Basic

INCOME TAX LAW AND PRACTICE
Unit –I
Basic Concepts
Income Tax
• Tax is a fee charged by a government on a product, income or activity.

• There are two types of taxes . Direct taxes and indirect taxes.
• If tax is levied directly on the income or wealth of a person, then it is a direct tax e.g.
income-tax, wealth tax.
• If tax is levied on the price of a good or service, then it is called an indirect tax e.g. excise
duty, Goods and Services Tax.
• In the case of indirect taxes, the person paying the tax passes on the incidence to another
person.
Why Tax Levied?
Revenue so raised is utilised for

The reason for levy of taxes is that meeting the expenses of government
they constitute the basic source of like defence, provision of education,
revenue to the government. health-care, infrastructure facilities
like roads, dams etc.
Heads of Income
1.Income from salary

2.Income from house property
3.Income from business/profession
4.Capital gains
5.Income from other sources
Income Tax Act, 1961
The levy of income-tax in India is governed by the Income-tax Act, 1961.
This Act came into force on 1st April, 1962.
The Act contains 298 sections and XIV schedules.
These undergo change every year with additions and deletions brought about by
the Finance Act passed by Parliament.
In pursuance of the power given by the Income-tax Act, rules have been framed
to facilitate proper administration of the Income-tax Act.
Income-tax is a tax levied on the total income of the previous
year of every person. A person includes
An individual,
Hindu Undivided Family (HUF),
Person u/s Association of Persons (AOP),
2(31) Body of Individuals (BOI),

A firm,
A company u/s 2(17),
Artificial Juridical Persons.
Assessment of Tax
Previous Year u/s 3: Assessment Year means the period of twelve months commencing on the 1st day of April every year.
Assessment Year u/s 2(9): Previous Year means the financial year immediately preceding the assessment year.
Exception: In the case of a business or profession newly set up or a source of income newly coming into existence in a
financial year, the previous year shall be the period beginning with the date of setting up of the business or profession or
the date on which the source of income newly comes into existence and ending with the said financial year.
Assessee u/s 2(7): Assessee means a person liable for payment of taxes or any other sum of money under the Income-tax
Act. It also includes the person for whom any proceeding has been initiated under the Income-tax Act. The term 'assessee'
also includes 'deemed assessee' and 'assessee-in-default'.
Assessee is a person who is liable to pay any tax or any sum of amount payable or
have any obligation to pay tax as per the Section 2(7) of the Income Tax Act,1961.
Classification of Assessee
a) Normal Assessee: An individual is considered to be normal assessee when he is
liable to pay tax for the income that is earned by him, or the loss incurred by him in
a Financial Year. And any person who is liable to pay any interest, penalty to the
government or entitled to get any refund under the act is considered normal
assessee.
b) Representative Assessee: A person who is not only liable to pay taxes for his
income or loss only but for income or loss of other persons also. As the name
Assessee u/s suggests, under this category assessee acts as representative for the persons who
may be able to pay their taxes due to some reasons. Examples of the representative
2(7)
assessee are Guardian of Minors, Agent of NRI’s.
c) Deemed Assessee:
An individuals who are covered under deemed assessee are-Executors or legal heir of
the property will be treated as deemed assessee, where deceased person dies after
writing his will to the legal heirs and executors.
Where a person dies, without writing his or her will. In this case, his eldest son or if
there is any other legal heir will be considered deemed assessee.
Guardians of Minors, lunatic or an idiot whose income is taxable as per the income tax
act, covered under deemed assessee.
Any person who is acting as the agent of NRI having taxable income in India.
• Assessee in Default:
A person is said to be an assessee in default if he fails to
comply with the duties imposed or fails to fulfill the statutory
obligation under the Income-Tax Act.
Assessee u/s For example- A person paying interest to another person, is
responsible for deducting TDS at source on this amount and
2(7) to deposit the tax with the government. If he did not follow
any of these duties, he shall be deemed to be an assessee in
default. Same way as per section 218, if a person does not pay
advance tax(in case coming under that) then in this case, he
shall be considered assessee in default.
Process of Income and Tax calculations
Income-tax is levied on an assessee’s total income. Such total income has to be computed as per the provisions contained in the Income-tax Act, 1961. Let us go step by step to understand the procedure of computation of total
income for the purpose of levy of income-tax.
• Step 1 Determination of residential status
• Step 2 Classification of income under different heads
• Step 3 Exclusion of income not chargeable to tax
• Step 4 Computation of income under each head
• Step 5 Clubbing of income of spouse, minor child etc.
• Step 6 Set-off or carry forward and set-off of losses
• Step 7 Computation of Gross Total Income.
• Step 8 Deductions from Gross Total Income
• Step 9 Total income
• Step 10 Application of the rates of tax on the total income
• Step 11 Surcharge
• Step 12 Education cess and secondary and higher education cess
• Step 13 Advance tax and tax deducted at source

• "income" includes-
• i) Profits and Gains
• ii) Dividend
• iii ) Voluntary contribution
What is called • iv) Perquisites
Income: • v) Allowance
• vi )Any capital Gain
• vii) Insurance profit
• viii) lottery, horse races, cards game, cross word
puzzles
Characteristics of An Income:
• There should be regularity or expected regularity and
definite source of income
• Income may be received in cash or in kind.
• Income may arise on cash basis or accrual basis.
What is called • Income tax is chargeable on illegal income.

• Reimbursement of expense or relief is not treated as
Income: income.
• Personal gifts are not income.
• Income may be positive or negative.
• Income can not be taxed twiced in any case.
Gross Total Income:
Gross income for an individual consists of income from wages and salary plus
other forms of income, including pensions, interest, dividends, and rental
income.
Gross income for a business is total revenues minus the cost of goods sold.
(GTI) = Salary Income + House Property Income + Business/Profession
Income + Capital Gains + Other Sources Income + Clubbed Income - Set off
of Losses.
Total Income ( Net Taxable Income: Taxable income is the portion of your gross income
used to calculate how much tax you owe in a given tax year. It can be
u/s 14)
described broadly as adjusted gross income (AGI) minus allowable itemized
or standard Deduction. Taxable income includes wages, salaries, bonuses, and
tips, as well as investment income and various types of unearned income.
Taxable income is the portion of your gross income that the IRS deems
subject to taxes.
It consists of both earned and unearned income.
Taxable income comes from compensation, businesses, partnerships, and
royalties, among others.
Taxable income is generally less than adjusted gross income because of
deductions that reduce it.

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INCOME TAX LAW AND PRACTICE

• Tax is a fee charged by a government on a product, income or activity.

Revenue so raised is utilised for

1.Income from salary

The levy of income-tax in India is governed by the Income-tax Act, 1961.

This Act came into force on 1st April, 1962.

The Act contains 298 sections and XIV schedules.

2(31) Body of Individuals (BOI),

• Step 1 Determination of residential status

• Step 2 Classification of income under different heads

• Step 3 Exclusion of income not chargeable to tax

• Step 4 Computation of income under each head

• Step 5 Clubbing of income of spouse, minor child etc.

• Step 6 Set-off or carry forward and set-off of losses

• Step 7 Computation of Gross Total Income.

• Step 8 Deductions from Gross Total Income

• Step 9 Total income

• Step 10 Application of the rates of tax on the total income

• Step 12 Education cess and secondary and higher education cess

• Step 13 Advance tax and tax deducted at source

What is called • Income tax is chargeable on illegal income.

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