Unit I: Income Tax Act 1961

Chapter 1, Chapter 2, Chapter 3

Basic Concepts: Income Tax, Need, Features and Basis of Charges.
Income Tax Act 1961 and Amendments
Residential status, Scope of Total Income
Heads of Income, Exempted Income

Introduction: The most important source of revenue of the Government is taxes. The act of levying taxes is
called taxation. A tax is compulsory charge or levy imposed by the Government on individuals or companies.
The taxes may be imposed on income and wealth of persons or companies and the rate may vary.

What is Tax? : Compulsory monetary contribution to the states revenue, assessed and imposed by
Government on the activities, expenditure, income, occupation, privilege, property, etc of individuals and
organizations. Tax is imposition of financial charge or other levy upon a taxpayer by a state or other the
functional equivalent of the state.

Income Tax: Income tax is tax on income. Income tax is a central subject according to the Constitution of
India. 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. Income tax is one of the
most important tools to achieve balanced socio-economic growth.

Objectives/Need for 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.

Canon of Taxation: By canons of taxation we simply mean the characteristics or qualities which a good tax
system should possess. Adam Smith first devised the principles or canons of taxation in 1776. Smithian
canons of taxation are applied by the modern governments while imposing and collecting taxes.
1. Canon of equality or equity: Canon of equality states that the burden of taxation must be
distributed equally or equitably among the taxpayers. Rich people are capable of paying more taxes
than poor people. Thus, justice demands that a person having greater ability to pay must pay large
taxes. To establish equality in sacrifice, taxes are to be imposed in accordance with the principle of
ability to pay.

2. Canon of certainty: The tax which an individual has to pay should be certain and not arbitrary.
According to A. Smith, the time of payment, the manner of payment, the quantity to be paid, i.e., tax
liability, should to be clear and plain to the contributor and to everyone.

3. Canon of economy: This canon implies that the cost of collecting a tax should be as minimum as
possible. Any tax that involves high administrative cost and unusual delay in assessment and high
collection of taxes should be avoided altogether.

4. Canon of convenience: Taxes should be levied and collected in such a manner that it provides the
greatest convenience, not only to the taxpayer but also to the government.

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 Modern economists have added more in the list of canons of taxation, these are:
5. Canon of productivity: This canon states that only those taxes should be imposed that do not
hamper productive effort of the community.

6. Canon of elasticity: This canon implies that a taxes should be flexible or elastic. It should be
levied in such a way. that the rate of taxes can be changed according to exigencies of the situation.

7. Canon of simplicity: Tax must be simple and intelligible to the people so that the taxpayer is able
to calculate it without taking the help of tax consultants.

8. Canon of diversity: Taxation must be dynamic. This means that a country’s tax structure ought to
be dynamic or diverse in nature rather than having a single or two taxes.

Brief History of Income Tax in India:

1. 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 measures only for five years.
2. The separate Income Tax Act was passed in the year 1886, which was remained in force up to 1917
with various amendments from time to time.
3. In 1918, a new Income Tax Act was passed.
4. The Income Tax Act 1918 was replaced by another new act which was passed in the year 1922. The
1922 Act was remained in force up to the Assessment year 1961-62 with numerous amendments.
5. Presently applicable Income Tax Act has been brought into force with effect from 01st April, 1962.
It applies to the whole of India.

Features of Income Tax :

1. Income tax is charged on the income of previous year, at a rate which is prescribed by the
Finance Act for the relevant Assessment year.

2. The Finance Act is passed every year by the parliament in the form of ‘Budget’.
3. Income tax is levied on a person in relation to his income of the previous year.
4. The tax payer’s liability is determined with reference to his residential status in the previous year
financial year.
5. Liability to income tax arises only where the total income in the accounting year exceeds the
maximum tax free amount prescribed by the Finance Act to that relevant year.
6. The rates of income tax are progressive and incidence of tax increases with the rise of income.

Types of taxe : There are two types of taxes in India – (a) Direct Taxes (b) Indirect Taxes BBA
2015
a) Direct Tax: Direct tax is a tax which is paid by a person on whom it is legally imposed and the
burden/incidence of which cannot be shifted to any other person. For example - Income Tax,
Property Tax
b) Indirect Tax: In case of indirect taxes the burden/incidence of collection and payment is
passed on to a third party. For example – Good and Service Tax (GST), Excise duty, Custom
duty.

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 Difference between Direct Tax and Indirect Tax
Sr. Point of Direct Tax Indirect Tax
No. Distinction
1. Meaning Direct tax is a tax wherein the levy of In this the levy of tax is made on one
tax is made on a person and the person and the responsibility of paying
responsibility of paying such tax is the tax to the Government is fixed on
fixed on that person. some other person.
2. Levy Direct tax is levied on person. Indirect tax is levied on goods and
services.
3. Transfer The burden of direct tax cannot be The burden of indirect tax can be
of tax transferred to other person. transferred to the end users.
4. Nature Direct tax is considered progressive Indirect tax is considered as
tax. regressive tax.
5. Effect The purpose of direct tax is to Indirect tax increases the price of
redistribute the wealth of a nation. goods or services.
6. Examples Income Tax, Property Tax. Goods and Services Tax, Excise Duty,
Customs Duty.

Short Title, Extent & Commencement (Sec 1) :

Short Title : This may be called The Income Tax Act, 1961 and Amendments
Extent : It extends to whole of India.
Commencement : This act comes into force on 1st day of April, 1962.
1. The levy of Income Tax in India is governed by the Income Tax Act, 1961.
2. The Act undergoes change/amendments every year with additions and deletions brought
about by the Finance Act passed by Parliament.
3. Every Year the Finance Minister presents budget to the Parliament, Part A of the budget contains
the proposed fiscal policies (government spending) and Part B contains detail Tax proposals.
4. In order to approve the proposed proposals, the finance bill is introduced in Parliament.
5. Once the finance bill is approved by the Parliament and gets assent of President it becomes Finance
Act.
6. The administration of direct taxes is looked after by the Central Board of Taxes (CBDT). CBDT
is a part of Revenue Department under Finance Ministry.
7. The CBDT frames rules from time to time, collectively called Income Tax Rules, 1962.
8. Income Tax Act 1961 contains 298 sections and XIV (14) schedules

Basis of Charge of Income Tax: The following principles are the basis of charging income tax –
BBA 2015
1. Income tax is chargeable on annual income, provided it exceeds the maximum exemption limit.
2. Income Tax rates are fixed by the annual Financial Act.
3. Income Tax is charged on total income of a person Section 2(31), on the basis of his residential status
in India.
4. The tax is charged on the total income of every person computed in accordance with the provisions of
the Income Tax Act.

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5. Income Tax is to be Deducted at the Sources (TDS) or paid in advance as provided under provisions
of the Act.
6. Income tax in chargeable on normal and special rates.
7. Income of previous year is taxable in the next following assessment year at the rate or rates
applicable to that assessment year.

However, in the following cases, the income of a year is assessed in the same year BBA 2017,
B.Com(H)2018,BBA 2023,

i) Shipping business of non-residents [Section 172]: In case a non-resident shipping company,

which has no representative in India, earns income by carrying passengers, livestock, mail or goods
loaded from any Indian port, such ship will not be allowed to leave the port till the tax on such income
has been paid or alternative arrangements to pay tax are made. As such income is assessed to tax at
current year’s rates.

ii) Assessment of persons leaving India [Section 174]: In case Income Tax Office (ITO) has the
reasons to believe that an individual will leave India with no intention to return during the current
assessment year, the total income of such individual for the period between the expiry of last previous
year and till the date of his departure, will be taxable in the current assessment year.

iii) Assessment of association of persons or body of individuals or artificial juridical person

formed for a particular event or purpose [Section 174A]: In case an Assessing Officer finds that
any association of persons (AOP), Body of individuals (BOIs) or Artificial Juridical person (AJP) has
been formed or established only for a limited period or for a particular event and it is likely to be
dissolved or discontinued in the same year after the accomplishment of such event or purpose, the
assessment of such person can be made in same year.

iv) Assessment of persons likely to transfer property to avoid tax [Section 175]: If it appears to
the I.T.O. that any person is likely to sell, transfer, dispose of or to part with any of his assets with the
intention to avoid payment of any tax liability, he may commence proceeding to assess the income for the
period between the expiry of last previous year and the date of commencement of such proceedings.

v) Discontinued business [Section 176]: In case any business or profession is discontinued during an
assessment year, the income of the period from the expiry of last previous year till the date of
discontinuation may be assessed to tax in the current assessment year at the discretion of the assessing
officer. Important

Definitions: Under Sec. 2 and 3 of the Income Tax Act, 1961,

Income Sec 2(24): BBA 2014, B.Com(H)2018 The definition income given in this section of is
inclusive and not exhaustive. Income includes: Profits, Gains, Dividend, Perquisites or Profits in lieu of
Salary, capital gain, winnings from lotteries, crossword puzzles, races, Forfeited money, payment on
termination of employment etc

Heads of Income :
The total income is computed on the basis of the residential status of the assessee. The income is
classified into the following Five heads.

1. Income from Salaries;

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2. Income from House Property;
3. Profits of Business and Profession;
4. Capital gains and
5. Income from other sources
1) Gross Total Income (Sec. 14): BBA 2104, BBA 2015, BBA 2016, B.Com(H)2018,
B.Com(H)2023,
The aggregate income under the above five heads- income from salaries, income from house
property, profits of business and profession, capital gains and income from other sources: is termed
as ‘Gross Total Income’. In other words, gross total income means total income derived from the
above five sources before making any deduction under section 80C to 80U.
2) Total Income: BBA 2104, B.Com(H)2015,B.Com(H)2018
Total income means the amount of income after making the deductions under sections 80C to 80U
from the gross total income. The amount so arrived is rounded off to the nearest multiple of ten
rupees.
Difference between Gross Total Income and Total Income BBA 2104, B.Com(H)2018
No. Gross Total Income Total Income
1. Aggregate of various heads of income After deduction U/s 80C to 80U, the balance is
is called Gross Total Income. called Total Income.
2. Gross Total Income is not rounded Total Income is rounded off to the nearest multiple
off. of ten rupees.
3. Tax is not levied on Gross Total Tax is levied on the Total Income at the prescribed
Income. rates.
4. Gross Total Income is not less than Total Income can be equal to Gross Total Income or
the Total Income. less than Gross Total Income.
5. Agricultural income is not included in If agricultural income excess Rs. 5,000/-, it is
Gross Total Income. included in the total income of an individual or HUF
to determine the tax payable by the assessee.

Procedure for computing the total income :

For computing the total income of an assessee & the tax payable by him, below 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 upto the assessable income of each head and the aggregate of all these assessable income is
called the Gross Total Income.
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.

3) Person Sec. 2(31) : BBA 2016,

The term ‘person’ includes:
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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.
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 of 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: All
other artificial persons, with a juristic personality are artificial persons, like universities.

4) Assessee Sec. 2(7) : BBA 2104, B.Com(H) 2018

An assessee means a person -
i) Who is liable to pay any tax; or
ii) Who is liable to pay any other sum of money under this Act (e.g., interest, penalty, etc.); or
iii) In respect of whom any proceeding under this Act has been taken for the assessment of his income; or
iv) In respect of whom any proceeding under this Act has been taken for the assessment of the income of
any other person in respect of which he is assessable; or
v) In respect of whom any proceeding under this Act has been taken for the assessment of the loss
sustained by him; or
vi) In respect of whom any proceeding under this Act has been taken for the amount of refund due to him;
vii) Who is deemed to be an assessee under any provision of this Act; or
viii) Who is deemed to be an assessee in default under any provision of this Act.

5) Deemed Assessee: A person, who is deemed to be an assessee for some other person, is called
‘Deemed Assessee’. For example,
i) After the death of a person, his legal representative will be treated as an assessee for that income of the
deceased on which tax has not been paid by the deceased before his death.

ii) A person representing a foreigner or a minor or a lunatic is treated as an assessee for the income of
such foreigner or minor or lunatic.
6) Assessee in Default:
When a person is responsible for doing any work under the Act and he fails to do it, he is called an
‘Assessee in Default’. For example, if a person while making any payment to another person, is liable
to deduct income tax thereon at source, does not deduct income tax there from, or having deducted
it, does not deposit it in the Government Treasury, he will be treated as an Assessee in Default.

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7) Previous Year (Sec. 3) PY: B.Com(H)2023, BBA 2015
Previous year means the financial year immediately preceding the assessment year. In other words,
the year in which income is earned is known as previous year and the next year in which this income
is taxable is known as assessment year. Income tax is charged on the total income of the previous
year at the rates prescribed by the relevant Finance Act for the assessment year.
8) Financial Year (FY):
The year started from 1st April to 31st March of the next year. A financial year is both a previous year
as well as an assessment year. It is previous year for the income earned during that financial year
and assessment year for the income earned during the preceding financial year. For example,
Financial Year 2023-24 is assessment year for the income earned during the financial year 2022-23.

9) Assessment Year (AY) BBA 2015, B.Com(H)2015,BBA 2016

The assessment year (AY) is the year that comes after the PY. This is the time in which the income
earned during PY is assessed and taxed. Both PY and AY start on 1 April and end on 31 March. For
instance, for PY 2022-23, the assessment year is AY 2023-24.
10) Rounding-off of income and tax (Sec. 288):
The Total Taxable Income & Total Tax Payable or Refund due shall be rounded off to the nearest
multiple of ten rupees and for this purpose any part of a rupee consisting of paise shall be ignored &
thereafter if such amount is not a multiple of ten, then if the last figure in that amount is 5 or more,
the amount shall be increased tothe nearest higher amount which is a multiple of 10 & if the last
figure is less than 5, the amount shall be reduced to the next lower amount which is a multiple of 10.

11) Casual Income:

Any receipt which is of a casual and non-recurring nature is casual income. In other words, casual
income is that income the receipt of which is accidental and without any stipulation. It is in nature of
an unexpected wind-fall.

Winning from lottery, crossword puzzles, card games and other games of any sort or from gambling
or betting of any form or nature, whatsoever are casual incomes. Receipts even from habitual betting
are non-recurring receipts and assessable as casual income.

Permanent Account Number (PAN): PAN means a number which the Assessing Officer may allot to
any person for the purpose of identification. PAN has a ten alphanumeric characters.

Application for PAN: If an assessee has not been allotted a Permanent Account Number he must apply
for it in Form No. 49A within the prescribed time. The Assessing Officer has also got power to allot to any
other person a Permanent Account Number if tax is payable by such person.
Quoting PA : Once a Permanent Account Number has been allotted, such number must be quoted in all
Returns, correspondence with Income Tax Authorities, challans for payment and in all documents
prescribed by the Board. It helps in linking the aforesaid documents to his assessment records to facilitate
quick disposal of his assessment and refund claim. Every person who has been allotted PAN is required to
intimate their Aadhaar number to tax authorities.

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Tax Deduction and Collection Account Number (TAN):
Every person, deducting tax or collecting tax at source, who has not been allotted a tax deduction account
number or a tax collection account number shall apply in duplicate in Form No. 49B within one month
from the end of the month in which the tax was deducted or collected to the Assessing Officer for the
allotment of TAN. Where a TAN has been allotted to a person, he shall quote such number in prescribed
documents.

Tax deduction at Source (TDS): BBA 2014, B.Com(H)2015, BBA 2015, BBA 2019,BBA 2023 In
case of certain payments, income tax is deducted at source by the payer at the prescribed rates on such
incomes before payment is made to them. The amount so deducted at source shall be deposited by the
deductor in the government treasury within the prescribed time limit. The tax so deducted is called
deduction of tax at source. TDS should be deposited to government on or before 7 days from the end of
the month in which the deduction is made.

Tax Collected at Source (TCS): Tax collected at source (TCS) is the tax payable by a seller which he
collects from the buyer at the time of sale. The Income-tax act governs the goods on which the seller has to
collect tax from the purchasers. The seller deposits the TCS amount within 7 days from the last day of
the month in which the tax was collected.

Advance payment of Tax: BBA 2015, BBA 2016, BBA 2017, BBA 2019, B.Com(H)2023,
Numerical-BBA 2019, BBA 2023
Advance payment of tax is also known as the 'pay-as-you-earn'. It means that assessee has to pay tax
simultaneously along with the earning of his income. This tax is paid on the current year’s income in the
same year. In fact, it is paid as advance and it is called ‘Advance payment of tax’.
Liability for payment of advance tax : Section 207
Advance tax shall be payable during any financial year in respect of the total income of the assessee
which should be chargeable to tax for the assessment year immediately following that financial year, and it
shall be called ‘Current Income’.
An individual resident shall not be liable, if –
i) He does not have any income chargeable under the head Profits and Gains from Business Profession;
and
ii) He is of the age of 60 years or more at any time during the previous year.
Condition of liability to pay advance tax :
Advance tax shall be payable if your tax liability exceeds Rs. 10,000 in a financial year.
Installments of advance tax and due dates:
Installment Due Date Amount Payable
I On or before Not less than 15% of advance tax
15th June
II On or before Not less than 45% of advance Tax. It means 45% of advance tax, less the
15th September amount paid in earlier installment i.e. 30%
III On or before Not less than 75% of advance Tax. It means 75% of advance tax, less the
15th December amount paid in earlier installment i.e. 30%
IV On or before 100% of advance Tax. Reduce the amounts paid earlier installments
15th March i.e. 25%

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Rates of tax/Surcharge and rebates for an Individual, HUF, AOP and BOI:
The rates of tax for the different classes of assessees are prescribed by the Annual Finance Act. For individuals,
HUFs etc., there is a slab rate and basic exemption limit. At present, the tax rates under the old and new regime for
Individuals, HUF, AOP and BOI are as follows. New Tax Regime was announced in the budget of 2020 and was
applicable from the FY 2020-21 (AY 2021-22), there are no deductions allowed under the new regime.

Surcharge: It is an additional tax payable over and above the income-tax. Surcharge is levied as a percentage
of income-tax (tax on tax). The highest surcharge rate on income above 5 crore has been reduced from 37% to
25% applicable under new tax regime from FY 23-24 (AY 24-25), no change in surcharges under old tax regime.

The enhanced surcharge of 25% & 37%, as the case may be, is not levied, from income chargeable to tax
under sections 111A, 112, 112A and 115AD (related to capital gain). Hence, the maximum rate of surcharge on tax
payable on such incomes shall be 15%.
Health and Education Cess: A 4% health and education cess (tax) is charge from all assessees, irrespective of
their income tax slab, for funding select government welfare programmes, specifically primary and secondary
education and health infrastructure. It is applicable to everyone including firms, at the same rate. However, there
will not be any cess if an individual's income tax liability is zero

.
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Tax Rebate Section 87A: This rebate is available on the tax computed before charging Health and Education
cess of 4%. Under the new income tax regime, the amount of the rebate under Section 87A for FY 2023-24 (AY
2024-25) has been modified. A resident individual with taxable income up to Rs 7,00,000 will receive a Rs 25,000
tax relief. The former tax regime remains the same, i.e. 12,500 for income up to Rs 5,000,000.

Rates of tax/Surcharge and rebates for Firm (including LLP) and Local Authority: Standard Tax rate
of 30% with 12% surcharge on income above 1 crore and 4% health and education cess (tax) is charged.

Rates of tax/Surcharge and rebates for Domestic Company: Income tax rate for a Domestic company
with gross receipts upto 400 crore in the previous year is 25% and for companies with gross receipts above 400
crore is 30%. Surcharge is of 7% if to total income is between 1 to 10 crores and 12% if total income exceeds 10
crore. Health and education cess (tax) of 4% is charged on income tax and surcharge payable.

Rates of tax/Surcharge and rebates for Foreign Company: Income tax rate for a foreign company is 40%
with a surcharge of of 2% if to total income is between 1 to 10 crores and 5% if total income exceeds 10 crore.
Health and education cess (tax) of 4% is charged on income tax and surcharge payable.

Deductions: A tax deduction is a provision under the act that reduces taxable income. To get the net income of a
taxpayer, the deduction amount is first included in the gross total income and then subtracted from it. It is kind
of concession received by the taxpayers from the income tax department. The tax deductions also promote
investments and savings by a taxpayer.
Marginal Relief: A marginal relief is given to individuals whose taxable income is beyond the threshold limit
after which surcharge is payable, but the net income above the threshold is less than the surcharge.

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1) Residential Status of an Individual
BBA 2014, BBA 2015, B.Com(H)2015,BBA 2016, BBA 2017, B.Com(H)2018,BBA 2019,
BBA 2023,Numerical- BBA 2017,

1) An assessee has to pay tax according to his/her Residential Status in a particular Financial Year.

2) The scope of total income of an assessee along with his residential status is determined with
reference to his residence in India in the Previous Year.

3) Residence and Citizenship are 2 different concepts.

4) The incidence of tax has nothing to do with citizenship.

5) The residence of a person may change from year to year but citizenship cannot change every year.

6) A person may be resident in more than one country for the same previous year.

7) A person is deemed to be of ‘Person of Indian origin’ if he, or either of his parents or any of his
grandparents, was born in undivided India. It may be noted that grandparents include both
maternal and paternal grandparents.

On the basis of residence the assessees are divided into following categories. As per the
provisions of the Income Tax Act, an individual can either be –
1) Resident and Ordinarily Resident (ROR) ; or
2) Resident but not Ordinarily Resident (RNOR) ; Deemed Resident or
3) Non-Resident

1) Resident and Ordinarily Resident:-

An individual is said to be resident in India in any previous year if he satisfies any one of the basic
conditions and both the additional conditions.
Basic Conditions:-
a) He is in India in the relevant previous year for a period of 182 days or more, or
b) He is in India for at least 60 days or more during the relevant previous year and he has been in
India for at least 365 days or more during the four years immediately preceding the previous
year.

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 Exceptions to the above rules of 60 days stay in India:-
i) An individual who is a citizen of India and leaves India in any previous year for the purpose of
employment or as a member of the crew of an Indian ship must have stayed in India for at
least 182 days during the previous year instead of 60 days;
ii) If any citizen of India or a foreign national of Indian origin, who is living outside India, comes
on a visit to India in the previous year, he must have stayed in India for at least 182 days if his total
income is less than 15 lakhs or 120 days if his total income is more than 15 lakhs other
than income from foreign sources during the previous year instead of 60 days
Notes:

1. It is not at all necessary that he should stay at a stretch for 182 days. His total stay for at least 182
days may be with gaps.
2. For calculating number of days stay in India, days of entry and exit should be included in the period
of stay in India.
3. Income from foreign sources means income which accrues or arises outside India (except income
derived from a business controlled in or a profession set up in India).
Additional Conditions:
A person has to satisfy both the following additional conditions besides satisfying any one of the
above mentioned basic conditions in order to become ‘Resident and Ordinarily Resident’.
i) He has been resident in India in at least 2 out of 10 previous years immediately preceding the
relevant previous year.
ii) He has been in India for at least 730 days in all during the seven previous years preceding
the relevant previous year.
Note: The day on which he enters in India as well as the day on which he leaves India shall be taken
into account as the stay of the individual in India.

2. Resident but not Ordinarily Resident:

If an individual satisfies any one of the above basic conditions but does not satisfy the two additional
conditions, he is said to be ‘Not Ordinarily Resident’.

Deemed Resident:
i) The Finance Act, 2020 has introduced new section 6(1A) to the Income-tax Act, 1961. The new
provision provides that from Assessment Year 2021-22, an Indian Citizen earning total income in
excess of Rs. 15 lakhs (other than from foreign sources) shall be deemed to be resident in
India if he is not liable to pay tax in any other country.
ii) A deemed resident is treated as resident but not ordinary resident (RNOR).

iii) The new provision seeks to treat an individual as an Indian tax resident based on citizenship
rather than on residence or period of stay in India. Thus a deemed resident can be taxed in
India even if he hasn’t stayed a single day in India in the previous year

3. Non-Resident:
If an individual satisfies none of the basic conditions, he is said to be ‘Non-Resident’.

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2) Residential Status of HUF BBA 2015,B.Com(H)2015,BBA 2016, B.Com(H)2018,BBA
2023

An HUF is said to be resident in India if –

a) Resident: The control and management of their affairs are wholly or partly situated within India
during the relevant previous year.

b) Resident and Ordinarily Resident

When the Karta of the HUF satisfies both the following conditions:

i) He (Karta) must be resident in at least 2 out of 10 previous years immediately preceding the relevant
previous year; and

ii) He must be in India for at least 730 days during 7 previous years immediately preceding the relevant
previous year

c) Resident but Not Ordinarily Resident

When the manager (Karta) of the HUF does not satisfy any one, or both, of the conditions mentioned
in clauses (i) and (ii) above.

d) Non-resident in India : If the control and management of their affairs are situated wholly outside
India.

3) Residential Status of Firm B.Com(H)2015,BBA 2015, BBA 2016, BBA 2023

A partnership firm is said to be resident in India if –
e) Resident: The control and management of their affairs are wholly or partly situated within India
during the relevant previous year.
f) Non-resident in India: If the control and management of their affairs are situated wholly outside
India.
A firm cannot be ordinarily or not ordinarily resident. The residential status of the partners is not
relevant in determining the status of the firm.

2) Residential Status of Company B.Com(H)2015,BBA 2015, BBA 2016, BBA 2023

a) Resident : A company is said to be a resident in India in any previous year, if -
i) It is an Indian company; or
ii) Its place of effective management, in that year, is in India.
An Indian company is always resident in India. A foreign company is resident in India only if during
the previous year, place of effective management is situated wholly in India.
b) Non resident B.Com(H)2017: A foreign company is treated as non-resident if during the
previous year, place of effective management is either is wholly or partly situated out of India.
A company can never be ordinarily or not ordinarily resident in India. In case of a foreign company
even the slightest place of effective management is exercised from outside India, it would be treated
as a non-resident.

Introduction to Income Tax Page 13

Scope of Total Income/Taxability in India Section 5 Numerical-BBA 2014, B.Com(H)2023,

The scope of total income and consequently the liability to income-tax depends upon the following facts:

1. Whether the income accrues or is received in India or outside,

2. The exact place and point of time at which the accrual or receipt of income takes place, and
3. The residential status of the assessee.

Scope of Total income has been defined on the basis of Residential status

1. Resident Assessee: Section 5(1) (in case of Individual and HUF Resident and Ordinarily
Resident) BBA 2019,

i) Income received or deemed to be received in India during the accounting year by or on behalf of such
person;
ii) Income which accrues or arises or is deemed to accrue or arise to him in India during the accounting year;
iii) Income which accrues or arises to him outside India during the accounting year.

It is important to note that under clause (3) only income accruing or arising outside India is included.
Income deemed to accrue or arise outside India is not includible in the total taxable income.

2. Resident but Not Ordinarily Resident In India: Section 5(1), in case of Individual and HUF

i) Income received or deemed to be received in India during the accounting year by or on behalf of such
person;
ii) Income which accrues or arises or is deemed to accrue or arise to him in India during the accounting year;
iii) Income which accrues or arises to him outside India during the previous year if it is derived from a
business controlled in or a profession set up in India.

3. Non-Resident: Section 5(2)

i) Income received or deemed to be received in India in the accounting year by or on behalf of such person;
ii) Income which accrues or arises or is deemed to accrue or arise to him in India during the previous year.

Income received or Deemed to be received in India: Section 7:

Any income which is received in India, during the previous year by any assessee, is liable to tax in India,
irrespective of the residential status of the assessee and the place of accrual of such income.

Receipts means the first receipt: The receipt of income refers to the first occasion when the recipient gets
the money under his own control. Once an amount is received as income, any remittance or transmission of
the amount to another place does not result in receipt within the meaning of this clause at the other place.

Income Deemed to be received in India: Section 7

The following incomes shall be deemed to be received in India in the previous year even in the absence of
actual receipt:
i) Contribution made by the employer to the recognized provident fund in excess of 12% of the salary of the
employee;
ii) Interest credited to the Recognized Provident Fund (RPF) of the employee which is in excess of 9.5% p.a.
iii) Transfer balance from the unrecognized fund to a Recognized Provident Fund;
iv) The contribution made, by the Central Government or any other employer in the previous year, to the
account of an employee under a notified contributory pension scheme referred to in section 80CCD.
Introduction to Income Tax Page 14
Income Deemed to Accrue or Arise in India: Section 9

1. Income by virtue of business connection: Income arising through or from business connection
to any assessee directly or indirectly, with or without a regular agency, branch or other type of
commercial association.

2. Income arising from any asset or property in India: Income arising in a foreign country
from any property situated in India would be deemed to accrue or arise in India. In this context, the
term property refers to all tangible properties whether movable or immovable.

3. Capital asset: Capital gains arising to an assessee from the transfer of a capital asset situated in
India would be deemed to accrue or arise in India irrespective of the fact whether the capital asset in
question represents a movable or immovable property or a tangible or intangible asset.

4. Income from salaries: Income which is chargeable under the head Salaries is deemed to accrue
or arise in India in all cases when earned in India. For this purpose income is said to be earned in
India if the services are rendered in India.

Income from salaries payable by the Government to a citizen of India outside India for his services
rendered outside India, is deemed to accrue or arise in India even though the income is actually
accruing outside India and is also received outside India.

5. Taxability of Interest: Interest payable in following cases will be deemed to accrue or arise in
India and will be taxable in the hands of recipient irrespective of his residential status. Interest
payable by:

i) Government; or

ii) A Resident in India, except where interest is payable in respect of moneys borrowed and used for
the purpose of business or profession carried outside India or earning any income from any source
outside India

iii) A Non-Resident in India provided interest is payable in respect of moneys borrowed and used for a
business or profession carried on in India

6. Taxability of Royalty: Royalty payable in following cases will be deemed to accrue or arise in
India and will be taxable in the hands of recipient irrespective of his residential status Royalty
payable by:

i) Government; or

ii) A Resident in India except where it is payable in respect of any right/ information/ property used for
the purpose of a business or profession carried on outside India or earning any income from any
source outside India

iii) A Non-Resident in India provided royalty is payable in respect of any right/ information/ property
used for the purpose of the business or profession carried on in India or earning any income from
any source in India

Introduction to Income Tax Page 15

7. Taxability of Fees for Technical Services: Fees for technical services payable in following cases
will be deemed to accrue or arise in India and will be taxable in the hands of recipient irrespective of
his residential status. Fees for technical services payable by:

i) Government; or

ii) A Resident in India except where services are utilized for the purpose of a business or profession
carried on outside India or earning any income from any source outside India

iii) A Non-Resident in India provided fee is payable in respect of services for the purpose of a business
or profession carried on in India or earning any income from any source in India

8. Taxability of Dividend: Dividend paid by any Indian company outside India is deemed to accrue
or arise in India and the income is consequently chargeable to income-tax irrespective of the fact
whether the dividend is interim dividend or a final dividend and whether it is an actual dividend or a
notional dividend.

Introduction to Income Tax Page 16

Exempt income/Income that do not form part of total income: Section 10
BBA 2016, BBA 2017, B.Com(H)2018,B.Com(H)2018,BBA 2019, B.Com(H)2023, BBA 2023

Exempt Income means the income which is not at all charged to any taxes, while calculating the Gross Total
Income. Whereas deduction means the amount which needs to be included in the income first then it is allowed for
deduction in full or in part on fulfillment of certain conditions. These incomes shall not be included in the total
income of an assessee.

The items of exemptions specified in Section 10, are explained as follows:

1. Agricultural Income: Section 10(1): Agricultural income as defined in Section 2(1A) is exempt from
income-tax in the case of all assesses. Agricultural income is defined under section 2(1A) of the Income-tax Act. As
per section 2(1A), agricultural income generally means:

i) Any rent or revenue derived from land which is situated in India and is used for agricultural purposes.
ii) Any income derived from such land by agriculture operations including processing of agricultural produce
so as to render it fit for the market or sale of such produce.
iii) Any income attributable to a farm house subject to satisfaction of certain conditions specified in this
regard in section 2(1A).

2. Amount received by a member of HUF: As per section 10(2), amount received out of family income, or
in case of impartible estate, amount received out of income of family estate by any member of such HUF is exempt
from tax in the hands of the member, because that has been taxed in hand of H.U.F.

3. Share of Profit received by a partner from the firm: As per section 10(2A), share of profit received by
a partner from a firm is exempt from tax in the hands of the partner. This exemption is limited only to share of
profit and does not apply to interest on capital and remuneration received by the partner from the firm/LLP.

4. Interests on non-resident accounts: As per section 10(4)(i), in the case of a non-resident any income by
way of interest on certain notified securities or bonds (including income by way of premium on the redemption of
such bonds) is exempt from tax.

As per section 10(4)(ii), in the case of an individual, any income by way of interest on money standing to his
credit in a Non-Resident (External) Account in any bank in India in accordance with the Foreign Exchange
Management Act, 1999, and the rules made there under is exempt from tax.

5. Any sum received under a Life Insurance Policy: Section 10 (10D) Any sum received under a life
insurance policy, including the sum allocated by way of bonus on such policy, is wholly exempt from tax. However,
no exemption is available in respect of ULIP issued on or after 1.2.21, if amount of premium payable for any
previous year during the term of policy exceeds Rs 2,50,000 (exemption available if the sum is received on death
of a person).

6. Interest and withdrawals from Sukanya Samriddhi Seheme: Section 10(11A) Payment from account
opened in accordance with the Sukanya Samriddhi Account Rules, 2014, for girl child below the age of 10 years.

7. Leave travel concession/allowance (LTC/LTA) [Section 10(5)] is given by an employer to an employee

and his family for meeting travel expenses within India when the employee is on leave from work.

Introduction to Income Tax Page 17

8. Certain Remuneration and Salaries [Section 10(6)]
 Remuneration received by specified diplomats and their staff [Section 10(6)(ii)]
 Salary of a foreign employee and non-resident member of crew [Section 10(6)(vi), (viii)]
 Remuneration of a foreign trainee [Section 10(6)(xi)]
 Tax paid on behalf of foreign company deriving income by way of royalty or fees for technical services
[Section 10(6A)]
 Tax paid on behalf of foreign company or non-resident in respect of other income [Section 10(6B)]
 Tax paid on behalf of foreign Government or foreign enterprise deriving income by way of lease of aircraft
or aircraft engine [Section 10(6BB)]
 Technical fees received by a notified foreign company [Section 10(6C)]
 Royalty/Fees received by non-resident from National Technical Research Organisation [Section 10(6D)]

9. Allowance/perquisites to Government employee outside India [Section 10(7)]

10. Certain retirement and other benefits [Section 10(10)]

 Death-cum-retirement gratuity received by Government servants [Section 10(10)(i)]
 Gratuity received by a non-Government employee covered by Payment of Gratuity Act, 1972 [Section
10(10)(ii)]
 Gratuity received by a non-Government employee not covered by Payment of Gratuity Act, 1972 [Section
10(10)(iii)]
 Pension [Section 10(10A)]:
 Leave salary [Section 10(10AA)]
 Retrenchment compensation [Section 10(10B)]
 Payment at the time of voluntary retirement [Section 10(10C)]
 Tax on perquisites paid by the employer [Section 10(10CC)]

11. Exemption in respect of amount received from public provident fund/statutory provident fund/
recognized provident fund/ un-recognised provident fund [Section 10(11)/(12)]

12. Payment from the National Pension System Trust to an employee [Section 10(12A)] and Partial
withdrawal from NPS [Section 10(12B)]

13. Payment from approved superannuation fund in specified circumstances and subject to certain
limits [Section 10(13)]and House rent allowance [Section 10(13A)

14. Payments under Bhopal Gas Leak Disaster (Processing of Claims) Act, 1985: Section 10(10BB):
Any payments made, under the above Act or any scheme made there under, shall be exempt in hands of the
recipient.

15. Income on certain funds of National Importance: Section 10(23C): Any income received by; The
Prime Minister Relief Fund, The Swachh Bharat Kosh, The Clean Ganga Fund etc

Comparison of Tax Planning, Tax Avoidance, Tax Evasion: BBA 2023

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.
Introduction to Income Tax Page 18
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.

No. Basis Tax Planning Tax Avoidance Tax Evasion

1. Meaning Reduce tax liability by Reduce tax liability by Reduce tax liability
claiming deduction, finding loopholes in the law. in dishonest
exemption, allowance, manner.
rebate, etc.
2. Legality It is fully legal and ethical. It is also legal but against the It is unethical.
intention of law maker.
3. Example Claiming deduction u/s 80C Clubbing of Income. Increasing expenses
to 80U by showing fake
bills.
4. Acceptance Fully accepted in the eyes of It is not accepted in the eyes It is clearly
law. of law. Government makes prohibited because it
amendments to stop such is fully illegal.
loopholes.
5. Penalty No penalty. May or may not. Heavy penalty.
6. Implication It leads to development of It leads to generation of It also leads to
economy. black money. generation of black
money.

B.Com(H) 2023

BBA2017

Introduction to Income Tax Page 19