Direct Tax (Income)

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Income tax
History of income tax in India
 Introduced for the first time in India by James Wilson in 1860 for the British government.
 Suppression of the first freedom struggle of 1857 caused heavy expenditure for the
British government which led to large addition to the public debt.
 As a result government decided to impose tax on income.
 1886 - seperate Income Tax Act was passed and remained in force upto 1917. Several
amendments were made.
 In 1918 a new Income Tax Act was passsed. And it was replaced by another new Act in
1922 and remained in force upto the assessment year 1961-1962 with numerous
amendments.
 The Act of 1922 was very complicated on account of innumerable amendments. So

Government of India referred it to the Law Commission in 1956 to simplify and prevent
the evasion of tax.
 Law Commission submitted its report in September 1958. But in the mean time
Government of India had appointed Direct Taxes Administration Enquiry Committee to
suggest measures to minimise inconveniences caused to assessees and also to prevent
tax evasion.
 Committee submitted its report in 1959.
 In consultation with the Ministry of Law , final Income Tax Act was passed in 1961.
 Came into effect on 1 April 1962.
 Income Tax Rules 1962.
 The Act applies to whole of India.
Characteristics of Income Tax
 Direct tax
 Central tax as it is levied and collected by central government.
 Tax on total income
 Tax exempted limit - tax is imposed only if the income exceeds the exempted limit.
 Progressive tax rates - the rate of tax increases with increase in income.
Prepared by Anaswara U, BBA LL.B, LL.M & Bennat Tom V, BA LL.B, LL.M
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 Tax burden is more on rich rather than poor.
 Administration - tax is imposed and recovered by income tax department under the
control of Central Board of Direct Taxes.
 Allocation of amount of income tax - amount collected by government is allocated

among central and state government according to the recommendation of finance
commission. State government will not be given any share of income tax revenue from
the following amounts
o Income tax amount recovered from companies
o Amount of surcharge
o Amount of health and education cess
Important definitions
Section 2 and 3 of the Income Tax Act deals with definitions.
Assessment year
Section 2(9)
Period of 12 months, commencing on April 1 every year and ending on 31 March of the next
year.
Assessee is liable to pay tax on the income of the previous year during the next following
financial year.
Assessment year 2022-2023
Tax paid for the previous year 2021- 2022
Previous year
Section 3
Previous year is the financial year immediately preceding the assessment year.
Incase of newly set-up business/ profession/ any other new source of income during the
financial year, the previous begins from the date of setting up the new business or the date of
coming into existence of the new source of income and will end with the said financial year.
 Income tax is charged on the total income of the previous year at the rates prescribed by
the relevant Finance Act for fhe year.
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Exception to the general rule ( taxation of the previous year's income during the same year)
 Income of non resident from shipping business
Non resident carrying on shipping business which has no representative in India, any
income derived from carrying passengers, livestock, mail or goods shipped at port in
India will be taxed in the year of its earning.
 Income of persons leaving India
When it appears to assessing officer that an individual may leave India during the current
year or shortly after its expiry and has no present intention of returning to India the total
income of such individual from the expiry of PY to the probable date of departure from
India shall be charged to tax in the same assessment year.
 Income of an Association of Persons or a Body of Individuals or an artificial judicial

person for a particular event or purpose.
When it appears to assessing officer that any AOP/BOI/AJP formed or established for a
particular event or purpose likely to be dissolved in the AY which it is formed then the
total income shall be chargeable to tax in that assessment year.
 Transfer of property to avoid tax
In the opinion of assessing officer, assessee is likely to transfer his property to avoid tax
then the total income of such persons for the period of expiry of PY to the date of
assessing officer commences proceedings u/section 175 shall be chargeable to tax.
 On discontinuance of a business or profession
The income of the period from the expiry of PY to the date of discontinuance at the
discretion of the assessing officer, be charged to tax in the same assessment year .
Person
Section 2(32)
Person includes;
i. An individual
ii. Hindu Undivided Family
iii. Company
iv. A firm including LLP
v. Association of Persons/ Body of Individuals
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vi. Local authority
vii. Every artificial judicial person
Assessee
Section 2 (7)
A person;
 Who is liable to pay any tax or
 Who is liable to pay any other sum of money under this Act
 In respect of whom any proceedings under this Act has been taken for the assessment
of his income or assessment of fringe benefits.
 In respect of whom any proceedings under this Act has been taken in respect of the
assessment of the income of any other person in respect of which he is liable.
 In respect of whom any proceedings under this Act has been taken for the assessment
of the loss sustained by him or by such other person.
 In respect of whom any proceedings under this Act has been taken for the amount of
refund due to him or to such other person.
 Deemed assessee under any provision of this Act.
 Assessee in default under any provision of this Act.
Deemed assessee
A person who is deemed to be an assessee for some other person is called deemed assessee.
Example, after the death of a person, his legal representative will be treated as an assesee for
that income of the deceased.
Assessee in default
When a person is responsible for doing any work under the Act and he fails to do it, he is called
assesee in default.
Income
Section 2 (24)
Income is very important as tax is charged on the income of a person. It is the subject matter of
the income tax.
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Inclusive definition, not a conclusive definition.
Income includes;
 Profit and gains
 Dividend
 Voluntary contributions received
 Value of perquisite or profits in lieu of salary
 Special allowance or benefits other than perquisites
 Any interest, salary, bonus, commission etc.
 Cash assistantance received
 Capital gains
 Any winning of lotteries, cross word puzzles, etc.
Concept of income
 Income means a monetary income.
 Definite sources - 5 heads of income
 Legal and illegal income is taxable.
 Not necessary that income should be received regularly or periodically.
 Lump sum received can also be income.
 Income should be received from outside.
 It is not essential that income must be received in the form of money.
 Temporary or permanent in nature
 If an assesee has earned an income but not actually received it, it will be treated as the
income of the assessee because he is entitled to receive it
 Reimbursement of expenses is not income.
 Pin money is not taxable.
 Disputed income is also taxable.
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 Income may be plus or minus.
Gross total income
Total of the income of the assessee during a previous year from various heads of incom, if there
is any losses from sources and income from other sources under the same head such losses
are set off against income of the same head, and brought forward losses is gross total income.
Total income
Gross total income as reduced by deduction under section 80C to 80U.
Amount left after making the deductions from gross total income is total income.
Charging section
Section 4 of the Income Tax Act 1961
Gives power to the central government to charge tax on income.
Following principles are relevant in charging tax on income:
 Income tax is an annual tax on income.
 Income of the previous year is taxable in the assessment year based on the rates
applicable for the assessment year.
 Finance Act passed by the Parliament fixes the rates of the tax applicable for the
relevant assessment.
 Tax is charged on income of every Person as defined in the Act.
 Tax is charged on the total income of the assessee.
 Wherever possible income tax must be deducted at source or must be paid in advance.
Residential status and incidence of tax
Residential status is very important in determining the tax liability of an assessee. Because total
income of assessee during the previous year is calculated on the basis of his residential status
in India during the previous year.
Residential status of;
Individual
HUF
Firms, AOP/ BOI
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Company
Every other person
Individual
Section 6(1)
Residential status of an individual can be
 Resident and ordinarily resident
 Resident but not ordinarily resident
 Non resident
For determining the status there are 2 basic conditions and 2 additional conditions. They are:
Basic conditions
1. The assessee is in India during the previous year for a period of 182 days or more; or
2. The assessee is in India during the previous year for a period of 60 days or more and has
been in India for a period of 365 days or more during the 4 years preceding the previous
year.
 The 60 days mentioned here will be extended to 182 in the following cases:
o In the case of individual who is a citizen of India, who leaves India in any previous
year as a member of the crew of an Indian ship or for the purpose of employment
outside India.
o Individual - citizen of India or a person of Indian origin, who comes to India on a

visit to India in any previous year.
Any assessee who satisfies any one of the basic conditions mentioned above is Resident in
India.
In CIT v. Abdul Razak (2011), it was held that employment includes self employment like
business or profession setup by assessee abroad.
The purpose of visit is immaterial, but should not be for permanent stay.
In CIT v. Suresh Nanda (2015), held that forced stay in India due to invalid impounding of
passport to be excluded for determination of residential status.
Additional conditions
1. The assessee has been resident in India ( satisfying any of the basic conditions ) in at
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least 2 out of 10 years preceding the previous year.
2. The assessee has been in India for a period of 730 days or more during the 7 years
preceding the previous year.
 Resident and ordinarily resident
An assesee satisfying any of the basic conditions and both the additional conditions
 Resident but not ordinarily resident
An assessee satisfying any one of the basic conditions but not satisfying both the additional
conditions.
 Non resident
An assessee satisfying none of the basic conditions
Following points are important
 Stay of assessee in India need not be continuous.
 24 hours will be counted as one day for the purpose.
 Days on entry and exit are included in the period of stay in India.
 The purpose of visit to India is immaterial.
 Person is deemed to be Indian origin, if he or either of his parents or any of his grand
parents was born in Undivided India.
HUF
Resident and ordinarily resident
 The management and control of its affairs is situated wholly or partly in India during the
previous year.
 Its manager or karta has been resident in India for 2 out of 10 years preceding the
previous year and
 He has been in India for a period amounting in all to 730 days or more during the 7 years
preceding the concerned year.
( i.e, karta is resident in India satisfying the additional conditions.)
Control and management means de facto control and not merely the right to control and
management.
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It is not necessary that control and management must situated where the business or
profession is being carried on.
Not ordinarily resident
If karta or manager is not ordinarily resident then HUF is also not ordinarily resident.
In Marimuthu Pillai v. CIT, Where during the last 10 years preceding the previous year the
manager or karta of HUF had been different from one another, the total period of stay of
successive kartas of the family should be aggregated to determine the residential status of
karta and consequently its HUF.
Non resident
Only when the entire control and management of their affairs is situated wholly outside India.
Firm, AOP/ BOI
Resident and ordinarily resident
Tha control and management of its affairs is situated wholly or partly in India during the
previous year.
 Firm, AOP/BOI cannot be not ordinarily resident.
Non resident
Only when the entire control and management of their affairs is situated wholly outside India.
Company
Section 6 (3)
Resident (ordinarily resident)
A company is said to be resident in India in any previous year if;
 It is an Indian company, or;
 Its place of effective management (POEM) in that year is in India
POEM means a place where key management and commercial decisions that are necessary for
the conduct of the business of an entity as a whole are, in substance made.
Company never be not ordinarily resident.
Non resident
If company does not satisfy both the aforesaid conditions of residence, i e, not a Indian
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company or POEM not in India.
Every other person
Local authority, artificial judicial person
Resident
Determined in the same manner of firm or AOP.
If control and management of its affairs are wholly situated outside India then it is non resident.
 Section 6(5) , Different residential status for different sources of income for the same
assessment year is not possible.
Scope of total income on the basis of residence or incidence of tax
Incidence of tax on a taxpayer depends on his residential status and also on place and time of
accrual or receipt of income.
Incidence of tax in case of ordinarily resident
Section 5(1)
Total income of any previous year of a person who is a resident includes all income from
whatever source derived which;
a) Is received or deemed to be received in India in such year by or on behalf of such person.
b) Accrues or arises or is deemed to accrue or arise to him in India during such year.
c) Accrues or arises to him outside India during such year.
Incidence of tax in case of not ordinarily resident
Total income of any previous year of a person who is a not ordinarily resident includes all
income from whatever source derived which;
a) Is received or deemed to be received in India in such year by or on behalf of such person.
c) Accrues or arises to him outside India from a business controlled in or profession set up
in India.
Incidence of tax in case of Non resident
Total income of any previous year of a person who is a non resident includes all income from
whatever source derived which;
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a) Is received or deemed to received in India in such year by or on behalf of such persons.
Received
Receipt of income on the first occassion
Deemed to be received
Section 7
Income has not actually received, but it is deemed to be received u/ Income Tax Act 1961.
Its instances are:
 Employer's contribution to recognised provident fund
 Transferred balance ( unrecognised provident fund is recognised by commissioner of IT

in a particular year, existing balance in the fund to the credit of the employee is
transferred to the recognised provident fund).
 Dividend is deemed to be received in the year in which it is declared.
 Income of the other persons clubbed with the income of the assessee.
Accrue or arise
Right to receive the income as against receipt of income.
Deemed to accrue or arise
Section 9
Income has not actually accrued or arisen in Indiabut it is deemed to accrue or arise in India.
 Income accruing or arising outside India, directly or indirectly through or from,
o Any business connections in India
o Any property or asset or source of income in India
o Transfer of capital asset situated in India
 Salary earned in India and received outside India
 Salary payable by the government to a citizen of India for services outside India
 Dividend paid by an Indian company outside India
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 Income by way of interest
 Income by way of royalty.
Exempted income (non taxable income)
Section 10
Exempted income is that income on which income tax is not chargeable.
In computing the total income of a previous year of any person, any income falling within any of
the following clauses shall not be included in total income, and is not taxable.
 Agricultural income
However state government can impose tax on agricultural income.
 Amounts received by a member from HUF out of the income of the family or out of the
impartible estate of the family is exempt from tax.
However income from converted property is taxable in the hands of the individual who
transferred the property.
 Share of partner in the profit of a firm
 Interest on moneys standing to the credit of individual in his NRE account.( non resident
extenal account).
 Remuneration received by individuals who are not citizens of India
a) Salary of diplomatic personnel
b) Salary of foreign employees
c) Salary of ship's crew
d) Remuneration of foreign trainee
 Compensation received on account of disaster
 Educational scholarship
Scholarship granted to meet the cost of education, from government or otherwise.
CIT v. Balachandran (2012), held that exemption is available even if the amount has been
spent for other purposes.
 Payment to MPs and MLAs
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 Awards,- any payment made whether in cash or in kind as an award instituted by central
government, state government or any other bodh and approved by central government in
that behalf.
 Family pension of a member of armed forces
 Income of khadi and village industries board.
 Income of specified charitable funds
o The prime minister national relief funds
o The prime minister fund ( promotion of folk art)
o The prime minister aid to students fund
o The national foundation for communal harmony
o The swach bharat kosh
o The clean ganga fund
 Income of registered trade unions
 Income of scheduled tribes residing in tribal areas or state of Arunachal Pradesh,

Mizoram, Manipur, Nagaland, Tripura, Sikkim, or Ladakh region of state of Jammu and
Kashmir
 Income of Board, trust, development authorities
 Subsidies received by planters
 Income of a local authority
 Annual value of one place of ex Indian ruler.
Income of a political party
Section 13 A
Income received as income from house property, capital gains, income from other sources and
any income by way of voluntary contributions received by a political party shall be exempt from
tax.
Available only for those political parties registered with the Election Commission and subject to
the following conditions;
o Political party to keep and maintain such book of accounts and other documents.
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o Must record every contribution of more than Rs 20000 along with the name and address
of the contributor.
o Book of accounts must have audited by a charted accountant.
o The treasurers of a political party shall in each financial year prepare a report of
contribution received in excess of Rs 20000 from any person or company and submit to
the election commission.
Five heads of income
All kinds of taxable income of an assessee falls under any of the following five heads.
The income which do not finds place under any of the first four heads, fall under the head -
income from other sources.
The five heads are;
1. Income frome salary
2. Income from house property
3. Profit and gains of business or profession
4. Capital gains
5. Income from other sources
Income from salary
Section 15, 16, 17 of Income Tax Act 1961
Section 15 charging section
Section 16 Deductions
Section 17 meaning of salary, perquisites and profit in lieu of salary
Section 17 (1) , salary includes;
 Wages
 Any annuity or pensions
 Any gratuity
 Aby fees, commission, perquisites or profit in lieu of salary or in addition to any salary or
wages.
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 Any advance of salary but does bot include loan gor purchasing car, cycle, house, etc.
 Any payment received by an employee in respect of any period of leave not availed by
him.
 Employer's contribution to recognised provident fund
 Transferred balance
 Contribution made by government or any employees to the account of an employee

under a pension scheme notified by government.
Different forms of salary
 Basic salary
 Leave salary
 Compensation for retrenchment
 Fees and commission
 Bonus
 Death cum retirement gratuity ( at the time of retirement taxable under salary, in case of
death taxable under income from other sources of the legal heirs).
 Pension
 Annuity
o If it is received from present employer it is taxable as salary
o If it is received from former employer it is taxable as profit in lieu of salary
o It it is received from person other than employer it is income from other sources.
Features of salary
 Employer and employee relationship
 Salary from more than one source is taxable under head salary
 Salary must be real and not fictitious.
 Receipt from person other than employer is not salary
 Voluntary foregoing is not taxable.
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 Surrender of salaries , the part so surrendered shall be exempt from this salary income.
Section 15
Following incomes are taxable under the head salaries
 The salary due from an employer or former employer to an assessee in the previous year,
whether paid or not.
 The salary paid or allowed to him in the previous year by or on behalf of an employer or
former employer though not due or before it becomes due
 Any arrear of salary apid or allowed to him in the previous year by pr on behalf of an
employer or former employer if not charged to income tax for any earlier previous year.
Allowances
Payment in cash made by the employer to his employee monthly other than salary is called
allowances.
It is a fixed sum of money paid regularly in addition to salary for the purpose of meeting some
particular requirements connected with services rendered by an employee.
There are three types of allowances.
 Taxable
 Allowances exempt upto specific limits
 Fully exempted allowances.
Fully taxable
 Entertainment allowance
 Dearness allowance and dearness pay
Dearness allowance is on account of high prices.
Dearness pay is paid as per terms of employment.
 Fixed medical allowance
 Tiffin allowance
 Servant allowance
 Non practicing allowance given to medical doctors who are banned form doing private
practice.
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 Hill allowance
 Warden allowance
 Deputation allowance
 Overtime allowance
 Other allowances like family, project, margiage, rural etc .
Allowances exempt to specific limit
 House rent allowance
 Special allowance for meeting certain expenditure
 In the performance of duties of his office
o Travelling allowance
o Daily allowance
o Conveyance allowance
o Helper allowance
o Academic allowance
o Uniform allowance
 To meet the personal expenses
o Children education
o Children hostel
o Transport allowance from residence to office
Fully exempted allowances
 Foreign allowance - paid by government to Indian citizens outside India for rendering
services abroad. Not available for non government employees and who are not citizens
of India.
 Allowances to HC and SC judges.
 Allowances from UNO to its employees
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Perquisites
Section 17 (2)
Perquisites means any benefits attached to an office or position in addition to salary or wages.
Denotes a personal advantage.
May be given in cash or in kind.
If it is given in kind, it should be capable of being measured in terms of money.
There are three types of perquisites;
 Perquisites taxable in case of all employees
 Perquisites taxable in case of specified employees
 Tax free perquisites
In case of all employees
 Value of residential accommodation provided to the assessee by his employer.
 Payment by the employer in respect of any obligation which would have been payable by
the assessee.
o Any loan due on his employee
o Education expenses of children
o Salary of the domestic servant of the employee
o Legal expense incurred by employer to defend or save employee.
 Value of any specified security or sweat equity shares alloted to employees by employer
free of cost or at concessional rates.
 Keyman insurance
Specified employees only
Employees who fulfill any of the following three conditions are called specified employees.
1. A director employee - an employee who is a director in the employer company whether

full time or part time.
2. Employee having substantial interest in the employer company - if he is benificial owner

of equity shares carrying not less than 20% of the voting rights.
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3. Any other employees other than those mentioned above drawing salary in excess of
50000 rupees. The amount of Rs 50000 is calculated at allowing deductions under
section 16.
Perquisites taxable only for specified employees are
o Facility of motor car
o Gas, electricity, water
o Sweeper, watchman, gardner, and personal attendant
o Educational facility to the members of employee's family
o Leave travel concessions
Tax free perquisites
Value of following perquisites shall not be included in the salary income of the employee
 Medical benifits
 Tea or snacks provided in office
 Residential accommodation provided at site
 Expenses of telephone including mobile phone
 Scholarship to employees or their children
 Refresher course to become more efficient
 Rent free house and conveyance facility provided to HC and SC judges
 Laptops and computers provided by employer for personal use of employee or family.
Profit in lieu of salary
Section 17(3)
Means payment made by employer to employees instead of salary or in addition to salary.
It includes
 Any compensation due to or recieve by an employee from employer in connection with

his termination.
 Any amount due or received from employer or former employer.
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 Any amount received from unrecognised provident fund to the extent of employer's
contribution and interest thereon.
 Any amount received under keyman insurance policy
 Any amount due or received from any person before joining employment with that
person or after cessation of employment with that person.
Maybe in lump sum or installments.
Exemption of profit in lieu of salary
 Death cum retirement gratuity
 Payment received in commutation of pension
 Retrenchment compensation received by workman
 Any amount received at the time of voluntary retirement from a public sector or local
authority or cooperative society or a university to central government scheme.
Deductions
Section 16
Gross salary = salary+allowances+perquisites
From the groas salary, the following deductions are allowed to compute income from salary.
1. Standard deductions, i.e, the flat deduction to salaried employees for meeting their
expenses. (Rs 50000 or the amount of salary received).
2. Entertainment allowances; in case of government employees
o The amount of entertainment allowance received
o 1/5 of the basic pay
o Rs 5000
Whichever is less is deductible.
3. Professional tax or employment tax
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Income from house property
Section 22 to 27
Rental income is chargeable under the head income from house property.
Section 22 of Income Tax Act says that;
The assessee is chargeable to tax on the annual value of the property consist of any buliding or
land appurtenant of which he is the owner and which is not used by him for his own business or
profession.
Three conditions have to be satisfied, they are
 Consist of any building or land appurtenant thereto
 He is the owner
 Not used by him for his own business or profession.
Annual value
This is the inherent capacity of the property to earn income,
 It has been defined as the sum for which the property might reasonably be expected to
let from year to year.
Building or land appurtenant thereto
Buliding includes;
Residential house, warehouses, stadium, auditorium for entertainment, cinema halls, building for
let out for office use, open use theatre, dance and music halls, lecture halls, etc...
Land appurtenant thereto includes;
Compound, play ground, kitchen garden, car parking, connecting roads in the factory, etc.
Owner
Owner includes legal owner and deemed owenr.
Deemed owner
 Transfer of property to his spouse or minor children without adequate consideration
 Holder of impartiable estate.
 Member of cooperative society, property tranfer under a house buliding scheme.
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 Section 53A of Transfer of Property Act
 Long term lease for more then 12 years.
Important points
 Income from house property situated abroad is taxable only in case of ordinarily
residents.
 Disputed ownership; decision rests with income tax department. Generally recipient of
rent or person who is in possession of property is taxable.
 Property by coowner (section 26) ; share of each such person from the property shall be
included in their respective total income. Portion occupied by a co-owner for his
residence will be treated as self occupied house and its annual value will be nil.
 Composite rent - building is let out with other facilities ( electricity, cooler, lift, water
pumb, etc.) if rent of the building can be seperated from the rent of such facilities it is
taxable under income from house property.
 Rent from vacant plot of land is income from other sources.
 Subletting is income from other sources.
 Paying guest accommodation is profit and gains of business or profession.
Deductions
 30% of annual value
 Interest on loan to purchase, construct, repair or renovate of the building.
Profit and gains of business or profession
Section 28 to 44
Income of every assessee from own business or profession is assessed under the head of
profit and gains of business or profession.
Business
Section 2(13)
Business includes any trade, commerce or manufacture; orr any adventure or concern in the
nature of trade, commerce or manufacture.
 Aim is to make profit.
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 It is not necessary that there should be series of transaction to constitute a business.
 Occassional transactions are also considered as business.
 Intention of the buyer must be to earn profit.
 Intention of purchase is important to determine rhe nature of the transaction.
Example: when a person purchase a commodity for own use and sells it later at a profit the
income is not business income.
Profession
Section 2(36)
Profession means those activities for which specialised knowledge and intellectual or manual
skill are required.
Example: the work of a doctor, lawyer, architect.
Income form vocation are also assessed under this head.
Vocation includes all those activities performed to earn livelihood, like self employment,
ventures, brokerage, dancing, music, insurance agency which do not require professional skills.
Incomes which includes under this head
 Profit and gains of business or profession carried by assessee during the previous year.
 Profits earned from illegal business.
 Repayment of any customs or excise duty to any person against export.
 Benifits or perquisites received by an assessee while exercising a business or

profession.
 Any interest, salary, bonus, commission, or remuneration by a partner.
 Any sum received under keyman insurance policy.
 Income from speculative transaction by buying and selling of shares or debentures.
Provisions regarding assessment of profits and gains of business or profession
 Business or profession carried carried on by assessee himself or his representative,( i.e,

guardian of minor or receiver/ trustees).
 Tax is chargeable on the aggregate income from all business or profession carried on by
24
the assessee.
o Different business are not taxed seperately.
o In a year he earns profit from one business and sustains loss in the other; he can set
off loss of one business against the profit of the other;
o And balance of amount shall be income under this head.
 Profit and loss of speculative business kept separate
o if there is a loss in speculative business it can be set off against profit of

speculative business and not against profit of other business.
 Business or profession is carried on by assessee for any time during the previous year.
 Profit on sale of the assets on winding up of a business
o Sale of assets is capital gain
o Sale of stock in trade is business transaction and is taxable under this head.
 Only leagal ownership is considered.
 No tax is payable on anticipated profit or notional profit(book profit).
 Income of illegal business is also taxable.
 Expenses incurred before setting up of a business is not admissible.
 Income is profit not gross receipt.
Deductions
Two types
 Expressly allowed
 Expressly disallowed
Expressly allowed deductions
 Expenses in respect of building ( rent, repair, local taxes, insurance premium)
 Expenses in respect of plant and machinery, furniture, etc.
 Depreciation on both tangible and intangible assets
 Expenditure on scientific research
25
 Capital expenditure to obtain licence to operate telecommunication
 Expenditure on specified business
 Insurance premium regarding stock and stores
 Insurance premium for health of employees
 Bonus or commission to employees
 Interest on borrowed capital
 Contribution to recognised provident fund, gratuity fund
 Bad debt
 Expenditure on family planning
 Entertainment expenditure
 Advertisement expenses
 Gift for publicity, free samples
Disallowed deductions
 Expenditure on advertisement published by a political party
 Interest on capital
 Salary of proprietor
 Provision for taxation
 Provision for bad debt
 Income tax
 Gift
Capital gains
Section 45 to 55
The profit or gains arising from the transfer of a capital asset made in a previous year is taxable
as capital gain.
The important element of capital gains include the following;
26
 Existence of a capital asset
 Transfer of capital asset
 Profit or gain arising from such transfer
Capital asset
It means property of any kind that is tangible or intangible, moveable or immovable, fixed or
floating and includes goodwill, jewellery, shares, manufacturing licence, investment, etc.
Types of capital asset
 Short term capital asset
 Long term capital asset
Short term capital asset
Capital asset held by the assessee for less than 36 months before its transfer is short term
capital asset.
Exception
 Shares held in a company, any other listed securities, units of Unit Trus of India, any
units of recognised mutual funds held by an assesee for less than 12 months before its
transfer.
 Listed shares held by an assessee for less than 24 months before its transfer.
 Assets used for business or profession and depreciation on the basis of written down
value method is always treated as short term capital asset.
Any gains from the short term capital asset is short term capital gains ( STCG)
Long term capital asset
Capital asset held by an assesee for more than 36 months before its transfer is called long term
capital asset.
Long term capital asset are taxed at the rate of 20% of its value.
Transfer of capital assets
Transfer in relation to capital asset includes;
 The sale, exchange, relinquishment of assets
 Extinguishment of rights in the assets
27
 Compulsory acquisition under any law
 Asset is converted into stock in trade
 Conversion of business to limited company
 Transfer of right in immovable property through the medium of cooperative societies or

company, etc.
 Maturity or redemption of zero coupon bond.
Zero coupon bonds are bonds issued by infrastructure company or infrastructure capital
fund or infrastructure deby fund notified by central government, and no payment or
benefit received or receivable before maturity or redemption.
Transactions which are not regarded as transfer
 Distribution of assets in kind by a company to its shareholders on liquidation.
 Distribution of capita assets in kind by HUF to its members at the time of partition.
 Transfer of capital asset under a gift or will or irrevocable trust.
 Transfer of capital asset by a wholly owned subsidiary company to its holding company.
 Transfer of capital asset by a wholly owned holding company to its subsidiary company.
 Any transfer in the scheme of amalgamation of capital asset by an amlagamating

company to amlagamated company.
 Any transfer by way of preferance sharesto equity shares.
 Transfer of debentures, deposit certificate to shares.
Computation of capital gain
Short term capital gains =
Full value of consideration
Less cost of acquisition
Less cost of improvement
Less cost of transfer
Long term capital gains =
Full value of consideration
28
Less indexed cost of acquisition
Less indexed cost of improvement
Less cost of transfer
Income from other sources
Section 56 to 59
A receipt shall be taxable under this head , if two conditions are satisfied;
 Shall be taxable income
 Does not fall under any one of four heads
According to section 56(2), the following incomes are taxable under this head;
 Dividend
 Casual income ( winning of lotteries, horse races)
 Gift
 Share premium in excess of market value
 Income by way on interest received or compensation
 Sum received by assessee from employees as contribution to recognised provident fund
 Interest on securities ( debentures)
 Letting of plant and machinery
 Received under keyman insurance policy
 Compensation of termination of employment
In addition to section 56 (2), the following incomes are also chargeable under this head by virtue
of section 56(1);
 Income from subletting
 Interest on bank deposit
 Interest on company deposit, loan, etc.
 Remuneration received from a person other than employer
29
 Income from royalty
 Income from undisclosed sources
 Director fees
 Income from private tuition
 Interest on income tax refund
 Family pension received by family members
 Agricultural income outside India
 Salary of MPs and MLAs
 Dividend from cooperative society
 Remuneration from writing articles in a journal

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1

History of income tax in India

 As a result government decided to impose tax on income.

 The Act of 1922 was very complicated on account of innumerable amendments. So

 Committee submitted its report in 1959.

 Came into effect on 1 April 1962.

 Income Tax Rules 1962.

 The Act applies to whole of India.

Characteristics of Income Tax

 Central tax as it is levied and collected by central government.

 Tax on total income

 Tax burden is more on rich rather than poor.

 Allocation of amount of income tax - amount collected by government is allocated

o Income tax amount recovered from companies

o Amount of health and education cess

Section 2 and 3 of the Income Tax Act deals with definitions.

Assessment year 2022-2023

Tax paid for the previous year 2021- 2022

 Income of non resident from shipping business

 Income of persons leaving India

 Income of an Association of Persons or a Body of Individuals or an artificial judicial

 Transfer of property to avoid tax

 On discontinuance of a business or profession

ii. Hindu Undivided Family

iv. A firm including LLP

v. Association of Persons/ Body of Individuals

vi. Local authority

vii. Every artificial judicial person

 Who is liable to pay any tax or

 Deemed assessee under any provision of this Act.

 Assessee in default under any provision of this Act.

Inclusive definition, not a conclusive definition.

 Profit and gains

 Voluntary contributions received

 Value of perquisite or profits in lieu of salary

 Special allowance or benefits other than perquisites

 Any interest, salary, bonus, commission etc.

 Cash assistantance received

 Any winning of lotteries, cross word puzzles, etc.

 Income means a monetary income.

 Definite sources - 5 heads of income

 Legal and illegal income is taxable.

 Not necessary that income should be received regularly or periodically.

 Lump sum received can also be income.

 Income should be received from outside.

 It is not essential that income must be received in the form of money.

 Temporary or permanent in nature

 Reimbursement of expenses is not income.

 Pin money is not taxable.

 Disputed income is also taxable.

 Income may be plus or minus.

Gross total income

Gross total income as reduced by deduction under section 80C to 80U.

Section 4 of the Income Tax Act 1961

Gives power to the central government to charge tax on income.

Following principles are relevant in charging tax on income:

 Income tax is an annual tax on income.

 Tax is charged on income of every Person as defined in the Act.

 Tax is charged on the total income of the assessee.

Residential status and incidence of tax