Professional Documents
Culture Documents
Previous Year In The Case Of Newly Set-Up Business/ Profession- In the case of
newly set-up business/ profession or in the case of a new source of income, the
previous year is determined as follows-
Tax rate of assessment year- Income of previous year is chargeable to tax in the next
following assessment year at the tax rates applicable for the assessment year. This
rule is, however, subject to some exception.
Rates fixed by Finance Act- Tax rates are fixed by the annual Finance Act and not
by the Income-tax Act. For instance, tax rates for the assessment year 2005-06 are
fixed by the Finance Act, 2005. If, however, on the first day of April of the
assessment year, the new Finance Bill has not been placed on the statue book, the
provisions in force in the prevailing assessment year or the provisions proposed in
the Finance Bill before parliament, whichever is more beneficial to the assessee, will
apply until the new provision becomes effective.
Provisions as on April 1 of the assessment year applicable for computing income for
the assessment year.
Rule Two- For other purposes- The above rule is applicable only for the
purpose of computing taxable income. To put it differently, it can be said
that the provisions applicable on April 1 of the assessment year are relevant
only for determining the taxable income for the assessment year.
Meaning of income:
Income is a periodically monetary returns with some sort of regularity. It
maybe recurring in nature. It may be broadly defined as the true increase in the
amount of wealth, which comes to a person during a fixed period of time.
Receipt vs. Accrual- Income arises either on receipt basis or an accrual basis.
Income may accrue to a taxpayer without its actual receipt. Moreover, in
some cases, income is deemed to accrue or arise to a person without its actual
accrual or receipt.
Illegal income- The income-tax law does not make any distinction between
income accrued or arisen from a legal source and income tainted with
illegality.
Surplus from mutual activity- A person cannot make taxable profit out of a
transaction with himself. Income must, therefore, come from outside.
Incomes should be real and not fictional- Income means real income and not
fictional income. A person cannot make a profit by trading with himself or
out of transfer of funds/ asset from one pocket to another pocket. Similarly,
income does not arise in a transaction between head office and branch office
even if goods are invoiced at a price higher than the cost price. Likewise,
income does not accrue or arise at the time of revaluation of asset.
Source of income need not exist in the assessment year- It is not necessary
that a source of income should exist in the assessment year. If there is an
income during the previous year , it is chargeable to tax for the following
assessment year even if the source of income does not exist during the
assessment year.
Pin money- Pin money received by wife for her dress/ personal expenses and
small savings made by a woman out of money received from her husband for
meeting household expenses is not treated as her income
Types of accounting methods- Mainly there are two types of accounting methods –
mercantile system and cash system
Cash system- Under cash system of accounting, revenue and expenses are
recorded only when received or paid. For instance, income received during the
previous year is included in taxable income whether it is earned during the
previous year or it is earned during the year preceding or following the previous
year. Similarly, expenditure is deductible from the taxable income only if it is
paid during the previous year, irrespective of the fact whether it relates the
previous year or not. Income under cash system of accounting is, therefore,
excess of receipts over disbursements during the previous year.
If all the aforesaid conditions are satisfied, 7.5 percent of amount received (or
receivable) on account of such carriage (including demurrage charge or handling
charge or similar amount) by the non-resident shall be deemed to be the income of
the non-resident.
For this purpose, 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 assessing officer is satisfied that it will be
difficult to submit the return before departure and if satisfactory arrangement for
payment of tax has been made).Unless tax has been paid (or satisfactory
arrangements have been made for payment thereof), a part clearance shall not be
guaranteed by the collector of customs.
Under the above noted provisions of section 172, 7.5 percent of amount of freight,
fare, etc., is collected and not in the immediately following assessment year.
1. It appears to the assessing officer that an individual may leave India during the
current assessment year or shortly after its expiry.
3. The total income of such individual up to the probable date of his departure from
India shall be chargeable to tax in that assessment year.
a. regular assessment for the previous year 2004-05 (i.e., income of the period
April 1, 2004 to March 31, 2005)
b. assessment for the income of the period April 1, 2005 to March 31,2006; and
c. assessment for the income of the period April 1, 2006 to April 12,2006.
The above three income assessments shall be completed separately. For the first
assessment , tax shall be chargeable at the rates applicable for the assessment year
2005-06. For the second and third assessments, tax shall be chargeable at the rates
applicable for the assessment year 2006-07 which are given in part 3 of the First
schedule to Finance Act, 2005.
Associations/ bodies formed for short duration [Sec 174A]- The provisions of
Section 174A are given below-
2.It appears to the Assessing Officer that the above-mentioned association, body,
etc., is likely to be dissolved in the assessment year (i.e.. April to March) in which
such association of persons or body of individuals or artificial juridical person was
formed are established or incorporated are immediately after such assessment year.
3. The total income of such association or body or juridical person for the period
from the expiry of the previous year for that assessment year upto the date of its
dissolution shall be chargable to tax in that assessment year.
a. Regular assessment for the previous year 2004-05 (i.e. income for the period
April 10, 2004 to march 31,2005 ) ;and
b. Assessment for the income of the period April 1 , 2005 to September 10,2005.
The above two income assessments shall be completed separately. For the first
assessment, tax shall be chargeable at the rates applicable for the assessment year
2005-06. For the second assessment, tax shall be chargeable at the rates applicable
for the assessment year 2006-07 which are given in part-3 of the first schedule to
Finance Act, 2005.
Persons like to transfer property to avoid tax (Section 175)- The salient
features of Section 175 are given below.
Provisions illustrated- On December 19, 2005, the assessing officer comes to know
that X Ltd. Is likely to dispose of a house property during January 2006 with a view
to avoiding payment of income- tax. A notice is issued by the assessing officer on
December 28, 2005 to X.Ltd.Under Section 175 to submit return of income of the
period commencing on April 1, 2005 to December 28, 2005.
In this case , income from April 1, 2005 to December 28,2005 is chargable to tax in
the assessment year 2005-06 and tax will be calculated at the rate applicable for the
assessment year 2006-07 given in part 3 of the first schedule to Finance Act, 2005.
Provisions illustrated- X discontinues his business on August 10, 2005 in this case,
income will be taxable as follows-
Basic condition (a) He is in India in the previous year for a period of 182 days or
more.
Basic condition (B) He is in India for a period of 60 days or more during the
previous year and 365 days or more during 4 years
immediately preceding the previous year
Exceptions:
Exception one
Exception two
Where a person is in India only for a part of a day, the calculation of physical
presence in India in respect of such broken period should be made on an
hourly basis. Data is not available to calculate the period of stay of an
individual in India in terms of hours, then the day on which he enters India
as well as the day on which he leaves India shall be taken into account as stay
of the individual in India
How to find out residential status of a Hindu Undivided Family [Sec.6 (2)]
A Hindu undivided family (like an individual) is either resident in India or
non-resident in India. A resident Hindu undivided family is either ordinarily
resident.
Additional condition (1) Karta has been resident in India in at least 2 out of
10 previous years immediately preceding the
relevant previous year
Additional condition (2) Karta has been present in India for a period of
730 days or more during 7 years immediately
preceding the previous year
How to determine residential status of firm and association of persons [Sec .6(2)]
A partnership firm and an association of persons are said to be resident in
India if control and management of their affairs are wholly or partly situated within
India during the relevant previous year. They are however, treated as non-resident
in India if control and management of their affairs are situated wholly outside
India.
What is the relationship between residential status and incidence of tax [Sec.5]
Under the Act, incidence of tax on a taxpayer depends on his residential
status and also on the place and time of accrual or receipt of income.
Indian income and foreign income- In order to understand the relationship between
residential status and tax liability, one must understand the meaning of “India
income” and “ Foreign income”.
Foreign income- If the following two conditions are satisfied, then such income is
“Foreign income”.
a. Income is not received (or not deemed to be received) in India: and
b. Income does not accrue or arise (or does not deemed to accrue or
arise) in India.
Receipt vs. Remittance- The “receipt” of income refers to the first occasion when the
receipient gets the money under his control.Once an amount is received as income ,
any remittance or transmission of the amount to another place does not result in
“ receipt” at the other place.
Actual receipt vs. deemed receipt- It is not necessary that an income should be
actually received in India in order to attract tax liability. An income deemed to be
received in India in the previous year is also included in the taxable income of the
assessee.
INCIDENCE OF TAX
In the case of individual / HUF/ or Company
2. Motor- cars
But “assets” does not include the following:
a. Motor-car used in the business of running on hire.
b. Motor-car held as stock- in- trade.
4. Urban land.
But “assets” does not include the following:
a. Urban land on which construction of a building is not permissible under
any law.
b. Land occupied by any building constructed with the approval of
appropriate authority.
c. Land held for industrial purposes for a period of 2 years from the date of
acquisition.
d. Land held by the assessee as stock-in – trade for a period of 10 years from
the date of acquisition.
Meaning of urban land: is a land situated in a specified area u/s 2(1A) of the
Income Tax Act i.e.
a. Situated within municipality etc which has a population of not less than
10,000 as per the latest census on the first day of the previous year.
b. Situated within 8 kilometers from the notified local limits.
5. Cash in hand
In case of individual or HUF any amount in excess of Rs.50,000. For others,
any amount not recorded in the books of accounts
6. Jewellery, bullion, furniture, utensils and any other article mmade wholly or
partly of gold, silver, platinum or other precious metals
The asset may be located anywhere but must belong to the assessee and held
by him on the valuation date.
For the purpose of taxability, the assessee must have the right of ownership
over the property and not mere possession.
Motor- cars cover all motor vehicle other than heavy vehicle. Hence buses,
trucks, tempos are not considered as motor cars. However, jeep sport utility
vehicle (SUV), multi utility vehicle (MUV) are classified as Motor-car.
Aircrafts used by the assessee for its own business is not treated as
commercial purpose. For example, aircrafts used for transporting goods of
the assessee, or carrying its directors or executives or employees shall not be
treated as used for commercial purposes.
Valuation date:
It refers to 31st March immediately preceding the assessment year.
Wealth Tax is charged on the amount of net wealth as on the valuation date.
The law in force on the first day of the assessment year, and not that on the
valuation date, is applicable.
Chargeability of net wealth:
Wealth Tax is chargeable @ 1% on the net wealth in excess of Rs.15 lakhs
The amount of wealth tax, interest, penalty, fine or any other sum payable
under the Wealth Tax Act shall be rounded off to the nearest rupee.
Exercise
2. Y Ltd. is engaged in the construction of residential flats. For the valuation date
31.3.2009, furnishes the following date and requests you to compute the taxable
wealth.
a. land in urban area (construction is not permitted as per municipal laws in force)
Rs. 20 lakhs
b. motor cars ( in the use of the company) Rs.5 lakhs
c. jewellery(investment) Rs.10 lakhs
d. cash balance(as per books)Rs.2 lakhs
e. bank balance(as per Books) Rs.3 lakhs
f. guest House (situated in rural area)Rs.4 lakhs
g. residential flat occupied by the managing director( annual remuneration of whom
is Rs.6 lakhs excluding perquisites)Rs.8 lakhs
h. residential house let-out 100 days in the financial years.7 lakhs
i. loan obtained for purchase of motor car Rs.2 lakhs
j. loan obtained for purchase of jewellery Rs.2 lakhs