A PROJECT REPORT

ON

DIRECT TAXATION

SUBMITTED:

By Anjali Mishra

in partial fulfillment for the award of the degree

of

MASTER OF COMMERCE PART II

Under The Guidance Of

Prof. Mahesh vaishya

BUNTS SANGHA’S

S.M.SHETTY COLLEGE OF SCIENCE, COMMERCE AND

MANAGEMENT STUDIES

UNIVERSITY OF MUMBAI

OCTOBER 2015

1

Address: Opp. JalvayuVihar, Hiranandani Garden, Powai, Mumbai - 400076

Web site: http://smshettyinstitute.org Telephone:(91-22)61327321Email id: college@smshettyinstitute.in Telefax:(91-22) 61327304

EVALUATION CERTIFICATE

This is to certify that the undersigned have assessed and evaluated the project on

DIRECT TAXATION, submitted by Anjali Mishra student of M Com part – II.

This project is original to the best of our Knowledge and has been accepted for

internal assessment.

Internal Examiner External Examiner PrincipalProf. Mahesh vaishya Dr. sridhara shetty

2

Address: Opp. JalvayuVihar, Hiranandani Garden, Powai, Mumbai - 400076

Web site: http://smshettyinstitute.org Telephone:(91-22)61327321Email id: college@smshettyinstitute.in Telefax:(91-22) 61327304

DECLARATION BY THE STUDENT

I, Anjali Mishra , student of M Com Part – II hereby declare that the project for the

paper Advance direct taxation, titled, “DIRECT TAXATION” submitted by me

for semester – III during the academic year 2015-16, based on actual work carried

out by me under the guidance and supervision of Prof. Mahesh vaishya.

I further state that this work is original and not submitted anywhere else for any

examination.

Signature

(Anjali Mishra)

3

ACKNOWLEDGMENT

Through this acknowledgment express my sincere gratitude to all those people who

have been associated with this assignment and have helped me to make it a

worthwhile experience.

Firstly I extend my thanks to the principal of the college Dr. sridhara shetty , and

vice principle Dr. Liji Santosh, who have given me the chance to prove myself,

shared their opinion through which I received the required crucial information’s for

my report.

Also I express my sincere thanks to my prof. Mahesh vaishya, who give these

opportunity to learn the subject in practical approach and provided me the valuable

guidance in preparing the project report.

Anjali Mishra

4

TABLE OF CONTENT

SR NO TOPIC PAGE NO

1 RESEARCH METHOD 06

2 HISTORY OF TAXATION 07

3 PHASES

1961 TO 1975

1976 TO 1990

1991 TO 2005

2006 TO 2015

07-16

4 HEADS OF INCOME

Heads of Income: Salary

Heads of Income: House Proper ty

Heads of Income: Prof i t in Business /

Profess ion

Heads of Income: Capi ta l Gains

Heads of Income: Other Sources

17-26

5 INCOME TAX DEDUCTION 26-27

6 TYPES OF DIRECT TAXES 28-30

7 CONCLUSION 31

8 BIBLIOGRAPHY 32

5

RESEARCH METHOD USED

Research is a systematic purposive investigation looking for the facts through

verifiable methods in order to establish a relationship between them and to

conclude from them broad principles or laws. There are various types of research

based on the intent:

1. Pure and Applied Research

2. Exploratory Research

3. Descriptive Research

4. Diagnostic Study

5. Evaluation Studies

6. Action Research

This project report is based on Exploratory Research, that is, I have conducted a

preliminary study of an unfamiliar problem. I have done it to generate new ideas or

increase my familiarity with the problem. Generally the methods used are literature

survey, experience survey, case studies etc.

Data Collection Method

There are two categories of data collection methods: Secondary. I have used both

sources of data. The sources include websites, text book and reference books.

Details of these sources are available in Bibliography and Webliography.

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HISTORY OF TAXATION

It is a matter of general belief that taxes on income and wealth are of recent origin but there is

enough evidence to show that taxes on income in some form or the other were levied even in

primitive and ancient communities. The origin of the word "Tax" is from "Taxation" which

means an estimate. These were levied either on the sale and purchase of merchandise or livestock

and were collected in a haphazard manner from time to time. Nearly 2000 years ago, there went

out a decree from Ceaser Augustus that the entire world should be taxed. In Greece, Germany

and Roman Empires, taxes were also levied sometime on the basis of turnover and sometimes on

occupations. For many centuries, revenue from taxes went to the Monarch. In Northern England,

taxes were levied on land and on moveable property such as the Saladin title in 1188. Later on,

these were supplemented by introduction of poll taxes, and indirect taxes known as "Ancient

Customs" which were duties on wool, leather and hides. These levies and taxes in various forms

and on various COMMODITIES and professions were imposed to meet the needs of the

Governments to meet their military and civil expenditure and not only to ensure safety to the

subjects but also to meet the common needs of the citizens like maintenance of roads,

administration of justice and such other functions of the State.

I. Phase 1961 TO 1975:

Direct Taxes Advisory Committee set up - Direct Taxes Administrative Enquiry

Committee constituted.

Income-tax Act, 1961 came into existence w.e.f. 1-4-1962.

Revenue Audit introduced for the first time in the Department.

New system for evaluation of work done by Income-tax Officers introduced.

Central Board of Revenue bifurcated and a separate Board for Direct Taxes known as

Central Board of Direct Taxes (CBDT) constituted under the Central Board of Revenue

Act, 1963.

For the first time an officer from the department became Chairman of the CBDT w.e.f. 1-

1-1964.

The Companies (Profits) Sur -tax Act, 1964 was introduced.

Annuity Deposit Scheme, 1964 introduced.

7

Voluntary Disclosure Scheme came into operation.

Functional Scheme introduced

Special Recovery Unit created.

Intelligence Wing created and placed under the charge of Directorate of Inspection

(Investigation).

Valuation Cell came into existence in the Income tax Department.

Valuation Cell came into existence in the Income tax Department.

Administrative Reforms Commission set up.

Direct Recruitment to Class II Income-tax Officers made.

The post of IAC (Audit) created in the Income-tax Department.

The posts of Addl. Commissioner of Income-tax created and abolished after one year.

Recovery functions which were hitherto performed by Income- tax Officers, given to Tax

Recovery Officers. Prior to that State Government officials exercised the functions of a

Tax Recovery Officer.

A new cadre of posts known as Tax Recovery Commissioners introduced w.e.f. 1.1.1972.

Report of Direct Taxes Enquiry Committee received.

Summary Assessment Scheme introduced w.e.f. 1-4-1971.

A Special Cell within the Directorate of Inspection (Investigation) created to oversee the

cases of big industrial houses.

A new cadre of posts known as IAC (Acq.) created and IAC appointed as Competent

Authority with the insertion of new Chapter XXA in the Income Tax Act, 1961 on the

acquisition of immovable properties in certain cases of transfer to counter evasion of tax.

Directorate of Organisation & Management Services (Income- tax) created.

The post of I.T.O. (Internal Audit) created.

Bradma Scheme in the Income-tax Department introduced.

System of Permanent Account Number introduced.

Valuation Officers given statutory powers under the Income-tax Act, 1961 and Wealth-

tax Act, 1957.

Compulsory Deposit Scheme (Income-tax Payers) Act, 1974 introduced.

Action Plan for the Income-tax Officers introduced for the first time.

Concept of M.B.O introduced.

8

Voluntary Disclosure Scheme for Income and Wealth implemented.

Special Cell for dealing with Smugglers' cases created.

II. PHASE 1976 TO 1990:

Settlement Commission created and Taxation Laws (Amendment) Act,1975 inserted a

new Chapter XIXA in the Income Tax Act w.e.f.1-4-1976.

Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976

introduced w.e.f. 25-1-1976.

A new scheme for departmentalization of accounts introduced.

Chokshi Committee submitted its interim report.

A new cadre of posts known as IAC (Assessment) created.

Appellate functions given to a new cadre of Commissioners known as Commissioner

(Appeals).

Directorate of Inspection (Recovery) set up.

A new directorate known as Directorate of Inspection (Vigilance) came into existence by

bifurcating the functions of Directorate of Inspection (Investigation).

Chokshi Committee submitted its final report.

A new directorate designated as Directorate of Inspection (Publication & Public

Relations) created out of the Directorate of Inspection (RS&P).

Hotel Receipt Tax Act, 1980 came into force w.e.f. 1.4.1981.

Economic Administrative Reforms Commission set up.

Three new Directorates viz. Directorate of Inspection (Intelligence), Directorate of

Inspection (Survey) and Directorate of Inspection (Systems) created.

Within the Directorate of Inspection (Income Tax and Audit), a separate Director of

Inspection (Audit) appointed.

9

Directorate of Inspection (RS&P) re-organized and Directorate of Inspection (P&PR) re-

designated as Directorate of Inspection (Printing & Publications).

I.R.S.(DT) Staff College, Nagpur, re-designated as National Academy of Direct Taxes.

Special Bearer Bonds (Immunities & Exemptions) Act promulgated.

Director General (Special Investigation) and Director General (Investigation) appointed

to control the functioning of various Directorates under the control of Central Board of

Direct Taxes.

Five posts of Chief Commissioner (Administration) created.

A few posts of Commissioner of Income-tax were earmarked as Commissioner of

Income-tax (Inv.) and Commissioner of Income- tax (Recovery).

Special Cell within the Directorate of Inspection (Investigation) converted into a separate

Directorate and re-designated as Directorate of Inspection (Special Investigation).

DIT (Systems) appointed in the Directorate of Income-tax (Organisation and

Management Services) to coordinate efforts in introducing electronic data processing in

the IT Dep’t. A microprocessor based EDP system along with data entry system was

installed heralding the era of computerisation.

Levy of Hotel Receipts Tax discontinued.

Regional Training Institute at Nagpur started functioning under the control of the

National Academy of Direct Taxes.

The vigilance set up reorganised and the strength of Dy. Director (Vigilance) and Asstt.

Director (Vigilance) augmented.

Computerised systems for processing challans and PAN designed and developed.

Taxation Laws(Amendment) Act 1984 passed to streamline procedures in the interest of

better work management; avoid inconvenience to tax payers; reduce litigation; remove

anomalies and rationalise some provisions.

Post of Director General (Investigation) created for more effective checking of tax

evasion.

E.D.(Amendment) Act 1985 discontinues levy of estate duty on deaths occurring on or

after 16.03.1985.

Compulsory Deposit Scheme (Income Tax Payers) Act 1974 discontinued w.e.f.

1.4.1985.

10

Interest Tax Act, 1974 discontinued w.e.f. 31.3.1985

A new "Reward Scheme" for motivating officers introduced w.e.f. 1.4.1985.

The I.T. Act and W.T. Act amended by Taxation Laws (Amendment and Miscellaneous

Provisions) Act :-

Established Settlement Commission.

Introduced Block assets concept for depreciation

Four offices of Appropriate Authority for acquiring property in which unaccounted

money is invested set up in metropolitan cities.

Government's approval obtained to set up three new benches of Settlement Commission.

L.K. Jha Committee set up for simplification and rationalisation of tax laws.

Office of Directorate General (Tax Exemption) set up at Calcutta.

The Direct Tax Law(Amendment) Act 1987 introduced uniform previous year and

redesignated the following authorities

Director of Inspection

Expenditure Tax Act 1987 brought into force.

Benami Transactions Prohibition Act 1988 introduced.

The Government announced a "Time Window Scheme" which allowed tax payers 50%

rebate of interest u/s 220(2) if they pay the tax and balance interest. The scheme was in

operation between 1.7.88 to 30.9.88.

CIT (Central) placed under the control and supervision of Director General

(Investigation).

Government decided that cadre control for Group 'C' and 'D' posts would be with Chief

Commissioner and with CBDT for Group 'A' and 'B'posts.

Extension of Direct Tax Law to the State of Sikkim by a notification of the President of

India dated 7.11.1988.

Creation of an attached office of DGIT(Management Systems) to supervise Directorate of

I.Tax(Research, Statistics, Publication & Public Relations) and Directorate of I.Tax

(Organisation and Management Services) from Sept. 1989.

Gift tax Bill introduced on 31.5.1990.

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Creation of 65 posts of Dy. Commissioner of I.Tax by upgradation of equal number of

posts of Asstt. Commissioner of I.Tax.

III. PHASE 1991 TO 2005:

Interest Tax Act, 1974 revived.

Directorate of Tax (Systems) started reporting directly to Board.

Rs. 1400 Presumptive Taxation scheme introduced as a measure to widen tax base.

The post of Director General of Income-tax (Management Systems) was abolished.

40 additional posts of Commissioner of Income-tax (Appeals) created.

Authority for Advance Rulings set up.

A comprehensive phased cadre review for Group B, C and D initiated.

2068 additional posts in Group B, C and D sanctioned.

New PAN introduced

Regional Computer Centres (RCCs) were set up in Chennai, Delhi and Mumbai.

New procedure for search assessment introduced.

50 years of training commemorated and "Seminar Twenty Five" introduced by National

Academy of Direct Taxes.

77 posts of Commissioners of Income-tax created

Infrastructure for operational needs strengthened.

Study report on 4th cadre reviews of Group 'A' officers (IRS) of the Department prepared

by Directorate of Income Tax (Organisation and Management Services).

Rates of Income-tax reduced significantly.

Legal measures to widen tax base on certain economic indicators introduced in selected

cities.

Presumptive tax scheme discontinued.

Voluntary Disclosure Scheme 1997 introduced.

Minimum Alternate Tax introduced.

National Computer Centre (NCC) was set up in Delhi.

Sec. 260A introduced enabling direct appeals to High Court.

1/6 Scheme & penalty for non-filing of return introduced to widen tax base.

12

Gift-tax abolished for gifts made after 1.10.1998.

Kar Vivad Samadhan Scheme 1998 introduced.

Silver Jubilee of Regional Training Institutes celebrated.

Designation of Asstt. Commissioner (Senior Time Scale) changed to Dy. Commissioner

and that of Dy. Commissioner (Junior Administrative Grade) to Joint Commissioner.

Furnishing details of bank account and credit cards in the prescribed form made

mandatory for refund purpose.

Prima-facie adjustments to return done away with; acknowledgments to serve as

intimations.

Samman Scheme introduced in 1999 to honour deserving tax payers.

The process of implementation of restructuring of the Department commenced to

increase efficiency and to deal with increased workload.

Total sanctioned work force reduced from 61,031 to 58,315.

Certain rationalisation measures at structural levels introduced.

Interest-tax Act terminated with effect from 1-4-2000.

The restructuring of the Department resulted in reducing the stagnation at all levels and

large numbers of personnel were promoted in various grades.

Jurisdiction pattern was revamped.

New posts were created at the level of DGIT/DIT in the areas of Research, International

Taxation and Infrastructure.

Computerised processing of returns all over the country introduced.

Kelkar Committee Report, inter alia, recommended

i. Outsourcing of non-core functions of the department

ii. Reduction in exemptions, deductions, reliefs, rebates etc.

The National Website of the Income Tax Department (www.incometaxindia.gov.in) was

launched to provide a vital interface between the Department and taxpayers.

The National Website of the Department (www.incometaxindia.gov.in) won the Silver

Medal in the category of the 'Government Websites'under the National e-Governance

Awards.

As a measure of widening of tax base, the concept of AIR (Annual Information Return)

was introduced.

13

Fringe Benefit Tax (FBT) was introduced as a major step towards widening of tax base

and bolstering of the Direct Tax Collection.

Securities Transaction Tax (STT) was introduced.

Tonnage Tax was introduced for the Shipping Companies.

Banking Cash Transaction Tax (BCTT) was introduced w.e.f. 01-06-2005.

IV. Phase 2006 To 2015:

A project for enabling electronic filing (e-filing) of Income Tax Returns was launched.

Tax Return Preparer Scheme (TRPS) was launched to assist individuals and HUF

taxpayers to file their Return of Income.

The institution of Income Tax Ombudsman set up in 12 cities throughout the country to

look into tax related grievances of the common public.

The Refund Banker Scheme was launched in Delhi and Patna charges.

Sevottam Scheme was launchedto standardize service delivery to the taxpayers.

The first citizen-friendly single window Aayakar Seva Kendra (ASK)was setup,for

centralized receipt and registration of specified categories of documents, including

income tax returns.

The Income Tax Department became the biggest revenue mobiliser for the Government

in 2007-08, with its share increasing from 34.76%in 1997-98 to 52.75%in 2007-08.

All India Tax Network (TAXNET) was setup connecting more than 700 offices in more

than 500 cities. Consolidation of 36 (RCC) independent regional databases into a single

centralized database (PDC or Primary Data Centre) was carried out.

Integrated Taxpayer Data Management System (ITDMS) for drawing of 360° taxpayer

profile was launched.

Cyber Forensic Labs were setup to identify relevant digital data during search and survey

operations, recover hidden or password protected or deleted data and store retrieved data

in a manner so that it could be used as evidence in judicial proceedings.

Electronic filing of Income Tax Returns Project was awarded Silver Award in the

category "Outstanding Performance in Citizen Centric Service Delivery" under the

National e-Governance Awards for the year 2007-08.

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Centralized Processing Centre was setup in Bengaluru for bulk processing of e-filed and

paper returns. The Centre operates without any interface with taxpayers in a jurisdiction –

free manner.

Integrated Tax Payer Data Management System (ITDMS) was conferred the Prime

Minister's Award for 'Excellence in Governance and Administration'.

CPC Bengaluru awarded the Gold Award for 'Excellence in Government Process Re-

engineering' under the National e-Governance Awards for the year 2010-2011.

To simplify the 50 years old Income-tax Act, 1961,'The Direct Taxes Code Bill, 2010'

was introduced in the Parliament.

Foreign Tax Division of CBDT was strengthened to effectively handle the increase in tax

information exchange and transfer pricing issues.

Various IT initiatives were taken for efficient tax administration. These include e-filing

and e-payment of taxes, adoption of 'Sevottam' concept by CBEC and CBDT, web based

facility for tax payers to track the resolution of refunds and credit for pre-paid taxes and

augmentation of processing capacity.

A new simplified form 'Sugam' was introduced to reduce the compliance burden of small

tax payers falling within presumptive taxation.

Senior Citizens (not having any income from business/profession), were exempted from

payment of advance tax.

TRACES (TDS Reconciliation, Accounting and Correction Enabling System) launched

to serve an integrated one-stop platform for the stakeholders to facilitate the services

related to TDS operations.

TRACES (TDS Reconciliation, Accounting and Correction Enabling System) launched

to serve an integrated one-stop platform for the stakeholders to facilitate the services

related to TDS operations.

Briefly, the salient features of the approved restructuring are as under:

a. Number of assessment units (AUs) increased by 1080 from 3420 to 4500, for

strengthening the tax-administration;

b. Each Range to have one more Assessing Officer;

15

c. Increase in the number` of Administrative CsIT deployed on assessment related

functions to increase from 228 to 250;

d. 114 Special Ranges to be created, with adequate supporting manpower;

e. Creation of reserves numbering 620 created in the IRS cadre;

f. Bifurcation of the posts of the CITs in the HAG and SAG scales, on functional

basis;

g. Upgradation of all existing 116 posts of CCsIT in HAG+ and Apex scales along

with an increase of their number by 1 post;

h. Strengthening of the training set-up with creation of three more RTIs;

i. Strengthening the Appellate/Advocacy Structure by increasing the number of CIT

Appeals and providing them supporting manpower. Advocacy structure in the ITAT

to be strengthened.

New National Website of the Income Tax Department www.incometaxindia.gov.in

launched with enhanced new features and content.

SIT to investigate Black Money in Swiss Bank Accounts formed

Tax Administrative Reforms Commission (TARC) headed by Dr. Parthasarathi Shome

submitted its report of reviewing the applicability of tax policies and tax laws in the

context of global best practices and recommending measures for reforms required in tax

administration to enhance its effectiveness and efficiency.

HEADS OF INCOME:

Under chapter 4 of Income Tax Act, 1961 (Section 14), income of a person is calculated under

various defined heads of income. The total income is first assessed under heads of income and

then it is charged for Income Tax as under rules of Income Tax Act. According to Section 14 of

Income Tax Act, 1961 there are following heads of income under which total income of a person

is calculated:

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Heads of Income: Salary

Heads of Income: House Property

Heads of Income: Profit in Business/ Profession

 Heads of Income: Capital Gains

Heads of Income: Other Sources

Salary Income Tax - Heads of Income: Salary

What is Salary: Income under heads of salary is defined as remuneration received by an

individual for services rendered by him to undertake a contract whether it is expressed or

implied. According to Income Tax Act there are following conditions where all such

remuneration are chargeable income tax:

When due from the former employer or present employer in the previous year, whether paid or

not

When paid or allowed in the previous year, by or on behalf of a former employer or present

employer, though not due or before it becomes due.

When arrears of salary is paid in the previous year by or on behalf of a former employer or

present employer, if not charged to tax in the period to which it relates.

What Income Comes Under Head of Salary?

Under section 17 of the Income Tax Act, 1961 there are following incomes which comes under

head of salary:

Salary (including advance salary)

Wages

Fees

Commissions

17

Pensions

Annuity

Perquisite

Gratuity

Annual Bonus

Income From Provident Fund

Leave Encashment

Allowance

Awards

What is Leave Encashment?

Leave encashment is the salary received by an individual for leave period. It is a chargeable

income whether he is a government employee or not. Under section 10(10AA)(i) there is also a

provision of exemption in case of leave encashment depending upon whether he is a government

employee or other employees.

What is Annuity?

It is an annual income received by the employee from his employer. It may be paid by the

employer as voluntarily or on account of contractual agreement. It is not taxable until the right to

receive the same arises. Under section 56, Income Tax Act, 1961 other annuities come under a

will or granted by a life insurance company or accruing as a result of contract which comes as

income under from other sources.

What is Gratuity?

It is salary received by an individual paid by the employee at the time of his retirement or by his

legal heir in the case of death of the employee.

What is Allowance?

18

It is the amount received by an individual paid by his/her employer in addition to salary. Under

section 15 of the Income Tax Act, 1961 these allowance are taxable excluding few conditions

where they are entitled of deduction/ exemptions.

Under Income Tax Act following types of allowance are defined

House Rent Allowance:

Under sections 10(13A) of Income Tax Act, 1961 allowance is defined as an amount received by

an employee paid by his/ her employer as a rent of his/her house. It is a taxable income. There is

no exemption in tax if he is living in his own house or house for which he is not paying rent.

There are following amount which are exempt from tax:

Actual house rent paid by that individual

Rent paid for the accommodation over 10% of the salary

50% of the salary if house is placed at Delhi, Mumbai, Kolkata, Chennai or 40% of the salary

in it is placed in any other city

Entertainment Allowance:

It is the amount paid by employer for availing entertainment services. Under section 16(ii) of

Income Tax Act, 1961 it is entitled to deduction in tax from is salary. But in this case deduction

is given to his gross salary which also includes entertainment allowance. Deduction in tax

against this allowance can be divided into two parts :

In case of Government employee entitled to minimum deduction of

Entertainment allowance received

20% of basic salary excluding any other allowance

Rs. 5000 In case of other employee entitled to minimum deduction of

(a) Entertainment allowance received

20% of basic salary excluding any other allowance

Rs. 7500

Entertainment allowance received during 1954-1955

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Other Special Allowances

Children Education Allowance

Tribal Area Allowance

Hostel Expenditure Allowance

Remote Area Allowance

Compensatory Field Area Allowance

Counter Insurgency Allowance

Border Area Allowance

Hilly Area Allowance

Allowances for there is a provision of exempt in income tax are

Allowance given to a citizen of India, who is a government employee, for rendering

services outside India

Allowances given to Judges of High Courts

Allowance given Judges of Supreme Court

Allowances received by an employee of UNO

What is Perquisite?

Under section 17(2) of Income Tax Act, 1961 perquisite is defined as:

Amount paid for the rent-free accommodation provided to the assessee by his

employer

Any concession in the matter of rent respecting any accommodation provided to the assessee by

his employer

Any benefit or amenity granted or provided free of cost or at concessional rate in any of the

following cases:

1. . By a company to an employee, who is a director thereof

2. By a company to an employee being a person who has a substantial interest in the

company

3. By any employer to an employee whose income under the head 'Salaries' exceeds

Rs.24000 excluding the value of non-monetary benefits or amenities

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4. Any sum paid by the employer in respect of any obligation which, but for such

payment, would have been payable by the assessee

5. Any sum payable by the employer whether directly or through a fund, other than a

recognised provident fund or EPF, to effect an assurance on the life of the assessee or to

effect a contract for an annuity

There are following perquisites which are tax free:

Medical facility

Medical reimbursement

Refreshments

Subsidised Luch/ Dinner provided by employer

Facilities For Recreation

Telephone Bills

Products at concessional rate to employee sold by his/ her employer

Insurance premium paid by employer

Loans to employees by given by employer

Transportation

Training

House without rent

Residence Facility to member of Parliament, judges of High Court/ Supreme Court

Conveyance to member of Parliament, judges of High Court/ Supreme Court

Contribution of employers to employee's pension, annuity schemes and group insurance

Heads of Income: House Property

What Is Heads of House Property?

21

According to Chapter 4, Section 22 - 27 of Income Tax Act, 1961 there is a provision of income

under head of house property. In every section from 22-27 there are detail specification of house

property income. It is defined as income earned by a person through his house or land.

What Income Comes Under Head of House Property:

Annual value of building or land owned by assessee. There is a charge on the potential of

property to generate income not on the rent received. But if property is used for making profit in

business then it will be taxable not under this head but will be taxable under head of profit in

business/ profession.

How to calculate annual value of property:

According to annual value, house property is calculated as

Annual value of a house is zero if property is in the occupation of the owner for his residence for

the whole year & if no other benefit is availed by owner from his property. There will be no

deductions as given under section 24 except deduction interest on borrowed capital

If the owner lets out the house or a part thereof for any period of time during the previous year

the annual value of the property or part has to be calculated for the whole year and the

proportionate annual value of the period for which the house or any part thereof was in the

occupation of the owner for his own residence shall be deducted from the gross annual value.

The assessee in such cases cannot claim deduction under section 24 in excess of the annual value

so determined

The assessee occupies more than one house for his residence, the above exemption is applicable

only to one such house at the option of the assessee. The annual value of the other house or

houses shall be computed as if the house or houses are let

In case where the assessee has only one residential house but it cannot be occupied by the owner

by reason of that owing to his employment, business or profession carried out on at any other

place, he has to reside at that other place in a building not belonging to him, the annual value of

such house shall be taken to be nil if the house is not actually let and no other benefit is derived

by the owner from such house. The assessee cannot claim any deduction in such case as

22

allowable under section 24 of the Act except for interest on borrowed capital subject to a

maximum of Rs. 15,000/-

Heads of Income: Profit in Business/ Profession

According to Income Tax Act, 1961 income under this head is defined as the income earned by

assessee as a profit or gain in his business or profession. Income under this head must follow

these conditions: 

There must be a business/ profession

Business/ profession is being carried by assessee

Business/ profession have been carried out by assessee in assessment year for which income

tax is filling

What Income Comes Under Head of Profit in Business

Profits and gains of assessee from any business or profession during assessment year

Any payment or compensation due or received by a person for his services to organization as a

part of his business

Making profit in TRADE  Income of professional or organization against services provided by

that professional/ organization

Profits on sale of a license granted under the Imports (Control) Order, 1955, (EXIM control Act,

1947)

Cash received or due by any person against exports under government schemes

Any benefit whether it is not in cash coming from business/ profession

Any profit, salary, bonus or commission received by company partners

Heads of Income: Capital Gains:

What is Capital Gain?

23

According to Income Tax Act,1961 heads of capital gain is defined as gains derived on transfer

of capital asset. Capital Gain is the profit or gain of an assessee coming from the transfer of a

capital asset effected during the previous year or assessment year. "Capital Asset" and transfer

are predefined in income tax act. 

What is Capital Asset:

Under section 2(14) of the Income Tax Act,1961 Capital Asset is defined as property of any kind

held by assesse including property held for his business or profession. It includes all type real

property as well as all rights in property. It is also defined as gains on transfer of assets in which

there in no cost of acquisition like:

Goodwill of business generated by assessee

Tenancy rights

Stage carriage permits

Loom hours

Right to manufacture

Processing & production of any article or things

Assets Which Don't Come Under Heads of Capital Assets

According to Income Tax Act,1961 there are few assets which don't form a part of Capital

Assets, which are as follows:

STOCK of goods and raw materials used by assessee for his business or profession Those

property which are movable like wearing apparel, furniture, automobile, phone, household goods

etc. Held by assessee. But Jewelry which is also an movable assets comes under heads of Capital

Assets

Agricultural property in India. But agriculture land coming under municipal limits (in area

having population ore than 10,000) comes under Capital Assets. Agriculture lands within 8 Km

from municipal limit also comes under Capital Assets if it is notified by the central government

of India

Agricultural property in India. But agriculture land coming under municipal limits (in area

having population ore than 10,000) comes under Capital Assets. Agriculture lands within 8 Km

from municipal limit also comes under Capital Assets if it is notified by the central government

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of India

Few GOLD Bonds issued by government

Few special bonds issued by central government like Special Bearer Bonds, 1991

Transfer of Capital Assets

Under Section 2(47) of The Income Tax Act,1961 transfer of capital assets is defined as: 

Sale, exchange and relinquishment of assets 

Extinguishment of any rights in capital assets 

Acquisition of capital assets or rights 

Conversion of capital asset by its owner as stock in TRADE  of his business, it may also be a

term of transfer 

Transfer of immovable property under Section 53A of Transfer of Property Act, 1882 

Any transaction by which an assessee become enable to act as a member of cooperative society.

Heads of Income: Other Sources

Every type of income comes under a specified heads. But there are few incomes, which don't

come under any of following heads:

Salary

House Property

Profit In Business/ Profession

Capital Gains

So under Section 56(2) of Income Tax Act,1962 all such income comes in this heads of income.

There are following incomes which are taxed under this heads

Income coming as a dividend paid by a company to an assessee

Income coming from winning in lottery, crossword puzzles, races, card games, gambling or other

such sports

Income coming as an amount received by assessee from his employer as aFUND  for welfare of

employee

Income as an interest on securities

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Income coming by letting on hire machinery, plant, furniture, building or other goods Income

coming from insurance policy

INCOME TAX DEDUCTION

Deduction is the amount, which is reduced from the gross total income before

computing tax.

There are other deductions such as for donations, for repayment of loans taken for

educational purposes etc.

Deductions on Interest ( U/s 80L)

Up to Rs. 12,000/- : If interest is earned on Govt. Securities, Bank deposits, Post

Office deposits, debentures, National Savings Certificates etc.,

Additional deduction up to

Rs. 3,000/-

On interest from Govt. Securities, if not already covered in the Rs.

12,000/- limit mentioned earlier.

Deductions on premium for medical insurance (U/s 80cc)

Up to Rs. 10,000/- If premium for medical insurance is paid by cheque for a person,

or his dependent family member or member of the HUF.

Up to Rs. 15,000/- For senior citizens

Deductions on expenditure on handicapped dependent (U/s 80DD)

Up to Rs. 40,000/- If any expenditure has been incurred on the treatment, nursing,

training of a handicapped dependent, or for creating an insurance

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benefit for such person subject to the condition that doctor

working in a government hospital has issued the necessary

certificate.

Deductions on treatment of diseases ( u/s 80DDB)

Up to Rs.40,000 /- If an individual or an HUF actually incurs expenditure for

treatment of certain specified diseases for himself, dependents or a

member of HUF.

Rs.60,000 /- For treatment of senior citizens

(This deduction is available only for certain specified diseases.)

Deductions on contribution to pension funds ( u/s 80CCC)

Up to Rs.10,000 /- If an individual contributes to specified pension funds The

pension will however be taxable on receipt.

TYPES OF DIRECT TAX IN INDIA:

Direct Taxes:-

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These types of taxes are directly imposed & paid to Government of India. There has been a

steady rise in the net Direct Tax collections in India over the years, which is healthy signal.

Direct taxes, which are imposed by the Government of India, are:

Income Tax:-

Income tax, this tax is mostly known to everyone. Every individual whose total income exceeds

taxable limit has to pay income tax based on prevailing rates applicable time to time.

By doing INVESTMENT in certain scheme you can save Income Tax.

For FY 2015-16 Income tax rates are:-

Capital Gains Tax:-

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Capital Gain tax as name suggests it is tax on gain in capital. If you sale property, shares, bonds

& precious material etc. and earn profit on it within predefined time frame you are supposed to

pay capital gain tax. The capital gain is the difference between the money received from selling

the asset and the price paid for it.

Capital gain tax is categorized into short-term gains and long-term gains. The Long-term Capital

Gains Tax is charged if the capital assets are kept for more than certain period 1 year in case of

share and 3 years in case of property. Short-term Capital Gains Tax is applicable if these assets

are held for less than the above-mentioned period.

Rate at which this tax is applied varies based on INVESTMENT class.

Example:-

If you purchase share at say 1000 Rs/- (per share) and after two months this price increased to

1200 Rs/-(per share) you decide to sale this STOCK and earn profit of 200 Rs/- per share. If you do

so you have to pay Short term CGT (capital gain tax) @ 10% +Education cess on profit as it is

short term capital gain. If you hold same share for 1 year or above it is considered as long term

capital gain and you need not to pay capital gain tax.it is considered as tax free.

Similarly if you purchase property after two year if you find that property price in which you

INVESTED has increased and you decide to sale it you need to pay short term capital gain tax.

For property it is considered as long term capital gain if you hold property for 3 years or above.

Securities Transaction Tax:-

A lot of people do not declare their profit and avoid paying capital gain tax, as government can

only tax those profits, which have been declared by people. To fight with this situation

Government has introduced STT (Securities Transaction Tax) which is applicable on every

transaction done at STOCK exchange. That means if you buy or sell equity shares, derivative

instruments, equity oriented Mutual Funds this tax is applicable.

This tax is added to the price of security during the transaction itself, hence you cannot avoid

(save) it. As this tax amount is very low people do not notice it much.

Current STT Rates are:-

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Perquisite Tax:-

Earlier to Perquisite Tax we had tax called FBT (Fringe Benefit Tax) which was abolished in

2009, this tax is on benefit given by employer to employee. E.g If your company provides you

non-monetary benefits like car with driver, club membership, ESOP etc. All this benefit is

taxable under perquisite Tax.

In case of ESOP The employee will have to pay tax on the difference between the Fair

MARKET Value (FMV) of the shares on the date of exercise and the price paid by him/her.

Corporate Tax:-

Corporate Taxes are annual taxes payable on the income of a corporate operating in India. For

the purpose of taxation companies in India are broadly classified into domestic companies and

foreign companies.

In addition to above other taxes are also applicable on corporates

CONCLUSION :

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Direct tax role is vital for the government's control of the economy. Its innovation in using

online technology has made tax collection easier and made it harder for income taxes to be

evaded. It uses tax revenue to finance its plans for the economy. Society has benefited from all

the projects and services that are provided through public expenditure. HMRC's role is vital for

the government's control of the economy.

This case study helps to illustrate the differences between the two main areas of taxation, direct

taxes and indirect taxes. It illustrates how governments use both fiscal policy and monetary

policy in order to meet their objectives. Finally, the case looks at the processes for collecting

income taxes, both for the employed and the self-employed and how it communicates the tax

message.

BIBLIOGRAPHY :

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(1) http://businesscasestudies.co.uk/hmrc/how-hmrc-collects-tax-revenue-to-support-

government-policy/conclusion.html#axzz3phSjfBkG

(2) http://icmai.in/upload/Students/Syllabus-2008/StudyMaterial/AppDirTax6.pdf

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