TAXATION UNIT I - INTRODUCTION

The word tax is derived from a Latin word “Taxare “it means to estimate or value. The term tax to a
common man means money paid to the Government out of compulsion without deriving any benefit directly by
himself or his family members.
As per taxation tax means statuary payment to be made by the public and imposed by the Government.
Definition:
As per Prof. Adams:
From the stand point of the state, a tax is source of derivate revenue, From the point of the citizen, A tax
is a coerced payment, From the Administrative point of view, it is a demand for money by state in conformity to
establish rules, From the point view of a Theory, a tax is a contribution from the individual for common
expenditure.

Characteristics of Tax:
1. Tax can be imposed by the Government only
2. Taxes are paid in the form cash only
3. the aim of levying tax is to promote the welfare of the people living in the country
4. the object of tax is to raise revenue to the Government
5. Tax is a legal collection enforceable by law.
6. payment of tax involves an element of sacrifice
7. it is levied by the Government by virtue of its power confirmed under the Constitution
8. Tax is not a payment for specific service rendered by the Government to tax payer there is no
QUID PRO QUO.
9. Tax is imposed on income or wealth or on a commodity i.e. either directly or indirectly, but tax is
actually paid by the individuals.
10. There is no EQUITY in taxing structure.
11. Tax is a part of common burden.

Objects of tax
Every government has to discharge its statutory, administrative and social functions. To discharge these
duties money is required by the Government. So, every Government has to levy and collect taxes from the public
to fulfill their functions and responsibilities.

1. To generate income to meet day to day expenditure of the Government

2. To make provisions to fulfill the basic needs of the people.
3. prevention and control of concentration of economic power i.e. income and wealth in the hands of
few persons
4. A good taxation system provides redistribution of income and wealth i.e. making the lower
income people to become rich and the rich not to grow at a faster rate
5. Increasing employment opportunities
6. Reducing regional imbalance
7. Production of domestic industries from the competition of foreign industries
8. Promoting capital formation
9. Promoting exports and restricting imports.
10. Rapid economic development
11. Regulating production from the national point of view
12. Regulating consumption of particular commodity
13. To induce saving habit in the citizens.
14. Reduction in economic inequalities.

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DIRECT TAXES
A direct tax is one in which the immediate and ultimate burden will be on the same person. Direct tax are
those which are imposed on a person income or wealth and the tax liability cannot transfer to other persons i.e if
tax is levied directly on a same person’s income or wealth then it is known as direct tax. A direct tax is paid to
the Government by the person on whom it is imposed.
Example: Income tax, Wealth tax and professional tax.
Merits of direct taxes:
1. Economy:
The cost of collecting direct taxes is low as compares to indirect taxes. The payment of these taxes is
made directly to the Government no mediators involve.
2. Certainty:
The Government declares tax rates and rules and regulations related to direct taxes in every financial
year. So as for the tax rates tax payer know how much and when he has to pay tax and the Government also
knows equally about the tax revenue likely to be received.
3. Elasticity:
Direct taxes are elasticity in nature. Government can increase its revenue by increasing tax rate and by
withdrawing the deductions and exemptions.
5. Convenience:
Most of the direct taxes are collected at the source of income itself as such it is convenient to the tax
payer and also for Government.
6. Civics Responsibility:
The direct taxes are create civic responsibility among the tax payers about their contribution to the
revenue of the Government for welfare of country.
7. Less possibility of shortage:
The possibility of shortage in the amount collected as direct taxes are very rare. The person who are
payable tax they remit the amount tax department with in the time stipulated. Because there is any delay or
default in payment then he person has to pay interest, penalty etc. and also subject to other punishment under
law.
8. Reducing the inequalities:
Direct taxes are equitable because rich has to pay more tax and poor man pay low tax or no tax.
The main aim of direct tax is to reduce the inequalities in the country. These taxes ultimately affect the rich
persons and if the Government spends the amount on increase the income of the poor people.
Demerits of direct taxes:
1. Unpopular:
Direct taxes are not popular when compared to indirect taxes. No person is willing to pay part of income
or wealth towards taxes i.e people will oppose imposition of taxes.
2. Inconvenience:
Indirect taxes are convenient because these taxes are included in price of goods. Under direct tax laws,
tax payer are required to maintain the accounts of the income, savings and capital expenditure etc. and the same
is to be submitted to the tax department at the time of filing returns. If he fails to file the returns in time it
becomes offense which causes inconvenience to the tax payers.
3. Complex laws:
Generally, the provisions of direct taxes contain deduction, exemptions and chargeability of income etc.
To a common man it becomes a problem to understand the provisions of the Act. So the must be depends on tax
consultants.
4. Possibility of evasion:
In case of direct taxes there is maximum chance of tax evasion compared with indirect taxes by hiding
incomes of tax payers.
5. Arbitrary tax rates:
Tax rates are fixed by the minister in charge with the help of tax department officials who may not
possess the knowledge to assess the tax payment capacity of the people.

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INDIRECT TAXES
Tax is levied on the price of goods and services then it is known as indirect tax. Indirect tax is collected
by middle men in the channels of distributions of goods and it is remitted to the Government. Indirect taxes are
the taxes charged to a business man, first pays the tax and later on he shifts the tax burden to ultimate consumer
by charging high price. The price charged to a consumer includes cost of goods, profit margin of the seller and
indirect taxes paid by him at the time of purchases or productions of the goods.
Merits of indirect taxes:
1. Convenience:
Indirect taxes are included in the price of the goods and services and as such tax payer is not aware of tax
payment while purchasing the goods and services. Since the tax is paid, tax payer is aware of the payment of tax
but he does not feel it as a burden.
2. Productivity:
Indirect taxes are highly productivity. By imposing few taxes government can get huge revenue.
Government can impose tax on selected goods and services whose demand is inelastic.
3. Minimum evasion:
Generally indirect taxes are levied and collected at the time of production or purchases of goods by the
business man and there is minimum scope for tax evasion.
4. Wide coverage:
Indirect tax covers most of the people irrespective of rich or poor will make the contribution to the
Government. i.e. indirectly it is helping one and all to participate for the development of the nation.
Demerits of indirect taxes:
1. Uncertainty:
Revenue to be collected through indirect taxes contains uncertainty because it is not easy to estimate the
demand for goods, which are influenced by the number of factors.
2. Violation of ability to pay principle:
Both reach and poor have to pay the same price for the goods i.e. both have to pay same amount of tax,
and this is against to the principal of the taxation.
3. Inflationary in nature:
Indirect taxes lead to a rise in prices. The increase in the prices of the raw material, finished goods etc.
create inflationary trends in the economy.
4. High cost of collection:
Administration cost of collecting indirect taxes may be high because they have to be collected from large
number of persons that to in small amount.
5. Absence of civic responsibility:
Indirect taxes are collected through middle man like traders. The tax payers do not feel the payment of
tax while purchasing goods i.e. indirect taxes may not create the civic responsibility in the minds of people.

Types of taxes
1. Duty:
Imposition of tax to regulating industrial production, and control export and imports of the goods is
known as Duty.
Example: Central Government levied Excise duty on goods manufacture in India and custom duty on export and
import.
3. Surcharge:
Tax on tax is known as “Surcharge”. It is levied by the central Government with object of collecting
higher tax in short period of time. The surcharge levied and collected by the Central Government is not made
available to the State Government as their share. Surcharge can be levied on Income tax and Customs or other
duties which are in the list of Central Government.
Example: Total Income of an Individual is more than Rs. 1 crore then surcharge is levied 15% on their income
tax.

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2. Cess:
If any tax is levied for a specific purpose then it is known as “Cess”. For example, Education cess, it is
levied for promoting education in the country.

4. Octroi:
If tax is levied by Local bodies or Municipalities on the goods brought from the other parts of the country
by traders for sale onto their jurisdiction limits then it is known as Octroi. This tax is also known as Entry tax.
5. Terminal Tax:
It is the tax levied by Local bodies or Municipalities on the goods leaving for sale from their boundaries
into other parts of the country.
6. Toll Tax:
This tax is paid by vehicular travelers. The persons who are traveling in car, bus, jeep etc. for using the
road or bridge to reach their destination have to pay the tax. Toll tax is collected not only from passenger’s travel
vehicles but it is also collected from truck, Lorries carrying the goods for transportation.

Difference between Direct taxes and Indirect taxes

Direct Taxes Indirect Taxes
1. Direct taxes are levied on income or Indirect taxes are levied on prices of
wealth of a person goods and services
2. The tax payer knows the tax liability The consumer has no idea about tax
time and amount of tax to be paid paid by him because the tax is included in
the price of goods charged by the business
men.
3. Increase in tax rate may reduce savings Increase in the tax rate is reduce
and investment by the public. Increase in consumption and increase the prices of
the rate will help to control the inflation goods
4. There is a scope of tax evasion is The scope for tax evasion by the
maximum, either by not paying tax or tax consumer is not there, but right from the
payer may understate the income or wealth manufacture to the retailer, the scope for
by suppressing the actual facts. tax evasion is possible by showing less
production or sales
5. The Government has to establish link The cost of collecting taxes to the
with every tax payer as such the cost of government is low when compared to
collecting tax is high. direct taxes, because these taxes are collets
directly from the manufacturer and
business men.
6. Ability of the tax payer is taken into Ability of the payer is ignored both rich
account i.e. collect more tax from rich and and poor have pay the same amount of tax
less or no tax from poor people and thus it it is against the principle of tax
is satisfies the principle of equity
7. The tax payer having civic responsibility The tax payer may not possess civic
responsibility
8. Direct taxes covered only particular Indirect taxes covered all class of people
class of People whose income is more than In the country.
exempted Limit like above middle class
and rich people.
9.In direct taxes no middle persons are In payment of indirect taxes middle
involved Tax payers pay tax directly to persons are involved like traders.
government .

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BASIC CONCEPTS

1. Income (Sec. 2(24) :

The Income Tax Act does not define the term “Income”. It has just specified certain thing, which can be
brought under the concept of income. The normal dictionary meaning anything which brings benefit in the form
of cash or kind of income is considered for income tax purposes. The term income includes the following.
1. Profit and gains of business.
2. Dividends.
3. Voluntary contribution received by a trust on an institution.
4. Perquisites or profits in lieu of salary.
5. Any special allowance or benefit given to an employee.
6. Any capital gains.
7. Insurance profit.
8. Any winning from lotteries, cross word puzzles, races etc.,
9. Any contribution by employer to provident fund.
10. Any rental income from house.
11. Any interest on debentures, bonds, and securities.
12. Any royalty income etc,.

2. Casual Income:
If an income earned due to an element of chance of happening or not happening of a event in the future
than such income is known as casual income. It contains the following features.
 It is unanticipated
 It is non-recurring in nature
 No specific effort was put in to earn such income.
Example: - Winning from lotteries, cross word puzzles, card games, horse races etc,.
Casual incomes are fully taxable under the head of other sources and taxed under a flat rate of 30% plus
education and Health cess @ 4%.

3. Gross Total Income:

According to the provisions of Sec.14 of the Income tax Act, the term Gross Total Income (GTI) means
the aggregate of the incomes computed under various heads of income (Income from salary, income from house
property, income from capital gains, income from business& profession, income from other sources) plus the
income of spouse or minor child after deducting current year set off losses and earlier carry forward losses
according to the respective provisions.

Gross Total Income includes the following.

Particulars Amount
Income from Salary. XXX
Income from House property. XXX
Profits and gains of Business or Profession. XXX
Income from Capital Gain. XXX
Income from Other Sources. XXX
GROSS TOTAL INCOME XXX

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4. Net Total Income:
According to the provisions of Sec 2(45) of the Income Tax Act, the term Total Income means the excess
of gross total income after allowing deductions under Sec.80C to 80U. It is also known as Net Total Income or
Taxable Income of the assessee on this income only tax liability is calculated as per applicable tax rates of
income tax. The total income is calculating as follows.

Particulars Amount
Income from Salary. XXX
Income from House property. XXX
Profits and gains of Business or Profession. XXX
Income from Capital Gain. XXX
Income from Other Sources. XXX
GROSS TOTAL INCOME XXX
Less: Deductions u/s 80 C to 80U XXX
NET TOTAL INCOME XXX

5. ASSESSEE (Sec 2(7)):

Assessee is a person by whom any tax or any other sum of money such as interest and penalty etc. due
under the Income tax Act. or in respect of whom any proceedings under the Act has been taken for the
assessment if his income or the income of the other persons for which he assessable or any refund due to him or
to such persons. The term ‘Assessee’ includes following persons.

a) Every person in respect of whom any proceeding under this Act has been taken for the assessment of his
income. for the current assessment year 2023-2024 if an individual’s total income is exceeding limit i.e.
Rs.2,50,000 for Non-senior citizen Rs.3,00,000 for senior citizen and Rs.5,00,0,00 for super senior
citizen he has to fill returns as per the income tax act provisions otherwise I.T.O will issue the notice and
proceedings initiated. Such person is known as an assessee.

b) A person to whom a refund of tax due

If any person has paid more tax in advance or tax deducted at source is more than the actual tax, to
claim the refund the person has to file returns, such person will be treated as an assessee.

c) Deemed Assessee :
The person who paid tax on behalf of others income known as deemed assessee. In the
following situations person is treated as deemed assessee
 Legal guardian or parents of a minor lunatic person.
 The trustee in case of trust.
 Agent of a nonresident person’s income in India.
 The legal representative of a deceased person.

d) Assessee in default:
Every person who is deemed to be an assessee in default under any provisions of income tax Act.1961.
A person is said to be an assessee in default if he fails to comply with the duties as per provisions of
income tax Act.
Eg: Employer in case of deduction of TDS from employee’s salary.

6. PERSON (Sec.2 (3)):

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 According to sec.2 (31) every person having a taxable income i.e. more than exempted limit is liable to
pay tax. Hence the term person is a very important it is including following types of assesses.
i. Individual:
It refers to a natural living human being whether male or female o minor or major.
ii. Hindu undivided family:
A HUF means a group of persons lineally descended from a common ancestor. The head of the HUF is
known as “KARTHA” and its members are called “co-parceners”. Karhta is assessed for the income derived
from the Joint Hindu family.
iii. Company:
A company which is incorporated under the Companies Act. of 1956.
iv. Firm:
A partnership of two or more persons carrying on a business or profession under the Indian Partnership
Act.1932.
v. An Association of Persons or Body of Individuals:
A group of persons formed for promoting a joint venture, business or trustee of a trust etc.
vi. Every other Artificial Judicial person:
A public corporation established under a Special Act. of legislature like University, Hindu deity

7. ASSESSMENT YEAR (Sec 2(a)):

Assessment year means the period of 12 months commencing from 1st April of every year and ending on
31st March of next year. This is also known as financial year.
The current assessment year is 2020-2120. It is starts on 1st April. 2023 and ends on 31st March, 2024.
During this period the total income earned in relevant previous year is computed for tax. Every person
who is liable to pay tax filled return during the assessment year on prescribed date. It is a year which whole of
the process of assessment is done and it is an income calculating year.

8. PREVIOUS YEAR (Sec.3)

Previous year is the preceding 12 months period in the relevant assessment year. It is starts on 1st April
and ends on 31st March of next year. The income earned during the above period is considered for tax purpose;
therefore, it is also known as Income year or Accounting year
Previous year is financial year immediately preceding to the assessment year. Present previous year is
2022-2023 i.e. 1st April, 2022 to 31st March, 2023.
1. Previous year for Discontinuing business:
It is the financial year preceding to the relevant assessment year.
2. Previous year in case of newly started business:
The previous year for newly started business shall be the period between commencement of business and
31st March next following.
3. Previous year in case of a newly created source of income:
In such case the previous year shall be the period between the day which such source comes into
existence and 31st March next following.
EXCEPTIONS FOR GENARAL RULE OF PREVIOUS YEAR:
The general rule is that the incomes earned during the year is put t tax in the relevant assessment year.
But there are certain exceptions to the general rule. In these cases, income is taxed in the year in which it is
earned. These exceptions are:
1. Shipping business income of nonresident person having no agent in India (Sec.172)
2. In case of person leaving India with no intention to return back during current previous
Year (Sec.174)
3. In case of persons who are likely to transfer the asset to avoid tax (Sec.175)
4. In case of discontinue business (Sec.176)
5. Income of bodies formed for short duration.
Cannons of Taxation
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 Cannons of taxation means the directive principles to be followed by the Government while farming the
taxation policies and imposing the taxes on the people. With a change in economic, political and social scenario,
the taxation policies have undergone a drastic change with regards to its objectives, coverage and administration
etc. Adam Smith gave a set of basic principles known as cannons of taxation. They are
1.Cannon of Equality:
Under this principle rich shall bare a higher tax burden. This cannon of equality advocates that the burden
must be directly proportionate to income and wealth of a person. Income of the person determines the ability to
pay. Tax burden should be more on rich than on the poor. If tax rates are high it will result in low savings and
low investment. Lack of equality may result into social disorder, economic crisis in the country.
3.Cannon of Certainty:
According to Adam Smith, tax policies must be specific and there should not be any confusion about the
tax amount, time of payment etc. This cannon also emphasizes that the Government should not follow an
arbitrary method and show discrimination I imposing taxes. Tax should not be subject to frequent amendments.
If frequent amendments are there it hinders the economic activity in the country.
3.Cannon of Economy:
This principle states that the minimum possible expenditure is to be incurred to collect the tax. Taxation
should be economical. If the cost of collection is too high on account of high administrative expenses of tax
department, then the very purpose of levying the tax i.e. to generate more revenues to the common wellbeing
defeated.
4.Cannon for Convenience:
This principle states that the tax must be collect in a convenience manner from the tax payers. For
example, formers feel convenient to pay tax on the sale of crop. Salaried persons and land lord of a property feel
convenient when they receive their income as salary and rent respectively. To the extent possible tax amount
should be collect in installments through bank.
Cannons of taxation given by other economists are:
1.Cannon of Productivity:
The term productivity means collecting sufficient revenue to the Government. It is considered as
productive if tax policy with regards to rate generates sufficient income to the Government to meet its
expenditure and to provide the required facilities to the public.
2.Cannon of Simplicity:
This principle states the need to have a simple taxation system in the country. The provisions in the tax
laws, tax rates and the provisions of the Act must be within the reach of a common man in understanding the
provisions. The rules and regulations must promote honesty among the tax payer and officials working in the tax
department.
3.Cannon of Elasticity:
The tax policies of the Government should contain flexibility. It should be capable of increasing the
revenues in times of emergency situation like war, floods etc. by increasing the tax rates. In order to build up
tempo for rapid economic development the tax rates should be kept at low level, with this it encourages capital
investment in the trade, business and industrial activities. In other words, the tax system should be capable of
adopting changes according to the needs of economic environment in the country.
4.Cannon of Diversity:
According to this principle there should be many taxes instead of a single tax. The taxation system of the
country should make of the potential tax payer to contribute to the revenues of the Government in one tax of the
other. To achieve this Government should impose both direct and indirect taxes.
5.Cannon of Expediency:
According to this principle taxes should be levied after considering economic, social and political
factors. Imposing of new taxes or new methods of tax payment should not invite social and political resistance.

6.Cannon of Co-ordination:
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 In a federal set up like our country, there should be proper co-ordination between taxes imposed by
central, state Governments and local authorities. The sales tax policy followed by different state Government
lead to unhealthy practices and tax evasion in the country. So care is to be taken for proper co-ordination
between different politics ideologies of the Government.

Exempted incomes under section 10 of Income tax Act

1) Sec. 10(1) Agricultural income is fully exempted from tax. Agriculture means rent or revenue derived
from land which is situated in India and used for agricultural purpose.
2) Sec.10(2) Receipts by a member from Hindu Undivided Family. Any sum received an individual as a
member of HUF either out of income of family or not out of income of estate belonging to the family is
exempted from tax.
3) Sec.10(2A) share of profit from a firm. Share profit received by a partner from a firm is exempted from
tax.
4) Sec. 10(7) Foreign Allowance. Any foreign allowance paid or allowed outside India by the Government
to an Indian citizen for rendering services outside India is wholly exempted from tax.
5) Sec. 10(16) Educational Scholarships. Scholarships granted to meet the cost of education is exempted
from tax. In order to avail the exemption, it is not necessary that should be financed by the Government.
6) Sec 10(17) Daily allowance of Members of Parliament. Daily allowance, any allowance received by a
member of Parliament under the Members of Parliament (Constituency Allowance) Rules 1986 and
Constituency allowance received by any person by reason of his membership of any state Legislature is
wholly exempted from tax.
7) Sec. 10(17) Rewards given by the Central Government for literary, scientific or artistic work or
attainment or for service for alleviating the distress of the poor, the weak and ailing, or for proficiency in
sports and games or gallantry award approved by the Government wholly exempted from the tax.
8) Sec. 10(18) pension and family pension of gallantry award winners.
9) Sec. 10(19) Family pension received by a family member (dependents) of armed forces persons who
received awards of Paramveer Chakra, Mahavir Chakra or Veer Chakra fully exempted from tax.
10) Sec. 10(9A) Notional property income of any one place occupied by a former ruler exempted from tax.
11) Payment receive out of Recognized Provident Fund and Statutory Provident Fund is fully exempted from
tax u/s 10(11) and u/s10(12)
12) Income of certain authorities set up to manage religious and charitable institutes exempted as per
conditions given u/s 10(23BBA)
13) Income of local authority is fully exempted from tax u/s 10(20).
14) Payment received out of approved Superannuation Fund fully exempted from tax u/s 10(13).
15) Gratuity received by the employees after retirement or in case of death fully exempted for government
employees and for non-government employees up to 3,00,000 exempted u/s10(10)
16) Leave encashment on retirement fully exempted for government employees and for non-government
employees up to 3,00,000 exempted u/s10(10AA)

RESIDENTIAL STATUSE
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 Income tax is chargeable in respect of total income of a person earned during the year. The scope of the
total income depends upon the residential status of the person. What incomes are to be included and excluded in
computing total taxable income. i.e. the income earned and received in India only is to be taxed or the income
earned and received in outside India is also taxed depends upon the residential status of the assessee in the
relevant previous year.
If the residential status of a person is “Resident “then he has to pay tax on global income i.e. income
received in India and also on the income received outside India.
If the residential status of a person is “Non- Resident “then he has to pay tax on the income received in
India only
Determination of Residential Status Sec.6
Income tax Act 1961 Sec.6 contains the provisions for determining the residential status of different
types of persons. For determining of residential statue, the PERSONS are classified as follows.
1. Individual
2. Hindu Undivided Family
3. Firm and Association of Persons (AOP)
4. Companies
5. Every other person

Residential Status of an Individual

The residential status of an Individual is determining in three types. They are
1) Resident and Ordinarily Resident
2) Resident and but not Ordinarily Resident
3) Non-Resident

Conditions for Determination of Residential Status

For determination of residential status of Individual two sets of conditions are considered
I. Basic conditions
II. Additional conditions
I. Basic conditions
These basic conditions are considered for determine whether the person is Resident or Non-Resident. The
basic conditions are two types
1. He is in India for a minimum period of 182 days or more in relevant previous year.
2. He is in India for a period of 60 days or more during the relevant previous year and 365 days or more
during the Four years preceding to the relevant previous year.
Exception to the General Rule in Special Situation
For the following person, the first basic condition only has to be applied to determine the residential
status i.e. no need to apply second basic condition.

a) An Indian citizen leaving the country during the previous year for employment outside India.
b) An Indian citizen or a person of an Indian origin visiting India during the previous year.
c) An Indian citizen who is a member of crew in the ship

 If a person satisfies one or both of the two basic conditions then he will be considered as “Resident “
 If a person fails to satisfies any one of the two basic conditions then he will be treated as “Non-Resident “
 If the status of person is “Resident “then only apply the test of additional conditions. If an assessee is a
“Non-Resident” the tests of additional conditions are not to be applied.

Additional conditions:
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 Additional conditions are to be applied if the residential status of an individual is “Resident”. Additional
conditions are two. They are
1. He has been resident in India for 2 out of 10 previous years preceeding to the relevant previous year
2. He has been resident in India for a period of 730 days or more during 7 years preceeding to the relevant
previous year.

 If an individual satisfies both the additional conditions then he will be treated as Ordinarily Resident.
 IF an individual satisfies any one of the two or none of the additional conditions then he will be
considered as “Not Ordinarily Resident”.
Resident and Ordinarily Resident:
If an individual satisfying two or any one of the basic conditions and both of additional conditions
then he/she is treating as “Resident and ordinarily Resident”.
Resident but not Ordinarily Resident:
If an individual satisfying two or any one of the basic conditions and any one or none of
additional conditions then he/she is treating as “Resident but not ordinarily Resident”.
Non-Resident:
If an individual is not satisfying any one of the basic conditions the he is treating as “Non-Resident”

Residential Status of Hindu Undivided Family

The joint Indian family is known as Hindu Undivided Family. The head of the H.U.F is known as
KARTHA. Kartha is assessed for the family income and as such he is liable to pay tax on it. The other members
of the family are known as coparceners are not liable to pay tax on family income. If the Kartha for any reason
relinquishes his responsibility, one of the coparceners has to manage the affairs, and then the member will be
designated as the manager.
The residential status of H.U.F is determining in three types. They are
1) Resident and Ordinarily Resident
2) Resident and but not Ordinarily Resident
3) Non-Resident
Conditions for Determination of Residential Status
For determination of residential status of Individual two sets of conditions are considered
I. Basic conditions
II. Additional conditions
I. Basic conditions
These basic conditions are considered for determine whether the H.U.F is Resident or Non-Resident.
To determine the residential status of H.U.F first control and management of affairs is to be considered.
1. If the place of control and management of affairs of the H.U.F is wholly or partly situated in India then it
is treated as “Resident “
2. If the place of control and management of affairs of the H.U.F is wholly situated in outside India then it
is treated as “Non-Resident “
Additional conditions:
Additional conditions are to be applied if the residential status H.U.F is “Resident” i.e. If H.U.F status is
Non-Resident then tests of additional conditions are not to be applied. Additional conditions are two. They are
1. The Kartha or the Manager of the H.U.F has been resident in India for 2 out of 10 previous years
preceding to the relevant previous year
2. The Kartha or the Manager of the H.U.F has been resident in India for a period of 730 days or more
during 7 years preceding to the relevant previous year.
 If the H.U.F satisfies both the additional conditions then it will be treated as “Resident and Ordinarily
Resident “
 If the H.U.F satisfies any one of the two or none of the additional conditions then it will be treated as
“Resident and not Ordinarily Resident “.
Residential Status of the Firm and Association Of Persons (AOP)
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 The residential status of Firm and AOP determine in two types
1. Resident
2. Non-Resident
To determine the residential status of Firm and AOP place of control and management of affairs is to be
considered.
1. If the place of control and management of affairs of the Firm and AOP is wholly or partly situated
in India then it is treated as “Resident “
2. If the place of control and management of affairs of the Firm and AOP is wholly situated in
outside India then it is treated as “Non-Resident “
Residential Status of Company
The residential status of Company determines in two types
1. Resident
2. Non-Resident
To determine the residential status of Company place of control and management of affairs is to be considered.
1. If a company incorporated under Indian companies Act 1986 and the place of control and
management of affairs of the Company is wholly situated in India then it is treated as “Resident “
2. If a company incorporated outside India and the place of control and management of affairs of the
Company is wholly or partly situated in outside India then it is treated as “Non-Resident “
Special Note:
Control and management mean the place of where the meeting of board of directors is held and not the
place of where employers, managers will carry on their jobs.

INCIDENCE OF TAX
Sec. 5 of the Income Tax Act 1961 deals with scope of the total income. The total taxable income of the
person is depending upon the residential status of the person in the relevant previous year. i.e. including of
income earning in India and income earning in outside India in total taxable income is depends on the residential
status of the person in the relevant previous year.
Types of Incomes
Incomes are classified into two types
1. Indian Income
2. Foreign Income

1. Indian Income:
The following incomes are considered as Indian Incomes
i). Income earned or accrued in India and received in India is India Indian Income
E.g. Salary received by the employee from the employer for services rendered in India.
ii). Income Earned or accrued in India but received outside is India Indian Income
E.g. A foreign company wholly controlled managed from India declared dividends and the dividends
received by the shareholders out of India
iii). Income earned or outside India but such income received in India is Indian Income
E.g. Income from business outside India received in India.

2. Foreign Income:
i.). Income earned or accrued outside India and received outside India is Foreign Income
E.g. Profit from business outside India received in outside India
ii). An income which is not earned or accrued in India.

Tax liability of the assessee based on the Residential status:

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 1) Resident and Ordinary Resident:
An assesee’s residential status is “Ordinary Resident” during the relevant
previous year then he has to pay tax on both incomes i.e. Indian Income and Foreign Income.

2) Resident and but not Ordinary Resident:

An assesee’s residential status is “Not Ordinary Resident” during the relevant
previous year then he has to pay tax on Indian Income only and Income from business outside India and
controlled from India also.

3) Non-Resident:
An assesee’s residential status is “Non-Resident” during the relevant previous year then he has
To pay tax on Indian Income only.

Summarized Table

Type of Incomes Resident & Ordinary Resident & Not Non-Resident

Resident Ordinary Resident

1.Income earning and received in India Taxable Taxable Taxable

2.Income earning in India and received Taxable Taxable Taxable
in outside India
3. Income earning in outside India and Taxable Taxable Taxable
received in India
4. Income from business outside India Taxable Taxable Not Taxable
which is controlled from India
5. Income earning in Outside India and Taxable Not Taxable Not Taxable
Received in outside India.

AGRICULTURAL INCOME
13 Avanthi Degree and PG College
 Under Sec. 10(1) of the Income Tax Act 1961, Agriculture income is exempted from tax but it is
included in the total income for to determine the tax on non-agriculture income. As per constitution Central
Government has no right to levy tax on agriculture income because it is subject matter of state i.e. Income tax is
Central Act whereas agriculture is state subject.
Sec.2 (1A) deals with the agriculture income according to this section, If the following conditions are
satisfied, then it is treated as Agriculture income.
1. The land situated in India
2. The land used for agriculture purpose
3. Income must derive from agricultural land directly.

1. Land situated in India:

The land used for agricultural purpose should be situated in the geographical borders of the country. It
may be situated anywhere in the country i.e. income from agricultural land situated outside India it will not be
eligible to exemption u/s 10(1) of income tax Act and it will be taxed under other sources.
2. The land must be used for Agricultural purpose:
To consider an income as agriculture income it is necessary that the land is used for agricultural purpose
only and assessee perform agricultural activities on the land. The agricultural activities are classified into two
types. They are
i) Basic operations
ii) Subsequent operations
i). Basic operations:
If an agricultural operations involvement of human skill and labour on the land prior to germination of
plants, tilling of the land, sowing of seeds, planting and similar operations the land before the crop sprouts from
land then these operations are known as basic operations.

ii). Subsequent operations:

Operations performed after the produce sprouts then these operations as known as subsequent operations
like weeding, digging the soil around the growth, removable of undesirable growth, prevention of the crop from
insects and pests and prevention of the crop from depredation by cattle etc.

If an assessee has performed basic operations and subsequent operations or only basic operations then the
income received is treated as agriculture income.

If assessee performs only in these subsequent operations then the income received by him is not
considered as agricultural income.
3. Income must be derived from agricultural land directly:
Any income received by a person from agricultural land directly from agricultural activities is agricultural
income, the following are considered as agricultural income.
a) Rent received from the agricultural land in cash or in kind.
b) Income from sale of produce.
c) Income from process of converting crop into marketable product. Eg:- Process of turmeric after produce,
Process of Tobacco after produce etc.
d) Income from agricultural house property.
e) Income from growing flower and creepers.
f) Income from nursery.
g) Income from toddy is agricultural income when the actual cultivators of the trees receive it.
h) Compensation received from an insurance company on account of damaged crop is an agricultural
income.

Incomes not considered as Agriculture Income

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The following incomes are related to land but not considered as agricultural income.
1. Income from land used for potteries or as brick fields.
2. Income from land used as stone quarries.
3. Income from fisheries.
4. Income from brick making.
5. income from land let for storing of crops or timber
6. Income from supplying surplus water to another agriculturist.
7. Royalty income of mines.
8. Income from dairy poultry farming, cattle breeding, butter and cheese making.
9. Commission received by a landlord on sale of agricultural produce of tenant.
10. Rent of site flour mill.
11. Annuity received by a person in consideration of transfer of agricultural land
12. Ground rent for permanent shops at bazaar and stall fees from daily sellers.
13. Income from the sale of wild grass, forests, bamboos, trees, flower and fruits of spontaneous growth
Partly Agricultural Income:
If agricultural product is subjected to any manufacturing process, the profit from the sale of finished
product is partly from business and partly from agricultural. In case of composite income, the total income
should be identified and segregated into agricultural income it is exempted from tax, and nonagricultural income
it is taxable i.e income received by a person related to agricultural and manufacturing activities the such income
called as partly agricultural income.
1. Profit of sugar factory:
For determining the taxable income in case of profit from sugar factory the average market value of the
agricultural produce i.e. sugar cane which has been utilized as a raw material for sugar factory shall be deducted
from the income of the factory ,the deducted value of agricultural produce includes expenses of cultivation ,rent
paid for the land plus reasonable rate of profit after deducting value of agricultural produce from income of sugar
factory the balance is taxable as business income.
2 . Income from manufacturing of tea:
If the assessee himself grows tea leaves and manufacturing tea in India and he received income on sale
of tea grown and manufacturing is partly agricultural and partly non-agricultural and out of received income 60%
of income is treated as agricultural income exempted from tax and 40% of income is non -agricultural is taxable.
In case any salary received by a partner from a firm which is engaged in the business of growing tea leaves
and manufacturing tea then 60% of such salary is agricultural income and 40%is nonagricultural income.
3 . Income from manufacturing coffee:
If assessee derive income from sale of coffee grown and cured by the seller in India is partly agricultural and
nonagricultural income out of that 75% of income is treated as agricultural and exempted from tax and 25% of
income is nonagricultural income is taxable.
If assessee received income from sale of coffee grown, cured, roasted and grounded manufacture in India
60% of income is treated as agricultural and exempted from tax 40% is nonagricultural income and taxable.
4 . Income from manufacturing of rubber:
If the assessee received income from sale of growing and manufacturing in India out of that income
received 65% of income is treated as agricultural income and exempted from tax and 35% of income treated as
nonagricultural income is taxable.
Rules for determining partly agricultural income and partly business income
Crop Agricultural Income Non-Agricultural Income
Income from growing, and manufacturing Tea in India 60% 40%
Income from growing, curing of coffee in India. 75% 25%
Income from growing, curing, roasting, and grounded by 60% 40%
the seller in India.
Income from growing and manufacturing of rubber in India 65% 45%

TREATMENT OF AGRICULTURE INCOME

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 According to Sec.10 (1) agricultural income is exempted from tax. But it is included in the total income
of individual to determine tax liability of non-agricultural income.
The process of adding the agriculture income to non-agriculture income known as “Integrating of the
Income or clubbing of the income”. The integration of agriculture income in the total income is made when
assessee satisfying the following conditions.
1) If the net income from the agriculture is more than Rs.5000.
2) If the non-agriculture income is more than exemption limit i.e Rs.2,50,000 for non-senior citizen, Rs.
3,00,000 for senior citizen and Rs.5,00,000 for super senior citizen for the assessment year 2023-2024.
Procedure of Tax Computation
Step1. Add the agriculture income and non-agriculture income and calculate tax on total income as per slab
rates.

Step2. Add the agriculture income to tax free income Rs.2,50,000 for non-senior citizen, Rs.3,00,000 for
senior citizen and 5,00,000 for super senior citizen and calculate tax on exempted income as per slab
rates.
Step3. Calculate Income tax with following equation
Income Tax = Tax on total income (-) Tax on exempted income.
Step4. Deduct rebate u/s 87A if total income is less than Rs.5,00,000.
Step5. Add surcharge 10% if income is more than 50 Lakhs less than 1crore 15% if total income is more than
1crore.
Step6. Add Education and Health Cess @ 4% on income tax

Note: Non-agricultural income means Income from salary, House property, Business or Profession, Short term
capital gain and other sources except Long term capital gain, short term capital gain on equity shares and casual
incomes.

Agricultural House
8., Tthe house which is satisfied the following conditions is considered as agricultural house. Income from such
house property is an exempted income
1. The house must be situated near to agricultural land.
2. The house is under the control of agriculturist.
3. The house is used for conducting agricultural activities.
4. The house is subject to land revenue tax.
5. The house is situated in a rural area.

9. Permanent Account Number (PAN):

Permanent Account Numbers means a 10 digits alpha numeric number which is allotted and issued by the
Income tax department to the assessee for easy identification. In case need, this number is useful to trace out the
previous returns submitted by the assessee and assessment orders passed on by the department. The assessee has
to quote PAN in all future correspondences with the income tax department.
If any person wants to obtained PAN card he applies to the Assessing officer in prescribe Form No.49A
with his details.

Provisions regarding allotment of PAN:

 Whose total income is more than exemption limit
 Any person carrying on business or profession whose total sales are exceeds Rs.5,00,000.
 Charitable trust or religious institution.
 Any person specified by central government.

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Quoting of PAN made compulsory in the following cases.
 Sale / purchases of immovable properties value is more than 10,00,000
 Sale / purchases of motor vehicles. (other than two wheelers)
 Deposits exceeding Rs.50,000 in bank.
 Sale / purchases of securities exceeds Rs.1,00,000.
 In case of exports and imports.
 Vat dealers
 Whose income is tax at source is likely to be deducted.
 Who travel to foreign country in the previous year except neighbor countries.
 In case of payment of hotel bill exceeds Rs.25,000 etc,.
 GST dealer

PREVIOUS YEAR FOR DEEMED INCOMES:

Incomes which are belongs to assessee found by the assessing officer in the books of accounts, if the
explanation given by the assesee about these incomes is not satisfactory to the assessing officer then these
incomes treated as deemed incomes.
The following are the deemed incomes:
1. Unexplained Cash credit (Sec.68):
It is a credit in the of accounts books of assessee for which the assessee is not in a position to give
satisfactory explanation to the assessing officer then the same will be treated as deemed as income of the
previous year.
2. Unexplained Investments (Sec.69):
The investment possessed by the assessee which are not record in the books of accounts they are found
by the assessing officer, then assessee is unable to give satisfactory explanation to the officer then it is treated as
deemed as income for the previous year in which they are made.
3. Unexplained money or jewelry or any other assets (Sec.69A):
When the assessee is found with the excess money then the balance shown by the cash book or holding
jeweler or valuable articles which are not record in the books and the assessee is not in position to explain how
he has acquired these, in such a case they will be treated deemed as income of the financial year in which they
have found in the possession.
4. Investments not fully disclosed (Sec.69B):
If the assessee has understated the amount of investments in the books the understated amount of
investment shall be deemed to be income of the assessee for the year in which such investments have been made.
5. Un-explained expenditure (Sec.69C):
If assesee spend money on marriage, party or on other items but he is unable to satisfy the authorities on
the source of income from where such amount was spent it called unexplained expenditure and it is treated
deemed as income of the previous year in which such expenditure is incurred.
6. Payment of Hundi Money in cash (Sec.69D):
Every payment against hundi must be made through account payee cheque. In case such payment made
in cash, it shall be deemed as income of the year in which such payment is made.

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