Basic Concept & Residential Status Prepared By Deepak C Dama

Index IntroductionDefinitions Tax & Its Types Charge of Income Tax Year (Assessment & Previous ) Person Assessee Assessee Assessment AssessmentIncome Receipt ( Capital & Revenue) Diversion & Application of Income Accounting Standard Residential Status Residential Status Scope of income in respect of residential status Tax Structure of India

Introduction Before Present Act, Income Tax Act, 1922 was prevailing Income Tax Act came in to force w.e.f. 1st April 1962 Scope extends to whole of India Act enacted by Parliament in the Twelfth year of the Republic of India The Act contains 298 sections and XIV schedules.

Tax means Fees charged by a government on a product, income or activity. Which constitute basic source of revenue to Government. Direct Taxes 1. Income Tax 2. Wealth Tax Indirect Taxes 1. Excise Duty 2. Custom Duty 3. Service Tax 4. Sales Tax / Value Added Tax Direct Tax: In Direct Tax, Person who pays and bears tax is same. It is directly paid by the person really bearing the tax. Indirect Tax : In Indirect Tax, Person who pays and bears tax is different. It is not directly paid by the person really bearing the tax

Charge Of Income Tax Tax Shall be charged on income of every person defined under section 2(31) which is earned during the previous year at rate prescribed by annual Finance Act.

Year (Assessment & Previous) Assessment Year : As Per Section 2(9), Assessment Year means a period of 12months commencing on 1 st April every year & ending on 31 st March of year in which tax is paid. Previous Year: As Per Section 3, Previous Year means the financial year immediately preceding the assessment year, in which income is earned. The rule of chargeability of income of previous year taxed in next year is not applicable to certain cases :- U/s. 172 Shipping business of non-resident U/s. 174 Persons leaving India U/s. 174A AOP / BOI / Artificial Juridical Person formed for a particular event or purpose U/s. 175 Persons likely to alienate property to avoid tax U/s. 176 Discontinued business

Person Defined by section 2(31) Includes : - Individual : In The term ‘individual’ means only a natural person, i.e., a human being. In the case of deceased person, assessment would be made on the legal representative. HUF : The expression is however defined under the Hindu Law as a family, which consists of all males lineally descendant from a common ancestor and includes their wives and unmarried daughters. Contd…

Firm : As Per Partnership Act 1932, Relationship between person who have agreed to share profit of business carried on by all any of them acting for all which should evidenced by instrument. Company : - any Indian company, - any Indian company, Private Company or Public Company any body corporate incorporated by or under the laws of a country outside India, or any body corporate incorporated by or under the laws of a country outside India, or - any institution, association or body, whether incorporated or not and whether Indian or non-Indian, which is declared by general or special order of the Central Board of Direct Taxes to be a company. Contd…

Association of Person : An association of persons means one in which two or more persons i.e. individual as well as non-individual voluntarily join for a common purpose or common action i.e. for producing income. Body of individual : Body of individual means one in which two or more persons i.e. only human being voluntarily join for a common purpose or common action i.e. for producing income. Local authority : The term means a municipal committee, district board, body of port commissioners or other authority legally entitled to or entrusted by the Government with the control or management of a municipal or local fund

Artificial Juridical Persons : This category could cover every artificial juridical person not falling under other heads. An idol, or deity would be assessable in the status of an artificial juridical person. Can the female blend her property with joint family? Can an individual of unsound mind be included in the definition of person ?

 No, The right to blending is limited to Coparceners. The Female member of joint family cannot blend separate property with joint family property.  Yes

Can a minor be a member of an ‘association of persons’ ?

Yes, if his lawful guardian gives his consent.

Assessee : Person by whom any tax or any other sum payable under the Act. can be classified in four ways : - First : A Person who is normally liable to pay tax under Act e.g. Individual, HUF, Firm etc. Second : A Person in respect of whom any proceeding is taken e.g. Assessment of amount of person’s income Third : Every person who is deemed to be assessee e.g. Representative of any assessee Fourth : Person who is deemed to be an assessee in default under any provision of the Act. e.g. Person who has not deducted Tax at Source required under provisions of Act.

Under Income Tax Act There are certain types of assessment which are … 1.Summary Assessment (Section 143(1) 2.Scrutiny Assessment (Section 143(3) 3.Best Judgment Assessment (Section 144) 4.Income Escaping Assessment (Section 147) : Entire process of computation of income & levy of tax on it. Assessment : Entire process of computation of income & levy of tax on it.

Income : Generally Income means Periodically monetary return coming from definite sources. It Consider : Business Gift Illegal Income Tax free Income Application of Income Negative Income (Loss) Awards As Professional Capacity Not Consider : Pin Money Personal Gift (Up to some extent) Dharmada receipt Diversion of income Capital receipt otherwise than taxable Contd…

Act says, “Income is inclusive and not exhaustive”. Covers 82 List in I of 7 th Schedule of Constitution For Example : - 1.Income from Salaries (Section 15) 2.Income from House Property (Section 22) 3.Income from Business / Profession (Section 28) 4.Income from Capital Gains (Section 45) 5.Income from Other Sources (Section 56) Income-tax Act levies tax on ‘income’, a term which is nowhere defined.

Capital Receipt Revenue Receipt A receipt referable to fixed capital would be a capital receipt. E.g. Receipt on sale of fixed asset, Receipt in lieu of source of income A receipt referable to circulating capital would be a revenue receipt. E.g. Sales of goods in ordinary course of business, Compensation on termination of an agreement Golden Rule For Taxation of Receipts  Capital receipts are exempt from tax unless they are expressly taxable  Revenue receipts are taxable unless they are expressly exempt from tax. Fixed capital is one which the owner keeps in his possession for making profit Circulating Capital is one which turned over, yields income or loss

Diversion Of IncomeApplication Of Income Income is received by person other than the person who is actually entitled for it Income is received by person Person who is actually entitled for it Income which is diverted before It reaches to assessee it is not taxable e.g. Amount towards certain fund for the purpose of returning to it Income which is required to applied to discharge of obligation after such reaches to assessee it is taxable e.g. Portion of salary retained by employer for compulsory deposit fund

Accounting Standard under Income Tax Act Given Accounting Standard are relevant only for Person who has income U/s. 28 & U/s. 56 In respect of above mentioned standard one should keep following points mind : (i) Prudence - Provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information; (ii) Substance over form - The accounting treatment and presentation in financial statements of transactions and events should be governed by their substance and not merely by the legal form; 1. Disclosure of Accounting Polices Contd…

Accounting Standard under Income Tax Act Prior Period items means income or expense which arise in the current period as result of errors or omission in preparation of financial statement of one or more prior periods. Extraordinary Items means income or expenses that arise from events or transactions that are clearly distinct from the ordinary activities of the enterprise and, therefore, are not expected to recur frequently or regularly. Contd… 2. Disclosure of Prior period and Extraordinary items and changes in accounting policies : iii) Materiality - Financial statements should disclose all material items, the knowledge of which might influence the decisions of the user of the financial statements.

Accounting Standard under Income Tax Act Change in Accounting Polices means change in an accounting estimate that has a material effect in previous year shall be disclosed and quantified. Any change in an accounting estimate, which is reasonably expected to have a material effect in year subsequent to previous year, shall also be disclosed.

Can different Methods of Accounting be adopted for different BUSINESSES?

If an assessee is carrying on more than one business, he can follow Cash System for one business and Mercantile (Accrual) System for the other business. Yes

Residential Status (Section 6) Chargeability of Income Tax depends upon Residential Status of Person Persons included for the determination of residential status are …  Individual  Hindu Undivided Family  Firm  Association of Persons or Body of Individual  Company  Local Authority  Artificial Juridical Person

Status of Individual Resident Non Resident i) He has been in India during the previous year for a total period of 182 days or more, Or ii) He has been in India during the 4 years immediately preceding the previous year for a total period of 365 days or more and has been in India for at least 60 days in the previous year. Resident and ordinarily Resident Resident but not ordinarily resident He is a resident in any 2 out of the last 10 years preceding the any relevant previous year His total stay in India in the last 7 years preceding the relevant previous year is730 days or more. If any of the conditions are not satisfied & Any One

Exception to Basic Condition : - (1) Indian citizens, who leave India in any previous year as a member of the crew of an Indian ship or for purposes of employment outside India, or (2) Indian citizen or person of Indian origin engaged outside India in an employment or a business or profession or in any other vocation, who comes on a visit to India in any previous year A person is said to be of Indian origin if he or either of his parents or either of his grandparents were born in undivided India.

Status of HUF Resident Non Resident Control & Management of affairs of HUF is wholly or partly in India. Resident and ordinarily Resident & He is a resident in any 2 out of the last 10 years preceding the relevant previous year, and (ii) His total stay in India in the last 7 years preceding the relevant previous year is730 days or more. Control & Management of affairs of HUF is wholly out side India. Karta Satisfies both condition

Status of Firm,AOP Local Authority & Artificial Juridical Person ResidentNon Resident Control & Management of affairs of Firm/AOP or other person is wholly or partly in India. Control & Management of affairs of Firm/AOP or other person is wholly outside India. Firm, Association of Person & Other Person can not be “ordinarily resident” or “not ordinarily resident”

Status of Company Resident Non Resident Indian Company Control & Management of affairs of Company is wholly outside India. Company can not be “ordinarily resident” or “not ordinarily resident” Foreign Company Control & Management of affairs of Company is wholly in India.

Scope of Income In respect of Residential Status For Chargeability of Tax Incidence Particulars Resident & Ordinarily Resident Resident but Ordinarily Resident Non Resident Income received in India √√√ Deemed to be received in India √√√ Accrued or Arisen in India √√√ Deemed to accrue or arise in India √√√ Income which accrues or arises outside India from a business controlled from or profession set up in India. √√X Other than Above √XX Mere Remittance (Not Income) XXX

1) What Are You Doing? Ans.: Business. (Pay Professional Tax) 2) What Are You Doing In Business? Ans.: Selling The Goods (Pay Sales Tax/VAT) 3) Where Are You Getting Goods? Ans.: From Other State/Abroad (Pay Central Sales Tax, Custom Duty & Octroi 4) What Are You Getting In Selling Goods? Ans.: Profit (Pay Income Tax 5) Where You Manufacturing The Goods? Ans.: Factory ( Pay Excise Duty) Tax Structure In India

6) Do You Have Office / Warehouse/ Factory? Ans.: Yes (Pay Municipal & Fire Tax) 7) Where Are You Taking Your Client For Lunch & Dinner? Ans.: Hotel (Pay Food & Entertainment Tax) 8) Have You Taken Or Given Any Service/S? Ans.: Yes (Pay Service Tax) 9) Do You Have Any Wealth? Ans.: Yes (Pay Wealth Tax) 10) Have You Purchased House? Ans.: Yes (Pay Stamp Duty & Registration Fee)

Tax Structure In India 11) Any Additional Tax? Ans.: Yes (Pay Educational, Additional Educational & Surcharge On All The Central Govt.'S Tax ) 12) Delayed Any Time Paying Any Tax? Ans.: Yes (Pay Interest & Penalty)

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