UNIT - 1

INTRODUCTION AND BASIC CONCEPTS OF INCOME TAX

INTRODUCTION:
Under the Constitution of India, Central Government is empowered to levy tax on the
income. Accordingly, the Central Government has enacted the Income Tax Act, 1961.
The Act provides for the scope and machinery for levy of Income Tax in India. The
Act is supported by Income Tax Rules, 1961 and several other subordinate and
regulations. Besides, circulars and notifications are issued by the Central Board of
Direct Taxes (CBDT) and sometimes by the Ministry of Finance, Government of
India dealing with various aspects of the levy of Income tax. Unless otherwise stated,
references to the sections will be the reference to the sections of the Income Tax Act,
1961.
DEFINITION OF TAX
A tax may be defined as a monetary burden rested upon individuals or people with
property to help add to the government’s revenue. Tax is, therefore, a mandatory
contribution and not a voluntary payment or donation which one decides on one’s
own. It is a payment exacted by the legislative authority. It may be direct tax or
indirect tax. Revenue growth which may be a little faster than GDP (Gross Domestic
Product) can result from revenue mobilization with an effective tax system and
measures.
The government uses this tax to carry out functions such as:
Pensions for the elderly and benefits schemes to the unemployed or the ones below
the poverty line.• Enforcement of law and order • Security infrastructure of the
country such as military equipment • Infrastructure such as roads, bridges, flyovers,
railways, ports, etc. • Social welfare projects like schools, hospitals, housing projects
for the poor, etc. •
Tax is the compulsory financial charge levy by the government on income,
commodity, services, activities or transaction. The word ‘tax’ derived from the Latin
word ‘Taxo’.
Dalton defines thus : & quot; A tax is a compulsory contribution imposed by a public
authority, irrespective of the exact amount of service rendered to the tax-payer in
return and not imposed as a penalty for any legal offence.& quot;
Section 3 defines “Previous year” as “the financial year immediately preceding the
assessment year”. Income earned in one financial year is taxed in the next financial
year. The year in which income is earned is called the “previous year” and the year in
which it is taxed is called the “assessment year” Common previous year for all source
of income:

PERSON [ Section 2(31) ]

The word “Person” is a very wide term and embraces in itself the following :
• Individual : • Hindu Undivided Family (HUF) • Company • Firm • Association
of Persons (AOP) or Body of Individuals (BOI) • Local Authority • Artificial
Judicial Person
These are seven categories of person chargeable to tax under the Act. The aforesaid
definition is inclusive and not exhaustive. Therefore, any person, not falling in the
above-mentioned seven categories, may still fall in the four corners of the term
“Person” and accordingly may be liable to tax under Sec.
ASSESSEE–S. 2(7)
U/s 2(7) “Assessee” means a person by whom income tax or any other sum of money
is payable under the Act and it includes:
a. every person in respect of whom any proceeding under the Act has been taken for
the assessment of his income or loss or the amount of refund due to him
b. a person who is assessable in respect of income or loss of another person or who is
deemed to be an assessee, or
c. an assessee in default under any provision of the Act
A minor child is treated as a separate assessee in respect of any income generated out
of activities performed by him like singing in radio jingles, acting in films, tuition
income, delivering newspapers, etc. However, income from investments, capital gains
on securities held by minor child, etc. would be taxable in the hands of the parent
having the higher income (mostly the father), unless if such assets have been acquired
from the minor’s sources of income.
ASSESSMENT - S 2(8)
An assessment is the procedure to determine the taxable income of an assessee and
the tax payable by him. S. 2(8) of the Income Tax Act, 1961 gives an inclusive
definition of assessment “an assessment includes reassessment “ U/s 139 of the Act,
every assessee is required to file a self declaration of his income and tax payable by
him called “return of income”.
INCOME- S 2(24)
Although, income tax is a tax on income, the Act does not provide any exhaustive
definition of the term “Income”. Instead, the term ‘income’ has been defined in its
widest sense by giving an inclusive definition. It includes not only the income in its
natural and general sense but also incomes specified in section 2 (24).
Broadly the term “Income includes the following:
i. profits and gains ; ii. dividend; iii. voluntary contributions received by certain
institutions iv. Receipts by employees the value of any benefit or perquisite, whether
convertible into money or not. v. Incomes from business – s- vi. any capital gains
chargeable under section 45; vii. any sum earlier allowed as deduction and chargeable
to income-tax under Section 59 viii. any winnings from lotteries, crossword puzzles,
races including horse races, card games and other games of any sort or from gambling
or betting of any form or nature whatsoever ix. any contribution received from
employees towards any provident fund or superannuation fund or Employees State
Insurance Act, 1948 , or any other fund for the welfare of such employees ; x. any
sum received under a Keyman insurance policy including the sum allocated by way of
bonus on such policy. xi. any sum of money or value of property received as gift –S
56(2) and Shares of closely held companies transferred to another company or firm
are covered in the definition of gift except in the case of transfer of such shares for
reorganization of business by amalgamation or demerger etc
SCHEME OF CHARGING INCOME TAX
Income tax is a tax on the total income of an assessee for a particular assessment year.
This implies that;
Income-tax is an annual tax on income•
Income of previous year is chargeable to tax in the next following assessment year at
the tax rates applicable for the assessment year.•
1. TAXES LEVIED BY THE CENTRAL GOVERNMENT AND
STATE GOVERNMENTS

By the Central Government: These include Income taxes, GST, Customs duties,
Corporation taxes, Excise duties, Estate duty and more

By the State Government: These include State GST, Excise on Liquor, VAT( value
Added Tax ) on Petrol & Diesel, Tax on Agricultural Income, land revenues,
tolls and more.
By the Local Civic Bodies: Municipal corporations and other local governing bodies
collect taxes like property taxes, Water Taxes, etc.

2. ON THE BASIS OF RELATIONSHIP BETWEEN TAX BASE AND TAX

RATES:
On this basis the Taxes are classified into Four types, such as;
Proportional Tax: A proportional tax, also referred to as a flat tax, impacts low-,
middle-, and high-income earners relatively equally. They all pay the same tax rate,
regardless of income. Taxes which very in direct proportion to the change in Tax
Bases. The Tax base could be income, Value of Goods and Value of Wealth or
Property.
Example: Wealth Tax and Sales Tax.

Progressive Taxes: A progressive tax has more of a financial impact on higher-

income individuals and businesses than on low-income earners. That means a
progressive tax imposes a greater percentage of taxation on higher income levels,
operating on the theory that high-income earners can afford to pay more.
Example: Income Tax

Regressive Taxes: Low-income individuals pay a higher amount of their incomes in

taxes compared to high-income earners under a regressive tax system because the
government assesses tax as a percentage of the value of the asset that a taxpayer
purchases or owns. This type of tax has no correlation with an individual’s earnings or
income level.
Example: Taxes on Goods & Services, Such as GST, Excise Duty, etc.
Digressive Taxes: A tax is called Digressive when the rate of progression in taxation
does not increase in the same proportion as the income increases. In this case, the rate
of tax increases up to certain limit, after that a uniform rate is charged and become
constant.
3. ON THE BASIS OF METHOD OF ASSESSMENT
On this basis, taxes are classified into two types, Such as;
Specific Duty: Taxes levied according to some unit of a product is called as Specific
Duty.
For example, Excise Duty on cigarettes are levied on the basis of length of the
cigarettes.
Ad-Valorem Tax: Taxes levied on the basis of value of the goods is called as Ad-
Valorem Duty. It is generally expressed in percentage form.

4. ON THE BASIS OF INCIDENCE AND IMPACT OF TAXES:

Before discussion on the types of taxes in this basis, you have to understand the
meaning of two important terms, i. ‘Incidence’ and ‘Impact’ of Tax are as follows;
Incidence of Tax: Incidence of Tax means the first burden of tax. Incidence of tax
falls on a person on whom the tax levied for the first time. Incidence of tax can be
shifted to another person.
Impact of Tax: Impact of tax means the ultimate/final burden of tax. Impact of tax
falls on the person who ultimately bears the burden of tax, i. the Consumer.

On the basis of incidence and impact of tax, a tax can be either, ‘Direct Tax’ or
‘Indirect Tax’

DIRECT TAXES:
The individuals directly pay these taxes to the respective governments. In this case the
both Incidence and Impact will fall in a single person, i. an assesse.
The most notable examples include Income tax, Capital gains tax, Corporate tax,
Wealth Tax and Securities transaction tax.

INDIRECT TAXES:
These taxes are not directly paid to the governments but are collected by the
intermediaries who sell or arrange products and services. In this case, the Incidence
and impact of taxes will fall on two different persons.
GST (Goods and Service Tax), Service tax, sales tax, octroi, customs duty, value-
added tax, and excise duty, customs duty, are some of the top examples
DIRECT TAX VS. INDIRECT TAX

For example, in the case of income taxation, an individual who earns more pays
higher taxes. It is computed as a percentage of the total income. Additionally, direct
taxes are the responsibility of the individual and should be fulfilled by no one else but
him.
TYPES OF DIRECT TAXES
1. Income tax
It is based on one’s income. A certain percentage is taken from a worker’s salary,
depending on how much he or she earns. The good thing is that the government is
also keen on listing credits and deductions that help lower one’s tax liabilities.
2. Transfer taxes
The most common form of transfer taxes is the estate tax. Such a tax is levied on the
taxable portion of the property of a deceased individual, including trusts and financial
accounts. A gift tax is also another form wherein a certain amount is collected from
people who are transferring properties to another individual.
3. Entitlement tax
This type of direct tax is the reason why people enjoy social programs like Medicare,
Medicaid, and Social Security. The entitlement tax is collected through payroll
deductions and is collectively grouped as the Federal Insurance Contributions Act.
4. Property tax
Property tax is charged on properties such as land and buildings and is used for
maintaining public services such as the police and fire departments, schools and
libraries, as well as roads.
5. Capital gains tax
This tax is charged when an individual sells assets such as stocks, real estate, or a
business. The tax is computed by determining the difference between the acquisition
amount and the selling amount.
1. Short-term capital asset An asset held for a period of 36 months or less is a short-
term capital asset. The criteria of 36 months have been reduced to 24 months for
immovable properties such as land, building and house property from FY 2017-18.
For instance, if you sell house property after holding it for a period of 24 months, any
income arising will be treated as long-term capital gain provided that property is sold
after 31st March 2017.
2. Long-term capital asset An asset that is held for more than 36 months is a long-
term capital asset. The reduced period of the aforementioned 24 months is not
applicable to movable property such as jewellery, debt-oriented mutual funds etc.
They will be classified as a long-term capital asset if held for more than 36 months as
earlier. Some assets are considered short-term capital assets when these are held for
12 months or less. This rule is applicable if the date of transfer is after 10th July 2014
(irrespective of what the date of purchase is).
6. Wealth tax
This liability arises from the ownership of properties and is paid every year based on
the market value of the property. Property owners must pay this tax irrespective of
whether the property earns them any income or not. Depending on the residential
status of the taxpayers, wealth tax is payable by individuals, Hindu Undivided Family
(HUF), and corporate taxpayers. Working assets like stock holdings, gold deposit
bonds, commercial complex properties, house property rented for more than 300 days
in a year, and house property owned for professional or business use are exempt from
paying wealth tax.
7. Securities Transaction Tax

Share trading on the stock market is subject to this tax. For every share purchase or
sale, you pay the Securities Transaction Tax.
8. Corporate Tax
Another type of Income Tax, the Corporate Tax is levied on the earning of businesses.
An Indian firm whose turnover is less than Rs. 1 crore is not subject to this tax. There
is a corporate tax slab according to which companies pay tax. Moreover, the tax
structure for international firms is different from domestic firms.
THE SALIENT FEATURES ARE LIKELY TO BE PRONOUNCED UNDER
THE

NEW DIRECT TAX LAW.

1. Single Destination for all Direct Tax laws
2. Digitalization in legal prosecution.
3. Easy to Amend.
4. No dividend distribution Tax
5. Simplified language
6. Stable Tax rates

INDIRECT TAX
The tax levied on the sales of goods. The Union Government imposes this sales tax on
theInter-State sale, while the sale tax on Intra-state sale is levied by the State
Government. This tax has a three-segment bifurcation along
Intra-State Sale• Sale during import/export • Inter-State Sale •
3. Service Tax :
Service tax are indirect indices which taxpayers pay on various paid services. These
paid services include-
Service tax interest is 15%• Consultancy service • Maintenance service • Event
management • Banking and financial service • Health centre • Advertising • Interior
decorator • Architect • Tour operator • Telephone •
4. Value Added Tax :
The state governments collect this category of taxes. For instance, when a person buys
a product that it is important, we pay an additional tax known as Value Added Tax.
Paid to the government, the VAT has a rate that is composed along nature of item and
respective state of sale.
5. Custom Duty and Octroi Tax :
Levied upon goods imported into the country from abroad. The tax of custom duty is
paid at the entry port of a country such as the airport. The rate of taxation is variable
as per product’s nature. Octroi is charged upon the goods entering a municipal zone.
6. Excise Duty :

Excise duty is an indirect tax form that is charged on the goods produced inside a
country. This duty is different from the custom duty. This is also known as CVAT, or
Central Value
Added Tax.
7. Anti-Dumping Duty :
This is levied upon goods that are exported at a rate less than the standard rate by the
nation to some other nation. This tax is levied upon by the Central government.
8. Newly Implemented Indirect Tax (GST)
GST is a highly regarded tax system for the country. It is amongst the latest indirect
tax systems operating under the constitution of India. The importance of this taxation
regime lies in the fact that it covers under itself various other indirect taxes operating
inside the country.
This tax regime has been brought in mark a change in the economy of the country and
to lessen the cascading effects from tax duties that deliver overall market inflation.
9. Toll Tax
It is imposed by the authorities for making travel on a specific stretch of highway. The
rate of toll tax is different for different toll Plaza. As a specific Toll Plaza maintains a
certain part of Highway only. Every year, toll rates for toll plazas get revised
according to policies mentioned in the National Highway fee under Determination of
Rates and Collection rules,
VIPs and dignitaries being exempted from the Toll Tax.

EXAMPLE OF INDIRECT TAXES

DISTINGUISH BETWEEN TAX AND FEE, TAX AND CESS

- DISTINGUISH BETWEEN TAX AND CESS

A tax is a fee that is levied on a product, income, or activity. Cess is basically just
another word for tax. Depending on the country and the tax in question, there can be
no difference between a tax and a cess, or there might be just some technical
differences.
Cess is a form of tax charged/levied over and above the base tax liability of a taxpayer.
A
cess is usually imposed additionally when the state or the central government looks to
raise funds for specific purposes. For example, the government levies an education
cess to generate additional revenue for funding primary, secondary, and higher
education. Cess is not a permanent source of revenue for the government, and it is
discontinued when the purpose levying it is fulfilled. It can be levied on both indirect
and direct taxes.
The government can impose cess for purposes such as disaster relief, generating funds
for cleaning rivers, etc. For example, after Kerala floods in the year 2018, the state
government imposed a 1% calamity cess on GST and became the first state to do it. In
other instances, the
central government may levy an education cess, or a health cess, or a sanitation cess.
All these levies are usually imposed as a percentage of the taxpayer’s basic tax
liability. Under the GST (Goods and Services Tax) regime, certain sin goods and
luxury items also attract a cess.
The procedure for introducing cess is comparatively simpler than getting the
provisions done for introducing taxes, which usually means a change in the law. Cess
is also easier to modify and abolish.
Types of cess in India

Infrastructure Cess: Announced in Union Budget 2016, this cess was charged on the
production of vehicles.• Krishi Kalyan Cess: This cess was aimed at developing the
agricultural economy, and was collected at the rate of 0%. • Swachh Bharat Cess:
Introduced in 2015, a 0% Swachh Bharat cess was imposed to fund national campaign
for clearing the roads, streets and the infrastructure of India. • Health and education
cess: Proposed in Budget 2018 by Finance Minister Arun Jaitley to meet the
education and health needs of rural and rural and Below Poverty Line (BPL) families.
• Education Cess: Education cess was introduced to finance and provide standard
quality education to poor people. •

Who pays cess? What is meant by cess in GST?

In the case of the cess levied on direct taxes, it is added to the basic tax liability of the
taxpayer and is paid as a part of the total tax paid by the taxpayers themselves. In the
case of the cess levied on indirect taxes, such as service tax or sales tax, or GST in
India’s case, it is paid by the producer of the goods and services. This usually adds to
the cost of making goods and services, and eventually, the consumer might end up
bearing the higher cost.

Comparison between Tax and Cess:

First step is the declaration of the liability by the Government i. what are all the
incomes chargeable to tax, second one is the assessment and tax payment by persons
and the last one is the method of recovery of tax if tax was not paid on time. Tax
planning and management focuses efficient administration of tax procedures and
minimization of tax liability through eligible schemes.
Through this chapter we can discuss about the basic concepts of Tax Planning, Tax
Management, Tax Evasion and Tax Avoidance.
Meaning of Company:

Corporate sector is the most widely used form of business Organisation particularly for medium and
large scale business. Under corporate sector, a business is carried on by floating a company duly
registered with appropriate authority.

Corporate taxation refers to taxation of companies (as defined under Income Tax Act, 1961) and is
a major source of revenue to the Government. Under Income Tax Act, 1961, a company is liable to
pay tax on its income at a flat rate (just as partnership firm) without any basic exemption limit as
applicable to an individual or FIUF.

'Corporate Tax' or 'Company Tax'

The tax collected from companies (as defined under the Income Tax Act, 1961) is called ‘Company
Tax’ or ‘Corporate tax’. It is interesting to note that the proceeds of corporate tax are retained by
the Central Government and are not shared with state governments

Definition of 'Company':
1. Company: As per section 2(17), Company means:

1. any Indian company, or

2.any body corporate incorporated by or under the laws of a country outside India, or

3.any institution, association or body which was assessed as a company for any assessment year
under the Income-tax Act, 1922 or was assessed under this Act as a company for any assessment
year commencing on or before 1.4.1970, or

4.Any institution, association or body, whether incorporated or not and whether Indian or
NonIndian, which is declared by a general or special order of CBDT to be a company.

2. A Company in which the public are substantially interested (Section 2(18) :

Section 2(18) of the Income-tax Act, has defined "a company in which the public are substantially
interested". It includes:

1.A company owned by Government or Reserve Bank of India.

2.A company having Govt. participation i.e. A company in which not less than 40% of the shares
are held by Government or the RBI or a corporation owned by the RBI.

3.Companies registered under section 25 of the Indian Companies Act, 1956: Companies
registered under section 25 of the Companies Act, 1956 are companies which are promoted with
special object such as to promote commerce, art, science, charity or religion or any other useful
object and these companies do not have profit motive. However, if at any time these companies
declare dividend they would loose the status of a company in which the public are substantially
interested.
4.A company declared by the CBDT: It is a company without share capital and which having
regard to its object, nature and composition of its membership or other relevant consideration is
declared by the Board to be a company in which public are substantially interested.

5.Mutual benefit finance company, where principal business of the company is acceptance of
deposits from its members and which has been declared by the Central Government to be a Nidhi or
a Mutual Benefit Society.

6.A company having co-operative society participation: It is a company in which at least 50% or
more equity shares have been held by one or more co-operative societies.

7.A public limited company: A company is deemed to be a public limited company if it is not a
private company as defined by the Companies Act, 1956 and is fulfilling either of the following two
conditions:

1.Its equity shares were listed on a recognised stock exchange, as on the last day of the relevant
previous year; or

2.Its equity shares carrying at least 50% of the voting power (in the case of an industrial company
the limit is 40%) were beneficially held throughout the relevant previous year by Government, a
statutory corporation, a company in which the public is substantially interested or a wholly owned
subsidiary of such a company.

Widely held company:

It is a company in which the public are substantially interested.

Closely held company:

It is a company in which the public are not substantially interested.

Indian company [Section 2(26)]:

'Indian Company' means a company formed and registered under the Companies Act, 1956 and
includes

1.a company formed and registered under any law relating to companies formerly in force in any
part of India (other than the State of Jammu and Kashmir and the Union Territories;

2.a corporation established by or under a Central, State or Provincial Act;

3.any institution, association or body which is declared by the Board to be a company;

4.in the case of the state of Jammu and Kashmir, a company formed and registered under any law
for the time being in force in that State;

5.in the case of any of the Union territories of Dadra and Nagar Haveli, Goa, Daman and Diu, and
Pondicherry, a company formed and registered under any law for the time being in force in that
Union Territory.

6.Provided that the registered or, as the case may be, principal office of the company, corporation,
institution, association or body, in all cases is in India.

Domestic company [Section 2(22A)]:

A domestic company means an Indian company or any other company which in respect of its
income, liable to tax under the Income-tax Act, has made the prescribed arrangements for the
declaration and payment within India, of the dividends (including dividends on preference shares)
payable out of such income.

7. Foreign company [Section 2(23A)]:

Foreign company means a company which is not a domestic company.

8. Investment company:

Investment company means a company whose gross total income consists mainly of income which
is chargeable under the heads Income from house property, Capital gains and Income from other
sources.

Residential Status Of A Company [Section 6(3)]

Determination of total income of a company depends upon its residential status
during the relevant previous year. The residential status of the company is
determined either

1.on the basis of its incorporation (Registration ) ; or

2.on the basis of the control and management of its affairs.

3.On the basis of Residential Status, companies can be classified in to’ two
categories

A.Resident Companies

B.Non Resident Companies.

(A) Resident Companies [Section 6(3)]

A company is said to be resident in India in any previous year

1.It is an Indian Company ; or

2.during the relevant previous year the control and management of its affairs is
situated wholly in India
Observations

An Indian company is always a resident company for income tax purposes even if
the control and management of its affairs is saturated outside India

A non-Indian company or a foreign company will be treated as resident of India for

any previous year only if the entire control and management of affairs of such
company, during the relevant previous year is situated in India.

For example :

A company is incorporated in India but has head office in Dacca,

A company is incorporated in Bangladesh but has head office in Kolkata

In first case it is incorporated in India and situation of its head office is immaterial,
as such it is resident company. In second case though it is incorporated outside India
but its control and management is wholly situated in India hence it is resident
company.

(B) Non Resident Company [Section 2(30)]

A Company will be a non-resident in any previous year if:

it is not an Indian company and

its place of effective management, in that year, is not in India.

It means a foreign company whose control and management is situated wholly or

partially outside India will be a non-resident company. For example an American
company holds 8 meetings in India out of total of 12 meetings held during the
previous year such company will be non-resident for income tax purposes for such
previous year.
The provisions regarding incidence of tax above may be summarised in the
following table:

Particulars of Income Whether Taxable

Resident
Not-
and Non-
Ordinarily
Ordinarily Resident
Resident
Resident
1. Income received or deemed to be received in
Yes Yes Yes
India whether earned in India or elsewhere.
2. Income which accrues or arises or is deemed
to accrue or arise in India during the previous Yes Yes Yes
year, whether received in India or elsewhere.
3. Income which accrues or arises outside India
and received outside India from a business Yes Yes No
controlled from India.
4. Income which accrues or arises outside India
and received outside India in the previous year Yes No No
from any other source.
5. Income which accrues or arises outside India
and received outside India during the years
No No No
preceding the previous year and remitted to
India during the previous year.

Types of Income in case of Companies (Section 7)

1. Income Received in India

The source of income may be situated anywhere in the world but if its first re’eipt is
in India, it is taxable for all. Income may be received by the assessee himself or by
his agent on his behalf or is actually received by him or it might be credited to his
account.
2. 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:

Contribution made by the employer to the recognized provident fund in excess of

12% of the salary of the employee;

Interest credited to the RPF of the employee which is in excess of 9.5% p.a.

Transfer balance from the unrecognized fund to a Recognised Provident Fund (It has
been discussed in the Chapter on 'Income from Salaries');

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.

3. Incomes which Accrue or Arise in India or are Deemed to Accrue or Arise in

India [Section 9]

(1) Accrue or Arise in India:

'Accrue' means 'to arise or spring as a natural growth or result', to come by way of
increase. 'Arising' means 'coming into existence or notice or presenting itself'.
'Accrue' connotes growth or accumulation with a tangible shape so as to be
receivable. In a secondary sense, the two words together mean 'to become a present
and enforceable right' and 'to become a present right of demand'.

Frequently, in the context of 'accrual' or 'arisal', the word 'earned' is used. The two
are different concepts. A person may be said to have 'earned' his income in the sense
that he has contributed to its production by rendering services or otherwise and the
parenthood of the income can be traced to him. But in order that the income may be
said to have 'accrued' to him, an additional element is necessary, that he must have
created a debt in his favour.

(2) Incomes which are Deemed to Accrue or Arise in India [Section 9]:

The following incomes shall be deemed to accrue or arise in India:

(a) Income from a Business Connection in India: Any income which arises,
directly or indirectly, from any activity or a business connection in India is deemed
to be earned in India.

Business connections may be in several forms e.g. a branch office in India or an

agent or an organization of a non-resident in India. Formation of a subsidiary
company in India to carry on the business of the non-resident parent company would
also be a business connection in India. Any profit of the non-resident which can be
reasonably attributable to such part of operations carried out in India through
business connections in India are deemed to be earned in India.

(b) These incomes actually Accrue Outside India but Under Secton 9 these are
Deemed to Accrue in India.

These incomes are :

Salary paid by govt. to its employees posted abroad,

Pension paid outside India but for services rendered in India,

Income from a capital asset located in India although transaction has taken place
outside India,

Dividend paid by Indian company outside India,

Apportionment of profits : In case a part of transaction takes place in India and the
other part outside India, proportionate profits from such transaction relating to
Indian part shall be deemed to accrue in India, [Taxable for R and NR]

Income from shooting of a film in India by a non-resident shall not be deemed to

accrue in India, hence taxable only for residents.
4. Any income Accruing and Received Outside India

It shall be taxable for Resident only.

5. Past Un-Taxed Income

Any income, which was exempted earlier but is brought to India in current PlY
shall be exempted for all.
 Set Off and Carry Forward of Losses: Basics

Understanding the provisions of set off and carry forward of losses is essential as it
significantly impacts the tax liability and tax planning of the taxpayer. Let’s
understand the basics of set off and carry forward of loss.

Definition and Distinction

Set Off of Losses is a provision that allows a taxpayer to reduce the income earned
within the same financial year with the losses incurred in other income areas.
Essentially, if a taxpayer incur a loss in one source of income, he can offset this
against a profit from another source within the same tax year, thus reducing the total
taxable income.

Carry Forward of Losses, on the other hand, allows taxpayers to carry forward
losses that cannot be completely set off within the same year to future tax years.
This is particularly beneficial when the losses are substantial compared to the profits
of the current year, enabling the use of these losses in subsequent years to reduce
future tax liabilities.

Key Distinctions:
Set Off of Losses: Utilizes losses within the same financial year to decrease taxable
income.
Carry Forward of Losses: Extends the benefit of losses to future years when they
could not be fully utilized in the year they occurred.
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Types of Losses

Following are the types of losses

Business Losses:

Set Off: Generally, business losses can be set off against any form of income except
salary in the same year.

Carry Forward: Non-speculative business losses can be carried forward for 8

assessment years and can be set off against future business profits. However, losses
from speculative businesses are restricted to being set off against speculative profits.

Capital Losses:

Set Off: Short-term capital losses can be set off against both short-term and long-
term capital gains, while long-term capital losses are only set off against long-term
capital gains.

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Carry Forward: Both short-term and long-term capital losses can be carried forward
for up to 8 years but must be set off against the same type of capital gains as
originally allowed.

Losses from House Property:

•
Set Off: Can be set off against other income heads up to a limit of INR 2 Lakhs in
the same year.
•
Carry Forward: Losses that are not set off within the year can be carried forward for
8 years but can only be set off against income from house property.
•
Losses from Owning and Maintaining Race Horses:
•
Set Off: These types of losses can only be set off against income from the same
activity.
•
Carry Forward: Can be carried forward for 4 assessment years and set off against
income from the activity.
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Set Off and Carry Forward of Losses: Rules

There are rules and conditions for set off and carry forward of losses which should
be known to every taxpayer. Let’s understand the rules related to set off and carry
forward of losses:

Same Head Set Off

In case of the same head or inter head set off, losses incurred under a specific head
of income can be offset against income from the same head. For instance, if a
business incurs a loss of INR 200,000 and in the same financial year earns a profit of
INR 500,000 from another business activity, the loss can be used to reduce the
taxable income from business activities to INR 300,000. This process is known as
"same head set off."

Inter-Head Set Off

Generally, losses from one head of income are allowed to be set off against income
from another head in the same assessment year, with some exceptions. For example,
if a taxpayer incurs a loss under the "Income from house property" head of INR
100,000 and has a gain under the "Capital gains" head of INR 200,000, the loss can
be set off, thus reducing the taxable capital gains to INR 100,000. However, losses
from "Capital gains" can only be set off within the capital gains head and not against
other income types.
 Restrictions and Prohibitions

Certain restrictions apply to the set off of losses which are as follows:

Speculative Losses: Losses from speculative business activities cannot be set off
against non-speculative business income.
•
Losses from House Property: These can only be set off up to INR 2,00,000 against
other heads of income per fiscal year.
•
Carried Forward Business Losses: These can only be set off against business
income.
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Set Off and Carry Forward of Losses: Special Considerations

The provisions for set off and carry forward of losses in special cases are as follows:

Losses in Case of Company Mergers

When companies undergo mergers or acquisitions, handling accumulated losses is a

crucial aspect of the transaction. Under Indian tax law, losses can be carried forward
by the amalgamated company if the business is continued for at least 5 years post-
merger. This provision ensures that mergers are undertaken for genuine business
purposes and not merely for tax evasion. Strategic planning and legal compliance
are critical to utilizing these benefits effectively.

Impact of Ownership Change on Losses

A change in the ownership structure of a company can affect its ability to carry
forward losses. According to tax law, if more than 49% of a company's shares are
transferred to new shareholders, the ability to carry forward past losses may be
forfeited unless the transfer is part of an approved amalgamation or demerger. This
rule is significant for startups and rapidly growing companies that may experience
changes in their investor base. Strategic planning of shareholding changes is
essential to preserve valuable tax benefits.