Income Tax Basic - Short Notes

[Write short notes on (a) Assessment year and Previous Year (b) Charge of income tax (c) Marginal rate of return (d) Capital asset  (e) Agricultural income (f) Person and Assessee (g) Revenue Vs Capital expenditure (h) Heads of Income, Gross Total Income and Total Income (i) Capital receipts (j) Revenue Receipts Vs Capital Receipts (k) Tax Return (l) Method of accounting (m) Tax evasion vs. Tax avoidance (n) NRI, Ordinarily resident and Not-ordinarily resident (o) Income tax authorities (p) CBDT (q) Income tax rate for the Assessment year 2020 – 2021 (Refer your book or consult teacher) (r) Permanent account number (PAN)]

(a) Assessment year and Previous Year

(b) Charge of Income Tax (Sec. 4)

Section 4 is the charging section for the Income-tax Act, 1961 (the Act). It provides for the charge and collection/ payment of Income Tax India. The important provisions of this section are:

Ø  Where any Central Act enacts for any Assessment Year that income-tax shall be charged at any rate or rates,

Ø  Income-tax at that rate or rates (including additional tax) shall be charged for that year in accordance with and subject to all the provisions of the Act.

Ø  In respect of the Total Income of the Previous Year of every Person

Ø  However, if by virtue of any provision of the Act, Income Tax India is to be charged in respect of the income of a period other than the previous year, then it shall be charged accordingly.

Ø  The Income-tax chargeable as above shall be deducted at source or paid in advance if so required under any provision of the Act.

(c) Maximum marginal rate

Maximum Marginal rate is the rate of income tax including surcharge applicable to the highest slab of income in the case of an individual, AOP or BOI as specified in the Finance Act of the relevant previous year. At present, the maximum marginal rate is 30% excluding surcharge. The maximum marginal rates of various individuals are listed below:

a)    For an individual having total income less than or equal to Rs. 50 lakhs – 31.2% including surcharge and cess.

b)   For an individual having total income more than 50 lakhs but less than or equal to Rs. 1 Crore – 34.32% including surcharge and cess.

c)    For an individual having total income more than 1 crore but less than or equal to Rs. 2 Crores – 35.88% including surcharge and cess.

d)   For an individual having total income more than 2 crores but less than or equal to Rs. 5 Crores – 39% including surcharge and cess.

e)   For an individual having total income more than 5 crores – 42.44% including surcharge and cess.

(d) Meaning of Capital Assets under Sec. 2(14) means:

Capital asset means property of any kind held by an assessee, whether or not connected with his business or profession. It includes plant and machinery, building – whether business premises or residential, all assets of a business, goodwill, patent rights etc. This definition of a capital asset is very wide and includes all types of properties, whether movable or immovable, tangible or intangible, fixed or floating but does not include the following.

1. Stock-in-trade, consumable stores or raw materials held for business or profession.

2. Personal movable properties viz. furniture, motor vehicles, refrigerators, musical instruments etc. held for the personal use of the assessee or his family. But personal property does not include the following:

Ø  Jewellery

Ø  Residential house property

Ø  Archaeological collections, drawings, paintings, sculptures, or any work of art.

3. Rural Agricultural land:

Ø  Land within the jurisdiction of a municipality or cantonment board having a population of 10,000 or more or

Ø  Land situated within 8 kilometers from the local limits.

4. 6½ per cent Gold Bonds, 1977 or 7 per cent Gold Bonds, 1980 or National Defence Gold Bonds, 1980 issued by the Central Government.

5. Gold Bonds issued by Government of India including gold deposit bonds issued under the gold deposit scheme, 1999 notified by the central Government.

6. Special Bearer Bonds, 1991 issued by the Government of India.

7. Deposit Certificates issued under the Gold Monetization Scheme, 2016 w.e.f. The assessment year 2017-18

(e) Agriculture Income [Section 2 (1A)]

Agriculture income is fully exempted from tax u/s 10(1) and as such does not form part of total income. As per Section 2(1A), agriculture income includes:

a)      Any rent or revenue derived from land which is situated in India and is used for agricultural purpose;

b)      Any income derived from such land by agriculture or by the process employed to render the product fit for market or by the sale of such produce by the cultivator or receiver of rent in Kind.

c)       Any income derived from any building provided the following conditions were satisfied:

Ø  The building is or on the immediate vicinity of the agricultural land;

Ø  It is occupied by the cultivator or receiver of rent or revenue

Ø  It is used as a dwelling house or storehouse or outhouse ;

Ø  The land is assessed to land revenue and it is not situated within the specified area.

(f) Person and Assessee

(g) Revenue Vs Capital Expenditure

Revenue Expenditure: Revenue expenditure is outlay or expenses incurred in the day to day running of a company. In most cases, revenue expenditure involves the procurement of services and goods that will be used within a financial year. Revenue expenditure does not improve or increase the income-generating abilities of a company rather at best it leads to the maintenance of the current organisational revenue-generating capacity.

All expenses of a revenue nature are recorded in the profit and loss account as either operating expenses, marketing and selling expenses and administrative expenses. Revenue expenses play a role in determining the profit earned or a loss by a company.

Revenue expenses are routine and recurring in nature and some examples of revenue expenditure include payments in staff wages and salaries, heating and lighting, depreciation, legal and professional fees, travel and subsistence, insurance, administrative expenses, most of the marketing and public relations expenses, audit fees, office supplies, staff training costs, staff recruitment costs and minor or immaterial items of equipment.

Capital Expenditure: Capital expenditure represents outlay on fixed assets. Capital expenditure can be an outlay of resources on the investment of long-term income-generating capability of the company. Investment in fixed assets will lead to an increase or improvement in the investing company's revenue-generating capacity. Capital expenditure can also be in the form of significant acquisitions or purchases of more expensive items of equipment that will last longer than a financial year.

All capital expenditure is recorded on the balance sheet. Capital expenditure will be depreciated or amortised annually to ensure that an expense is charged to the profit and loss account to reflect the capital expenditure's usage by the company.

Some of the examples of capital expenditure include outlay on land and buildings, plant and equipment, vehicles, computer equipment, product development costs, finance leases and software development costs.

General Principles cum difference between capital and revenue expenditure

To decide whether an expenditure is a capital and revenue in nature the following points should be considered. 

1.      Acquisition of Fixed Assets v. Routine Expenditure- Capital expenditure is incurred in acquiring extending or improving a fixed asset, whereas revenue expenditure is incurred in the normal course of business as business expenditure.

2.      Several previous years vs. one previous year- Capital expenditure produces benefits for several previous years, whereas revenue expenditure is consumed within a previous year.

3.      Improvement v. Maintenance- Capital expenditure makes improvements in earning capacity of a business. Revenue expenditure, on the other hand, maintains the profit-making capacity of a business.

4.      Non-recurring v. Recurring- usually capital expenditure is a non-recurring outlay, whereas revenue expenditure is recurring outlay. 

(h) Heads of Income, Gross Total Income and Total Income

Section 14: As per section 14, all income, for purposes of income-tax, will be classified under the following heads of income.

(i)      Income under the head Salaries (Sections 15 to 17),

(ii)    Income from House Property (Sections 22 to 27),

(iii)   Profits and gains of business or profession (Sections 28 to 44)

(iv)  Capital gains (Sections 45 to 55)

(v)    Income from other sources (Sections 56 to 59)

Incomes earn under different heads are calculated separately and then aggregated. The aggregate of incomes computed under the above 5 heads, after applying clubbing provisions and making adjustments of set-off and carry forward of losses, is known, as gross total income (GTI) [Sec. 80B]

From the gross total income computed above, deductions allowed under Sections 80C to 80U is deducted to find the total income and on this income tax is calculated.

(i) Capital Receipts

A receipt in place of the source of income is a capital receipt. E.g., Compensation for the loss of employment is a capital receipt. The capital receipt is generally referable to fixed capital. E.g., Sale price on the sale of assets, which assessee uses as a fixed asset in his business is a capital receipt. Capital receipts are never taxable. That’s why amount received from an insurance company at the time of maturity is not taxed under Section 10(10D). Similarly, the loan taken is also not taxed. However, some of the capital receipts are taxable since they have been specifically provided in the definition of Income such as tax on Capital gains on sale of a Capital asset. 

(j) Revenue Vs Capital Receipts:

Any receipt of money can either be categorized as revenue or capital. Revenue receipts are always fully taxable unless a specific exemption has been provided for that. Capital receipts are never taxable. That’s why amount received from an insurance company at the time of maturity is not taxed under Section 10(10D). Similarly, the loan taken is also not taxed. However, some of the capital receipts are taxable since they have been specifically provided in the definition of Income such as tax on Capital gains on sale of a Capital asset.

DIFFERENCE BETWEEN CAPITAL RECEIPT AND REVENUE RECEIPT

Capital Receipt

Revenue Receipts

Ø  A capital receipt is generally referable to fixed capital. E.g., Sale price on the sale of assets, which assessee uses as a fixed asset in his business is a capital receipt

Ø  Revenue receipt refers to circulating capital. E.g., the Sale price of the stock in trade is a revenue receipt

Ø  Payment received towards the compensation for the extinction of a profit-earning source is a capital receipt

Ø  Payment received to compensate the loss of earnings is a revenue receipt

Ø  A receipt in place of the source of income is a capital receipt. E.g., Compensation for the loss of employment is a capital receipt.

Ø  A receipt in place of income is a revenue receipt

Ø  Capital receipts are exempt from tax unless they are expressively taxable like in the case of capital gains

Ø  Revenue receipts are always taxable unless expressly exempt from tax under section 10

(k) Tax Return

The tax form or forms used to file income taxes with the Internal Revenue Service (IRS). Tax returns often are set up in a worksheet format, where the income figures used to calculate the tax liability are written into the documents themselves. Tax returns must be filed every year for an individual or business that received income during the year, whether through regular income (wages), interest, dividends, capital gains, or other profits. A return of excess taxes paid during a given tax year; this is more accurately known as a "tax refund".

(l) Method of Accounting [Section 145]

As per section 145, for income-tax purposes, only one of the following two methods of accounting can be followed:

a)      Mercantile system;

b)      Cash system.

Further, the profits from business and profession will have to be computed in accordance with accounting standards which may be prescribed by the Central Government from time to time. The Central Government has since notified the following two accounting standards to be followed by all assessee who is following mercantile system of accounting:

a)      Accounting Standard I relating to disclosure of accounting policies.

b)      Accounting Standard II relating to disclosure of prior period and extraordinary items and changes in accounting policies.

(m) Tax Evasions, Tax Avoidance, Tax mitigation and Tax Planning

The methods adopted to reduce the tax liability can be broadly put into four categories: "Tax Evasion";” Tax Avoidance”, "Tax Mitigation", "Tax Planning".  The difference between these four methods sometimes becomes blurred owing to the perception of the tax authorities and/or taxpayer.

Tax Evasion: Tax Evasion term is usually used to mean 'illegal arrangements where liability to tax is hidden or ignored i.e. the taxpayer pays less than he is legally obligated to pay or by hiding income or information from the tax authority.   Thus, here the tax liability is reduced by "illegal and fraudulent" means. For example: understatement of income.

Tax Avoidance: Tax Avoidance refers to the legal means to avoid or reduce tax liability, which would be otherwise incurred, by taking advantage of some provision or lack of provision in the law.   Thus, in this case, the taxpayer tries to reduce his tax liability but here the arrangement will be legal, but may not be as per the intent of the law.   Thus, in this case, a taxpayer does not hide the key facts but is still able to avoid or reduce tax liability on account of some loopholes or otherwise. For example: misinterpreting the provisions of the IT Act.

Tax Mitigation: "Tax Mitigation" is a situation where the taxpayer takes advantage of a fiscal incentive afforded to him by the tax legislation by actually submitting to the conditions and economic consequences that the particular tax legislation entails.  A good example of tax mitigation is the setting up of a business undertaking by a taxpayer in a specified area such as Special Economic Zone (SEZ).

Tax Planning: Tax Planning is defined as "arrangement of a person's business and/or private affairs to minimize tax liability". For example availing deduction.

(n) Income Tax Authorities

Section 116 of the Income Tax Act, 1961 provides for the administrative and judicial authorities for the administration of this Act. The Direct Tax Laws Act, 1987 has brought far-reaching changes in the organizational structure. The implementation of the Act lies in the hands of these authorities. The change in designation of certain authorities and the creation of certain new posts in the structure are the main features of amendments made by The Direct Tax Laws Act, 1987. The new feature of authorities has been properly depicted in a chart on the facing page. These authorities have been grouped into two main wings:

(i)  Administrative [Income Tax Authorities] [Sec. 116]

a)      the Central Board of Direct Taxes constituted under the Central Boards of Revenue Act, 1963 (54 of 1963),

b)      Directors-General of Income-tax or Chief Commissioners of Income-tax,

c)       Directors of Income-tax or Commissioners of Income-tax or Commissioners of Income-tax (Appeals),

d)      Additional Directors of Income-tax or Additional Commissioners of Income-tax or Additional Commissioners of Income-tax (Appeals),

e)      Joint Directors of Income-tax or Joint Commissioners of Income-tax.

f)       Deputy Directors of Income-tax or Deputy Commissioners of Income-tax or Deputy Commissioners of Income-tax (Appeals),

g)      Assistant Directors of Income-tax or Assistant Commissioners of Income-tax,

h)      Income-tax Officers,

i)        Tax Recovery Officers,

j)        Inspectors of Income-tax.

(ii) Assessing Officer [Sec. 2(7A)]

"Assessing Officer" means the Assistant Commissioner or Deputy Commissioner or Assistant Director or Deputy Director or the Income-tax Officer who is vested with the relevant jurisdiction by directions or orders issued under sub-section (1) or sub-section (2) of section 120 or any other provision of this Act, and the Joint Commissioner or Joint Director who is directed under clause (b) of sub-section (4) of that section to exercise or perform all or any of the powers and functions conferred on, or assigned to, an Assessing Officer under this Act;

(o) Central Board of Direct Taxes

The Central Board of Direct Taxes (CBDT) is the highest executive authority. It is sub­ject to the overall control of the Central Government. It is authorized to discharge all those functions prescribed in the Act and those which are entrusted to it by the Central Government. The Central Board of Direct Taxes consists of a Chairman and following six Members:

a)      Chairman

b)      Member (Income-tax)

c)       Member (Legislation & Computerisation)

d)      Member (Personnel & Vigilance)

e)      Member (Investigation)

f)       Member (Revenue)

g)      Member (Audit & Judicial)

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