dividend received from a company engaged in agricultural operations. Illustration Determine whether the following incomes are agricultural incomes or not. 1. Income from interest on arrears of rent payable in respect of land used for agricultural purpose. 2. Income from use of land for grazing of cattle required for agricultural operations. 3. Income from the sale of trees spontaneously grown. 4. Income from the sale of replanted trees in the forest. 5. Lease rent for letting out a tea estate by the assessee doing the business of growing and manufacturing tea. Solution: 1. Non-agricultural income as the income is derived from a financial activity and not from direct agricultural activity. 2. Agricultural income as it is an agricultural activity. 3. Non-agricultural income because no agricultural activity is involved. 4. Agricultural income as there is some agricultural activity involved. 5 It is agricultural income as the estate is used for agricultural activities Partly Agricultural Income: Sometimes, there is composite income which is partially agricultural and partially non-agricultural income. For certain crops, income tax act gives fixed percentages to segregate agricultural and non- agricultural incomes. Agricultural income is not taxable and the non-agricultural portion would be taxable. FOR PRIVATE CIRCULATION ONLY 14 Table 1.1 PARTLY AGRICULTURAL AND PARTLY NON-AGRICULTURAL INCOME Crop Rule Agricultu Non- ral agric income ultur al inco me 1) Growing and manufacturing of 8 60% 40% tea 2) Rubber manufacturing business 7A 65% 35% 3) Coffee grown and cured by 7B(1) 75% 25% seller 4) Coffee grown and cured, 7B(1A 60% 40% roasted and grounded by the seller ) in India with or without mixing chicory or other flavoring agents Integration of Agricultural Income with Non-Agricultural Income: [sec 2(2)]: Agricultural income is exempt from tax u/s 10(1) but it is included in the total income for tax liabilitycalculation. The object of aggregating the net agricultural income with non-agricultural income is totax the non-agricultural income at higher rates. Conditions for aggregation:  Integration is done only in case of Individuals, HUF, Firms assessed as association of persons (AOP), Association of persons, Bodies of individuals, artificial juridical persons.  Integration is done only if Non-agricultural income of persons mentioned above exceeds the exempted limits which are Rs.2,50,000 for individuals and HUF, and Rs. 3,00,000 for senior citizens in the relevant previous year.  Integration is done if net agricultural income of all these persons exceeds Rs. 5000 in the relevant previous year, companies and co-operative societies. Calculation of net agricultural income: It is computed in accordance with the rules laid down u/s 2(iA) of the Income tax act 1961 and rules 7& 8of the income tax rules 1962. These rules are: 1. Rent or revenue derived from agricultural land will be computed on the same basis which is adoptedfor computation of income under the head income from other sources u/s 57 to 59 of the income taxact. 2. Income derived from agricultural operations will be computed as if it is income chargeable to tax under the head profits & gains of business or profession. Depreciation and loss on the death of animalsused in agricultural operations are allowed as expenses. 3. Income from agricultural house property will be computed as if such income is chargeable to tax under the head ‘income from house property’ and provisions under section 22 to 27 shall be FOR PRIVATE CIRCULATION ONLY 15 applicable. 4. For computing share of income from tea business income is computed under rule 8 which shall be considered to be agricultural income. 5. For computing share of income or loss of a firm assessed as AOP same rules are applicable asprovided in income tax act for computing share of profits and losses from firm assessed as firm. 6. Loss incurred in agriculture will be allowed to be set off only against agricultural incomes. 7. Any sum payable by the person on account of any tax levied by State Govt. on agricultural income will be allowed as deduction. 8. Where the net result of agricultural income from the various sources stated above in a particular previous year is a loss, such loss will be disregarded and net agricultural income shall be taken as nil. 1.7 Capital and Revenue: 1.7.1 Introduction It is necessary to understand the distinction between capital and revenue items to determine the taxtreatment of expenses and incomes. For the understanding of the concepts, it is divided into three parts: i) Receipts ii) Expenditure iii) Losses Capital Receipt Revenue Receipt 1.Amount of fixed capital received is 1.Amount received as circulating a capitalreceipt. capital is arevenue receipt. 2.A receipt in substitution of a source 2. A receipt in substitution of an of income income is a is a capital receipt. E.g. Compensation revenue receipt. E.g. Bonus received by an received from his employee from his employer is a employer for the revenuereceipt. termination of service is a capital receipt. 3.An amount received as a 3. An amount received under an compensation forthe surrender of agreement as compensation for loss of certain rights under an agreement is a future profits is a revenue receipt. capital receipt. E.g. Amount paid to a Compensation paid for breach of retiring director of a company for agreement is a revenue receipt not starting a competing business after his retirement 4. If the asset is used by the 4. If the asset is kept in the business as assessee as an investment then the stock in trade i.e. for the purpose of sale proceeds thereof willbe a capital making profit from its sale then the sale receipt. E.g.: Motor car used by a proceeds thereof is a revenue receipt. business is a capital asset and the E.g. Sale proceeds of motor FOR PRIVATE CIRCULATION ONLY 16 sale proceed thereof is a capital cars maintained by vehicle dealer. receipt. 5. Subsidies or grants received from 5. Subsidies or grants received from the government for specific capital the government for meeting foreign purpose. E.g., competitionor otherwise assisting the For any development scheme or trader in his renovation or modernization is a business are revenue receipts. capital receipt. 6. Insurance money received for a 6. Insurance money received for a capitalasset is capital receipt. tradingasset is revenue receipt. 1.7.2. Capital Expenditure and Revenue Expenditure: Capital expenditure is not deductible from the gross income of the business but the revenue expenditure is deductible therefore, it is essential to know the difference between the two: Capital expenditure Revenue expenditure 1. Cost of acquisition and 1. Purchase price of goods installation of a fixed asset is a bought for resale along with capital expenditure. expenses on their purchase is revenue expenditure. 2. An expenditure incurred to 2. An expenditure incurred to discharge a capital liability is a discharge a revenue liability capital expenditure. is revenue expenditure. 3. An expenditure incurred for 3. An expenditure incurred for acquiring a source of income is a earning an income is a revenue capital expense. expense. e.g. acquisition expenses of a business 4. An 4. An expenditure incurred for expenditure incurred for maintaininga fixed asset in good increasing the earning capacity of condition is revenue expenditure. a business by improving its fixed assets isacapital expenditure. 5. Capital expenditure is a non- 5. It is recurring in nature. recurring item. 6. Expenditure in obtaining 6. Expenditure incurred in raising capital by issuing shares is a loans or issuing capital expenditure. debentures is revenueexpenditure. FOR PRIVATE CIRCULATION ONLY 17 1.7.3 Capital and revenue Losses: Loss on the sale of a capital asset is a capital loss whereas loss on sale of goods of the business is a revenue loss. Loss sustained on account of embezzlement done by an employee, destruction of goods or non-recovery of any amount due in connection with business is a revenue loss. Loss sustained by theft committed by an employee during usual business hours or outside business hours is a revenue loss being incidental to the trade. 1.8 Exempted Incomes U/S 10 The exempted incomes are given u/s 10(1) to 10 (49) of the act and are not included for the calculationof total income of the assessee. Some of these incomes are listed below: 1. Agricultural income from a land in India – fully exempted u/s 10(1). 2. Share of income from HUF- fully exempt u/s 10(2) 3. Share of income from firms assessed as firm u/s 184 or 185 is fully exempt u/s 10(2A) 4. Any income from investment by an NRI in bonds and securities –fully exempted u/s10 (4)(i). No exemption on such bonds issued after 1.6.2002. 5. Any income from interest on Non-resident (external) account – fully exempted u/s 10 (4)(ii). 6. Leave travel concession to an Indian citizen employee – exempted up to limits laid down u/s 10(5) 7. Tax paid by government or an Indian concern on behalf of foreign company (sec 10(6A)) 8. Perquisites and allowances given by the government to its employees posted abroad - fullyexempted u/s 10 (7). 9. Any income of employees of foreign countries working in India under co-operative technicalassistance Programme – fully exempted u/s 10(8). 10. Amount of retrenchment compensation given to workers – fully exempted u/s 10(10B) 11. Compensation received in case of any disaster [sec 10(10BC)] – in case an individual or his legalheir receives any compensation on account of any disaster from central or state Government or a localauthority, the same shall be exempted. 12. Any amount received from life insurance corporation on maturity of policy with or without bonus – fully exempt u/s 10(10D). The sum assured shall be exempt along with bonus in the following cases: If any sum received from insurance company on insurance of a dependent handicapped member a) If any sum received from insurance company when a dependent, or a member of family is suffering from a notified disease, b) Any sum received under a key man insurance policy 13. Payment received out of statutory provident fund – fully exempt u/s 10(11) 14. Payment received out of recognized provident fund – fully exempt u/s 10(12) 15. House rent Allowance – exempted as per conditions given u/s 10 (13A). 16. Income from certain exempted securities u/s 10(15). 17. Educational scholarships given by government or any other organizations - fully exempt undersec10(16). 18. Allowances received by MPs/MLAs – exempted u/s 10(17) up to the following extent:  Daily allowance and Constituency allowance – fully exempted. 19. Any Awards instituted or notified by central or state government in the following fields– fully exempt u/s 10(17 A) FOR PRIVATE CIRCULATION ONLY 18 a) Literary, scientific or artistic work or attainment b) Services alleviating the distress of the poor, the week and the ailing c) Proficiency in sports or games d) Gallantry awards (paramveerchakra, Mahaveer chakra) approved by the government 20. Any pension received by winners of Param veer chakra, Mahaveer chakra and veer chakra and family pension received by their dependents- fully exempted under sec 10(18) 21. Family pension received by family members of armed forces. u/s 10(19). 22. Annual value of any one palace of an ex-ruler of Indian states shall be fully exempt u/s 10(19A) 23. Income of a local authority – exempted as per conditions given u/s 10(20) 24. Income of a scientific research association – exempted as per conditions given u/s 10(21). 25. Income of a fund set up for welfare of employees or their dependents exempted as per conditionsgiven u/s 10(23AAA). 26. Any income of a trust or society approved by Khadi and Village Industries Commission u/s 10(23B). 27. Income of mutual fund – exempted as per conditions u/s 10(23D). 28. Income of a venture fund - exempted as per conditions u/s 10(23FA) 29. Income by way of dividend from an Indian company –fully exempted u/s 10(34) 30. Income from units of UTI and other mutual funds and (see 10(35) any income by the way: a) Any income received by way of dividend from a domestic company. b) Income received in respect of units from the specified company. 31. Income from sale of shares in certain cases [sec 10(36)] Any income arising from the transfer of a long-term capital asset, being an eligible equity share in a company purchased on or after march 1, 2003 and before march 1, 2004 and held for a period oftwelve months or more. 32. Any income from long- term capital asset being self-cultivated urban agricultural land on compulsory acquisition [section 10(37)]- in case of an assessee, being an individual or a Hindu Undivided family, capital gain arising from the compulsory acquisition of self-cultivated land shall be fully exempted. 33. Income from international sporting event (sec 10(39)) Any specified income of specified persons from any international event held in India shall be fully exempt if: a) Such event is approved by the international body regulating the international sport relating to such event; b) It has participation by more than two countries; and c) It is notified by the central government in this regard. 1.9 Central Board of Direct Taxes (CBDT)  It is a statutory body established as per the Central Board of Revenue Act, 1963.  It is India’s official financial action task force unit. FOR PRIVATE CIRCULATION ONLY  19  It is administered by the Department of Revenue under the Ministry of Finance. To note is that originally there was a board called the Central Board of Revenue that functioned as the apex body of the Income Tax Department. The said board was set up under the Central Board of Revenue Act, 1924 and was in charge of both direct and indirect taxes. The Central Board of Revenue got split in 1964 into two boards: 1. Central Board of Direct Taxes 2. Central Board of Excise and Customs CBDT Structure The Central Board of Direct Taxes consists of a Chairman, and six members that deal with the following:  Income Tax & Revenue  Administration  Legislation  Audit and Judicial  Investigation  TPS & System The Members of the CBDT are selected from the Indian Revenue Service (IRS). The members constitute the top management of the Income Tax Department. The CBDT in India performs various functions to ensure the effective administration of direct taxes. These functions include: I) Policy Formulation: CBDT formulates policies and guidelines related to the administration and enforcement of direct taxes in India. II) Tax Legislation: CBDT plays a crucial role in drafting and amending tax laws, including the Income Tax Act and other relevant legislation. III) Taxpayer Services: CBDT is responsible for providing taxpayer services and initiatives to enhance compliance, facilitate the filing of tax returns, and address taxpayer grievances. IV) Assessments and Audits: CBDT oversees the assessment of income and the conduct of tax audits to ensure accurate reporting of income and compliance with tax laws. V) Tax Collection and Recovery: CBDT monitors tax collection and recovery activities to ensure the timely and efficient collection of direct taxes. VI) Tax Investigation and Enforcement: CBDT is involved in tax investigation and enforcement activities to identify tax evasion, financial fraud, and non-compliance with tax laws. VII) International Taxation: CBDT deals with matters related to international taxation, including cross- border transactions, transfer pricing, and double taxation agreements. FOR PRIVATE CIRCULATION ONLY  20 VIII) Legal and Judicial Matters: CBDT handles tax-related legal matters, provides legal opinions, and represents the Income Tax Department in tax-related judicial proceedings. IX) Computerization and Technology: CBDT focuses on leveraging technology for effective tax administration, including the implementation of digital platforms and systems. X) Policy Analysis and Research: CBDT conducts policy analysis, research, and studies to assess the impact of tax policies and propose improvements in the tax system. Powers of CBDT The Central Board of Direct Taxes (CBDT) in India possesses various powers to administer and enforce direct taxes. These powers include: i) Administrative Powers: CBDT exercises administrative control over the Income Tax Department and oversees its functioning at the national level. ii) Rule-Making Powers: CBDT has the authority to make rules and issue guidelines for the implementation and enforcement of direct tax laws in India. iii) Power to Grant Exemptions and Approvals: CBDT has the power to grant exemptions, relaxations, and approvals under certain provisions of the Income Tax Act, such as exemptions for charitable organizations or specific transactions. iv) Power to Conduct Tax Audits: CBDT has the power to conduct tax audits, either through its officers or by appointing external auditors, to examine and verify the accuracy and compliance of tax-related information. v) Authority to Impose Penalties: CBDT can impose penalties for non-compliance, including the failure to file tax returns, underreporting of income, or any violation of tax laws. vi) Power to Conduct Surveys and Search Operations: CBDT can authorize surveys and search operations to gather information, detect tax evasion, and seize assets by the provisions of the Income Tax Act. vii) Power to Requisition Information: CBDT has the authority to requisition information, documents, or statements from individuals, banks, or other entities for tax assessment and investigation. viii) Power to Make Appellate Decisions: CBDT exercises appellate powers to hear and decide on appeals filed against orders passed by income tax authorities, providing a higher level of scrutiny and resolution for tax-related disputes. ix) Power to Enter into International Agreements: CBDT has the power to enter into international agreements, such as Double Taxation Avoidance Agreements (DTAA), to prevent double taxation and facilitate the exchange of information with other countries. 1.10 Powers and Functions of Chief Commissioner of Income Tax. Powers: FOR PRIVATE CIRCULATION ONLY 21 i. To act as assessing officer. ii. To appoint authorities below rank of Assistant commissioner of Income Tax. iii. To transfer the case from one subordinate authority to another. iv. He can act as assessing officer in case of concealed income. v. To issue instructions to the assessing officers for their guidance. vi. To make enquiry as assessing officer. Functions: i. To give instructions to the income tax officers. ii. To enquire or investigate into concealment. iii. To search and seizure. iv. To requisite books of account. v. To make any enquiry. TERMINAL QUESTIONS: Section A – 5Marks Questions 1. Briefly explain the Canon of income tax. 2. Briefly explain the exceptions to the general rule of previous year. 3. Differentiate between Capital income and Revenue income. 4. Discuss the history of Income tax. Section B & C – 9 and 12Marks Questions 1. Differentiate between Capital expenditure and Revenue expenditure. 2. Mention any 10 items which are exempted from tax U/S 10. 3. Describe any 5 Agricultural and Non- agricultural income. 4. Explain the powers and functions of CBDT FOR PRIVATE CIRCULATION ONLY  22 Module 2: Residential Status and Incidence of Tax Contents: Residential status of an Individual – Determination of Residential status - Incidence of Tax RESIDENTIAL STATUS AND INCIDENCE OF TAX It refers to the status of an individual, which determined based on his/her, total stay in India. Under section 6, the residential status of an individual is divided into the following categories. Residential status of an individual Resident Non- Resident Ordinary Resident Not Ordinary Resident Basic Conditions u/s 6 (i) An assessee must be in India for a period of 182 days or more during the previous year OR (ii) An Assessee must be in India for a period of 60 days or more during the previous year and 365days in 4 years preceding the relevant previous year. Exception: II Basic condition is subject to the following exceptions (i) In case of an assessee who is an Indian citizen leaves India for employment purpose or as a crew member of an Indian ship. (ii) In case of an assessee who is of an Indian origin comes to India during the previous year for avisit. In the above cases 60 days, as suggested u/s 6 (1) shall be replaced by 182. In other words, the secondbasic condition shall not be applicable. Additional Conditions u/s 6(6) (i) An assessee must be a Resident for 2 or more years out of 10 years preceding the relevant previous year. AND (ii) An assessee must have been in India for at least 730 days in 7 years preceding the relevant previous year. FOR PRIVATE CIRCULATION ONLY 23 Types of Residential Status An individual who satisfies any one of the above Basic conditions u/s 6(1) is treated as a resident for the previousyear. 1) Ordinary Resident (O.R): An individual who satisfies any one of the basic condition and both the additionalconditions. 2) Not Ordinary Resident (N.O.R): An individual who satisfies any one of the basic condition and any one ornone of the additional conditions 3) Non-Resident (N.R): An individual who does not satisfy any of the basic conditions will be treated as Non-Resident; here the additional conditions are irrelevant. Incidence of tax or taxability of total income based on residence: 1) Resident: Total income of any previous year of a person who is an “Ordinary Resident” includes all incomefrom whatever source derived which: a) Is received or deemed to be received in India b) Accrues, arises, is deemed to accrue or arise to him in India c) Accrues, or arises to him outside India during the previous year. 2) Resident but not Ordinary Resident The total income of a person who is a resident but not ordinary resident includes all income from whatever sourcederived which: a) Is received or deemed to be received in India b) Accrues or arises or deemed to accrue or arise to him in India c) Accrues or arises to him outside India from a business controlled in or a profession setup in India. 3) Non–resident Total income of a Non-resident includes all income from whatever source derived which: a) Is received or deemed to be received in India b) Accrues, arises, or is deemed to accrue or arise to him in India during such year. Problems on Residential Status Illustration 1 BRET lee an Australian cricket player, visits India for 100 days in every financial year. This has been in practicefrom the past 10 financial years. Find out his residential status for the assessment year A.Y. 2024-25. Solution: Assessee: Bret lee Previous Year: 2023-24 Assessment Year: 2024-25 Determination of Residential Status of Bret Lee for the AY 2024-25 Si. PY / 7PP 2/10 Years APR MAY JUNE JUL AUG SEP OCT NOV DEC JAN FEB MAR 4PP Y No Total Y PPY 2023-24 100 *** **** yes 1 2022-23 100 Yes 2 2021-22 100 400 700 Yes 3 2020-21 100 Yes 4 2019-20 100 Yes *** 5 2018-19 100 Yes FOR PRIVATE CIRCULATION ONLY 24 *** 6 2017-18 100 Yes 2016-17 *** 7 100 **** *** 8 2015-16 100 *** **** *** 9 2014-15 100 *** **** 10 2013-14 Nil Nil Nil Nil. COMPUTATION OF RESIDENTIAL STATUS BY APLLYING THE CONDITIONS U/S 6(1) & 6(6) Basic conditions Under Section 6(1) 6(1) A. An Individual Should be in India for a period of 182 Days or More In the Previous Not Year Satisfied 6(1) B. An Individual Should be in India for a period of 60 Days or More In Previous Year Satisfied& &365 Days out of 4 Preceding to Previous Year Satisfied Additional Conditions Under Section 6(6) 6(6) 1. An Individual Should be a Resident 2 Years out of 10 PPY Satisfied 6(6) 2. An Individual Should be in India at least 730 Days out of 7PPY Not Satisfied INTERPRETATION: Bret lee satisfied one of the conditions under section 6(1), and satisfied one of the 6(6). Therefore, Bret lee is called as resident but not ordinary resident. Illustration 2 Mr Emad an Indian citizen left for South Korea on July1, 2019. He came back on August 7, 2023. Determine hisresidential status for the A.Y. 2024-25. Solution: Assesse: Mr Emad Previous Year: 2023-24 Assessment Year: 2024-25 Determination of Residential Status of Mr Emad for the AY 2024-25. PY / 2/10 Sl. No Years APR MAY JUNE JUL AUG SEP OCT NOV DEC JAN FEB MAR 4PPY 7PPY Total PPY *** *** *** *** PY 2023-24 25 30 31 30 31 31 29 31 238 *** *** *** *** *** *** *** *** *** *** *** *** 1 2022-23 Nil **** *** *** *** *** *** *** *** *** *** *** *** *** 2 2021-22 Nil **** *** *** *** *** *** *** *** *** 457 3 2020-21 30 31 30 1 92 Yes 4 2019-20 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ 366 1552 Yes 5 2018-19 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ 365 **** Yes 6 2017-18 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ 365 **** Yes 7 2016-17 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ 365 **** Yes 8 2015-16 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ 366 **** **** Yes 9 2014-15 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ 365 **** **** Yes 10 2013-14 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ 365 **** **** Yes COMPUTATION OF RESIDENTIAL STATUS BY APLLYING THE CONDITIONS U/S 6(1) & 6(6) FOR PRIVATE CIRCULATION ONLY 25 Basic conditions Under Section 6(1) 6(1) A. An Individual Should be in India for a period of182 Days or More In the Satisfied PreviousYear 6(1) B. An Individual Should be in India for a period of 60 Days or More In Previous Satisfied& Year& 365 Days out of 4 Preceding to Previous Year Satisfied Additional Conditions Under Section 6(6) 6(6) 1. An Individual Should be a Resident 2 Years out of 10 PPY Satisfied 6(6) 2. An Individual Should be in India at least 730 Days out of 7PPY Satisfied INTERPRETATION: Mr Emad satisfied both of the conditions under section 6(1), AND satisfied both of the 6(6).So Mr Emad is called as resident - ordinary resident. Illustration 3 Dr. Sreeraj, an Indian citizen and Professor in IIM, Lucknow, left India on September 15 2023 for USA to takeup professor’s job in MIT, USA. Determine his residential status for the A.Y. 2024-25. Solution: Assesse: Dr. Sreeraj Previous Year: 2023-24 Assessment Year: 2024-25 Determination of Residential Status of Dr. Sreeraj, for the AY 2024-25. AP MA JUN JU AU OC NO DE JA FE MA PY / 4PP 7PP 2/10 Sl.No Years R Y E L G SEP T V C N B R Total Y Y PPY 2023-24 30 31 30 31 31 15 *** *** *** *** *** *** 168 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ 1 2022-23 366 Yes 2 2021-22 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ 365 Yes ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ Full Yes 3 2020-21 365 4 2019-20 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ 365 Yes Full 5 2018-19 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ 366 Yes 6 2017-18 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ 365 Yes 7 2016-17 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ 365 Yes 8 2015-16 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ 365 Yes 9 2014-15 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ 366 Yes 10 2013-14 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ 365 Yes COMPUTATION OF RESIDENTIAL STATUS BY APLLYING THE CONDITIONS U/S 6(1) & 6(6) Basic conditions Under Section 6(1) 6(1) A. An Individual Should be in India for a period of182 Days or More In Not Satisfied thePrevious Year 6(1) B. An Individual Should be in India for a period of 182 Days or More Not InPrevious Year & 365 Days out of 4 Preceding to Previous Year Satisfied Note: Second basic condition of 60 days is going to substitute with 182 days since he left India for employmentpurpose. FOR PRIVATE CIRCULATION ONLY 26 Dr. Sreeraj not satisfied both of the conditions under section 6(1), so checking of conditions under section 6(6)is immaterial. Means if an assessee will not satisfy basic condition itself, additional conditions will not be applicable for him. Dr. Sreeraj is called as Non-resident. Illustration 4 Mr. Kamath, after about 30 years, stays in India, returns to America on June 30, 2020. He returns India on 11 January 2024 to join American Company as its overseas branch manager. Determine his residential status for the assessment year A.Y. 2024-25. Solution: Assesse: MR. Kamath Previous Year: 2023-24 Assessment Year: 2024-25 Determination of Residential Status of MR. Kamath for the AY 2024-25. Sl. No APR MAY JUNE JUL AUG OCT NO V DEC JAN FEB MAR PY/ 4PPY 7PPY 2/10 Years SEP Total PPY *** *** *** *** *** *** *** *** *** 2023-24 21 29 31 81 Yes *** *** *** *** *** *** *** *** *** *** *** *** *** 1 2022-23 *** *** *** *** *** *** *** *** *** *** *** *** *** 2 2021-22 *** *** *** *** *** *** *** *** *** 91 457 3 2020-21 30 31 30 Yes ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ 366 4 2019-20 Yes 1552 5 2018-19 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ 365 Yes 6 2017-18 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ 365 Yes 7 2016-17 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ 365 Yes 8 2015-16 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ 366 Yes 9 2014-15 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ 366 Yes 10 2013-14 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ 365 Yes COMPUTATION OF RESIDENTIAL STATUS BY APLLYING THE CONDITIONS U/S 6(1) & 6(6) Basic conditions Under Section 6(1) 6(1) A. An Individual Should be in India for a period of182 Days or More In thePrevious Not Satisfied Year 6(1) B. An Individual Should be in India for a period of 60 Days or More InPrevious Satisfied& Year & 365 Days out of 4 Preceding to Previous Year Satisfied Additional Conditions Under Section 6(6) 6(6) 1. An Individual Should be a Resident 2 Years out of 10 PPY Satisfied 6(6) 2. An Individual Should be in India at least 730 Days out of 7PPY Satisfied INTERPRETATION: MR. Kamath satisfied one of the conditions under section 6(1), AND satisfied both of the conditions under section 6(6).So MR. Kamath is called as resident -ordinary resident. Illustration 5 Ms Priya, is a foreign citizen, not being a person of Indian origin. Determine her residential status for the assessment year 2024-25. On the assumption that during financial year 2009- 2010, she was present in India as follows: FOR PRIVATE CIRCULATION ONLY 27 Years No of Days Years No of Days Years No of Days 2009-10 221 2014-15 340 2019-20 182 2010-11 22 2015-16 30 2020-21 85 2011-12 50 2016-17 160 2022-23 280 2012-13 72 2017-18 96 2023-24 86 2013-14 130 2018-19 286 2024-25 65 Solution: Assesse: Ms Priya, Previous Year: 2023-24 Assessment Year: 2024-25 Determination of Residential Status of Ms. Priya, for the AY 2024-25 Si.No APR MAY JUNE JUL AUG OCT NOV DEC JAN FEB MAR PY/ Total 4PP Y 7PP Y 2/10 Years SEP PPY 2023-24 / /// /// / /// /// /// / /// / /// /// PY / / / / 65 / / / / 1 2022-23 / /// /// / /// /// /// / /// / /// /// 86 Yes / / / / / / / / 633 1175 2 2021-22 / /// /// / /// /// /// / /// / /// /// 280 Yes / / / / / / / / 2020-21 / /// /// / /// /// /// / /// / /// /// 85 3 / / / / Yes / / / / 2019-20 / /// /// / /// / /// / /// / /// /// 182 4 Yes / / / / / / / / / / 5 2018-19 / /// /// / /// / /// / /// / /// /// 286 /// Yes / / / / / / / / / / 2017-18 / /// /// / /// / /// / /// / /// /// /// Yes 6 96 / / / / / / / / / / 2016-17 / /// /// / /// / /// / /// / /// /// /// Yes 7 160 / / / / / / / / / / 2015-16 / /// /// / /// / /// / /// / /// /// /// /// //// 8 30 / / / / / / / / / / 2014-15 / /// /// / /// / /// / /// / /// /// /// /// Yes 9 340 / / / / / / / / / / 2013-14 / /// /// / /// / /// / /// / /// /// /// /// /// 10 130 / / / / / / / / / / COMPUTATION OF RESIDENTIAL STATUS BY APLLYING THE CONDITIONS U/S 6(1) & 6(6) Basic conditions Under Section 6(1) 6(1) A. An Individual Should be in India for a period of182 Days or More In the Not Satisfied Previous Year 6(1) B. An Individual Should be in India for a period of 60 Days or More In Satisfied & Previous Year & 365 Days out of 4 Preceding to Previous Year satisfied Additional Conditions Under Section 6(6) 6(6) 1. An Individual Should be a Resident 2 Years out of 10 PPY Satisfied 6(6) 2. An Individual Should be in India at least 730 Days out of 7PPY Satisfied INTERPRETATION Ms Priya, satisfied one of the conditions under section 6(1), AND satisfied both of the conditions under section 6(6).Therefore, Ms. Priya, is called as resident -ordinary resident. FOR PRIVATE CIRCULATION ONLY 28 Illustration 6 Mr. Bhaskar, born and brought up in India, joined a company in Bahrain on 1 st October 2018. He came back to India on 25th April 2019 and went back on 25th may 2019. He again came to India on 25th March 2020 and left back on 22nd May 2020. Due to acute illness, he came back to India on leave on 15th October 2020 and joined back his duty on 1st august 2022. He resigned from his job on 1st January 2023 and came back to India on 1st February 2023. Determine his residential status for the assessment year 2024-25. Solution: Assesse: Mr. Bhaskar Previous Year: 2023-24 Assessment Year: 2024-25 Determination of Residential Status of Mr. Bhaskar, for the AY 2024-25. Departure Arrival 01/10/201 25/04/2020 9 25/05/202 25/03/2021 0 22/05/202 15/10/2021 1 01/08/202 01/02/2024 3 AP MAY JU AUG OC NDE JA FE MAR PY / 2/10 Si.No Years JUNE SEP 4PPY 7PPY R L T OC N B Total PPY V PY 2023-24 30 31 30 31 1 0 0 00 0 29 31 183 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ 1 2022-23 365 2 2021-22 30 22 0 0 0 0 17 331 31 28 31 220 Yes 0 807 Yes 3 2020-21 6 25 0 0 0 0 0 00 0 0 7 38 2019-20 Yes 4 30 31 30 31 31 30 1 00 0 0 0 184 2018-19 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ 1902 Yes 5 365 2017-18 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ Yes 6 365 2016-17 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ Yes 7 365 2015-16 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ Yes 8 366 2014-15 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ Yes 9 365 2013-14 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ Yes 10 365 COMPUTATION OF RESIDENTIAL STATUS BY APLLYING THE CONDITIONS U/S 6(1) & 6(6) Basic conditions Under Section 6(1) 6(1) A. An Individual Should be in India for a period of182 Days or More In the Previous Year Satisfied 6(1) B. An Individual Should be in India for a period of 182 Days or More In Previous Year &365 Satisfied Days out of 4 Preceding to Previous Year Additional Conditions Under Section 6(6) 6(6) 1. An Individual Should be a Resident 2 Years out of 10 PPY Satisfied 6(6) 2. An Individual Should be in India at least 730 Days out of 7PPY Satisfied FOR PRIVATE CIRCULATION ONLY 29 INTERPRETATION: Mr. Bhaskar, satisfied both of the conditions under section 6(1), AND satisfied Both of the conditions under section 6(6).Mr. Bhaskar, is called as resident -ordinary resident. 7. Mr. Irfan comes to India for the first time on April 16, 2022; he has stayed in India up to October 5th 2022. Determine hisresidential status for the AY 2024-25. 8. Mr. Piyush an Indian Citizen left India on 15th August 2022 for the first time to UK. For the purpose of employment. Heplans to visit India every year and stay here from 15h April to 10th September from 2023 onwards. What will be his residential status for AY 2024-25? 9. Mr. Anil went to England for studies on 5th August 2020 and came back to India on 25th February 2022. He had never been out of India before. Determine the residential status for the assessment year 2024-25 Incidence of Tax Section 5 of Act provides the scope of the total income in terms of residential status of person. It dependsupon following 3 considerations: (i) The residential status of the person. (ii) The place of accrual or receipt of income. (iii) The point of time at which the income is accrued or received. The tax incidence can be understood from the following table: Whether taxable or not Incomes Ordi Not No nary n Ord ina ry Resi Res Re dent ide sid nt ent 1. Income received in India whether accrued or arisen Yes Yes Yes in India or outside 2. Income deemed to be received in India whether Yes Yes Yes accrued or arisen in India or outside India 3. Income accruing or arising in India whether received Yes Yes Yes in India or outside India 4. Income deemed to accrue or arise in India whether Yes Yes Yes received in India or outside India 5. Income received and accrued or arisen outside India from a business controlled in or a profession set up in Yes Yes No India 6. Income received and accrued or arisen outside India from a business controlled from outside India or Yes No No profession setup outside India FOR PRIVATE CIRCULATION ONLY 30 7. Income received and accrued or arisen outside India Yes No No from any other source 8. Income accrued or arisen and received outside India in earlier years but later on remitted No to India during the No No Previous year. Illustration 1 Mr. Satya gives you the following information being a Resident Ordinary Resident. 1. Salary Rs. 80, 000 received in Japan for the services rendered in India. 2. Commission received in India for the services given in Sri Lanka Rs.1,40,000 3. House rent of the house situated in Nepal received in India Rs.30,000 4. Dividend of a England based company received in India Rs.75,000 5. Profit of the business situated in Japan brought to India Rs.5,00,000 Determine the residential status of Mr. Satya for the previous year 2023-24 and explain that onwhich income he is liable to pay tax in India. Compute his taxable income for the AY 2024-2025. Computation of Total Income Name of the Assessee: Ms. Satya P.Y.2023-2024 Residential status: Resident Ordinary Resident A.Y. 2024-2025 Types of Income N R I Salary received in Japan for the services 1 rendered inIndia (Assumed to be computed income) Rs.80,000 Commission received in India for the 2 services givenin Sri Lanka Rs.1,40,000 House rent of the house situated in Nepal 4 received inIndia Rs.30,000 Dividend of a England based company Rs.75,000 5 received in India Profit of the business situated in Japan 6 Rs.5,00,000 brought to India GTI / TOTAL INCOME Rs. 8,16,000 Illustration2 Kishan, a foreign national furnishes the following particulars of his income relevant for the previous year 2024-25 1. Profit on sale of plant at London (one half is received in India) 1,46,000. 2. Profit on sale of plant at Delhi (one half is received in London) 1,02,000 3. Salary from an Indian company received in London (one half is paid for services FOR PRIVATE CIRCULATION ONLY 31 rendered in India) Rs.60,000. 4. Interest on UK development bonds (entire amount received in London) Rs. 40,000 5. Income from property in London received there Rs. 30,000 6. Profit from a business in Delhi managed from India Rs. 49,000 7. Income from agriculture in London received there, half of which is used for meeting hostel expenses of hisson and remaining amount is later on remitted to India Rs. 25,000. 8. Dividend (gross) received in London from a company registered in India but mainly operating in LondonRs.17,000. 9. Rental income from a property in Nepal deposited by the tenant in a foreign branch of an Indian bank operatingthere. Rs. 12,000 10. Gift from a relative in foreign currency (one third of which is received in India and remaining amount is used for meeting education expenses of Kumar’s son in USA) Rs. 3,90,000. Determine gross total income of Kishan for the Assessment Year 2024-25, if he is a) Resident and ordinary resident b) Resident but not Ordinary resident, and c) Non-resident. Solution: Computation of Gross Total Income of Kishan for the A.Y 2024-25 Not Ordinar Non- Particulars y Ordina ry Residen reside Reside t nt nt 1. Profit on sale of plant at 1,46,000 73,000 73,000 London 2. Profit on sale of plant at 1,02,00 1,02,00 1,02,000 Delhi 0 0 3. salary from an Indian 60,000 30,000 30,000 company 4. Interest on UK 40,000 ----- ----- development bonds 5. Income from property in 30,000 ----- ----- London 6. profit from a business in 49,000 49,000 49,000 Delhi 7. income from agriculture 25,000 ----- ----- in London 8. Dividend from an Indian 17,000 17,000 17,000 company 9. Rental income from property in Nepal 12,000 ---- ---- 10. gift from a relative 1,30,00 1,30,00 3,90,000 0 0 Gross total income 4,01,00 4,01,00 871,000 0 0 Illustration 3. From the following particulars of Mr. Uday compute his Gross total income FOR PRIVATE CIRCULATION ONLY 32 for theA.Y.2024-25 if he is 1. Resident, 2. Not Ordinarily Resident and 3. Non-Resident (a) Income from business from India Rs. 50,000 (b) Profit from business in U.K. controlled from India Rs 60, 000 (c) Income from house property in Japan not received in India Rs 30, 000 (d) Income from business in India but received in Pakistan Rs 50, 000 (e) Salary received in India for service rendered in USA Rs 70, 000 (f) Interest on deposit with State Bank in Bangalore Rs 10, 000 (g) Profit from business in Ceylon controlled from India (1/3 profit received in India) Rs 30,000 (h) Salary received in India for service rendered in Kuwait Rs 35, 000 (i) Past untaxed foreign income brought into India Rs 8, 000 (j) Dividend received from Domestic Company Rs 5,000 (k) Interest on Post Office Savings Bank A/c Rs 1,000 (l) Agriculture income earned in Nepal Rs 25,000. (m) Gift in cash from a relative received in India Rs 60000. (n) Interest received from a firm in UK later on remitted to India Rs 10000 Computation of Total Income Previous Year :2023-2024 Name of the Assessee : Mr. Uday Assessment Year: 2024- 2025 Types of Income NI R NOR NR (a) Income from business from India II 50,000 50,000 50,000 Not (b) Profit from business in U.K. controlled from CI 60, 000 60, 000 Taxable India Income from house property in Japan not Not Not (c) FI 30, 000 received inIndia Taxable Taxable Income from business in India but received (d) II 50, 000 50, 000 50, 000 inPakistan (e) Salary received in India for service rendered in II 70,000 70,000 70,000 USA (f) Interest on deposit with State Bank in 10, 000 10, 000 10, 000 II Bangalore II& CI (g) Profit from business in Ceylon controlled from 10, 000 10, 000 10, 000 India(1/3 profit received in India) Rs. 30,000 20,000 20,000 (h) Salary received in India for service rendered in II 35, 000 35, 000 35, 000 Kuwait (i) Past untaxed foreign income brought into India EI Not Not Not Taxabl Taxable Taxable e (j) Dividend received from Domestic Company II 5,000 5,000 5,000 FOR PRIVATE CIRCULATION ONLY 33 (k) Interest on Post Office Savings Bank A/c EI Not Not Not Taxabl Taxable Taxable e (l) Agriculture income earned in Nepal. FI 25,000 Not Not Taxable Taxable II (m) Gift in cash from a relative received in India 60000 60000 60000 (n) Interest received from a firm in UK later on CI 10,000 10,000 Not remitted toIndia Taxable TERMINAL QUESTIONS: Section A – 5Marks Questions 5. Mention the different types of residents for income tax purpose. Section B : 9Marks Question 1. Mr. Raj, citizen of U.S. came to India for the first time on 01.05.2019. Hestayed here without any break for 3 years and left for Bangladesh. on 01.05.2022. He returned to India on 01.04.2023 and went back to U.S. on01.12.2023 He was posted back to India on 20.01.2024. Determine his residential status for the A.Y 2024-25. 2. Vaishak, a foreign national (not being a person of Indian origin), comes to India for the first time on April 15, 2019. During financial years 2019-20, 2020-21, 2021-22, 2022- 23, 2023- 2024 he was in India for 130days, 80days