UNIT-1

BASIC CONCEPTS

INCOME
Income

is the subject matter of tax which comes under income tax act 1961. The definition of income is given in section2(24) of this act, acc. to this the term income mainly includes profits and gains, dividends,value of any perquisite or profits in lieu of salary, allowances, income from business and profession, capital gains, winning from lotteries, crossword puzzles etc.

 Besides

the items listed under this section some other receipts and benefits are also treated as income under income tax act fact, the word income covers receipts in shape of money or moneys worth which arise with certain regularity or expected regularity from a definite source, for eg. salaries, income from house property, capital gains, profit and gains of business and profession.

In

AGRICULTURAL INCOME

a)

Under section 10(1) of the act agriculural income is exempt from income tax act. The constitution of india does not empower the central govt. to impose income tax on agr. income yet state govt. can impose tax on it but no state in india has imposed tax till now. Section2(1A) defines asAny 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 agricultural or by the process employed to render the produce fit for the market or by sale of such produce by a cultivator or reciever of rent in kind. c) Any income derived from any building owned and occupied by the rent reciever, satisfying following conditions The building is in the immediate vicnity of the agricultural land.

 It

is occupied by the cultivator or reciever of rent or revenue. It is used as storage house or out house. The land is assessed to land revenueor a local rate. If it is not like that then it should be situated outside the urban area.

Essential Elements
1.

2.
3.

Income must be derived from land Land must be situated in India Land must be used for agricultural purpose

TYPES OF AGR. INCOME

1)

2)
3) 4) 5) 6)

Rent or revenue derived from land Income from agricultural Income from operations to render the produce fit for market Income from sale of the produce Income from farm house used for agricultural purpose Income from saplings seedlings

PARTLY AGRICULTURAL INCOME

a)

b)
c) d)

Profits of sugar mills and other industries Income from the manufacturer of rubber Income from manufacturer of coffee Income from manufacturer of tea

CASUAL INCOME
It

means such income, the receipt of which is accidental and without any stipulation. It is in the nature of an unexpected wind fall. For eg- Lottery, crossword puzzles, card games, gambeling or betting etc.

ASSESSMENT YEAR
Acc. to section 2(9) of the income tax act assessment year means the period of 12 months commencing on the 1st day of april every year and ending to 31si march next is called an assessment year. This is also called the financial year of government. This is the year in which the income of the previous year is assessed for the purpose of imposing tax.

PREVIOS YEAR
As

per sec2(34) previous year is defined in section 3. It is the income of year which is charged in income tax during the current financial year. Previous year means the financial year immediately preceding the assessment year.

Provisions Regarding Previous Year

Preceding

financial year Previous year for newly setup business Previous year for a new source of income Previous year for old business or profession Previous year for life insurance business Previous year for share in firms profit

Exceptions Of General Rule of previous year

Shipping

business of non resident Persons leaving India Association formed for short duration Person likely to transfer property to avoid tax Discontinued business

GROSS TOTAL INCOME

Section 14 says that all types of income shall be classified in the following 5 headsi. Salaries ii. Income from house property iii. Profits and gains of business and profession iv. Capital gains v. Income from other provisions

GROSS TOTAL INCOME

Taxable

income of each head is computed by aggregating the incomes under each head as per the act and then deducting their deductions. Taxable income of each head is called as the net taxable income of heads now all taxable incomes are aggregated. So, this final amount is called Gross total income.

TOTAL INCOME
As

per section 2(45) the total income of an assesse is computed by deducting all deductions from the gross total income, under sec 80c. Total income= Total of taxable incomes from all heads of income Deduction under sec 80c

PERSON
Acc to sec 2(31) person includeso An individual o A hindu undivided family o A company o A firm o An assosiation of persons wheather incorporated or not eg. A club, a co operative society o A local authority such as Municipality, cantonment board, District board etc. o Every artificial juridical person, not falling within any of the above for eg. A Hindu idol

TAX PLANNING
It

means to reduce tax burden by managing and planning of sources related to the tax. By Prof DaltonTax planning is a scientific way to pay minimum tax by taking advantage of exemptions and incentives given under the government poliy.

Objectives
To

reduce tax liability Elimination of tax liability Legal and moral process Financial security of future Beneficial for government also

TAX EVASION

When a person reduces his total income by not disclosing the information regarding his real income by making false claim, so that his tax liability is reduced, is known as tax evasion. It is not only illegal but also immoral, anti social and anti national practice. There are many provisions in law to impose high penalties on tax evaders.

Ways to reduce Taxable income

By not showing his total taxable income To reduce income by showing fake expenditure To treat family and personal expenses as business expenses and show less profit By showing unrealistic bad debts To hide profit earned on the sale of shares To sell property at higher price and showing them at less price To enjoy unreasonable exemptions, eg- receive fake reciepts from trust without making actual donation

TAX AVOIDANCE

Tax avoidance is an art of reducing tax without actually breaking the law. It is a way in which people take advantage of short comings or drawbacks in the tax provisions. For eg. Land is assumed as capital asset and profit acquired on the sale or transfer of the land is taxable as capital gain. Some people convert their land as stock in trade and showed profit as profit relating to business bcoz many expenses are allowed here.