Chapter 2 : Previous Year, Charge of Income, Scope of Total Income, Residential Status (Section 3 to 9)

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1 Chapter 2 : Previous Year, Charge of Income, Scope of Total Income, Residential Status (Section 3 to 9) Advance Direct Tax and Service Tax [Sub code : 441]

2 Learning Objectives Kinds of Taxable Income Previous Year Scope of Total Income Resident, Ordinarily Resident and Non-Resident Income deemed to be received Income deemed to accrue or arise in Incidence of tax for different taxpayers 2

3 Previous Year Previous year means the financial year immediately preceding the assessment year. Where a business or profession is newly set up, or a source of income has newly come into existence the Previous Year shall be The period beginning with the date of setting up of the business or profession (or a source of income newly so arising) and ending on the following 31 st March The assessment year is the following financial year to the previous year. 3

4 Charge of Income Tax Income-tax shall be charged on every person in respect of his total income of the previous year for any assessment year at any rate or rates in force in accordance with and subject to the provisions of this Act It is well-settled that income attracts as soon as it accrues. The application or destination of the income has nothing to do with its accrual or taxability. 4

5 Contd It is a fundamental rule of the law of taxation that, unless otherwise expressly provided income cannot be taxed twice. Same income cannot be taxed in two different years. Any effort at tax planning must be legitimate. Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honorable to avoid the payment of tax by resorting to dubious methods. Court can go behind and look into substance of any transaction. 5

6 Scope of Total Income Total income in case of a Resident shall be all income which is received or is deemed to be received in or accrues or arises or is deemed to accrue or arise to him in accrues or arises to him outside The term 'deemed' brings within the net of chargeability income not actually accruing but which is supposed notionally to have accrued. An Income accrues when assessee acquires right to receive it. Income may accrue to an assessee without actual receipt of the same If the assessee acquires a right to receive the income 6

7 Contd Total income in case of a Person Not Ordinarily Resident in shall be all income which accrues or arises to him from within from outside only if it is derived from a business controlled in or a profession set up in The total income of a person who is a Non-Resident includes all income from whatever source derived which is, received or is deemed to be received in in such year by or on behalf of such person; or accrues or arises or is deemed to accrue or arise to him in during such year 7

8 Resident in An individual is resident in in any previous year, if he a. is in in that year for 182 days or more; or b. been in for 365 days out of 4 years preceding that year AND is in for a period or periods amounting in all to 60 days or more in that year A Hindu undivided family, firm or other AOP is resident in in any previous year in every case except where during that year the control and management of its affairs is situated wholly outside. A company is resident in in any previous year, if a. it is an n Company; or b. during that year, the control and management of its affairs is situated wholly in. 8

9 Not Ordinary Resident in A person is said to be not ordinarily resident in in any previous year if such person is a. an individual who has been a non-resident in in 9 out of the 10 previous years preceding that year, or b. has during the 7 previous years preceding that year been in for a period of 729 days or less; An Hindu undivided Family, is said to be not ordinarily resident, whose Manager a. has been a non-resident in in 9 out of the 10 previous years preceding that year, or b. has during the 7 previous years preceding that year been in for a period of 729 days or less; 9

10 Income Deemed to Accrue or Arise in The following incomes shall be deemed to accrue or arise in from any business connection in, or from any property in, or from any asset or source of income in, or through the transfer of a capital asset situate in. Income which falls under the head "Salaries", if it is earned in. income chargeable under the head "Salaries" payable by the Government to a citizen of for service outside 10

11 Contd a dividend paid by an n company outside income by way of Interest payable by Government of Resident of income by way of Royalty payable by Government of Resident of income by way of Fess for Technical Services payable by Government of Resident of 11

12 Incidence of Tax Individual & HUF Resident and Ordinarily Resident in Resident but Not Ordinarily Resident in Non Resident in [1] n Income Taxable in Taxable in Taxable in [2] Foreign Income - If it is business income and business is controlled wholly or partly from - If it is income from profession which is set up in - If it is business or professional Income and business or profession is set up and controlled from outside Taxable in Taxable in Not Taxable in Taxable in Taxable in Not Taxable in Taxable in Taxable in Not Taxable in - Any other foreign income Taxable in Taxable in Not Taxable in 12

13 Incidence of Tax Any other Tax Payer Resident in Non-Resident in n Income Taxable in Taxable in Foreign Income Taxable in Not Taxable in 13