Knowledge is power or ignorance is strength is an unsolved puzzle. Here strength stands for the capability to resist and power represents the ability to control. The traditional wisdom recommends says; it is better to know something and control ahead, instead of resisting and wrestling later. Taxes are inevitable and income-tax is no exception. So, basic knowledge of income-tax is an absolute necessity. It is very difficult to condense the Income-tax law in few pages, yet the basic concepts and taxpayer’s obligations thereunder are summarized for offering a bird’s eye view on the subject.
Income-tax is an annual tax on ‘income’. On the basis of various judicial principles, the term ‘income’, can be described as ‘a periodical monetary return regularly coming from a definite source’. Income of a ‘previous year’ (financial year) is chargeable to tax in the next following year i.e. ‘assessment year’ at the tax prescribed rates.
‘Assessee’ means a person by whom any tax or penalty or interest, is payable under the Income-tax Act (the Act) including deemed assessee. Tax is chargeable on every person including an individual, a HUF, a Company, a firm, an AOP or BOI, local authority and every artificial juridical person. However, any person not falling in this category may still be liable to tax.
As per Section 14, income of a person is computed under five heads of income viz. (I)Salaries, (II) Income from House Property (III) Profits & Gains of Business or Profession (IV) Capital Gains (V) Income from Other Sources. The aggregate income under all these heads is termed as ‘gross total income’ i.e. the total income before making any deduction under sections 80C to 80U of the Act.
I- Income from Salary
The income chargeable under the head ‘salaries’ is computed after including (i) income from salary (ii) income by way of allowances and (iii) taxable value of perquisite.
(i) Salary is chargeable to tax on "due" or "receipt" basis, whichever is earlier and includes wages, annuity or pension, gratuity, bonus, fees, commission, perquisites or profits in lieu of salary, advance salary, leave encashment, etc. Salary received in advance or arrear salary is taxable on receipt basis. However, relief u/s.89 can be claimed in this respect.
(ii) ‘Allowance’ is a fixed amount of money given in addition to salary for some particular purpose connected with the service or compensation for unusual service conditions. House Rent Allowance (partly), entertainment allowance (partly) special allowances, limited to the amount of expenditure incurred in the given context are exempt.
(iii) ‘Perquisite’ is a benefit that is given to an employee in addition to his regular salary and allowances. Valuation of perquisites is made as per Rule 3 of the Income-tax Rules. Some perquisites; such as medical facilities, free meals in office up to Rs. 50 per employee, telephone, perquisites by Government paid outside India, sums paid to pension scheme, deferred annuity schemes, group insurance schemes and premium for personal accident policy are not taxable as per the Act/Rules or CBDT instructions.
II. Income from house property.
Income is taxable under the head ‘Income from house property’ if it is derived (a) from property consisting of any buildings or lands appurtenant thereto (b) the assessee is owner of the property and (c) the property is not used by the owner for the purpose of his business or profession, the profits of which are chargeable to income tax. Tax is charged on the ‘inherent income yielding capacity’ of the property and not on the basis of rent. The standard selected as a measure of the income to be taxed is ‘annual value’ computed under provisions of the Act. The following deductions are allowable against the annual value:
a. Municipal Tax, etc. - allowable only if borne and paid by the owner
b. Standard deduction – 30% of Annual Value
c. Interest on borrowed capital
In the case of one self-occupied house property, the annual value of the SOP or part thereof shall be nil, however, deduction for interest on borrowed capital is allowable up to Rs.1,50,000/- subject to requisite compliances. In respect of all other house(s), even though self-occupied, notional income will be assessed after allowing the admissible deductions.
III. Profits and gains of business or profession
As per Section 28 of the Act, nine types of income are chargeable to tax under the head ‘Profits and gains of business or profession’:
(a) profits and gains of any business or profession,
(b) compensation
(c) income of trade, professional associations
(d) profit on sale of import entitlement licences, cash compensatory incentives, drawback of duty,
(e) value of any benefit arising from business or profession
(f) interest, salary, bonus, commission or remuneration received by a partner,
(g) sums received or receivable for not carrying on business,
(h) sums received under a keyman insurance policy
(i) income from speculative transaction.
Income from the above activities is computed as per provisions of sec. 29 to 44DB of the Act. While computing total income, the total income as per Profit & Loss A/c. is taken as basis and the amounts, which are debited but are not allowable as deduction are added back and the expenses which are not debited but are allowable are deducted. Similarly, incomes which are exempt are also deducted and incomes which are not credited but are taxable are added. Claims towards payment of interest, royalty, fees, etc. payable out side India if stipulated conditions are not fulfilled and TDS is not made, payments are attracting TDS provisions made without TDS, Fringe Benefit Tax , Income-tax, Wealth-tax, tax on perquisite paid by employer, amounts not deductible in case of partnership firm u/s.40(b), AOP or BOI u/s.40(ba), unreasonable payments u/s.40A(2), payments exceeding Rs.35,000/- (in a day) to transporters, Rs.20,000//- (in a day) to others made against Section 40A(3) and provision of unpaid liability u/s.43B are expressly disallowable.
IV- Capital gains
Any profit or gain arising from the transfer of a capital asset during a previous year is chargeable to tax under the head “capital gains” if it is not eligible for exemption. It is charged only if the asset is (i) a "capital asset" (ii) there is a "transfer" of such capital asset and (iii) it arises either profits or gains or losses out of such transfer.
Capital assets are of two types (i) Short term capital assets (ii) Long term capital asset. Short term capital asset means a capital asset held by an assessee for not more than 12 months in the case of shares, securities, units, bonds and in other cases 36 months, immediately prior to the date of its transfer. Other capital assets are Long term. Long term capital gain is generally taxable at a lower rate. The important event for charging capital gains to tax is ‘transfer’. Section 47 gives details of transactions which do not constitute transfer. Capital Gains are generally charged to tax in the year in which "transfer" takes place.
The capital gains on transfer of following capital assets, qualify for exemption subject to certain conditions:-
(a) Residential House property held by Individual or HUF for 3 years, if reinvested in residential house within 1 year before or 2 years (if purchased) or 3 years (if constructed), after the date of transfer, the amount of gains or the cost of new asset, which ever is less is exempt.
(b) Agricultural land used for agricultural purposes and held by individual for two years, if reinvested in agricultural lands.
(c) Industrial land or building or any right held for two years transferred under compulsory acquisition, if reinvested in industrial land, building or any right therein within three years after the date of transfer.
(d) Any long term capital asset, if reinvested the whole or any part of capital gain, within six months from the date of transfer in NHAI or REC notified bonds redeemable after three years.
(e) Any capital asset not being a residential house held by individual or HUF, reinvested in residential house. Similarly, the capital gain arising from industrial land or building are plant and machinery/ foreign exchange asset are also exempt subject to certain conditions.
V- Income from other sources
It is residuary head of Income which must satisfy the following conditions:-
(a) There must be an income
(b) This income is NOT exempt under the IT Act 1961; and
(c) This income is not chargeable to tax under the other four heads of income, discussed above. Income by way of Dividend, Wining from lotteries, etc, Employees contribution towards staff and welfare scheme, Interest on securities, Rental income of machinery, plant, furniture, Rental income of letting out of plant, machinery or furniture along with building & two letting are not separable. Some receipts under key-man insurance policy, gift from unrelated persons exceeding Rs.50,000/-and Interest on compensation or enhanced compensation, are always taxable under the head income from other sources.
Special provisions for assessment of HUFs, Firms, LLPs, AOPs, Cooperative Societies, Charitable trusts, Companies,:-
HUFs- Under the Income-tax Act, a Hindu Undivided Family, is treated as a separate entity for the purpose of assessment. Almost all the provisions applicable to individual assessee are applicable to HUF. The expression ‘family’ defined under the Hindu law is applicable and it is assessed in that status, if two conditions namely; (a) there is a coparcenership and (b) there is a joint family property, are satisfied. Jain, Baudha and Sikh families are treated as HUF for the purposes of the Act.
Firms including Limited Liability Partnerships
Partnership firm as defined under the Indian Partnership Act is a separate assessable entity under the Act. Persons who have entered into partnership with one another are individually called partners and collectively a firm. The share of the partner in the income of the firm is not included in computing his total income. Any salary, bonus, commission or remuneration, etc. paid or payable to the partners, subject to certain conditions, is allowed as deduction to the firm but it is taxable in the hands of the partners. The maximum rate of interest payable to partner is restricted to 12%.
A.O.P or B.O.I
Association of persons or Body of Individuals is a separate taxable entity under the Act. While computing the income of these entities, no deduction is allowed in respect of interest, salary, bonus, commission or remuneration, etc. paid to its members. If the shares of the members are determined, the income will be charged to tax at the tax rate as applicable to ‘individual’. Where the shares of members are indeterminate, tax will be charged at the maximum marginal rate and if the income of any of its members is chargeable to a rate, higher than maximum marginal rate, tax will be charged at such higher rate.
CO_OPERATIVE SOCIETIES
It means a society registered under the Co-operative Societies Act. It is assessable as a separate entity and while computing total income of a society, deductions u/s.80P are allowed on profits from specified activities, subject to compliance to relevant provisions.
CHARTIABLE TRUST
Section 2(15) of the Act defines ‘Charitable purpose’ to include relief of the poor, education, medical relief, preservation of environment, monuments, etc. and any other object of public utility and trusts formed for these purposes are separate taxable entities. Specific provisions for registration under the Act, filing of audited accounts, accumulation of income, etc. stipulated in sections 11,12 and 13 of the Act are required to be compiled with for recognition and exemptions allowable to charitable trust.
COMPANIES
A company defined u/s. 2(17) is a separate entity for the purpose of assessment. Section 115JB contains special provision for assessment of companies to tax and a company may be required to pay Minimum Alternative Tax (MAT), which is worked out on the basis of book profit, that is obtained after making stipulated adjustments to the profit as per Profit & Loss Account. If tax chargeable under the normal provisions is less than tax chargeable under the special provisions, the provisions of MAT shall prevail and the assessee is required to pay MAT @18.5% of the book profits.
VARIOUS OBLIGATIONS UNDER THE INCOME TAX ACT
Subject to various provisions of the Act, an assessee is obliged
Income-tax is an annual tax on ‘income’. On the basis of various judicial principles, the term ‘income’, can be described as ‘a periodical monetary return regularly coming from a definite source’. Income of a ‘previous year’ (financial year) is chargeable to tax in the next following year i.e. ‘assessment year’ at the tax prescribed rates.
‘Assessee’ means a person by whom any tax or penalty or interest, is payable under the Income-tax Act (the Act) including deemed assessee. Tax is chargeable on every person including an individual, a HUF, a Company, a firm, an AOP or BOI, local authority and every artificial juridical person. However, any person not falling in this category may still be liable to tax.
As per Section 14, income of a person is computed under five heads of income viz. (I)Salaries, (II) Income from House Property (III) Profits & Gains of Business or Profession (IV) Capital Gains (V) Income from Other Sources. The aggregate income under all these heads is termed as ‘gross total income’ i.e. the total income before making any deduction under sections 80C to 80U of the Act.
I- Income from Salary
The income chargeable under the head ‘salaries’ is computed after including (i) income from salary (ii) income by way of allowances and (iii) taxable value of perquisite.
(i) Salary is chargeable to tax on "due" or "receipt" basis, whichever is earlier and includes wages, annuity or pension, gratuity, bonus, fees, commission, perquisites or profits in lieu of salary, advance salary, leave encashment, etc. Salary received in advance or arrear salary is taxable on receipt basis. However, relief u/s.89 can be claimed in this respect.
(ii) ‘Allowance’ is a fixed amount of money given in addition to salary for some particular purpose connected with the service or compensation for unusual service conditions. House Rent Allowance (partly), entertainment allowance (partly) special allowances, limited to the amount of expenditure incurred in the given context are exempt.
(iii) ‘Perquisite’ is a benefit that is given to an employee in addition to his regular salary and allowances. Valuation of perquisites is made as per Rule 3 of the Income-tax Rules. Some perquisites; such as medical facilities, free meals in office up to Rs. 50 per employee, telephone, perquisites by Government paid outside India, sums paid to pension scheme, deferred annuity schemes, group insurance schemes and premium for personal accident policy are not taxable as per the Act/Rules or CBDT instructions.
II. Income from house property.
Income is taxable under the head ‘Income from house property’ if it is derived (a) from property consisting of any buildings or lands appurtenant thereto (b) the assessee is owner of the property and (c) the property is not used by the owner for the purpose of his business or profession, the profits of which are chargeable to income tax. Tax is charged on the ‘inherent income yielding capacity’ of the property and not on the basis of rent. The standard selected as a measure of the income to be taxed is ‘annual value’ computed under provisions of the Act. The following deductions are allowable against the annual value:
a. Municipal Tax, etc. - allowable only if borne and paid by the owner
b. Standard deduction – 30% of Annual Value
c. Interest on borrowed capital
In the case of one self-occupied house property, the annual value of the SOP or part thereof shall be nil, however, deduction for interest on borrowed capital is allowable up to Rs.1,50,000/- subject to requisite compliances. In respect of all other house(s), even though self-occupied, notional income will be assessed after allowing the admissible deductions.
III. Profits and gains of business or profession
As per Section 28 of the Act, nine types of income are chargeable to tax under the head ‘Profits and gains of business or profession’:
(a) profits and gains of any business or profession,
(b) compensation
(c) income of trade, professional associations
(d) profit on sale of import entitlement licences, cash compensatory incentives, drawback of duty,
(e) value of any benefit arising from business or profession
(f) interest, salary, bonus, commission or remuneration received by a partner,
(g) sums received or receivable for not carrying on business,
(h) sums received under a keyman insurance policy
(i) income from speculative transaction.
Income from the above activities is computed as per provisions of sec. 29 to 44DB of the Act. While computing total income, the total income as per Profit & Loss A/c. is taken as basis and the amounts, which are debited but are not allowable as deduction are added back and the expenses which are not debited but are allowable are deducted. Similarly, incomes which are exempt are also deducted and incomes which are not credited but are taxable are added. Claims towards payment of interest, royalty, fees, etc. payable out side India if stipulated conditions are not fulfilled and TDS is not made, payments are attracting TDS provisions made without TDS, Fringe Benefit Tax , Income-tax, Wealth-tax, tax on perquisite paid by employer, amounts not deductible in case of partnership firm u/s.40(b), AOP or BOI u/s.40(ba), unreasonable payments u/s.40A(2), payments exceeding Rs.35,000/- (in a day) to transporters, Rs.20,000//- (in a day) to others made against Section 40A(3) and provision of unpaid liability u/s.43B are expressly disallowable.
IV- Capital gains
Any profit or gain arising from the transfer of a capital asset during a previous year is chargeable to tax under the head “capital gains” if it is not eligible for exemption. It is charged only if the asset is (i) a "capital asset" (ii) there is a "transfer" of such capital asset and (iii) it arises either profits or gains or losses out of such transfer.
Capital assets are of two types (i) Short term capital assets (ii) Long term capital asset. Short term capital asset means a capital asset held by an assessee for not more than 12 months in the case of shares, securities, units, bonds and in other cases 36 months, immediately prior to the date of its transfer. Other capital assets are Long term. Long term capital gain is generally taxable at a lower rate. The important event for charging capital gains to tax is ‘transfer’. Section 47 gives details of transactions which do not constitute transfer. Capital Gains are generally charged to tax in the year in which "transfer" takes place.
The capital gains on transfer of following capital assets, qualify for exemption subject to certain conditions:-
(a) Residential House property held by Individual or HUF for 3 years, if reinvested in residential house within 1 year before or 2 years (if purchased) or 3 years (if constructed), after the date of transfer, the amount of gains or the cost of new asset, which ever is less is exempt.
(b) Agricultural land used for agricultural purposes and held by individual for two years, if reinvested in agricultural lands.
(c) Industrial land or building or any right held for two years transferred under compulsory acquisition, if reinvested in industrial land, building or any right therein within three years after the date of transfer.
(d) Any long term capital asset, if reinvested the whole or any part of capital gain, within six months from the date of transfer in NHAI or REC notified bonds redeemable after three years.
(e) Any capital asset not being a residential house held by individual or HUF, reinvested in residential house. Similarly, the capital gain arising from industrial land or building are plant and machinery/ foreign exchange asset are also exempt subject to certain conditions.
V- Income from other sources
It is residuary head of Income which must satisfy the following conditions:-
(a) There must be an income
(b) This income is NOT exempt under the IT Act 1961; and
(c) This income is not chargeable to tax under the other four heads of income, discussed above. Income by way of Dividend, Wining from lotteries, etc, Employees contribution towards staff and welfare scheme, Interest on securities, Rental income of machinery, plant, furniture, Rental income of letting out of plant, machinery or furniture along with building & two letting are not separable. Some receipts under key-man insurance policy, gift from unrelated persons exceeding Rs.50,000/-and Interest on compensation or enhanced compensation, are always taxable under the head income from other sources.
Special provisions for assessment of HUFs, Firms, LLPs, AOPs, Cooperative Societies, Charitable trusts, Companies,:-
HUFs- Under the Income-tax Act, a Hindu Undivided Family, is treated as a separate entity for the purpose of assessment. Almost all the provisions applicable to individual assessee are applicable to HUF. The expression ‘family’ defined under the Hindu law is applicable and it is assessed in that status, if two conditions namely; (a) there is a coparcenership and (b) there is a joint family property, are satisfied. Jain, Baudha and Sikh families are treated as HUF for the purposes of the Act.
Firms including Limited Liability Partnerships
Partnership firm as defined under the Indian Partnership Act is a separate assessable entity under the Act. Persons who have entered into partnership with one another are individually called partners and collectively a firm. The share of the partner in the income of the firm is not included in computing his total income. Any salary, bonus, commission or remuneration, etc. paid or payable to the partners, subject to certain conditions, is allowed as deduction to the firm but it is taxable in the hands of the partners. The maximum rate of interest payable to partner is restricted to 12%.
A.O.P or B.O.I
Association of persons or Body of Individuals is a separate taxable entity under the Act. While computing the income of these entities, no deduction is allowed in respect of interest, salary, bonus, commission or remuneration, etc. paid to its members. If the shares of the members are determined, the income will be charged to tax at the tax rate as applicable to ‘individual’. Where the shares of members are indeterminate, tax will be charged at the maximum marginal rate and if the income of any of its members is chargeable to a rate, higher than maximum marginal rate, tax will be charged at such higher rate.
CO_OPERATIVE SOCIETIES
It means a society registered under the Co-operative Societies Act. It is assessable as a separate entity and while computing total income of a society, deductions u/s.80P are allowed on profits from specified activities, subject to compliance to relevant provisions.
CHARTIABLE TRUST
Section 2(15) of the Act defines ‘Charitable purpose’ to include relief of the poor, education, medical relief, preservation of environment, monuments, etc. and any other object of public utility and trusts formed for these purposes are separate taxable entities. Specific provisions for registration under the Act, filing of audited accounts, accumulation of income, etc. stipulated in sections 11,12 and 13 of the Act are required to be compiled with for recognition and exemptions allowable to charitable trust.
COMPANIES
A company defined u/s. 2(17) is a separate entity for the purpose of assessment. Section 115JB contains special provision for assessment of companies to tax and a company may be required to pay Minimum Alternative Tax (MAT), which is worked out on the basis of book profit, that is obtained after making stipulated adjustments to the profit as per Profit & Loss Account. If tax chargeable under the normal provisions is less than tax chargeable under the special provisions, the provisions of MAT shall prevail and the assessee is required to pay MAT @18.5% of the book profits.
VARIOUS OBLIGATIONS UNDER THE INCOME TAX ACT
Subject to various provisions of the Act, an assessee is obliged
- to apply for PAN and quote the same in all returns, correspondences, challans, etc.
- to file/ revise the return of income for each assessment year within time
- to pay advance tax
- to pay self-assessment tax
- to pay tax demand raised within 30 days.
- to make TDS and deposit the same and file quarterly returns of TDS and issue certificates as per provision of the Act
- to make TCS and deposit the same and file quarterly returns of TCS and issue certificates as per provision of the Act
- to comply with various notices/ summon issued by Income Tax Department
- to furnish accurate particulars of income and not to conceal income
- to keep and maintain proper books of account. Professionals to main books of account as prescribed under Rule 6F.
- to get the accounts audited and obtain audit report as required,
- to keep and maintain information and documents in respect of international transactions to get accounts audited and furnish report u/s 92E
- not to accept or repay loans or deposits of aggregate amounts exceeding Rs.20,000/- otherwise through account payee cheque or demand draft
- to cooperate in search and survey proceedings.
- to furnish Annual Information Return (AIR).
Rates of Income-tax for
A.Y.2013-14
1- For Individuals/HUF/AOP/BOI
Income
|
Rate (%)
|
Up to Rs.200,000
|
NIL
|
Rs.200,001 to Rs.500,000
|
10%
|
Rs.500,001 to Rs.1,000,000
|
20%
|
Above Rs. 1,000,000
|
30%
|
Threshold limit
for individuals of 60 years to 80 years of age: Rs.2,50,000/-
Threshold limit
for individuals of 80 years and above: Rs.5,00,000/-
2- For
Firms/LLPs – 30% Education Cess 3% - Total 30.90%
3- For Domestic companies -30%; Surcharge 5%, Edu.Cess.3% Total
32.445%
MAT @18.5%
4- Co-operative Societies-
Income
|
Rate %
|
Edu.Cess %
|
Total %
|
Up to 10000
|
10
|
3
|
10.3
|
10001 to 20000
|
20
|
3
|
20.6
|
20001 and above
|
30
|
3
|
30.9
|
5- Advance tax is payable if it exceeds Rs.10,000/-
Due date of
Instalment
On or before
|
Amount payable at % of tax
|
|
For companies
|
For others
|
|
15th
June
|
15%
|
--
|
15th
September
|
30%
|
30%
|
15th
December
|
30%
|
30%
|
15th
March
|
Balance
|
Balance
|
This gives broad outline of the relevant topics and for detailed information, it is suggested that one must go through the Govt. publications or Income-tax web site ‘www.incometax india.gov.in’.
(Published in Souvenir released on the occasion of 9th Delegates Conference of Income-tax Employees Federation, MP & Chhattisgarh, Bhopal)
(Published in Souvenir released on the occasion of 9th Delegates Conference of Income-tax Employees Federation, MP & Chhattisgarh, Bhopal)
-S. Rajeswara Rao,
Advocate
