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INTRODUCTION OF DIRECT TAX

INTRODUCTION

Income tax is levied by the Central Government under entry 82 of the Union of chedule !II to

Constitution of India" This entry deals #ith $Tax on income other than a%ricultural income&" This

tas' is achieved by the enactment of the Income Tax (ct) *+,* -.The (ct/0"

The (ct 1rovides for the sco1e and machinery for levy and collection of Income Tax in India" It

is su11orted by Income Tax Rules) *+,2 and several other subordinate rules and re%ulations"

esides) circulars and notifications are issued by the Central oard of Direct Taxes 3CDT4 and

sometimes by the 5inistry of 6inance) Government of India dealin% #ith various as1ects of the

levy of Income tax" Unless other#ise stated) references to the sections #ill be the reference to the

sections of the Income Tax (ct) *+,*"

ection 7) #hich is the char%in% section) 1rovides that Income tax is a tax on the total income of

a 1erson called the assessee of the 1revious year relevant to the assessment year at the rates

1rescribed in the relevant 6inance (ct This 1hrase sets the tone and a%enda of any study on

Income Tax a# This com1rises of the understandin% of the follo#in%9

Conce1t of assessment year and 1revious year)

5eanin% of 1erson and assessee)

:o# to char%e tax on income)

;hat is re%arded as income under the Income


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BR=!IOU >=(R< " 23@74 " @

Definition:

ection @ defines .Brevious year/ as .the financial year immediately 1recedin% the assessment

year/" Income earned in one financial year is taxed in the next financial year" The year in #hichincome is earned is called the .1revious year/ and the year in #hich it is taxed is called the

.assessment year/"

Common previous year for all source of income:

( 1erson may earn income from more than one sources but 1revious year #ill al#ays be

common for all the sources of income "This #ill be so even if a 1erson maintains records or

boo's of accounts se1arately for different sources of income"

Total income of a 1erson from all the sources of income #ill be ta'en to%ether and considered in

the 1revious year or the financial year immediately 1recedin% the assessment year"

New usiness or !rofession:

;here ) a business is ne#ly set u1 durin% the 1revious year ) or #here a ne# source of income

has arisen durin% the 1revious year )the 1revious year #ill be the 1eriod 3 obviously less than one

year4 commencin% from the date of settin% u1 of the ne# business or the date of ne# source of

income arisin%"

E"ception:

There are some exce1tions to the rule that income of the 1revious year is taxable in the nextassessment year" In such cases) the income of is taxed in the 1revious year itself" (s a result) in

such case) a financial year becomes the 1revious year as #ell as the assessment year"

These exce1tions are 1rovided to ensure safe%uards to smooth collection of income tax from a

class of tax1ayers #ho may not be traceable till the commencement of the normal assessment

year"

T#e E"ceptions referre$ to a%ove are:

a4 Income of non


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C&A''IFICATION OF INCO(E TAX

INTRODUCTION

Income tax is 1ayable by an assessee on his total income from all the source of income" =ach

source has its o#n uniue features and reuires s1ecific treatment for correct com1utation of

income from that 1articular source" Naturally) rules and method for com1utation of income from

each such source are different accordin% to the nature of the source" These sources of income are

classified under various heads of income in section *7" These heads of income are as follo#s9

INCO5= UND=R T:= :=(D ((RI= 3=CTION *F ? *4

(mon% the five heads of income listed by "*7) .alaries/ is the first and most im1ortant head of

income" The conce1t of .alaries/ is very #ide and includes not only the salary in common

1arlance but also various other recei1ts) %ifts) 1eruisites and benefits" The lesson is divided into

various sections dealin% #ith the conce1t of salary income and its characteristics) #hich define

as to #hat constitutes .salaries/ follo#ed by the incomes fallin% under this head the com1utation

of basic salary) ty1es of allo#ances and 1eruisites) valuation of the 1eruisites) various income

tax 1rovisions for com1utin% taxable value of allo#ances etc" and their detailed descri1tions

alon% #ith the a11licable le%al 1rovisions of income tax"

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asis of c#ar)e

ection *F 1rovides the basis and sco1e of char%in% salaries to income tax9

(ny salary due from an em1loyer or a former em1loyer to an assessee in the 1revious

year #hether actually 1aid or not) (ny salary 1aid or allo#ed to him in the 1revious year by an em1loyer or former

em1loyer to an assessee in the 1revious year #hether actually 1aid or not) and (ny arrears of salary 1aid or allo#ed to him in the 1revious year by an em1loyer or a

former em1loyer if not char%ed to income tax for any earlier 1revious year"

ection *, and ection * res1ectively 1rescribe the deductions to be made #hile com1utin% the

income from salary and ex1lain the terms"

INCO5= 6RO5 :OU= BROB=RT> 3=CTION 22 ? 24

Income from house Bro1erty/ is si%nificantly different than the other heads of income unli'e the

other heads as it covers not only the actual income but also the notional income"

This lesson ex1lains the taxin% 1rovisions in re%ard to .Income from house 1ro1erty/" ections

22 to 2 deal #ith the com1utation of income from house 1ro1erty" 22 defines the sco1e of

Income from :ouse Bro1erty and ection 2@ and 27 %ive the mode of com1utation of income

and the amounts deductible therefrom" " 2F deals #ith the amounts not deductible" ection 2,

deals #ith the income of co


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$and a11urtenant& means the land connected or adHacent to the buildin% e"%" o1en s1ace)

a11roach roads) courtyard) com1ounds) courtyards) bac'yards) 1lay%rounds) 1ar'in%

s1aces) etc"

Income from any other 1ro1erty e"%" rental Income from a vacant 1lot of land is not char%eable to

tax under this head unless it is a11urtenant to a buildin%"

" The 1ro1erty must be o#ned by the assessee" It is only the o#ner or deemed o#ner of house

1ro1erty #ho is liable to tax on income under this head" 6ollo#in% 1oints are im1ortant in

this re%ard 9

a4 O#ner may be any 1erson i"e" an individual) :U6) firm) com1any) coo1erative society or

association of 1ersons etc"

b4 The 1erson must be the o#ner in the 1revious year" ubseuent chan%e in the o#nershi1

of the 1ro1erty is immaterial"

c4 imilarly) sub


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Trade) commerce and) business refer to normal commercial activities of dealin% or tradin% in

%oods or services for 1rofit" Broducin% ne# %oods or articles #ill constitute manufacture"

Brofession covers the s'illed 1ersonaliJed services li'e doctors) architects) la#yers) chartered

accountants form the 1rofession and vocation #ill include all the other services even 1riests)

astrolo%ers) 1lumbers) mechanics) deliverin% discourse) 1erformin% 1ooHa etc"

Im1ortantly) the 1hrase .adventure in the nature of trade) commerce or manufacture/ indicates

that business or 1rofession need not be or%aniJed) systematic or re%ular" ( sin%le act may be

treated as the business or 1rofession" (ccordin%ly) #hen a land #as 1urchased develo1ed and

subdivided in smaller 1lots for resale #as held as an adventure in the nature of trade or

commerce or manufacture"

C(BIT( G(IN 3=CTION 7F ? FF4

Income tax bein% a tax on income #as not 1erceived to be a levy on transfer of ca1ital assets) for

the sim1le reason that ca1ital assets re1resented the investments made out of the income saved#hich #as already taxed" The 1osition is substantially chan%ed and no# ca1ital %ains are bein%

1ro%ressively brou%ht to tax


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Insurance money:

5oney or other assets received durin% the 1revious year from an insurer on account on account

of dama%e to or destruction of a ca1ital asset) as a result of9

6lood) ty1hoon) hurricane) cyclone) earthua'e or other convulsions of nature or

Riot or civil disturbance or

(ccidental fire or ex1losion or

(ction by an enemy or action ta'en in combatin% an enemy"

Conversion of capital asset into stoc-:

Transfer by #ay of conversion) by the o#ner of a ca1ital asset into) or its treatment by him as

stoc'


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INCO5= 6RO5 OT:=R OURC= 3=CTION F, ? F+4

Income from other sources&& is last and residuary head of income< F,-*0" It covers all such

incomes) #hich are not char%eable under any other head of income viJ salary) Income from

house 1ro1erty) ca1ital %ains and 1rofits and %ains of business and 1rofession" This head also

com1rises of some #ell =LCUI!=

(ll the heads of income are mutually exclusive" If any income is considered under a 1articular

head e"%" Income from house 1ro1erty) it #ill not be ta'en into consideration for another head

e"%" Brofits and Gains from business and 1rofession"

The nature of income is such that at times) it may not be 1ossible to have #ater


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T(L ON (GGR=G(T= INCO5= UND=R ( T:= :=(D

(lthou%h the income is com1uted under five different heads of income) tax #ill be com1uted on

the a%%re%ate or total income from all the sources ta'en to%ether at the 1rescribed rates"

:o#ever) different tax treatment is %iven to different items" 6or instance) on% term Ca1ital

%ains 3TCG4 are %enerally taxed at 2AM" ut TCG on listed securities is exem1t from tax"

imilarly) short term ca1ital %ain on sale of euity shares is taxed at *8M" The amount of such

short term ca1ital %ains #ould be deducted from the a%%re%ate total income and accordin%ly tax

rates are a11lied" imilarly) shi11in% com1anies are taxed on the basis of tonna%e of the shi11in%

fleet" ( lottery) horse races etc" are taxed at the maximum rate of tax @AM (ll such incomes

are excluded and tax is com1uted on rest of the total income"

CO55ON R=ID=NTI( T(TU 6OR ( T:= :=(D

" , 1rovides that #here a 1erson is resident for the 1ur1ose of any 1articular head of income) he

#ill also be considered as resident for the 1ur1oses of com1utation of income under all the heads

of income"

=B(R(T= OURC= O6 INCO5= UND=R ON= :=(D

Income is classified for each head of income" That head of income may have different sources of

income fallin% under that head" 6or instance a 1erson may be in recei1t of his salary from more

than one em1loyer or rent from t#o or more house 1ro1erties or more than one business" (ll such

sources #ill be clubbed to%ether to arrive at the income from that head"

=LB=N= UND=R =(C: :=(D O6 INCO5=

It may be noted that ex1enses may be allo#ed under each head of income accordin% to the

1rovisions a11licable" The recent trend is to restrict and standardiJe the allo#ance of

ex1enditure" 6or instance virtually no ex1enses exce1t 1rofessional tax are allo#ed under the

head salaries" Ca1ital %ains envisa%e deduction if only the cost of acuisition and im1rovement

and transfer ex1enses and so on and so forth"

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B=RON (ND C(I6IC(TION O6 INCO5= T(L

INTRODUCTION

B=RON ?" 23@* 4Definition9 ection 23@*4 %ives an inclusive definition of .1erson/

.Berson/ includes9

a4 (n individualEb4 ( :indu undivided family 3:U64E

c4 ( com1anyE

d4 ( firmEe4 (n (ssociation of Bersons 3(OB4 or a ody of Individuals) 3oI4 #hether incor1orated

or notE

f4 ( local authorityE and%4 =very artificial Huridical 1erson not fallin% #ithin any of the 1recedin% cate%oriesKsub

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