Indian Income Tax Basic Concepts

Basic Concepts
INTRODUCTION
Tax is today an important source of revenue for governments in all the countries. It has become inevitable imposition because it has great potentials for raising funds for meeting the development and defence needs of a nation.
DIRECT AND INDIRECT TAXES
•Direct Taxes: A tax which is born and paid directly by the person on whom it is impose is a direct tax e.g., Income Tax, Wealth Tax, Gift Tax, etc. It is directly paid by the tax payer to the government without any intermediary and it comes from own pocket.
•Indirect Taxes: If the liability of payment of tax can be passed on by the tax payer to some other person it is an indirect tax e.g. Sales Tax, Value Added Tax (VAT) etc. It is not directly paid by the person on whom it is levied, but is paid indirectly through the medium of other persons.
Source of Income tax –Law in India
Income Tax Act 1961
Annual Finance Act (During Annual Union Budget)
Income Tax Rules, 1962
CBDT(Central Board of Direct Taxes) Circulars & Clarifications
Judicial Decisions
INCOME TAX ACT 1961
1. PERSON [ Section 2(31) ]
The word “Person” is a very wide term and embraces in itself the following :
Individual: It refers to a natural human being whether Male or Female , Minor or Major.
Hindu Undivided Family (HUF): It is a relationship created due to operation of Hindu Law. The Manager of HUF is called “Karta” and its member are called ‘Coparceners’.
Company: It is an artificial person registered under the Indian Companies Act 1956.
Firm: It is an entity which comes into existence as a result of partnership agreement.
Association of Persons (AOP) or Body of Individuals (BOI): Co-operative societies are the example of such persons. When persons combine together to carry on a joint enterprise and they do not constitute partnership under the ambit of law, they are assessable as an Association of Persons. An A.O.P. can have firms, companies, associations and individuals as its members.
A Body of Individual (B.O.I.) cannot have non-individuals as its members. Only natural human being can be members of a Body of Individuals.
The basic difference between AOP and BOI is:
In BOI there are only individuals but in AOP there can be any type of persons.
Local Authority: Municipality, Panchayat, Cantonment Board, Port Trust etc. are called Local Authority.
Artificial Judicial Person: Statutory Corporations which have a legal existence in the eyes of law like Life Insurance Corporation, University etc. are called Artificial Judicial Persons.
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.4.
2. ASSESSEE [ Section 2(7) ]
‘Assessee’ means a Person by whom any Tax or any other sum of money is payable under this Act.
3. ASSESSMENT
It is a process of determining the correctness of income of an assessee and of assessing the amount of tax payable by him and procedure for imposing tax liability.
4. Assessment Year [Sec. 2 (9)]
“Assessment Year” means the period of 12 months commencing on the 1st day of April every year. In India, the Govt. maintains its accounts for a period of 12 months i.e. 1st April to 31st March every year. As such it is known as Financial Year. At present the Assessment Year 2013-2014 (1-4-2013 to 31-3-2014) is going on.
5. Previous Year [Sec. 3]
Previous Year is the Financial Year preceding the Assessment Year e.g. for Assessment Year 2013-2014 the Previous Year should be the Financial Year ending 31st March 2013. Income of a previous year is taxed in its relevant assessment year. At present the previous Year 2012-2013 (1-4-2012 to 31-3-2013) is going on.
Cases When Income of Previous Year is Taxable in the same Previous Year & not in the immediately following Assessment Year: The rule that the income of the previous year is taxable as the income of the immediately following assessment year has certain exceptions:
I. Income of non-residents having business of carrying passengers, livestock, mail or goods shipped at a port in India & not having an agent in India.
II. Income of persons leaving India either permanently or for a long period of time during the current Assessment Year (A.Y.) or shortly thereafter with no present intention of returning to India.
III. Income of bodies [Association of Persons (AOP) or a Body of Individuals (BOI) or an artificial judicial person] formed or established or incorporated for short duration or for a particular event or purpose that it is likely to get dissolved in the A.Y. in which it is formed or immediately after such A.Y.
IV. Income of a person trying to alienate (sell, transfer or dispose) his/her assets with a view to avoiding payment of tax.
V. Income of a discontinued (wound up/ended) business.
6. INCOME-TAX
Tax collected by the central Government for each financial year on the total taxable income of an assesse earned during the previous year is called Income-tax.

7. INCOME

An assesses may get income from different sources, e.g.- salaries, house property income, profits and gains of business or profession, capital gains & income from other sources like interest on securities, lottery winnings, races etc.

8. GROSS TOTAL INCOME

It is the aggregate taxable income under the different heads of income such as income from salary, income from house property, income from profits and gains of business or profession, income from capital gains and income from other sources. The total income computed in accordance with the provision of the act before making any deductions under Sec 80 C to 80 U is called Gross Total Income.

9. TOTAL INCOME

Total income is arrived after making various deductions from gross total income under section 80 C to 80 U. It is computed on the basis of residential status of an Assesse.

COMPUTATION OF TAX
1. INCOME FROM SALARIES XXXX
2. INCOME FROM HOUSE PROPERTY XXXX
3. INCOME FROM BUSINESS/PROFESSION XXXX
4. INCOME FROM CAPITAL GAINS XXXX
5. INCOME FROM OTHER SOURCES XXXX GROSS TOTAL INCOME XXXXX DEDUCTIONS U/S 80 C to 80 U XXX TAXABLE INCOME XXXXX

10. Revenue Vs. Capital Expenditure

Revenue Expenditure: Revenue expenditure is outlay or expenses incurred in the day to day running of a company. It is incurred for 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. Examples: staff wages and salaries, legal and professional fees, insurance, administrative expenses, most of marketing and public relations expenses.

Capital Expenditure: Capital expenditure represents outlay on fixed assets or 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. All Capital expenditures will have effect which lasts longer than a financial year. All capital expenditure is recorded on the balance sheet. Examples: 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 capital or revenue in nature consider the following points: 1. Acquisition of Fixed Assets vs. 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. Increase vs. Maintenance- Capital expenditure increases earning capacity of a business. Revenue expenditure, on the other hand, maintains the current earning capacity of a business.
4. Non-recurring v. Recurring- usually capital expenditure is a non-recurring outlay, whereas revenue expenditure is a recurring outlay.

11. Revenue Vs. Capital Receipts:
Any receipt of money can either be categorized as revenue or capital.
DIFFERENCE BETWEEN CAPITAL RECEIPT AND REVENUE RECEIPT
1. Source
Capital receipt is the amount received from the sale of assets, shares and debentures. Revenue receipt is the amount received from the sale of goods and services.

2. Nature
Capital receipt is of non-recurring nature. Revenue receipt is of recurring nature.

3. Impact
Main items of capital receipt are capital and loan, which affect financial position of the business. Main items of revenue receipt are sale of merchandise, discount and commission, which affect operating results of the business.

4. Treatment
Capital receipt is shown on the liabilities side of the balance sheet. Revenue receipt is shown on the credit side of the trading and profit and loss accounts.
5. Taxability
Capital receipts are exempt from tax unless they are expressively taxable like in the case of Capital Gains. Revenue receipts are always taxable unless they are expressly exempt from tax under section 10.
12. Exempted Incomes (Section 10)
These incomes do not from part of total income either fully or partially and hence no tax is payable on such incomes. These incomes are given u/s 10(1) to 10(32) of the Act. Some of these are:
1. Agricultural Income u/s. 10(1)
2. Share of Profit from partnership firm u/s. 10(2A)
3. Gratuity u/s. 10(10)
4. House Rent Allowance u/s. 10 (13A)
5. Compensation received at the time of Voluntary Retirement u/s. 10(10C)
6. Amount received under Life Insurance Policy u/s 10(10D)
7. Payment received from Provident Fund u/s. 10 (11), (12)
8. Interest on Securities u/s. 10(15)
9. Educational Scholarships u/s. 10(16)