Income Tax-I Unit-1 Notes.pdf

Introduction to Income Tax

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Department of Management, AIGS
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INCOME TAX-I
CHAPTER-1: INTRODUCTION TO INCOME TAX



BRIEF HISTORY OF INCOME TAX IN INDIA

 In India, Sir James Wilson, who became first British-India’s First Finance
Minister, introduced income tax for the first time in 1860 in order to meet the
expenses and losses suffered by the rulers on account of Military Mutiny (Freedom
Movement) of 1857. It was introduced as a temporary revenue measure only for
five years.
 Thereafter; several amendments were made in it from time to time. In 1886, a
separate Income tax act was passed. This act remained in force up to, with various
amendments from time to time. In 1918, a new income tax was passed and again it
was replaced by another new act which was passed in 1922.This Act remained in
force up to the assessment year 1961-62 with numerous amendments.
 The Income Tax Act of 1922 had become very complicated on account of
innumerable amendments. The Government of India therefore referred it to the law
commission in 1956 with a view to simplify and prevent the evasion of tax. The law
commission submitted its report-in September 1958, but in the meantime the
Government of India had appointed the Direct Taxes Administration Enquiry
Committee submitted its report in 1956.In consultation with the Ministry of Law
finally the Income Tax Act, 1961 was passed.
 The Income Tax Act 1961 has been brought into force with 1 April 1962. It applies
to the whole of India including Jammu and Kashmir.
 Income Tax Act 1961 contains 298 sections and XIV (14) schedules.

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Department of Management, AIGS
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SHORT TITLE, EXTENT AND COMMENCEMENT (SEC 1):

1.1 Short Title: This may be called the Income Tax Act, 1961,
1.2 Extent: It extends to whole of India. (It also means people of Jammu and Kashmir
earning income is required to pay income tax to Government of India).
1.3 Commencement: This act comes into force on 1st day of April, 1962.

INCOME-TAX LAW IN INDIA
The income tax law in India consists of the following components:
1. Income tax Acts
2. Income tax rules
3. Finance Act
4. Circulars, notifications etc.
5. Legal decision of courts.

 Finance Act:
Every year, the Finance Minister of the Government of India presents the Budget to the
Parliament. Once the Finance Bill is approved by the Parliament and gets the assent of the
President of India, it becomes the Finance Act.

 Income-tax Rules:
The administration of direct taxes is looked after by the Central Board of Direct Taxes
(CBDT). The CBDT is empowered to make rules for carrying out the purposes of the
Act. For the proper administration of the Income-tax Act, the CBDT frames rules from
time to time. These rules are collectively called Income-tax Rules, 1962.

 Circulars and Notifications:
Circulars are issued by the CBDT from time to time to deal with certain specific
problems and to clarify doubts regarding the scope and meaning of the provisions. These
circulars are issued for the guidance of the officers and/or assesses.


MEANING OF TAX

Tax is a levy imposed on the individual by an appropriate authority. It is a form of revenue
to the Government.
According to Taylor: ‘Tax means a compulsory donation by public without any direct
benefit for such donation’

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Department of Management, AIGS
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INCOME TAX:

 Income tax is tax on income. Income tax is a very important direct tax. It is an
important and most significant source of revenue of the Government.
 The government needs money to maintain law and order in the country; safeguard
the security of the country from foreign powers and promote the welfare of the
people. It is the foremost duty of the government to bring out such welfare and
development programmes which will bridge the gap between the rich and the poor.
 For this purpose, mobilization of funds from various sources is required. These
sources may be direct or indirect. Income tax is one of the most important tools to
achieve balanced socio-economic growth.

OBJECTIVES OF INCOME TAX:

1. To reduce inequalities in the distribution of income and wealth.
2. To bring out equity between classes of tax payers.
3. To accelerate the economic growth and development of country.
4. To make available of funds for economic development.
5. To encourage investment in new capital goods.
6. To channelize investment into those sectors which contribute the most economic growth.

TYPES OF TAXES

Direct Tax: it refers to the type of tax in which the incidence (i.e., liability for payment of
tax) and impact (i.e., actual payment of tax) is on the same person. It is a form of tax which
can be traced to the payer and it flows directly from the tax-payer to the Government.

Indirect Tax: refers to the type of tax in which the incidence and impact of are on different
persons. It is a form of tax which cannot be traced to the payer and it flows from the payer
to the Government indirectly - i.e., through others. Here the incidence and impact of tax
falls on the same person. Example Direct Tax, Wealth Tax, Property Tax etc.

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Department of Management, AIGS
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THREE IMPORTANT TERMINOLOGIES IN TAX

Tax Avoidance:
Tax avoidance means taking undue advantage of the loopholes, lacunae or drafting mistakes
for reducing tax liability and thus avoiding payment of tax which is lawfully payable.
Generally, it is done by twisting or interpreting the provisions of law and avoiding payment
of tax. Tax avoidance takes into account the loopholes of law. Though it has a legal
sanction, it means following the provisions of law in letter but killing the spirit of the law.

Tax Evasion:
Tax evasion means avoiding tax by illegal means. Generally, it involves suppression of
facts, falsifying records, fraud or collusion. It is an attempt to evade tax liability with the
help of unfair means. Tax evasion is illegal and would result in punishment by way of
penalty, fines and sometimes prosecution.

Tax Planning:
Tax planning may be defined as an arrangement of one’s financial affairs in such a way that
without violating in any way the legal provisions of an Act, full advantage is taken of all
exemptions, deduction, rebates and reliefs permitted under the Act, so that the burden of the
taxation on an assessee, as far as possible, is the least. It is within the framework of law.

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Department of Management, AIGS
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LEGAL FRAMEWORK OF INCOME TAX IN INDIA

Income tax in India is governed and monitored by the following:
1. Income Tax Act, 1961 as amended from time to time.
2. The Finance Act, passed by the Parliament, every year.
3. The Income Tax Rules, 1962 as framed and amended by the Central Board of Direct
Taxes (CBDT) from time to time.
4. Judicial decisions.
5. The circulars, notifications, orders and executive instructions given by the CBDT from
time to time.

The Finance Bill/Act

 Generally, on the last working day of February of each year the Finance Minister of
the Government of India presents a bill known as Finance Bill in the Parliament. In
the bill, among others, the finance minister proposes

 amendments in direct and indirect taxes,
 amendments in rates of direct and indirect taxes,
 amendments in rates for deduction of tax at source, etc., in the Finance Bill.

 When this bill is approved by both the houses of Parliament (i.e., Lok Sabha and
Rajya Sabha) and approved by the President of India, it becomes Finance Act.

 Thereafter the provisions of Finance Act are incorporated in the Income Tax Act.
The Finance Act also specifies the rates of tax for computation of income tax and
other taxes.

Procedure for passing of the Money Bills:

1. A money bill can be introduced or originated only in Lok Sabha.
2. A money bill can be introduced only on prior recommendations of the President.
3. Lok Sabha speaker will decide whether it is a money bill or not. His decision is final, no
one is challenging his decision.
4. A money bill can be a government bill only.
5. Once a money bill is passed in Lok Sabha, it is transmitted to Rajya Sabha for its
consideration. Rajya Sabha can neither reject nor amend the money bill. It can make only
recommendations and has to return the bill with or without recommendation to Lok Sabha
in 14 days.
6. The Lok Sabha may or may not accept the recommendations of Rajya Sabha. Thus,
returned bill is considered passed in both houses. If Rajya Sabha does not even return the
bill in 14 days, it is considered passed in both houses.
7. The bill has to passed by the Parliament within 75 days of its introduction.

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Department of Management, AIGS
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CANNONS OF TAXATION

Cannons of taxation, also known as principles of taxation, refer to the guidelines laid down
by various economists and statesmen for framing rules of taxation. Adam Smith, in his book
"An inquiry into the nature and causes of the wealth of nations" laid down four cannons of
taxation viz.,

(1) Cannon of ability,
(2) Cannon of economy,
(3) Cannon of convenience and
(4) Cannon of certainty.

To these cannons of taxation, modern economists have added five more viz.,
(1) Cannon of productivity,
(2) Cannon of elasticity,
(3) Cannon of flexibility,
(4) Cannon of diversity and
(5) Cannon of simplicity.

A brief explanation of these canons is given below.

1. Cannon of ability: - It states that the taxes imposed must be proportional to the ability
of the citizens to pay. The taxpayers should not be made to pay tax beyond their
capacity to pay. The tax should be based upon the principle of equity and justice.
According to this principle a person with high income has higher capacity to pay tax and
should be made to pay more tax and a person with low income has less capacity to pay
tax and should be made to pay less tax.

2. Cannon of economy: - It states that the cost of collecting tax must be less and
economical.

3. Cannon of convenience: - It states that maximum convenience must be provided to the
taxpayer to pay tax. For example, a salaried employee should be allowed to pay tax when he
receives salary, a buyer should be allowed to pay tax when he buys the product and a farmer
must be allowed to pay tax when he harvests the crop and so on.

4. Cannon of certainty: - It states that the payer of tax must have a certain idea about the
mode, time, place and the amount of tax payable by him.

5. Cannon of productivity: - It states that the taxes imposed must be capable of producing
more revenues and should not affect the production and distribution of the country.

6. Cannon of elasticity: - It states that rates of tax should be more elastic i.e., a slight
reduction in tax rates should enable collection of more taxes.

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Department of Management, AIGS
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7. Cannon of flexibility: - It states that tax policy should enable adjustments if needed.

8. Cannon of diversity: - It states that tax structure should be diversified i.e., there must be
a diverse variety of taxes so that all categories of people are brought under the tax net,

9. Cannon of simplicity: - It states that the tax rules and procedures must be simple so that
the tax payers are able to understand the details of taxes easily


IMPORTANT DEFINITIONS

Assessment Y e a r : Section 2(9)
“Assessment year” means the period starting from April 1 and ending on March 31 of the
next year. Eg: Assessment year 2022-23 which commences on April 1, 2022 and ends on
March 31, 2023. Income of previous year of an assessee is taxed during the assessment year
at the rates prescribed by the relevant Finance Act for tax rates.

Previous year: section 3
Income earned in a particular year is taxable in the next 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. In other words, previous year is the financial year immediately proceeding the
assessment year.

Exceptions to the general rule that previous year’s income is taxable during the assessment
year
In the following situations income of an assessee is liable to be assessed to tax in the same
year in which he earns the income:
a.
Income of non-residents from shipping;
b.
Income of persons leaving India either permanently or for a long period of time;
c.
Income of bodies formed for short duration;
d. Income of a person trying to alienate his assets with a view to avoiding payment of tax;
e.
Income of a discontinued business.

Person: Section 2(31)
The term “person” includes:

i) An individual: An individual means a natural person or a human being, who may be
male, female, minor child or a lunatic.

ii) A Hindu undivided family : A Hindu Undivided Family means a Hindu family which
consists of all persons lineally descended from a common ancestor including their wives
and unmarried daughters.

iii) A company : A company may be defined as an artificial person created by law with
perpetual succession, a common seal and shares carrying limited liability.

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Department of Management, AIGS
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iv) A firm : A firm means a partnership firm which is defined under the Partnership Act.
There are two conditions for partnership firm
(i) There must be registered partnership deed
(ii) Profit sharing ratio must be included in deed.

v) An association of persons (AOP) or a body of individuals (BOI), whether
incorporated or not : An association of persons means two or more persons joining for a
common purpose for the purpose of earning income. It may consist two or more individuals
or any other person, i.e., an individual and a company or two or more companies.

vi) A local authority : Local authority includes Municipality, Municipal Corporation,
District Board, etc.

vii) Every artificial juridical person not falling within any of the preceding categories :
An idol or deity is assessable as an artificial juridical person, but through persons managing
them. Similarly, all other artificial persons, with a juristic personality are artificial persons,
like universities.

Assessee: Section 2(7)
Every person in respect of whom, any proceeding under the act has been taken for the
assessment of his income or of the income of any other person in respect of which he is
assessable or of the loss sustained by him or by such other person or the amount of refund
due to him or to such other person may be called an assessee.

Deemed Assessee:
A person who is deemed to be an assessee for some other person is called “Deemed
Assessee”.

Assessee In Default:
When a person is responsible for doing any work under the Income Tax Act and he fails to
do it, he is called an “Assessee in default”.

Assessment [Section 2(8)]
This is the procedure by which the income of an assessee is determined by the Assessing
Officer.

Basis Of Charge of Income Tax Sec: 4
To know the procedure for charging tax on income, one should be familiar with the
following:

1.
Annual tax - Income-tax is an annual tax on income.

2.
Tax rate of assessment year - Income of previous year is chargeable to tax in the
next following assessment year at the tax rates applicable for the assessment year.
This rule is, however, subject to some exceptions.

3.
Rates fixed by Finance Act - Tax rates are fixed by the annual Finance Act and not
by the Income-tax Act. For instance, the Finance Act, 2013, fixes tax rates for the
Assessment year 2022-23.

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Department of Management, AIGS
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4.
Tax on person - Tax is charged on every person.

5.
Tax on total income - Tax is levied on the “total income” of every assessee
computed in accordance with the provisions of the Act.

INCOME: Section2 (24)
The definition of the term “income” in section 2(24) is inclusive and not
exhaustive. Therefore, the term “income” not only includes those things that are included in
section 2(24) but also includes those things that the term signifies according to its general
and natural meaning. Income, in general, means a periodic monetary return which accrues
or is expected to accrue regularly from definite sources. However, under the Income-tax
Act, 1961, even certain income which do not arise regularly are treated as income for tax
purposes e.g., Winnings from lotteries, crossword puzzles.

Section 2(24) of the Act gives a statutory definition of income.
At present, the following items of receipts are included in income: —
(1)
Profits and gains.
(2)
Dividends.
(3)
Voluntary contributions received by a trust/institution created wholly or partly for
charitable or religious purposes or by an association or institution
(4)
The value of any perquisite or profit in lieu of salary taxable under section 17.
(5)
Any special allowance or benefit other than the perquisite included above, specifically
granted to the assessee to meet expenses wholly, necessarily and exclusively for the
performance of the duties of an office or employment of profit.
(6)
Any allowance granted to the assessee to meet his personal expenses at the place where
the duties of his office or employment of profit are ordinarily performed by him or at a
place where he ordinarily resides or to compensate him for the increased cost of living.
(7)
The value of any benefit or perquisite whether convertible into money or not, obtained
from a company either by a director or by a person who has a substantial interest in the
company or by a relative of the director or such person and any sum paid by any such
company in respect of any obligation which, but for such payment would have been
payable by the director or other person aforesaid.
(8)
The value of any benefit or perquisite, whether convertible into money or not, which is
obtained by any representative assessee mentioned under section 160(1)(iii) and (iv), or
by any beneficiary or any amount paid by the representative assessee for the benefit of
the beneficiary which the beneficiary would have ordinarily been required to pay.
(9)
Deemed profits chargeable to tax under section 41 or section 59.
(10)
Profits and gains of business or profession chargeable to tax under section 28.
(11)
Any capital gains chargeable under section 45.
(12)
The profits and gains of any insurance business carried on by Mutual Insurance
Company or by a cooperative society, computed in accordance with Section 44 or any
surplus taken to be such profits and gains by virtue of the provisions contained in the first
Schedule to the Act.
(13)
The profits and gains of any business of banking (including providing credit facilities)
carried on by a co-operative society with its members.

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(14)
Any winnings from lotteries, cross-word puzzles, races including horse races, card
games and other games of any sort or from gambling, or betting of any form or nature
whatsoever.
(15)
Any sum received by the assessee from his employees as contributions to any
provident fund or superannuation fund or Employees State Insurance Fund (ESI) or any
other fund for the welfare of such employees.
(16)
Any sum received under a Keyman insurance policy including the sum allocated by
way of bonus on such policy will constitute income. “Keyman insurance policy” means a
life insurance policy taken by a person on the life of another person where the latter is or
was an employee or is or was connected in any manner what so ever with the former’s
business.
(17)
Any sum referred to clause (va) of Section 28. Thus, any sum, whether received or
receivable in cash or kind, under an agreement for not carrying out any activity in relation to
any business; or not sharing any know-how, patent, copy right, trade-mark, licence,
franchise, or any other business or commercial right of a similar nature, or information or
technique likely to assist in the manufacture or processing of goods or provision of services,
shall be chargeable to income tax under the head “profits and gains of business or
profession”.
(18)
Any sum of money or value of property referred to in section 56(2)(vii) or section
56(2)(viia).
(19)
Any consideration received for issue of shares as exceeds the fair market value of
shares referred to in section 56(2)(viib).

Gross Total Income Sec: 80b (5)

As per section 14, the income of a person is computed under the following five heads:
1.
Salaries.
2.
Income from house property.
3.
Profits and gains of business or profession.
4.
Capital gains.
5.
Income from other sources.
If the income is not derived from any of the above sources, it is not taxable under the act.
The aggregate income under these heads is termed as “gross total income”.

PROCEDURE FOR COMPUTING THE TOTAL INCOME:

For computing the total income of an assessee and the tax payable by him, following
procedure is followed –

1. Classify the income under each of the five heads and then deduct from the income under
each head the deductions permissible under the Act in respect of that head of income.
The balance of amount left under each head of income is its assessable income.


2. Total up to the assessable income of each head and the aggregate of all these assessable
incomes is called the Gross Total Income.

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Department of Management, AIGS
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3. From the Gross Total Income deduct the deductions permissible under Sec. 80C to 80U
of the Act for computing the total income. The balance left after subtracting the allowable
deductions is called the ‘Total Income’.

4. The amount of income tax payable is then calculated on this total income according to the
rates prescribed by the Finance Act for the relevant assessment year and the rates prescribed
under different sections of the Act.

Total Income Sec: 2(45)
Total income means the the amount left after making the deductions under section 80C to
80U from the gross total income.

Casual Income
Any receipt which is of a casual and non-recurring nature is called casual income. Casual
income includes the following receipts:
1. Winning from lotteries,
2. Winning from crossword puzzles,
3. Winning from races (including horse races),
4. Winning from card games and other games of any sort
5. Winning from gambling or betting of any form or nature.


SLAB RATES APPLICABLE FOR A.Y.2022-23 ARE AS FOLLOWS:
Income Tax Slab Rates FY 2021-22 & AY 2022-23 for Individuals Opting for Old Tax
Regime
 Individuals below the age of 60 years
 NRI
 Hindu Undivided Family (HUF)
 Associate of person, Body of Individuals and Artificial Judicial Person
Income Slab (in Rs.) Income Tax Rate
Up to 2,50,000 NIL
2,50,000- 5,00,000 5% of the amount exceeding Rs. 2,50,000
5,00,000- 10,00,000 20% of amount exceeding 5,00,000 + Rs. 12,500
1,000,000 & above 30% of amount exceeding 1,000,000 + Rs. 1,12,500
Surcharge
 10% of income tax where total income exceeds Rs. 50,00,000
 15% of income tax where total income exceeds Rs. 1,00,00,000
 25% of income tax where total income exceeds Rs. 2,00,00,000
 37% of income tax where total income exceeds Rs. 5,00,00,000

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Department of Management, AIGS
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*Health and Education Cess:- 4% of income tax and surcharge
Income Tax Rates FY 2021-22 & AY 2022-23 for Hindu Undivided Family (HUF) for Old
Tax Regime
Income Slab (in Rs.) Income Tax Rate
Up to 2,50,000 NIL
2,50,000- 5,00,000 5% of the amount exceeding Rs. 2,50,000
5,00,000- 10,00,000 20% of amount exceeding 5,00,000 + Rs. 12,500
1,000,000 & Above 30% of amount exceeding 1,000,000 + Rs. 1,12,500
Surcharge
 10% of income tax where total income exceeds Rs. 50,00,000
 15% of income tax where total income exceeds Rs. 1,00,00,000
 25% of income tax where total income exceeds Rs. 2,00,00,000
 37% of income tax where total income exceeds Rs. 5,00,00,000
*Health and Education Cess: - 4% of income tax and surcharge
Income Tax Slab Rates FY 2021-22 & AY 2022-23 for Senior Citizens (Above 60 years but
Below 80 years)
Income Slab (in Rs.) Income Tax Rate
Up to 3,00,000 NIL
3,00,000- 5,00,000 5% of the amount exceeding Rs. 3,00,000
5,00,000- 10,00,000 20% of amount exceeding 5,00,000 + Rs. 10,000
1,000,000 & above 30% of amount exceeding 1,000,000 + Rs. 1,10,000
Surcharge
 10% of income tax where total income exceeds Rs. 50,00,000
 15% of income tax where total income exceeds Rs. 1,00,00,000
 25% of income tax where total income exceeds Rs. 2,00,00,000
 37% of income tax where total income exceeds Rs. 5,00,00,000
*Health and Education Cess: - 4% of income tax and surcharge

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Department of Management, AIGS
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Income Tax Slab Rates FY 2021-22 & AY 2022-23 for Senior Citizens (Above 80 Years of
Age)
Income Slab (in Rs.) Income Tax Rate
Up to 5,00,000 NIL
5,00,000- 10,00,000 20% of amount exceeding Rs. 5,00,000
1,000,000 & Above 30% of amount exceeding 1,000,000 + Rs. 1,00,000
Surcharge
 10% of income tax where total income exceeds Rs. 50,00,000
 15% of income tax where total income exceeds Rs. 1,00,00,000
 25% of income tax where total income exceeds Rs. 2,00,00,000
 37% of income tax where total income exceeds Rs. 5,00,00,000
*Health and Education Cess:- 4% of income tax and surcharge
Note- A resident individual is eligible for tax exemption under Section 87A if the total
income does not exceed Rs. 5,00,000. The amount of exemption shall be 100% of income tax
or Rs.12,500, whichever is less.
Rebate under Section 87A:
Rebate under Section 87A helps taxpayers reduce their income tax liability. You can claim
the said rebate if your total income, i.e. after Chapter VIA deductions, does not exceed Rs 5
lakh in a financial year. Your income tax liability becomes nil after claiming the rebate under
Section 87A.
Things to remember to avail rebate under Section 87A
 The rebate can be applied to the total tax before adding a health and education cess of
4%
 Only resident individuals are eligible to avail rebate under this section.
 Senior citizens above 60 years and below 80 years of age can avail a rebate under
Section 87A
 Super senior citizens above 80 years of age are not eligible to claim rebates under
Section 87A
 The amount of rebate will be lower than the limit specified under Section 87A or total
income tax payable (before cess)
 Section 87A rebate is available under old as well as the new tax regime

“Education Cess &Secondary &Higher Education Cess “on Income tax:

Education cess (EC) 2% of income-tax and surcharge, if applicable
Secondary and Higher Education
Cess (SHEC)
1% of income-tax and surcharge, if applicable

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Education Cess
Education cess consists of Primary Education and Secondary and Higher Education Cess
making up 3% of the tax payable. It is used to fund salaries, mid-day meals, infrastructure,
special schemes, and premier educational institutions in the country. Further, ―Secondary
and higher education cess on income-tax‖ @1% of income-tax plus surcharge, if applicable, is
leviable to fulfill the commitment of the Government to provide and finance secondary and
higher education.
Note: Education cess was initiated in 2004 as an addition to income tax. The aim of this cess
was to support government's finances for providing children with access to basic education.
Of the 3% of education cess, 1% is charged as secondary and higher education cess.

ROUNDING OFF TOTAL INCOME-SEC.288A: The Total Income shall be rounded off to
the NEAREST MULTIPLE OF TEN RUPEES.
ROUNDING OFF OF TAX-SEC.288B: Aggregate of tax, surcharge and education cess
payable shall be rounded off to NEAREST MULTIPLE OF TEN RUPEES.
Average Rate of tax: SEC.2 (10)
Average Rate of tax = Tax payable/Total Income *100

Maximum marginal rate mean the rate of income-tax (including surcharge on the income-tax,
if any) applicable in relation to the highest slab of income in the case of an individual, AOP or
BOI, as the case may be, as specified in Finance Act of the relevant year.

AGRICULTURE INCOME

Agriculture income is exempt under the Indian Income Tax Act. This means that income
earned from agricultural operations is not taxed. The reason for exemption of agriculture
income from Central Taxation is that the Constitution gives exclusive power to make laws
with respect to taxes on agricultural income to the State Legislature. However while
computing tax on non-agricultural income agricultural income is also taken into
consideration. As per Income Tax Act income earned from any of the under given three
sources meant Agricultural Income;

(i)
Any rent received from land which is used for agricultural purpose.
(ii)
Any income derived from such land by agricultural operations including processing of
agricultural produce, raised or received as rent in kind so as to render it fit for the
market, or sale of such produce.
(iii)
Income attributable to a farm house subject to the condition that building is situated on
or in the immediate vicinity of the land and is used as a dwelling house, store house etc.
Now income earned from carrying nursery operations is also considered as agricultural
income and hence exempt from income tax.

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Department of Management, AIGS
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In order to consider an income as agricultural income certain points have to be kept in
mind:
(i)
There must me a land.
(ii)
The land is being used for agricultural operations.
(iii)
Agricultural operation means that efforts have been induced for the crop to sprout out
of the land .
(iv)
If any rent is being received from the land then in order to assess that rental income as
agricultural income there must be agricultural activities on the land.
(v)
In order to assess income of farm house as agricultural income the farm house building
must be situated on the land itself only and is used as a store house/dwelling house.

Certain income which is treated as Agriculture Income:
(a)
Income from sale of replanted trees.
(b)
Rent received for agricultural land.
(c)
Income from growing flowers and creepers.
(d)
Share of profit of a partner from a firm engaged in agricultural operations.
(e)
Interest on capital received by a partner from a firm engaged in agricultural operations.
(f)
Income derived from sale of seeds.

Certain income which is not treated as Agricultural Income:
(a)
Income from poultry farming.
(b)
Income from bee hiving.
(c)
Income from sale of spontaneously grown trees.
(d)
Income from dairy farming.
(e)
Purchase of standing crop.
(f)
Dividend paid by a company out of its agriculture income.
(g)
Income of salt produced by flooding the land with sea water.
(h)
Royalty income from mines.
(i)
Income from butter and cheese making.
(j)
Receipts from TV serial shooting in farm house is not agriculture income.


Partly agriculture income
Partly agricultural income consists of both the element of agriculture and business, so non
agricultural part of the income is taxed. Some examples for partly agricultural income are
given below:

1. Profit of business other than Tea
This rule applicable to agricultural produce like cotton, tobacco, and sugarcane etc, here
the market value of the agricultural produce raised by the Assessee for utilizing it as raw
material for his business will be deducted out of the total profit of such Assessee while
calculating tax on his income.

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Department of Management, AIGS
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2. Profit from Tea manufacturing
If a person using his own tealeaves grown by him for his tea manufacturing business,
then 60% of his income will be treated as agricultural income and the remaining 40 %
will be treated as business income. So he has to pay tax on that remaining 40% of
income.
3. Income from the manufacturing of centrifuged latex or cenex
If a person manufacturing centrifuged latex by using his own made raw then, 65 % of the
income derived from the sale of the same is treated as agricultural income so he has to pay
tax remaining part of the income.
4. Income from the coffee manufacturing
a)
75% of the income derived from the sale of coffee grown and cured by the seller in
India is deemed to be agricultural income 25% is taken as business income.
b)
65% the income derived from the sale of coffee grown, cured, roasted and grounded
by the seller in India is deemed to be agricultural income 40% is taken as business income.

Taxation of Agricultural Income
It is totally exempted from tax under Section 10(1). But, in case of agricultural income from
land situated outside India, it will be fully taxable under the head Other Sources.

Partial Integration
The concept of partial integration has been introduced to ensure that nonagricultural income is
taxed at higher slab rate
Conditions for Partial Integration
1. Agricultural income should exceed Rs5, 000.
2. Non-agricultural income should not exceed the taxable limit that is Rs 5,00,000 in case of
super senior citizen, Rs3, 00,000 in case of senior citizens and in case of individuals below 60
years the limit is Rs 2,50,000.
3. Partial Integration is applicable for individual, HUF, AOP, Artificial Juridical Person. In
other words, this concept is not applicable for Companies, Cooperative Societies, Local
Authorities and Partnership Firm

Steps in Partial Integration
1. Add: Agricultural Income to Non-agricultural income and compute tax.
2. Add: Agricultural Income to maximum income exempted from income tax and compute the
tax.
3. Gross Tax Liability= Step 1- Step 2.

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Department of Management, AIGS
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REVENUE AND CAPITAL RECEIPTS
Introduction:
For Income tax purpose, a clear understanding of the distinction between the two is essential because
income tax is charged on revenue incomes and not on capital incomes unless they are expressly taxable.
Again, the distinction between the two is vital because only revenue expenses are allowed and capital
expenses are disallowed.

Capital and Revenue are mainly classified into:




Capital and Revenue
Receipts
1. Capital Receipts.
2. Revenue Receipts.
Expenditure
1. Capital Expenditure.
2. Revenue Expenditure.
Losses
1. Capital Losses.
2. Revenue Losses.

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Department of Management, AIGS
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Meaning:
According to English Dictionary, 'Revenue' means 'the return, yield, or profit of any lands,
property or any other important source of income; that which comes in to one as a return from
property or possessions; income from any source"; and 'capital' means "accumulated wealth
employed re productively".
Capital and Revenue Receipts:
Capital Receipts are non-recurring in nature and do not arise in the day-to-day activities of the
business. On the other hand, revenue receipt is recurring in nature and arise during the ordinary
course of business.

Examples of Capital Receipts
(i) Compensation received for nationalization.
(ii) Insurance money received for the loss of a capital asset.
(iii) Profits due to fluctuations in the rate of exchange of foreign currency.
(iv) Premium on the issue of new shares.
(iv) Compensation received for termination of agency before the expiry of stipulated
period, the only source of income being agency.
(v) Compensation received from the employer for premature termination of services.
(vi) Annuity received under LIC scheme.


Examples of Revenue Receipts

(i) Annuities received periodically.
(ii) Compensation received for loss of profits.
(iii) Proceeds of sale of forest trees.
(iv) Damages received for breach of contract.
(v) Dividends and interest from investments.
(vi) Amount received by an assessee for digging and removing earth from his land for
brick-making.
(vii) GST collected from purchasers/customers.
(viii) Compensation received for the injury suffered in an accident.
(ix) Compensation received for the compulsory vacation of the place of business.
(x) Money received as the consideration for not resigning directorship.
(xi) Money received by a tyre manufacturing company for sale of technical know-how
regarding manufacturing of tyre.
Note: Unclaimed dividend cannot deemed to be profit of business. It is not a taxable receipt.

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Department of Management, AIGS
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Capital and Revenue Expenditure –
Capital expenditure is the fund-Used by a company to acquire and upgrade physical assets such
as land and building, plant and machinery, furniture and fixture etc. on the other hand, any
maintenance cost to physical assets owned by the company is revenue expenditure.

Examples of Capital Expenditure
1. Cost of acquisition and installation of fixed asset.
2. An expenditure incurred for the purpose of increasing the earning capacity.
3. Amount paid as commission to purchase machinery.
4. Cost of reconstructing of a business building.
5. Brokerage paid for raising capital.

Examples of Revenue Expenditure
1. Expenditure incurred in raising loan.
2. A reward given to the employee in consideration of his good service,
3. Brokerage paid for raising loan for the purpose of business.
4. Legal expenses in connection with resolving winding up petition by shareholders.
5. Amount received on the sale of securities by an investment company.
6. Interest on loan.

Capital and Revenue Loss

The distinction between the two is vital because only revenue losses are allowed and capital
losses are-disallowed.
Examples of Capital Loss
1. Los-son sale of office furniture.
2. Issue-of debentures at discount price.

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Department of Management, AIGS
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Examples of Revenue Loss
1. Loss sustained on account of embezzlement done by an employee.
2. Bad Debts.

MAJOR DIFFERENCE BETWEEN CAPITAL AND REVENUE EXPENDITURE

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Department of Management, AIGS
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INCOME TAX AUTHORITIES (SEC 116 TO 119)
1. CENTRAL BOARD OF DIRECT TAXES
The CBDT is a part of Department of Revenue in the Ministry of Finance. On one hand, CBDT provides
essential inputs for policy and planning of direct taxes in India, at same time it is also responsible for
administration of direct tax laws through the Income Tax Department. The Central Board of Direct
Taxes is a statutory authority functioning under the Central Board of Revenue Act, 1963. The officials of
the Board in their ex-officio capacity also function as a Division of the Ministry dealing with matters
relating to levy and collection of direct taxes.

The Central Board of Revenue as the Department apex body charged with the administration of taxes
came into existence as a result of the Central Board of Revenue Act, 1924.
Initially the Board was in charge of both direct and indirect taxes. However, when the administration of
taxes became too unwieldy for one Board to handle, the Board was split up into two, namely the Central
Board of Direct Taxes and Central Board of Excise and Customs with effect from 1.1.1964. This
bifurcation was brought about by constitution of the two Boards u/s 3 of the Central Boards of Revenue
Act, 1963.

ORGANIZATIONAL STRUCTURE OF THE CENTRAL BOARD OF DIRECT TAXES:
The Chairman, who is also an ex-officio Special Secretary to Government of India, heads the CBDT. In
addition, CBDT has six Members, who are ex officio Additional Secretaries to Government of India.
 Member (Income Tax)
 Member (Legislation and Computerization)
 Member (Revenue)
 Member (Personnel & Vigilance)
 Member (Investigation)
 Member (Audit & Judicial) The Chairman and Members of CBDT are selected from Indian Revenue
Service (IRS), a premier civil service of India, whose members constitute the top management of Income
Tax Department.

Key functions, powers and responsibilities:
1. Set up and structure of Income Tax Department;
2. Methods and procedures of work of the CBDT;
3. Measures for disposal of assessments, collection of taxes, prevention and detection of tax evasion and
tax avoidance;
4. Recruitment, training and all other matters relating to service conditions and career prospects of all
personnel of the Income-tax Department;
5. Laying down of targets and fixing of priorities for disposal of assessments and collection of taxes and
other related matters;

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6. Write off of tax demand exceeding Rs.25 lakhs in each case;
7. Policy regarding grant of rewards and appreciation certificates.
8. Any other matter, which the Chairman or any Member of the Board, with the approval of the
Chairman, may refer for joint consideration of the Board.

1. THE COMMISSIONERS OF INCOME TAX (CIT):

Commissioners are appointed by the Central Government. Generally, they are appointed to head income-
tax administration of a specified area. As the head of administration, a Commissioner of income-tax
enjoys certain administrative as well as judicial powers. A commissioner may exercise powers of an
assessing officer. It has the power to transfer any case from one or more assessing officers to any other
assessing officer. It can grant approval for an order issued by the assessing officer. Prior approval is
required for reopening of an assessment. Its, also, has the power to revise an order passed by an
assessing officer in addition to many other powers as given in the Income Tax Act, 1961.
Key Functional Powers and Responsibilities:
 Issue notice to person for fling a return.
 Final authority to decide the disputes if two subordinate income tax authorities are not in agreement
regarding their areas of jurisdiction.
 The commissioner may delegate to any taxation officer all or any of its powers or functions, other than
the powers of delegation.
 The commissioner can recognize the provident fund, superannuation und and gratuity fund etc. under
the income tax ordinance, 2001.
 CIT supervises the functions, duties and jurisdictions of its subordinate authorities.
 Power to issue notice to any person for filling the return or for the collection of tax from the tax payer.

2. INCOME TAX OFFICER (ITO) /ASSESSING OFFICER
An Individual officer of the Income-tax Department who is entrusted with this task of assessment is
called as ‘Assessing Officer (AO)’ An AO is an income tax officer who has jurisdiction to make an
assessment of a taxpayer (assessee) who is liable to tax under the Act.
a. Power regarding discovery, production of evidence etc.
b. Power to call information.
c. Power to inspect registers of companies.
d. Power to set off refunds against tax remaining payable.
e. Power to dispose of appeals.
f. Power to impose penalty.

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Department of Management, AIGS
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STRUCTURE OF IT AUTHORITIES (SEC. 116):
There shall be the following classes of income tax authorities for purposes of the Income Tax Act.


PROBLEM-1
What will be the previous year in relation to assessment year 2022-23 in the following cases?
a. A sole trader keeping his accounts on financial year basis.
b. Sri Murthy start up a new business on 03/03/2022.
c. Mrs. Anjali joins an Indian company on 23/01/2022.
d. Smt. Archana bought a house on 01/08/2021 and let out at Rs.6000 p.m.
e. Smt. Smriti is a registered doctor and keeps her income and expenditure accounts on calendar
year.
SOLUTION: -
a. 01-04-2021 to 31-03-2022
b. 03-03-2022 to 31-03-2022
c. 23-01-2022 to 31-03-2022
d. 01-08-2021 to 31-03-2022
e. 01-04-2021 to 31-03-2022

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Department of Management, AIGS
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PROBLEM-2
Determine the Income status of the following:
a. Dr. Arjun a lecturer in the Bangalore university.
b. Bharathi Dasan University.
c. Sri. Ganesh is director in Bharat Electronics Limited.
d. Bharat Heavy Electrical Limited (BHEL).
e. Mr.Kiran a sole proprietor of a Business.
f. Bangalore Municipal Corporation (BMC).
g. Bangalore Development Authority (BDA).
h. Life Insurance Corporation of India.
i. Malleshwaram Ladies Association (MLA).
j. Co-operative Society.
k. Praveen and Sons (Partnership Firm).
l. A joint Family of Sri. Baswegowda, his wife, children and parents.
m. Ram and laxman, who are the legal heirs of satyanarayan.
n. Union Bank of India Limited.

SOLUTION:-
a. An Individual.
b. Artificial Juridical Person.
c. An Individual.
d. A Company.
e. An Individual.
f. A Local Authority.
g. Artificial Juridical Person.
h. A Company.
i. An Association of Person.
j. An Association of Person.
k. A Firm.
l. Hindu Undivided Family.
m. Hindu Undivided Family.
n. A Company.

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Department of Management, AIGS
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PROBLEMS ON AGRICULTURE INCOME: -

PROBLEM-03
State whether the following incomes are agriculture or Non-agriculture Incomes: -
a. Income from growing flowers and creepers.
b. Dividend received from a company engaged in agricultural operations.
c. Interest on loan given to a farmer.
d. Income from agricultural activities in Sri Lanka.
e. Income from conversion of sugarcane into jaggery by the farmer himself.

SOLUTION:-
a. Agricultural Income, as it is an Agricultural Activity.
b. Non-Agricultural Income, as it is not directly connected with Land.
c. Non-Agricultural Income, as it is not directly connected with Land.
d. Non-Agricultural Income, as agricultural land is not situated in India.
e. Difference between market price and cost price of sugarcane is agricultural Income.

PROBLEM-04
State whether the following incomes are agriculture or Non-agriculture Incomes: -
a. Income from sale of forest trees of spontaneous growth.
b. Income from agricultural land situated in urban area.
c. Income derived from lease of land for grazing of cattle required for agricultural operations.
d. Income from sale of earth for brick making.
e. Income from dairy farming.

SOLUTION:-
a. Non-Agricultural Income, as basic agricultural operations are not performed.
b. Agricultural Income, as the land is situated in Urban Area and used in agricultural
purposes.
c. Agricultural Income, as it is used for agricultural purpose.
d. Non-Agricultural Income, as basic agricultural operations are not performed.
e. Non-Agricultural Income, as basic agricultural operations are not performed.

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Department of Management, AIGS
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PROBLEM-05
State whether the following incomes are agriculture or Non-agriculture Incomes: -
a. Income from Interest on arrears of rent payable in respect of land used for agricultural Purposes.
b. Income from agricultural land situated in Australia.
c. Income from sale of forest trees of spontaneous growth.
d. Income from lease of Land for grazing of cattle required for agricultural Pursuits.
e. Income from Interest on Simple Mortgage of land used for agriculture.
f. Rent received from house property situated in a village.
g. Remuneration received as manager of an agricultural farm house.
h. Income from Dairy farm, poultry farming etc.
SOLUTION: -
a. Non-Agricultural Income.
b. Non-Agricultural Income.
c. Non-Agricultural Income.
d. Non-Agricultural Income.
e. Non-Agricultural Income.
f. Non-Agricultural Income.
g. Non-Agricultural Income.
h. Non-Agricultural Income.

PROBLEM-06
State whether the following incomes are agriculture or Non-agriculture Incomes: -
a. Dividend from a company engaged in agriculture.
b. Lease rent received from lands given to tenants for agricultural operations.
c. Salary received as a partner from a tea manufacturing firm.
d. Sale of plants from nursery.
e. Income from self-grown grass and trees.
SOLUTION: -
a. Non-Agricultural Income, as it is not directly connected with Land.
b. Agricultural Income, as basic agricultural operations are performed.
c. Non agricultural income, as it is not directly connected with Land.
d. Agricultural Income, as basic agricultural operations are performed.
e. Non-Agricultural Income, as basic agricultural operations are not performed.

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Department of Management, AIGS
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PROBLEM-07
State whether the following incomes are agriculture or Non-agriculture Incomes: -
a. Sale of plants from nursery.
b. Interest on loan given to a farmer.
c. Income from agricultural activities in Sri Lanka.
d. Lease rent received from lands given to tenants for agricultural operations.
e. Remuneration received as Manager of an agricultural farm.

SOLUTION:-
a. Agricultural Income, as basic agricultural operations are performed.
b. Non agricultural income, as it is not directly connected with Land.
c. Non agricultural income, as agricultural land is not situated in India.
d. Agricultural Income, as basic agricultural operations are performed.
e. Non-Agricultural Income, as basic agricultural operations are not performed.

PROBLEMS ON CAPITAL AND REVENUE: -

PROBLEM-08
State whether the following are capital or revenue in nature: -
a. Cost of acquisition and installation of fixed asset.
b. Expenditure incurred in raising loan.
c. An expenditure incurred for the purpose of increasing the earning capacity.
d. A Reward given to the employees in consideration of his good service.
e. Loss sustained on Account of embezzlement done by an employee.

SOLUTION: -
a. Capital Expenditure.
b. Revenue Expenditure.
c. Capital Expenditure.
d. Revenue Expenditure.
e. Revenue loss.

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Department of Management, AIGS
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PROBLEM-09
State whether the following are capital or revenue in nature: -
a. Compensation received for Nationalization.
b. Dividends and interest from Investments.
c. Unclaimed Dividend.
d. Premium on the issue of new shares.
e. Amount received by an assessee for digging and removing earth from his land for brick-
making.
f. Rs.50,000 received as premium on hiring out 50 shops.
g. Sales tax collected from purchases/customers.
h. Compensation received for termination of agency before the expiry of stipulated period,
the only source of income being the agency.
i. Bonus shares received by a dealer of shares.
j. Annuity received.
k. Compensation received from the employer for premature termination of services.

SOLUTION: -
a. Capital Receipt.
b. Revenue Receipt.
c. Neither capital nor revenue.
d. Capital Receipt.
e. Revenue Receipt.
f. Capital Receipt.
g. Revenue Receipt.
h. Capital Receipt.
i. Revenue Receipt.
j. Revenue Receipt.
k. Capital Receipt.

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PROBLEM-10
Determine the nature of the following items:
a. Amount paid as commission to purchase machinery
b. Cost of Reconstructing of a business building.
c. Brokerage paid for raising loan for the purpose of business.
d. Legal expenses in connection with resolving winding up petition by shareholders.
e. Brokerage paid for raising capital.
f. Expenses incurred on the acquisition of copyrights by a publisher.
g. Amount received on the sale of securities by an investment company.
h. Interest on Loan.

SOLUTION: -
a. Capital Expenditure.
b. Capital Expenditure.
c. Revenue Expenditure.
d. Revenue Expenditure.
e. Capital Expenditure.
f. Capital Expenditure.
g. Revenue Expenditure.
h. Revenue Expenditure.




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