DIRECT AND

INDIRECT TAX
 Why Taxes?
To finance government expenditures
 Taxes in India
Direct Taxes: The Taxes whose burden falls
directly on the Tax payers are the Direct
Taxes like Income Tax, Wealth Tax etc.,

Indirect Taxes: The taxes in which the

burden is passed on to a third party are
called Indirect Taxes like Service Tax, VAT
etc.
UNIT I: INTRODUCTION
Taxes in India are levied by the Central
Government.
The Central Board of Direct Taxes (CBDT) is a
part of the Department of Revenue in the
Ministry of Finance, Government of India. It
provides essential inputs for policy and
planning of direct taxes in India.
Income Tax Act of 1961
The tax rate is prescribed every year by
Parliament in the Finance Act, popularly called
the Budget.
 INCOME TAX
According to Income Tax Act 1961, every
person, who is an assessee and whose
total income exceeds the maximum
exemption limit, shall be chargeable to
the income tax at the rate or rates
prescribed in the Finance Act. Such
income tax shall be paid on the total
income of the previous year in the
relevant assessment year.
Person (Sec 2(31)):
Person includes
an individual : Individual" includes:
Male and Female
Major and Minor
Individual of sound mind as well as unsound mind

a Hindu undivided family: HUF consists of all

persons lineally descended from a common
ancestor and includes their wives and unmarried
daughters.
 a company: Company means company as
defined under Section 2(17) of Income Tax
Act, 1961 or registered under companies
Act 1956.
a firm: whether such firm is registered or

unregistered under Partnership Act.

a local authority: Panchayat, Municipalities

and Municipal Corporations are the

examples of Local Authorities.
 an association of persons or a body of individuals,
whether incorporated or not,
an association of person implies a voluntary getting
together for a definite purpose whereas a body of
individuals would be just a body without an intention to
get-together. For example, Ram is living in Delhi and he
supports BJP. Shyam is living in kashmir and he also
supports BJP. So, even though, they do not know each
other but still they are under same umbrella i.e. BJP and
constitute a body of individuals
the members of body of individuals can be individuals
only whereas the members of an association of persons
can be individual or non-individuals (i.e. artificial persons
like companies).
 artificial juridical person, God, Idols and
deities (devi-devtas) are the examples of
Artificial Judicial Persons.
Assessee (Sec 2(7)):
It means a person by whom income tax or any other

sum of money is payable under the Act. It includes

every person in respect of whom any proceeding under
the Act has been taken for the assessment of his
income or loss and the amount of refund due to him.
Deemed Assessee: A person may not be liable only

for his own income or loss but also on the income or

loss of other persons e.g. agent of a non-resident,
guardian of minor or lunatic etc. In such cases, the
person responsible for the assessment of income of
such person is called representative assessees. Such
person is deemed to be an assesseee.
 In case of a deceased person who dies after writing
his will the executors of the property of deceased
are deemed as assesses.
In case a person dies intestate (without writing his
will) his eldest son or other legal heirs are deemed
as assesses.
In case of a minor, lunatic or idiot having income
taxable under Income-tax Act, their guardian is
deemed as assessee.
In case of a non-resident having income in India,
any person acting on his behalf is deemed as
asseessee.
Example
Mr. Ram (resident of India, age 50 years).
He earned Rs. 100 and his wife earned no
income in the P.Y 2014-15. His son (age 16
years) earned Rs. 3,20,000 in the P.Y 2014-
15. This income is to be clubbed with the
income of Mr. Ram as per the provisions of
Income Tax. Whether Mr. Ram is assessee
under Income Tax or not? Yes, he is
assessee
 Assessee in Default: Under Income Tax
Act, a person is considered as Assessee in
default if such person fails to fulfil the
obligations imposed upon him by income
tax laws. For example if an employer, who is
required to deduct TDS, fails to deduct such
TDS or deduct such TDS but fails to deposit
such TDS, such employer is considered as
Assessee in default.
(example (6.) page 4)
Note
Every person need not be an assessee
Mr. Ram (resident of India, age 30 years)

provides coaching classes to the students of

Company Secretary and Chartered
Accounts. His total income for the P.Y 2014-
15 was Rs. 2,40,000. Whether he is
assessee under Income Tax or not? No, he is
not assessee
TOTAL INCOME
As per section 14, income of a person is
computed under the following heads: -
Salaries
Income from house property
Profits & gains of business or profession
Capital gains
Income from other sources
The aggregate income under these heads is

termed as gross total income.

GROSS TOTAL INCOME
U/s 14 the term Gross Total Income [ GTI ] means aggregate
of incomes computed under the following Five heads :
Income under the head Salaries

Income under the head House Property

Income under the head Profit and Gains of Business or

Profession.
Income under the head Capital Gain.

Income under the head Other Sources.

After aggregating income under various heads, losses are

adjusted and the resultant figure is called Gross Total

Income [ GTI ]
From Gross Total Income , Deductions u/s 80 are allowed. The

resultant figure is called Total Income on which Rates of

Taxes are applied.
INCOME TAX RATES
(for the assessment year 2015-2016)
TAXABLE INCOME RATE
UP TO 250000 nil
250000 TO 500000 10%
500000 TO 1000000 20%
100000 & ABOVE 30%

TAXABLE INCOME RATE

UP TO 300000 nil
300000 TO 500000 10%
500000 TO 1000000 20%
100000 & ABOVE 30%
Super senior Citizen i.e. above
80
Taxable Income Tax Rate
Up to 500000 NIL
500000 to 1000000 10%
Above 1000000 20%
Financial Year
The financial year is a 12 month period

beginning the April1st each year and ending

on 31st of March the following year.
For example: You will pay taxes on your

earnings during the April 1st 2012 to March

31st 2013 which is referred to as financial
year 2012-13.
Assessment Year (Sec 2(9))
It may be defined as a year in which the

income of the previous year is to be

assessed. It always starts on April 1 and
ends on March 31 of the next year. Thus,
the assessment year 2015-16 starts on April
1, 2015 and ends on March 31, 2016.
Previous Year (Sec 3)
It may be defined as the financial year

immediately preceding the assessment

year. The year in which income is earned is
known as previous year and the next year in
which income is taxable is known as
assessment year. Thus, for the assessment
year 2015-16, the immediately preceding
financial year i.e. 2014-15 is the previous
year.
(Example: page no. 1)
Exercises
X set up a new business on March 3, 2012.
What is the previous year for the
assessment year 2012-2013?
X set up a new business on April 10, 2011.

What is the previous year for the

assessment year 2012-2013?
UNIT I: AGRICULTURAL
INCOME
AGRICULTURAL INCOME

Sec.10(1) exempts Agricultural Income from Income-

Tax. Agricultural Income means :
Any Rent or Revenue derived from Land which is
situated in India and is used for agricultural
purposes. Any income derived from such land :
Use for Agricultural purposes ; or
Used for agricultural operations means- irrigating and
harvesting , sowing, weeding, digging, cutting etc. It involves
employment of some human skill, labour and energy to get
some income from land. ; or
According to Sec. 2(1)(a) , if the following 3
conditions are satisfied, income derived from Land
can be termed as Agricultural Income.
 Condition-1 : Income derived from
Land
Condition-2 : Land is used for

Agricultural Purposes
Condition-3 : Land is situated in India
Tax Treatment of Income which is partially
Agricultural and partially from Business

Types of Income Business Income Agricultural Income

Tea Business 40% 60%
Coffee Business 40% 60%
Rubber Business 35% 65%
 Mr. X owns a Flour Mill and some agricultural
Land. During the year 2007-2008 he has shown
profit of Rs.25 lacs from the Business of Flour
Mill. On scrutiny of accounts it was found that he
has used 5,000 quintals of wheat produced in his
own Farms and cost of this wheat has not been
debited to P & L account. The market price of the
wheat during the season was Rs.400 per quintal..
Find out his Agricultural and Business income.
[ Hints : Agricultural income Rs.20,00,000 and
Business income Rs. 5,00,000 ]
Integration of agricultural and
non agricultural income
Integration of non- agricultural and agricultural
income is applicable if the following conditions are
satisfied:
Non- agricultural income exceeding the exemption

limit. And
Agricultural income exceeds Rs. 5000.
Integration Steps:
Compute tax on total income.
Compute tax on exempted income ( agricultural and

exemption limit i.e. 250000)

Deduct tax on exempted income from tax on total

income.
INCOME EXEMPT FROM TAX u/s
10
Not added in Total Income of the assessee.
Exempted Income u/s
Agricultural Income 10(1).

Share of profit from a firm 10(2)

Leave Travel Concession 10(5)

Gratuity 10(10)
Commuted pension 10(10 A)
Leave Salary 10 (10 AA)
Retrenchment 10(10B)
Compensation
Recd. from public sector 10(10C)
company for Voluntary
retirement
Exempted Income u/s
Tax on perquisite paid by 10(10CC).
employer
Any sum from LIC 10(10 D)

Amount recd. from 10(11)/(12)

RPF,PPF,SPF
HRA 10(13A)
Income of a MF set up by 10(23 D)
public sector bank or
public financial institution
Capital gains on transfer 10 (33)
of US64
Dividend from Domestic 10(34)
Company
Recd. from public sector 10(10C)
company for Voluntary
retirement
UNIT II: Residential Status
Residential Status and its effect
on tax incidence
Determination of the residential status of a
person is very significant in order to find out
his tax liability.
Residential Status and its effect
on tax incidence

Ordinarily
Resident
Resident
RESIDENTIAL Not- Ordinarily
STATUS Resident
Non- Resident
 Step 1: Determining whether resident
or non-resident .
Ordinarily Not Non-
Resident Ordinarily Resident
(OR) Resident (NRI)
(NOR)
Basic At least 1 At least 1 None
Conditions
Additional Both None or NA
Conditions One
Rule 1B+ 2A 1B+0A or 0B
1A
Conditions
Basic Conditions u/s 6(1)

1. He is in India in the previous year for a

period of 182 days or more. OR
2. He is in India for a period of 60 days or
more during the previous year and 365
days or more during 4 years immediately
preceding the previous year.
Exceptions:
Basic conditions (b) is not taken into
consideration in two special cases given below.
If an NRI, who is citizen of India or Person of

Indian Origin, who is on visit to India or

If a person, who is citizen of India, leaves

India for employment outside India or as a

member of the crew of an Indian ship.
In these two special cases, an individual will be
resident in India only if he is in India during the
relevant previous year for at least 182 days.
Additional Conditions u/s 6(6)
i. He has been resident in India in at least 2
out of 10 previous years immediately
preceding the relevant previous year.
ii. He has been in India for a period of 730
days or more during 7 years immediately
preceding the relevant previous year.
RESIDENTIAL STATUS OF AN
INDIVIDUAL
Check Basic Conditions.
Fulfilled 1 or more---------resident.
Now check OR/NOR
Check Additional Conditions
Fulfilled both------------OR
Fulfilled 0ne------------NOR
R=1B
OR=1B+2A
NOR=1B+1A
NRI= None B
(Example 19- P1 to 19-E10)
Residential Status
Income tax is levied on the basis of residential
status of the taxpayer. E.g.
Indian income is taxable in India whether the

person earning the income is a resident or a

non-resident.
Conversely, foreign income of person is

taxable in India only if such person is a

resident in India. Foreign income of a non-
resident is not taxable in India.
(example 24.4 page no. 31)
(Problems 28, page no. 36)
Income R/OR NOR NRI
Indian Income Taxable in India Taxable in India Taxable in India

Foreign Income Taxable in India Only two types Not Taxable in

of income is India
taxable:
If it is
business
income and
business is
controlled
wholly or
partly from
India.
If it is income
from
profession
which is set
up in India.
Income OR NOR NRI
Income received or deemed to be T T T
received in India whether accrued in
India or outside India.
Income accrue or deemed to accrue in T T T
India. whether received in India or
outside India.
Income received outside India from a T T NT
Business or profession wholly or partly
controlled from India
Income received outside India from a T T NT
Profession set up in India
Income received outside India from T NT NT
any other source apart from business.
Past untaxed profit or income earned NT NT NT
in earlier years but later on remitted
to India
 Income deemed to be received in India:
Interest credited to RPF in excess of 9.5%.
Employers contribution above 12%.
Income deemed to accrue in India:
Any income accruing or arising to an assessee in any place
outside India whether directly or indirectly
from any business connection in India,
from any property in India,
from any asset or source of income in India
transfer of any capital asset in India.
Income which falls under the head Salaries; if it is earned in India.
Income from Salaries which is payable by Government to a citizen of India for
services rendered outside India.