GIBS TAX LAW BBALLB 7SEM INTRODUCTION TO INCOME TAX

UNIT-I
CHAPTER1 INTRODUCTION TO INCOME TAX

The taxation system in India is such that the taxes are levied by the Central Government and
the State Governments. Some minor taxes are also levied by the local authorities such as the
Municipality and the Local Governments.

To run the government and manage the affairs of a state, money is required. So the government
imposes taxes in many forms on the incomes of individuals and companies.

Classification of Taxes

Broadly taxes are divided into two categories:

1. Direct Taxes
2. Indirect Taxes

Direct Taxes

A direct tax can be defined as a tax that is paid directly by an individual or organization to the
imposing entity (generally government). A direct tax cannot be shifted to another individual or
entity. The individual or organization upon which the tax is levied is responsible for the fulfilment
of the tax payment.

The Central Board of Direct Taxes deals with matters related to levying and collecting Direct
Taxes and formulation of various policies related to direct taxes.

A taxpayer pays a direct tax to a government for different purposes, including real property tax,
personal property tax, income tax or taxes on assets, FBT, Gift Tax, Capital Gains Tax, etc.

Indirect Taxes

The term indirect tax has more than one meaning. In the colloquial sense, an indirect tax such
as sales tax, a specific tax, a value-added tax (VAT), or goods and services tax (GST) is a tax
collected by an intermediary (such as a retail store) from the person who bears the ultimate
economic burden of the tax (such as the consumer).

The intermediary later files a tax return and forwards the tax proceeds to the government with
the return. In this sense, the term indirect tax is contrasted with a direct tax which is collected
directly by the government from the persons (legal or natural) on which it is imposed.

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GIBS TAX LAW BBALLB 7SEM INTRODUCTION TO INCOME TAX

Key Differences Between Direct And Indirect Taxes

Context Direct Tax Indirect Tax

Paid directly to the Paid to the government via an

Meaning
government intermediary

Levied on Profits and income Goods and services

Individuals, HUFs, and End-consumers of products, goods,

Taxpayer
businesses and services.

Directly depends on income

Tax Rate Same for everyone
and profits

Tax Rate of tax is flat so tax burden is

Progressive
Burden regressive

Transfer
Not transferable Can be transferable
of liability

Tax
Complex Quite convenient
Collection

Types Income Tax and STT Goods and Services Tax (GST)

Evasion Possible Not possible

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. 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/Need of Income Tax: The objectives of income tax may be –

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.

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GIBS TAX LAW BBALLB 7SEM INTRODUCTION TO INCOME TAX

5. To encourage investment in new capital goods.

6. To channelize investment into those sectors which contribute the most economic growth.
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
or accounting 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.
7. It is compulsory to deduct the tax at source and to pay it to the Government.

Income: [Sec. 2(24)]

The definition of ‘Income’ given under section 2(24) is inclusive and not exhaustive and therefore
it may be possible that certain items may be considered as income under this Act according to
its general and natural meaning, even if it is not included under section 2(24). The term ‘Income’
includes the following:

Profits and gains;

Dividend;
Voluntary contributions received by a trust which is created wholly or partly for charitable or
religious purposes; or by educational institutions, hospitals or electoral trust;
The value of any perquisite or profit in lieu of salary taxable u/s 17;
Any special allowance granted to the assessee to meet expenses wholly, necessarily and
exclusively for the performance of office or employment duties;
The value of any benefit or perquisite, whether converted into money or not, obtained from a
company either by a director or by a person who has 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, otherwise, would have been payable by the director or other person
aforesaid;
The value of benefit or perquisite to a representative assessee like a trustee appointed under a
trust;
Any sum chargeable to income-tax under clauses (ii) and (iii) of sec. 28 or sec. 41 or sec. 59;
Any sum chargeable to income-tax under clauses (iiia), (iiib), (iiic), (iv), (v), (va) and (via) of sec.
28;
Any capital gains chargeable u/s 45;
The profits and gains of any insurance business carried on by a mutual insurance company or
by a co-operative society, computed in accordance with section 44 or any surplus taken to be
such profit and gains by virtue of provisions contained in the First Schedule;
The profits and gains of any of banking business (including providing credit facilities) carried on
by a co-operative society with its members;
Winnings from lottery, crossword puzzles, races (including horse races), card games or other
games of any sort or from gambling or betting;

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GIBS TAX LAW BBALLB 7SEM INTRODUCTION TO INCOME TAX

Any sum received by the assessee from his employees as contributions to any provident fund
or superannuation fund or any fund set up under Employees’ State Insurance Act, 1948 or any
fund for the welfare of such employee; [Sec. 2(24)(x)]
Any amount received under the Keyman insurance policy including the sum allocated by way of
bonus; [Sec. 2(24)(xi)]
Any sum chargeable to income-tax u/s 56(2)(v), (vi);
Any sum of money or specified movable or immovable properties received without consideration
or inadequate consideration as provided u/s 56(2)(vii), (via);
Any consideration received for issue of shares as exceeds the FMV of shares referred to in
section 56(2)(viib);
Any sum of money received as advance in the course of negotiation for transfer of a capital
asset, if such sum is forfeited as the negotiation do not resulted in transfer of the asset 56(2)(ix);
Any sum chargeable to income-tax u/s 56(2)(x);
Any compensation or other payment referred to in Sec. 56(2)(xi);
Income shall include assistance received in the form of a subsidy or grant or cash incentive or
duty drawback or waiver or concession or reimbursement (by whatever name called) from the
Central Government or a State Government or any other authority or body or agency in cash or
kind to the assessee other than:
(a) the subsidy or grant or reimbursement which is taken into account for determination of the
actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of
section 43,
(b) the subsidy or grant by the Central Government for the purpose of the corpus of a trust or
institution established by the Central Government or the State Government, as the case may
be.

What is a Capital Receipt?

Capital receipts are the result of decisions with long-term implications. They are receipts
received occasionally not from the day-to-day business activities of a company. Most commonly,
they involve selling one's assets or creating liabilities.

Capital receipts are generally non-recurring, and a business or a government can't record it as
their regular source of income. In other words, they are cash inflows from capital gains generated
from the sale of investments or assets like buildings, land, or jewellery.

As capital receipts are the result of transactions of assets and liabilities, they are part of the
balance sheet. They are not reflected in the income or profit-and-loss statement.

What is a Revenue Receipt?

Revenue receipts refer to the receipts of income which a company or government makes from
its day-to-day activities. It does not involve the creation of liabilities or the sale of assets. It is a
function of the products and services which are offered in the market.

These revenues are recurring in nature as they are the products of the daily business of a
company or government. It is part of the profit-and-loss or income statement of a company.

From the definition, it is clear that any type of receipt needs to satisfy one of the two conditions
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GIBS TAX LAW BBALLB 7SEM INTRODUCTION TO INCOME TAX

to be called as revenue receipt –

First, it must not reduce the assets of the company.

Second, it must not create any liability for the company.

Key Differences between Capital Receipts and Revenue Receipts

Capital Receipt Revenue Receipt

These are generated by creating Derived from the daily business activities of an
liabilities or selling assets. enterprise. It primarily involves selling of goods
and services.

They are shown in the balance sheet. They are reflected in profit-and-loss or income
statements.

It is non-recurring. It is recurring.

Usually not subject to income tax. In This type of income is subject to taxation.
some cases, capital gains tax may be
applicable.

Capital receipts cannot be used for Revenue receipts are one of the sources for
creating reserve funds in the business. creating reserves

INCOME TAX ACT, 1961

Short Title: This may be called the Income Tax Act, 1961.
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).
Commencement: This act comes into force on 1st day of April, 1962

SCHEME OF TAXATION: BASIS OF CHARGES

• Under the Income –tax Act, 1961
• Every person,
• Who is an assessee and
• Whose total income
• Exceeds the maximum exemption limit
• Shall be chargeable to Income-tax
• at the rate prescribed in the Finance Act.
• Such Income-tax shall have to be paid
• On total income of the previous year
• In the relevant assessment year.

Person [Section 2(31)]: Person includes:-

1. An individual
2. A Hindu Undivided Family(HUF)
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GIBS TAX LAW BBALLB 7SEM INTRODUCTION TO INCOME TAX

3. A company
4. A firm(partnership)
5. An Association of Persons (AOP) or a Body of Individual (BOI), whether incorporated or
not e.g. clubs, co operative societies etc.
6. A local authorities e.g. MCD, DDA etc.
7. Every artificial judicial person not falling within any of the preceding sub-clauses e.g.
Delhi University.

Assessee [Section 2(7)]

Assessee means a person by whom any tax or any other sum of money is payable as per
this Act.

A 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 (ii) a person
representing a foreigner or a minor or a lunatic

Assessee in Default
When a person is responsible for doing any work under the Act and he fails to do so, he is
called an assessee in default. For example- if a person is liable to deduct income tax while
making any payment to another person & he does not deduct or does not deposit it in the
Govt. Treasury.

Assessment Year [Section 2(9)]

It is the period of 12 months commencing on first day of April of every year. In simple words,
this is the year in which the tax liability of the assessee is calculated and is paid by assessee
on the income earned in previous year.

Previous year [Section 2(34) & 3]

It is the financial year immediately preceding the assessment year. Therefore, the income
earned during the previous year 2022-23 will be assessed or charged to tax in the
assessment year 2023-24.

First Previous year for a business/profession newly set-up during the financial year
or for a new source of income:
From the date of setting up of the business or from the date of the new source came to
existence To the last date of that financial year i.e. 31st of March.

Cases where income of previous year is assessed in the same year

As a normal rule, the income earned during any previous year is assessed or charged to tax
in the immediately succeeding year. However, in the following cases the income is taxed
in the same previous year:-
1) Non- resident shipping business (Section 172): If a non-resident owns a ship or ship
is chartered by him & the ship carries passengers, livestock, mail or goods shipped at a
port in India, 7.5% of amount paid/payable on a/c of such carriage to the non-resident
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GIBS TAX LAW BBALLB 7SEM INTRODUCTION TO INCOME TAX

shall be deemed to be income of the taxpayer. The master of the ship shall submit a
return of income before the departure of the ship from the Indian port. Such return may
be submitted within 30 days of the departure of the ship, if the Assessment Officer is
satisfied that it will be difficult to submit the return before departure & if satisfactory
arrangement for payment of tax has been made.

2) Assessment of Persons Leaving India(Section 174): When it appears to the

Assessing Officer that any individual may leave India during the current assessment year
and that he has no intention of returning to India, the total income of the individual for the
period noted below is charged to tax in that assessment year:
❖ Commencing from first day of assessment year
❖ To the probable date of his departure from India

3) AOP/BOI formed for short duration (Section 174A): If it appears to the Assessing
Officer that any AOP/BOI is likely to be dissolved in the assessment year in which it
was formed, the total income of such AOP/BOI for the period from first day of that year
to the date of its dissolution shall be chargeable to tax in that assessment year.

4) Assessment of Persons likely to Transfer Property to Avoid Tax (Section 175): If

it appears to the Assessing Officer that any person is likely to sell, transfer, dispose off
any of his assets with a view to avoid the tax, the total income of such person for the
period from first day of that year to the date when he is likely to do so shall be
chargeable to tax in that assessment year.

5) Discontinued Business (Section 176): The income for the period commencing from
the first day of the assessment year to the date of discontinuance, is taxed in the
assessment year of discontinuance.
Note
It may be noted that in first four cases, it is mandatory for the AO to charge the tax in the
same P/Y. But in last case, there is a choice for the AO i.e. if he wishes he can case or he
can wait till the A/Y.

COMPUTATION OF TOTAL INCOME (TAXABLE INCOME)

As per section 14, all the incomes shall be classified in following five heads:-
1. Income from Salaries (Section 15-17) XXX
2. Income from House Property (Section 22-27) XXX
3. Profits & gains from business & profession (Section 28-44D) XXX
4. Capital Gains (Section 45-55A) XXX
5. Income from other sources(Section 56-59) XXX
(Income from interest, lotteries, gifts etc.)
Total (1+2+3+4+5) XXX
Less: Adjustment on account of set-off & carry forward of losses XXX
GROSS TOTAL INCOME (GTI) XXX
Less:Deduction U/S 80C to 80U XXX
TOTAL INCOME/TAXABLE INCOME (*Rounded Off U/S 288A) XXX

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GIBS TAX LAW BBALLB 7SEM INTRODUCTION TO INCOME TAX

Computation of Tax Liability

Tax on Total Income XXX
Less: Rebate U/S 87A (**Resident individual having total income XXX
not exceeding Rs.5 lakh)
Income Tax after rebate U/S 87A XXX
Add: Surcharge (if applicable) XXX
Tax after surcharge XXX
Add: Health & Education Tax (4% of tax after surcharge) XXX
Less: Rebate U/S 86,89,90,90A & 91 (if applicable) XXX
Tax Payable XXX
Less: Pre Paid Taxes if any-
• Tax paid on self-assessment
• TDS
• Advance tax paid
Tax Liability (*Rounded off U/S 288B) XXX

*Rounded Off U/S 288A/288B

As per these sections, total income/tax liability is rounded off to the nearest multiple of 10.
Up to Rs. 4.99 is ignored. If last figure is 5 or more than it is rounded off to next multiple of
10.e.g. If net income is 2, 45,234.99, it shall be 2, 45,230. But if it is 2, 45,235, it shall be 2,
45,240.

**Rebate u/s 87A

The amount of rebate is income tax on total income or Rs.12,500 whichever is less.

Difference between Gross Total Income and Total Income

S. NO. Gross Total Income Total Income

1. Aggregate of various heads of income is After deduction U/s 80C to 80U, the balance is
called Gross Total Income. called Total Income.
2. Gross Total Income is not rounded off. Total Income is rounded off to the nearest multiple
of ten rupees.
3. Tax is not levied on Gross Total Income. Tax is levied on the Total Income at the prescribed
rates.
4. Gross Total Income is not less than the Total Income can be equal to Gross Total Income
Total Income. or less than Gross Total Income.
5. Agricultural income is not included in Gross If agricultural income excess Rs. 5,000/-, it is
Total Income. included in the total income of an individual or
HUF to determine the tax payable by the
assessee.

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GIBS TAX LAW BBALLB 7SEM INTRODUCTION TO INCOME TAX

Tax Rates for A/Y 2023-24 (Under Regular Tax Regime)

(A) For Resident Senior Citizen (age 60 years but less than 80 years Men/Women )
Total income up to Rs.3, 00,000 Nil
Total income above Rs.3,00,000 to Rs.5,00,000 5% of excess of Rs. 3, 00,000
Total income above Rs.5,00,000 to Rs. 10, 20% of excess of Rs. 5, 00,000
00,000
Total income above Rs. 10, 00,000 30% of excess of Rs.10, 00,000

* Health &Edu. Cess(H & EC) @4% of Tax

Surcharge
10% of the Income Tax, where total taxable income is more than Rs. 50,00,000 and 15% of
Income Tax if total income exceeds Rs. 1 crore.

(B) For Resident Senior Citizen (age 80 years or above Men/Women)

Total income up to Rs. 5, 00,000 Nil

Total income above Rs. 5, 00,000 to Rs. 20% of excess of Rs. 5, 00,000
10, 00,000
Total income above Rs. 10, 00,000 30% of excess of Rs.10, 00,000

*Health &Edu. Cess(H & EC) @4% of Tax

Surcharge
10% of the Income Tax, where total taxable income is more than Rs. 50,00,000 and 15% of
Income Tax if total income exceeds Rs. 1 crore.

(C) For Other Individuals (men/women)/AOP/BOI etc. (other than Firm &Company)

Total income up to Rs. 2, 50,000 Nil

Total income above Rs. 2, 50,000 to Rs. 5, 5% of excess of Rs. 2, 50,000
00,000
Total income above Rs.5,00,000 to Rs. 10, 20% of excess of Rs. 5, 00,000
00,000
Total income above Rs. 10, 00,000 30% of excess of Rs.10, 00,000

Surcharge
10% of the Income Tax, where total taxable income is more than Rs. 50,00,000 and 15% of
Income Tax if total income exceeds Rs. 1 crore.

Tax Rates for A/Y 2023-24 (Under Alternative Tax Regime U/S 115BAC)
An individual/HUF can opt for the alternative tax regime where tax rates are lower than
the regular rates. However, a few tax incentives are blocked. So, taxable income is
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GIBS TAX LAW BBALLB 7SEM INTRODUCTION TO INCOME TAX

calculated without availing these blocked incentives.

Total Income (computed after ignoring blocked Tax Rates

incentives)
Up to Rs. 2, 50,000 Nil
Above Rs. 2, 50,000 to Rs. 5, 00,000 5% of excess of Rs. 2, 50,000
Above Rs. 5, 00,000 to Rs. 7, 50,000 10% of excess of Rs. 5, 00,000
Above Rs. 7, 50,000 to Rs. 10, 00,000 15% of excess of Rs. 7, 50,000
Above Rs. 10, 00,000 to Rs. 12, 50,000 20% of excess of Rs. 10, 00,000
Above Rs. 12, 50,000 to Rs. 15, 00,000 25% of excess of Rs. 12, 50,000
Above Rs. 15, 00,000 30% of excess of Rs.15, 00,000

*Exemption limit is Rs.2,50,000 even in case of senior citizens and super senior citizens.
*Rebate U/S 87A is available.
*Surcharge and education cess are applicable same as under regular tax regime.

Blocked Incentives under Alternative Tax Regime

- Leave travel concession [sec. 10(5)]

- House rent allowance [sec. 10(13A)]
- Special allowances other than (a) travelling allowances (b) transfer allowance (c)
conveyance allowance for official purposes (d) transport allowance of Rs.3200 per month
to employee who is blind or deaf dumb or orthopedically handicapped. [sec. 10(14)]
- Allowance to MPs/MLAs [sec. 10(17)]
- Exemption up to Rs.1500 available in the case of clubbed income of minor child [sec.
10(32)]
- Special economic zone [sec. 10(AA)]
- Exemption of perquisite in respect of free food and non-alcoholic beverage i.e., Rs.50
per meal provided through paid voucher [sec. 17(2)]
- Standard deduction [sec. 16(ia)]
- Entertainment allowance deduction [sec. 16(ii)]
- Professional tax deduction [sec. 16(iii)]
- Interest on housing loan in the case of one or two self occupied properties [sec. 24(b)]
- Additional depreciation [sec. 32(1)(iia)]
- Site restoration fund [sec. 33ABA]
- Tea/coffee/rubber development account [sec. 33AB]
- Deduction for scientific research [sec. 35(1)(ii)/(iia)/(iii), 35(2AA)]
- Capital expenditure pertaining to specified business [sec. 35AD]
- Agriculture extension project [sec. 35CCC]
- Standard deduction in case of family pension [sec. 57(iia)]
- Deduction U/S 80C to 80U except employer’s contribution towards NPS u/s 80CCD(2),
deduction u/s 80JJAA and deduction u/s 80LA(1A).

How to Find Out Whether Alternative Tax Regime is Better or Not

Alternative Tax Regime u/s 115BAC is an optional scheme. One can find out net income and
tax liability under the regular tax regime and alternative tax regime. By comparing the tax
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GIBS TAX LAW BBALLB 7SEM INTRODUCTION TO INCOME TAX

liability under the both tax regimes, one can find out whether alternative tax regime is better
or not.

*NOTE: If the amount of blocked incentives is Rs.2,50,000 or more, regular regime is better.
If this amount is less than Rs.2,50,000 then one must separately calculate tax liability under
both regimes and compare where it is less.

Some Important Principle Which Explain The Concept Of Income For

Income Tax Purpose

1) Regularity of Income
a) To be taxed it is not necessary a source of income is regular
b) Thus even casual income like lotteries, winning from races etc. are taxable

2) Form of income : Income can be received in cash or in kind

3) Legal Vs. Illegal Income

a) For income tax purpose, there is no difference b/w legal & illegal income
b) For example income from smuggling would also be taxable

4) Disputed Income
a) Any dispute regarding the title of income cannot hold up the assessment of the
income
b) In such case it is AO who decides regarding the taxability of such disputed income.

5) Lump sum Receipt: If a receipt is an income whether it is received in lump sum or in

installments would not affect its taxability.

Diversion of Income vs. Application of Income

Introduction
Diversion of income and application of income are two concepts that are recognized under the
Income Tax Act, 1961 in India. These concepts are used to determine the taxability of income in
certain situations where income is diverted or applied by a taxpayer in a manner that may affect
its tax liability. Let's delve into a detailed analysis of these concepts as per the Income Tax Act,
1961:

1. Diversion of Income:
Diversion of income refers to a situation where income is legally diverted by a taxpayer to a third
party before it reaches the taxpayer, and the diverted income is not considered as the taxpayer's
income for tax purposes. In other words, the income is diverted to another person before it
becomes taxable in the hands of the taxpayer.
Under the Income Tax Act, for a diversion of income to be recognized, the following conditions
must be met:

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GIBS TAX LAW BBALLB 7SEM INTRODUCTION TO INCOME TAX

a) Existence of a legal obligation: There must be a legal obligation on the taxpayer to apply the
income in a particular manner before it accrues or arises to the taxpayer. This legal obligation
can arise from a contract, an agreement, a statute, or any other legal arrangement.
b) Diversion before accrual or arising of income: The income must be legally diverted to a third
party before it accrues or arises to the taxpayer. Once the income accrues or arises to the
taxpayer, it becomes taxable in the hands of the taxpayer unless it satisfies the conditions for
diversion of income.
c) Diversion without the taxpayer's control: The income must be diverted to a third party without
the taxpayer having control over it. The taxpayer must not have any power or control over the
diverted income after it is diverted.
d) Genuine and bona fide transaction: The diversion of income must be a genuine and bona fide
transaction, and it must not be a sham or colorable transaction intended to evade taxes.
If all these conditions are met, the diverted income will not be treated as the taxpayer's income
for tax purposes, and it will be taxable in the hands of the third party to whom it is diverted.

2. Application of Income:
Application of income refers to a situation where income is applied by a taxpayer for a specific
purpose or utilized in a particular manner, and such application or utilization is considered as a
taxable event. In other words, the income is applied or utilized by the taxpayer for a particular
purpose, and it is treated as the taxpayer's income for tax purposes.
Under the Income Tax Act, the concept of application of income is primarily used in cases where
income is accumulated or set apart for the benefit of a specific person, such as a trust or a fund.
In such cases, the income is considered as the taxpayer's income and is taxable in the hands of
the person for whose benefit it is accumulated or set apart.

Diversion Of Income v/s Application Of Income

The Supreme Court decision in case of CIT v. Sitaldas Tirthdas (1961) is the authority for the
proposition that where by an obligation, income is diverted before it reaches the assessee, it is
deductible from his income as for all practical purposes it is not his income at all (as it is diversion
of income by overriding title). But where the income is required to be applied to discharge an
obligation after it reaches the assessee, it is not deductible (as it is called as application of
income). Thus, there is the difference between the diversion of income by an overriding title and
application of income as the former is deductible while the latter is not.
Thus, when management of a company is taken over by another person from the existing team
in consideration of percentage of future profit to the latter, in computing the business income of
the former, such percentage of profits is diversion of income and hence, deductible [CIT v.
Travancore Sugars and Chemicals Ltd. (1973)].

Example of Application of Income Example of Diversion of Income

Mr. A is liable to pay Rs. 2,000/- per month M/s ABC is a partnership firm in which A and
to Ms. B (his ex-wife) as an alimony sum. his two sons B & C are partners. The
Mr. A being an employee of Mr. C, instructs partnership deed provides that after the
him to pay Rs. 2,000/- per month out of his death of Mr. A, B & C shall continue the
salary and disburse the remaining salary to business of the firm subject to a condition

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GIBS TAX LAW BBALLB 7SEM INTRODUCTION TO INCOME TAX

him. Whether this amount of Rs. 2,000/- per that 20% of profit of the firm shall be given to
month be included in the Total Income of Mrs. D (Wife of Mr. A/ Mother of B & C). After
Mr. A or is it a case of diversion of income the death of Mr. A, whether this 20% amount
of Mr. A and not taxable in his hands? of profit be included in the Total Income of
Firm M/s ABC or is a case of diversion of
This is a case of Application of Income by income of M/s ABC and not taxable in its
Mr. A and not diversion of Income and hands?
hence it will be included in the Total Income
of Mr. A. This is because this amount of Rs. This is a case if Diversion of Income and the
2,000/- per month is an obligation of Mr. A said 20% amount shall not be included in the
to pay to Ms. B out of his income and not an Total Income of M/s ABC, i.e., it is deductible
income in which Ms. B had over riding from its Total Income. This is because the
entitlement from Mr. C before being earned clause mentioned in partnership deed has
by Mr. A. In other words, this is an Income given an overriding title of 20% profit to Mrs.
of Mr. A, which is applied by him to fulfill an D and such income is a precondition for the
obligation and hence included in his Total firm to continue its business. In other words,
Income and a mere arrangement to make this 20% profit reaches Mrs. D before it
Mr. C make such payments directly to Ms. becomes income of the firm and hence it is a
B won’t make it a case of Diversion of case of diversion of Income.
Income.

SAMPLE PRACTICAL QUESTIONS

Question1: Mr. X (35 years) is an individual. His net income under regular tax regime is
Rs.18,20,000. It is calculated after claiming a few deductions/incentives (i.e., standard
deduction: Rs.50,000, deduction u/s 80C: Rs. 1,50,000, and deduction u/s 80G: Rs.70,000).
Find the tax liability of Mr. X for A/Y 2023-24 under both regular and alternative tax regime.
Also suggest which tax regime should he opt?

Solution: The quantum of blocked incentives is Rs.2,70,000 (i.e., Rs.50,000 + Rs.1,50,000

+ Rs.70,000). Whenever the quantum of blocked incentives is higher than Rs.2,50,000,
regular tax regime is better than the alternative tax regime. To verify it, let us calculate the
tax liabilities under both regimes:
Particulars Regular Tax Alternative Tax
Regime (Rs.) Regime (Rs.)
Net Income under regular tax regime 18,20,000 18,20,000
Add: Blocked incentives --- 2,70,000
Net income under regular/alternative tax 18,20,000 20,90,000
regime
Income tax under regular/alternative tax 3,58,500 3,64,500
regime (WN 1 & 2)
Add: Health & education cess @ 4% 14,340 14,580
3,72,840 3,79,080

CLASSES BY: Dr. JATIN LAMBA

GIBS TAX LAW BBALLB 7SEM INTRODUCTION TO INCOME TAX

Tax liability is lower under the regular tax regime. X should not opt for the alternative tax
regime.

Working Notes:

1. Income tax under regular tax regime:

Income Tax
First Rs.2,50,000 Nil
Above Rs.2,50,000 to Rs. 5,00,000 Rs.12,500 (5% of 2,50,000)
Above Rs.5,00,000 to Rs.10,00,000 Rs.1,00,000 (20% of 5,00,000)
Above Rs.10,00,000 Rs.2,46,000 (30% of 8,20,000)
Total Rs. 3,58,500

2. Income tax under alternative tax regime:

Income Tax
First Rs.2,50,000 Nil
Above Rs.2,50,000 to Rs. 5,00,000 Rs.12,500 (5% of 2,50,000)
Above Rs.5,00,000 to Rs.7,50,000 Rs.25,000 (10% of 2,50,000)
Above Rs.7,50,000 to Rs.10,00,000 Rs.37,500 (15% of 2,50,000)
Above Rs.10,00,000 to Rs.12,50,000 Rs.50,000 (20% of Rs. 2,50,000)
Above Rs.12,50,000 to Rs.15,00,000 Rs.62,500 (25% of Rs.2,50,000)
Above Rs.15,00,000 Rs.1,77,000 (30% of Rs.5,90,000)
Total Rs. 3,64,500

Question2: Mr. Y (23 years) is an individual. His net income under regular tax regime is
Rs.22,50,000. It is calculated after claiming a few deductions/incentives (i.e., standard
deduction: Rs.50,000 and deduction u/s 80C: Rs. 10,000).
Find the tax liability of Mr. Y for A/Y 2023-24 under both regular and alternative tax regime.
Also suggest which tax regime should he opt?

Solution: The quantum of blocked incentives is Rs.60,000 (i.e., Rs.50,000 + Rs.10,000).

Since the quantum of blocked incentives is lower than Rs.2,50,000, tax liability should be
calculated separately under both tax regimes as follows:
Particulars Regular Tax Alternative Tax
Regime (Rs.) Regime (Rs.)

CLASSES BY: Dr. JATIN LAMBA

GIBS TAX LAW BBALLB 7SEM INTRODUCTION TO INCOME TAX

Net Income under regular tax regime 22,50,000 22,50,000

Add: Blocked incentives --- 60,000
Net income under regular/alternative tax 22,50,000 23,10,000
regime
Income tax under regular/alternative tax 4,87,500 4,30,500
regime (WN 1 & 2)
Add: Health & education cess @ 4% 19,500 17,220
5,07,000 4,47,720

Working Notes:
1. Income tax under regular tax regime:

Income Tax
First Rs.2,50,000 Nil
Above Rs.2,50,000 to Rs. 5,00,000 Rs.12,500 (5% of 2,50,000)
Above Rs.5,00,000 to Rs.10,00,000 Rs.1,00,000 (20% of 5,00,000)
Above Rs.10,00,000 Rs.3,75,000 (30% of 12,50,000)
Total Rs. 4,87,500

2. Income tax under alternative tax regime:

Income Tax
First Rs.2,50,000 Nil
Above Rs.2,50,000 to Rs. 5,00,000 Rs.12,500 (5% of 2,50,000)
Above Rs.5,00,000 to Rs.7,50,000 Rs.25,000 (10% of 2,50,000)
Above Rs.7,50,000 to Rs.10,00,000 Rs.37,500 (15% of 2,50,000)
Above Rs.10,00,000 to Rs.12,50,000 Rs.50,000 (20% of Rs. 2,50,000)
Above Rs.12,50,000 to Rs.15,00,000 Rs.62,500 (25% of Rs.2,50,000)
Above Rs.15,00,000 Rs.2,43,000 (30% of Rs.8,10,000)
Total Rs. 4,30,500

QUESTIONS FOR PRACTICE

1. Total income of Mrs. Neha, aged 50 a resident of India is Rs.13, 94,000. It is calculated
after claiming a few deductions/incentives (i.e., Blocked incentives of Rs.2,30,000). Compute
hertax liability for A/Y 2023-24 under both regular and alternative tax regime. Also suggest
which tax regime should he opt?

2. Total income of Mr. Malhotra, aged 56 is Rs. 3, 26,500. It is calculated after claiming
a few deductions/incentives (i.e., Blocked incentives of Rs.50,000). Compute his tax
liability for A/Y 2023-24 under both regular and alternative tax regime. Also suggest which
CLASSES BY: Dr. JATIN LAMBA
GIBS TAX LAW BBALLB 7SEM INTRODUCTION TO INCOME TAX

tax regime should he opt?

3. Total income of Mr. Sarna, aged 70 a resident of India for assessment year 2023-24 is12,
90,450. It is calculated after claiming a few deductions/incentives (i.e., Blocked incentives of
Rs.2,80,000). Compute his tax liability for A/Y 2023-24 under both regular and alternative tax
regime. Also suggest which tax regime should he opt?

4. Total income of Mr. Arora, aged 45 a resident of India is Rs. 18, 94,000. Compute his tax
liability for A/Y 2023-24 under regular tax regime.

5. Total income of Mrs. Arora, aged 75 a non-resident of India is Rs. 17, 46,300. Compute
her tax liability for A/Y 2023-24 under regular tax regime.

6. Total income of Mrs. Arora, aged 55 a non-resident of India is Rs. 18, 46,300. Compute
her tax liability for A/Y 2023-24 under regular tax regime.

7. Total income of Mr. Sharma, aged 60 a resident of India for assessment year 2023-24 is
18, 90,460. Compute his tax liability under regular tax regime.

8. Total income of Mrs. Sharma, aged 54 a resident of India for assessment year 2023-24 is
27, 45,640. Compute her tax liability under regular tax regime.

9. Total income of Mr. Shyam, aged 70 a resident of India for assessment year 2023-24 is
19, 54,430. Compute his tax liability under regular tax regime.

10. Total income of Mr. Vipin, aged 80 a resident of India for assessment year 2023-24 is
18, 94,000. Compute his tax liability under regular tax regime.

CLASSES BY: Dr. JATIN LAMBA