1. Basic concepts of Income Tax

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1 Quick review of the chapter: Sections Particulars Sec. 2(7) Assessee Sec. 2(9) Assessment year Sec. 2(24) Income Sec. 2 (31) Person Sec. 2(34) & 3 "Previous Year" defined Sec. 80B(5) Gross total income 1.1: Basics of Income Tax CA-IPCC: Taxation Made Easy 1. Basic concepts of Income Tax Income Tax Law includes: The Income-tax Act, 1961 (amended up-to-date) The Income-tax Rules, 1962 (amended up-to-date) Circulars, clarifications issued from time to time by the CBDT Judicial decisions The provisions of income-tax are contained in the Income-tax Act, 1961 which extends to the whole of India and became effective from Annual amendments: Every year a Budget is presented before the Parliament by the Finance Minister. One of the most important components of the Budget is the Finance Bill, which declares the financial proposals of the Central Government for the next financial year. The Bill contains various amendments which are sought to be made in the areas of direct and indirect taxes levied by the Central Government. The Finance Bill also mentions the rates of income-tax and other taxes. When the Finance Bill is approved by both the Houses of Parliament and receives the assent of the President, it becomes the Finance Act. The provisions of such Finance Act are thereafter incorporated in the Income-tax Act, Central Excise Act, etc. Besides the annual amendments, sometimes amendments are brought through an amendment Act, e.g. Income Tax Amendment Act/Taxation Amendment Act, etc. Scheme of Taxation: Every person whose total income of the previous year exceeds the maximum amount which is not chargeable to income-tax is an assessee and chargeable to income-tax in the assessment year at the rate or rates prescribed in the Finance Act and the Income Tax Act, 1961 for the relevant assessment year. However his total income shall be determined on the basis of his residential status in India. Besides the rates which are given in the Finance Act every year, there are certain incomes which are taxable at the special rates given in the Income-tax Act itself e.g. short/long-term capital gain is 15%/20% and income from lotteries, crossword puzzles, etc. are 30% for Assessment Year : Important Definitions Person Sec. 2(31) Person includes: An Individual A Hindu Undivided Family (HUF) A Company A Firm An AOP or a BOI, whether incorporated or not A local authority Every artificial juridical person not falling within any of the preceding sub-clauses. Assessment Year Sec. 2(9) It means the period of 12 months commencing on the first day of April every year. Previous Year Sec. 3 It means the previous year as defined in Sec. 3. According to Sec. 3, previous year means the financial year immediately preceding the assessment year. Note: First previous year for a business/profession newly set-up during the financial year or for a new source of income, starts from the date of setting up of the business or from the date the new source came into existence). However, subsequent previous years shall always be a financial year. Previous Year Assessment Year Income of previous year is taxed in the assessment year. Sometimes income of the previous year is taxed in the same financial year in which income is earned. In other words, previous year and assessment year are same Shipping business of non-residents [Sec. 172] Assessment of persons leaving India [Sec. 174] Where an association of persons or a body of individuals or an artificial juridical person formed or established for a particular event or purpose is likely to be dissolved in the previous year in which it is formed or established or immediately thereafter, he shall tax such AOP or BOI in the same previous year in which income is earned. [Sec. 174A] Assessment of persons likely to transfer property to avoid tax [Sec. 175] Discontinued business [Sec. 176]: Where a business or profession is discontinued in any previous year, the income of the period starting from 1st April of the previous year to the date of discontinuance may be taxed in the same previous year. 1

2 Income includes Sec. 2(24) 1. Profit & gains 2. Dividend 3. Voluntary contribution received by a trust for religious/charitable purpose 4. Voluntary contribution received by any university/other education institutions 5. Value of any perquisites or profit in lieu of salary received by an employee 6. Any special allowance or benefit received by an employee 7. Value of benefit or perquisite obtained from company: By the director of the company OR By a person who has substantial interest in company OR By a relative of the director 8. Income derived by trade, professional or similar association from specific services performed for its members 9. Profit on sale of import license 10. Drawback of custom or excise duty 11. Cash assistance received or receivable by any person against exports under any scheme of the Government 12. Value of any benefit or perquisites, whether convertible into money or not, arising from business or profession 13. Any interest, salary, bonus, commission or remuneration due to or received by a partner from its partnership business 14. Any capital gains chargeable under Sec Profit and gain from any ins. Business 16. Any winning from lotteries, crossword puzzles, races including horse races, card games and other games of any sort 17. Any sum received by the assessee from his employees as contribution to any Provident Fund or superannuation fund or employees state insurance or other funds welfare of the employees 18. Any sum received under a Key-man ins. policy 19. Any sum received in cash or kind, under an agreement for: Not carrying out any activity in business Not sharing any know-how, patent right, copy right, trademark, license, franchise etc. 20. Receipt of any sum of money (without consideration) or receipt of any property (without/inadequate consideration) Gross Total Income (GTI) Sec. 14 As per Sec. 14, all income shall, for purposes of Income-tax and computation of total income, be classified under the following heads of income: Salaries Income from House Property Profits and Gains of Business or Profession Capital Gains Income from Other Sources Aggregate of incomes computed under the above five heads, after applying clubbing provisions and making adjustments of set off and carry forward of losses, is known as Gross Total Income (GTI). Total Income (taxable income) The total income of an assessee is computed by deducting from the gross total income, all deductions permissible under Chapter VIA of the Income Tax Act i.e., deductions under Sec. 80C to 80U. Total income so computed shall be rounded off to the nearest ten. 1.3: Income Tax Rates for Individual/HUF/AOP/BOI and every artificial juridical person Upto ` 1,80,000 NIL ` 1,80,000 to ` 5,00,000 10% ` 5,00,000 to ` 8,00,000 20% Above ` 8,00,000 30% For resident women below the age of 60 years at any time during the previous year Upto ` 1,90,000 NIL ` 1,90,000 to ` 5,00,000 10% ` 5,00,000 to ` 8,00,000 20% Above ` 8,00,000 30% For resident individuals of the age of 60 years or more but less than 80 years at any time during the previous year Upto ` 2,50,000 NIL ` 2,50,000 to ` 5,00,000 10% ` 5,00,000 to ` 8,00,000 20% Above ` 8,00,000 30% For resident individuals of the age of 60 years or more but less than 80 years at any time during the previous year Upto ` 5,00,000 NIL ` 5,00,000 to ` 8,00,000 10% Above ` 8,00,000 30% Note: No surcharge is payable by the above assesse. Education 2% & Secondary and Higher Secondary Education Cess 1% on income tax shall be chargeable Co-operative society Upto ` 10,000 NIL ` 10,000 to ` 20,000 10% Above ` 20,000 30% Note: No surcharge is payable by the above assesse. Education 2% & Secondary and Higher Secondary Education Cess 1% on income tax shall be chargeable Firms/Limited Liability Partnerships (LLPs)/Local authority 30% Note: No surcharge is payable by the above assesse. 2

3 Education 2% & Secondary and Higher Secondary Education Cess 1% on income tax shall be chargeable Company Company Particular Surcharge Rate Domestic Total income exceeds ` 1,00,00, % 30% Foreign Total income exceeds ` 1,00,00, % 40% Note: Surcharge shall be charged only if total income exceeds ` 1 crore. Education 2% & Secondary and Higher Secondary Education Cess 1% on income tax shall be chargeable Special rates of Income Tax On Short-Term Capital Gain (STCG) covered under Section 111A 15% On Long-Term Capital Gain (LTCG) covered under Section % On winning of lotteries, crossword puzzles, card games etc. [Sec. 115BB] 30% Marginal relief: In the case of every company having a total income exceeding ` 1 crore, the total amount payable as income-tax and surcharge on such income shall not exceed the total amount payable as income-tax on a total income of ` 1 crore by more than the amount of income that exceeds ` 1 crore. 1.4: Assumptions Note: If nothing mentioned clearly in question only then make following assumptions. No. Particulars Assumption Income from Salary 1. Govt./Non-Govt. Assume non-govt. employee 2. Gratuity Employee is not covered under Payment of Gratuity Act 3. Pension Un-commuted pension 4. Employees PF contribution Basic salary is gross without deducting employees contribution 5. Dearness Allowances It is not under terms of employment 6. Dearness Pay It is under terms of employment 7. Specified Allowances If expenditure not given assume that fully expended for official purpose (Travelling Allowances, Daily Allowances) 8. HRA, city in which house taken on rent Assume 40% (For any other place) 9. Rent free Accommodation If nothing is mentioned or only Fair Rent Value given than assume that owned by employer and if Actual Rent or Lease Rent given then not owned by employer 10. Rent free Accommodation If owned by employer and population not given then assume that in city of more than 25,00, Interest free loan If rate of interest of SBI not given assume to be 12% p.a. 12. Education facility Employer has no contract with the school and it is not maintained by employer 13. Medical facility In any other hospital and exemption upto ` 15,000 Income from House Property 14. Interest for self-occupied property Loan was taken before 1/4/ Recovery of unrealized rent Covered u/s 25A Income from Other Sources 16. Debentures Non-listed at any recognized stock exchange Set-off and carry forward of Losses 17. Business Losses Non-speculation Business Losses 1.5: Meaning of Relatives in different cases No. Particulars Meaning of relative Income from Salary 1. Prescribed fringe benefits Member of household (a) Spouses (b) Children and their spouses (c) Parents (d) Servants and dependents 2. Medical facilities and leave travel concession (a) The spouses & children (b) Parents, brothers and sisters of the individual wholly or mainly dependent on the individual Profit & Gains from Business and Profession 3. Payment to specified persons [Sec. 40A(2)] Specified person means relative, partner, director or person having substantial interest or relative of any such person (Any relative i.e., spouse, any brother, sister lineal ascendant or descendant of such individual) Income from Other sources 4. Gifts (in money) [Sec. 56(2)] (i) Spouse of the individual (ii) Brother or sister of the individual (iii) Brother or sister of spouse of the individual (iv) Brother or sister of either of the spouse or the individual (v) Any lineal ascendant or descendant of the individual (vi) lineal ascendant or descendant of spouse of the individual (vii) Spouse of the person referred to in clauses (b) to (f) 3

4 Clubbing of income 5. Substantial Interest Individual, spouse, brother, sister or lineal ascendant & descendant Deductions 6. Life Insurance Premium [Sec. 80C] LIP on life of himself, spouse and children. In HUF: any member of family 7. Medical Insurance Premium [Sec. 80D] (1) Individual, spouse, parents (whether dependent or not), dependent children (2) In case of HUF: in the name of any member 8. Sec. 80DD & Sec. 80DDB (i) Individual, spouses, children, parents, brother and sister (ii) In case of HUF, any member of HUF 9. Sec. 80E Spouse, children of individual 1.6: Computation of Total Income Determination of residential status Classification of income under 5 heads House Property Salaries Business & Profession Capital Gain Other Sources Aggregate of Income Application of clubbing provision Set-off & carry forward Provisions Gross Total Income Deductions from GTI Total Income 4

5 2. Scope of Total Income & Residential Income Quick review of the chapter: Sections Particulars Sec. 2(45) Total Income defined Sec. 6 Resident in India Sec. 6(1) Rules for determining the residential status of an individual Sec. 6(2) Rules for determining the residential status of an HUF, Firm, AOP, BOI Sec. 6(3) Rules for determining the residential status of a company Sec. 6(4) Rules for determining the residential status of firm/aop/boi Sec. 6(5) Deemed resident Sec. 6(6) Not ordinarily resident in India Sec. 7 Incomes received or deemed to be received Sec. 8 Dividend Income Sec. 9 Income deemed to accrue or arise in India 2.1: Scope of Total Income Total Income Sec. 2(45) Total Income means the total amount of Income referred to in Sec. 5, computed in the manner laid down in the Income-tax Act. Total income is computed under five heads of income. Income computed under each head is thereafter aggregated and the aggregate amount is known as Gross Total Income. From Gross Total Income, certain deductions are allowed under Sec. 80C to 80U and the balance income after deductions is known as Total Income. Scope of total income (Incidence of tax) Sec. 5 Total income of an assessee cannot be computed unless we know his residential status in India during the previous year. Apply your knowledge: (1) Residential status is to be determined for (a) Previous year (b) Assessment year (c) Accounting year (2) Total income of a person is determined on the basis of his (a) Residential status in India (b) Citizenship in India (c) None (d) Both (a) and (b) Residential Status Individual & HUF Others Resident Non-resident Resident Non-resident Ordinarily Resident Not Ordinarily Resident 2.2: Total Income in case of different cases Total income in the case of Resident in India (resident and ordinarily resident in case of individual or HUF) [Section 5(1)] The following incomes from whatever source derived form part of Total Income in case of resident in India/ordinarily resident in India: (a) Any income which is received or is deemed to be received in India in the relevant previous year by or on behalf of such person; (b) Any income which accrues or arises or is deemed to accrue or arise in India during the relevant previous year; (c) Any income which accrues or arises outside India during the relevant previous year. Total income in the case of a Resident but not Ordinarily Resident in India (In the case of individuals and HUF only) [Section 5(1) and its proviso] The following incomes from whatever source derived form part of Total Income in the case of resident but not ordinarily resident in India: (a) Any income which is received or is deemed to be received in India in the relevant previous year by or on behalf of such person; (b) Any income which accrues or arises or is deemed to accrue or arise to him during the relevant previous year; (c) Any income which accrues or arises to him outside India during the relevant previous year if it is derived from a business controlled in or a profession set up in India. Total income in the case of Non- Resident [Section 5(2)] The following incomes from whatever source derived form part of Total Income in the case of Non-Residents in India: (a) Any income which is received or is deemed to be received in India during the relevant previous year by or on behalf of such person; (b) Any income which accrues or arises or is deemed to accrue or arise to him in India during the relevant previous year. 5

6 2.3: Residential Status CA-IPCC: Taxation Made Easy 2.3.1: Residential Status of an Individual [Sec. 6(1)] Basic Rules: Residential status is determined for each category of persons separately. Residential status is always determined for the every previous year separately. If a person is resident in India in a previous year relevant to an assessment year in respect of any source of income, he shall be deemed to be resident in India in the previous year relevant to the assessment year in respect of each of his other source of income. [Sec. 6(5)] A person may be a resident of more than one country for any previous year. Citizenship of a country and residential status of that country are separate concepts. It is the duty of the assessee to place all material facts before the assessing officer to enable him to determine his correct residential status. When an individual is said to be resident in India? An individual is said to be resident in India if he satisfies any one of the following two conditions: (1) He is in India for a period or periods amounting in all to 182 days or more in the relevant previous year; OR (2) He is in India for 60 days or more during the relevant previous year and has been in India for 365 days or more during 4 previous years immediately preceding the relevant previous year. When an individual is said to be resident and ordinarily resident in India? An individual who is resident in India, shall be resident and ordinarily resident in India if he satisfies both the following conditions (a) He has been resident in India for at least 2 out of 10 previous years immediately preceding the relevant previous year. This means that he must have satisfied any one of the conditions, with exceptions (given above) for being a resident for at least 2 out of 10 previous years immediately preceding the relevant previous year. and (b) He has been in India for 730 days or more, during 7 previous years immediately preceding the relevant previous year. When an individual is said to be resident but not ordinarily resident in India?[Section 6(6)(a)] An individual who is resident in India is said to be "not ordinarily resident in India" if he does not satisfy any or both of the conditions mentioned in clause (a) and (b). When an individual is said to be non-resident in India? [Section 2(30)] An individual is said to be a non-resident, if he is not a resident in India. Concession in certain cases There are two concessions given to following persons: (1) In case of an individual, who is a citizen of India and who leaves India in any previous year for the purpose of employment outside India, the period of 60 days, in condition No. 2, supra, shall be substituted by 182 days, in other words, in this case second condition shall not be applicable and he shall not be a resident of India unless his stay in India is at least 182 days during the relevant previous year in which he leaves India. Similarly in case of an individual who is a citizen of India and who leaves India in any previous year as a member of the crew of an Indian ship, the period of 60 days will be substituted by 182 days. (2) In case of an individual, who is a citizen of India, or is a person of Indian origin, who, being outside India, comes on a visit to India in any previous year, the period of 60 days in the second condition given above, will be substituted by 182 days, in other words, in this case also second condition shall not be applicable and he shall not be a resident unless his stay in India is at least 182 days during the relevant previous year in which he visits India. Apply your knowledge: A citizen of USA has been staying in India since He leaves India on on a visit to USA and returns on Determine his residential status for the previous year Important Note: In computing the period of 182 days, the day he enters India and the day he leaves India should both be treated as stay in India. However, in borderline cases where stay in India is near about 182 days his stay in India has to be calculated on hourly basis and a total of 24 hours will be taken as one day. For example, if a person is in India for 82 days and 6 hours and then again he comes to India for 20 days and 20 hours, his stay in India will be taken as 103 days. The individual is treated as being in India if he is at any place within the territorial waters of India. Test yourself: 1. Indian citizen and businessman Rajnikanth, who resides in Jaipur, went to Germany for employment purposes on and came back to India on He has never been out of India in the past. (a) Determine residential status of Shri Raj Gopal for the assessment year (b) Will your answer be different if he had gone on a leisure trip? 2. Ricky Pointing, an Australian cricketer has been coming to India for 100 days every year since : 6

7 (a) Determine his residential status for the assessment year (b) Will your answer be different if he has been coming to India for 110 days instead of 100 days every year. 3. X came to India from America for the first time on He returned to his home country after staying in India upto Will he be a resident in India for the assessment years and ? 2.3.2: Residential Status of Hindu Undivided Family [HUF] [Sec. 6(2)] When HUF is said to be resident in India? A HUF is said to be resident in India in any previous year in every case except where during that year the control and management of its affairs is situated wholly outside India. When is HUF said to be a resident and ordinarily resident in India? The HUF shall be said to be resident and ordinarily resident in India if the Karta of the HUF satisfies both the following conditions: (a) He (Karta) must be resident in at least 2 out of 10 previous years immediately preceding the relevant previous year and (b) He must be in India for at least 730 days during 7 previous years immediately preceding the relevant previous year. When HUF is said to be non-resident in India? A HUF is said to be non-resident in India if during the previous year, the control and management of its affairs is situated wholly outside India. In other words it will be non-resident in India if no part of the control and management of its affairs are situated in India. Control and management refers to the decisions taken regarding affairs of the HUF. The control and management lies at the place where decisions regarding the affairs of the HUF are taken. When is HUF said to be resident but not ordinarily resident in India? [Section 6(6)(b)] A HUF, which is resident in India, is said to be resident but not ordinarily resident in India during the relevant previous year, if the manager (Karta) of the HUF does not satisfy any one, or both, of the conditions mentioned in clause (a) and (b) : Residential Status of Firm, Association of Persons (AOP), Body of Individuals (BOI) and of other persons (except companies) [Sec. 6(2) and 6(4)] When is a Firm, AOP, BOI, etc. said to be resident in India? A firm, AOP, etc. is said to be resident in India in any previous year in all cases except where during that year the control and management of its affairs is situated wholly outside India. In the case of a firm, the control and management is in the hands of the partners and therefore, if the partners generally meet in India regarding the affairs of the firm, then the firm is said to be resident in India. When is a Firm, AOP, BOI, etc. said to be Non-Resident in India? If the control and management of the affairs of these entities is wholly out of India during the relevant previous year then they are said to be non-resident. In other words, to be Non-Resident, no part of the control and management should be in India : Residential Status of a Company [Sec. 6(3)] When is a company said to be resident in India? A Company is said to be a resident in India in any previous year if: (a) It is an Indian company, OR (b) During the relevant previous year, the control and management of its affairs is situated wholly in India. When is a company said to be Non-resident in India? A Company will be a non-resident in any previous year if: (a) It is not an Indian company; AND (b) The control and management of its affairs is situated wholly or partially outside India. Test yourself: 1. R was born on 5th April, 1985 in India & he later on took the citizenship of U.S.A. Neither his parents nor his grand-parents were born in divided/undivided India. R in this case shall be: Citizen of India Person of India origin A foreign national 2. Determine the residential status of the following: (a) R a person of Indian origin visited India on and plans to stay here for 185 days. During 4 years prior to previous year , he was in India for 750 days. Earlier to that he was never in India. For assessment year , R shall be? (b) R, a citizen in India is employed on an Indian ship. During the previous year he leaves India for Germany on for holidays and returned on He had been non-resident for the past 3 years. Earlier to that he was permanently in India. For assessment year , R shall be? (c) R Ltd., is registered in U.K. The control and management of its affairs is wholly situated in India. R Ltd., shall be? (d) R, a foreign national but a person of Indian origin visited India during previous year for 181 days. During 4 preceding previous years he was in India for 400 days. R shall be? 3. 'U' was born in 1978 in India. His parents were also born in India in His grand-parents were, however, born in England. 'U' was residing in India till Thereafter, he migrated to England and took the citizenship of that country on He visits India during the previous year for 90 days. Determine the residential status of 'U' for assessment year Mr. Kohli, a citizen of India, is an export manager of Arjun Overseas Limited, an Indian Company, since He has been regularly going to USA for export promotion. He spent the following days in U.S.A. for the last five years: Previous Year Ended No. of days spent in USA

8 Determine his residential status for assessment year assuming that prior to he had never travelled abroad. 5. Determine the residential status in the following cases for the assessment year : (a) The control and management of a HUF is situated in India. The manager of the H.U.F. visited England with his wife from to Earlier to that he was always in India. (b) A company, whose registered office is in America, is partly controlled and managed from its branch established in India. (c) In a partnership firm, there are three partners namely A, B and C. A and B reside in India while C lives in Germany. The firm is fully controlled by C. During the previous year, Mr. C stayed for 6 months in India. (d) A V.I.P. Club is in India, whose director Mr. X belongs to China. The Club is controlled fully by Mr. X. In the previous year. Mr. X did not come for a single day to India. 2.4: Incidence of Income 2.4.1: Income Received and Deemed to be received in India [Sec. 7] Income received in India Any income which is received in India, during the previous year by any assessee, is liable to tax in India, irrespective of the residential status of the assessee and the place of accrual of such income. Receipts means the first receipt: The receipt of income refers to the first occasion when the recipient gets the money under his own control. Once an amount is received as income, any remittance or transmission of the amount to another place does not result in receipt within the meaning of this clause at the other place. Income deemed to be received in India The following incomes shall be deemed to be received in India in the previous year even in the absence of actual receipt: (i) Contribution made by the employer in excess of 12% of the salary of the employee to Recognised Providend Fund. (ii) Interest credited on the balance to the credit of the employee at a rate exceeding a rate fixed by the Central Government which at present is 9.5%. (iii) Transferred balance of un-recognised provident fund to a Recognised Provident Fund (It has been discussed in the Chapter on 'Income from Salaries'); (iv) The contribution made, by the Central Government or any other employer in the previous year, to the account of an employee under a notified contributory pension scheme referred to in Section 80CCD; (v) Tax deducted at source is deemed to be received in the hands of the payee [Section 198]; (vi) Investments, expenditure, cash credits detected during the previous year which are unexplained and cash, bullion, gold, jewellery or other valuable articles in respect of which the assessee offers no satisfactory explanation about the nature and source of its acquisition shall be treated as income deemed to be received. [Sections 68, 69, 69A, 69B and 69C]; (vii) Deemed profit chargeable to tax under Sections 41 and 59. Incomes which accrue or arise in India or are deemed to accrue or arise in India [Sec. 9] Accrued or Arise in India: 'Accrue' means 'to arise or spring as a natural growth or result', to come by way of increase. 'Arising' means 'coming into existence or notice or presenting itself'. 'Accrue' connotes growth or accumulation with a tangible shape so as to be receivable. In a secondary sense, the two words together mean 'to become a present and enforceable right' and 'to become a present right of demand'. Incomes which are deemed to accrue or arise in India: The following incomes shall be deemed to accrue or arise in India: (a) Income from a business connection in India: Any income which arises, directly or indirectly, from any activity or a business connection in India is deemed to be earned in India. Business connections may be in several forms e.g. a branch office in India or an agent or an organization of a non-resident in India. Formation of a subsidiary company in India to carry on the business of the non-resident parent company would also be a business connection in India. In the case of a Non-Resident the following shall not, however, be treated as business connection in India: (i) Operations confined to purchase of goods in India for purpose of exports; (ii) Operations confined to collection of news and views for transmission outside India by or on behalf of Non-Resident who is engaged in the business of running news agency or of publishing newspapers, magazines or journals; (iii) Operations confined to shooting of cinematograph films in India if such Non-Resident is: a. An individual: He should not be a citizen of India; or b. A firm: The firm should not have any partner who is a citizen of India or who is resident in India; or c. A company: The company does not have any shareholder who is a citizen of India or who is resident in India. In the case of a business of which all the operations are not carried out in India, only such part of the income as is reasonably attributable to operations carried out in India shall be treated as deemed to accrue or arise in India. (b) Income from any property, asset or source of income situated in India: Any income which arises from any property movable or immovable, tangible or intangible which is situated in India, is deemed to accrue or arise in India. (c) Income from the transfer of any capital asset situated in India: Where the capital asset is situate in India, regardless of the residential status of the transferor or the transferee, capital gain, arising on its transfer, would be deemed to be income accruing or arising in India and hence would be taxable. (d) Any income which falls under the head 'Salaries' if it is earned in India: Any income payable for services rendered in India shall be regarded as income earned in India though it may be paid in India or outside. It will also include salary of the rest period or leave period which is preceded and succeeded by service rendered in India and forms part of the service contract of employment. (e) Salary payable by the Government to an Indian citizen/national for services rendered outside India: The following conditions have to be satisfied before such income is treated as deemed to accrue or arise in India: (i) Income should be chargeable under the head 'Salaries'; (ii) The payer should be Government of India; 8

9 (iii) The recipient should be an Indian citizen whether Resident or Non-Resident; (iv) The services should be rendered outside India. While salary of Indian citizen in the above case shall be deemed to accrue or arise in India but all allowances or perquisites paid outside India by the Government to the above Indian citizens for their rendering services outside India are exempt under Section 10(7). (f) Dividend paid by an Indian company outside India: Dividend paid by an Indian company outside India is deemed to accrue or arise in India. (g) Interest payable by: (i) Government; or (ii) A person who is a resident in India, except where interest is payable in respect of money borrowed and used for the purpose of business or profession carried on outside India or earning any income from any source outside India; or (iii) A person who is a non-resident in India provided interest is payable in respect of money borrowed and used for a business or profession carried on in India, shall be income which is deemed to accrue or arise in India in the hands of the recipient. (h) Royalty payable by: (i) Government; or (ii) A person who is a resident in India except where it is payable in respect of any right/information/property used for the purpose of a business or profession carried on outside India or earning any income from any source outside India; or (iii) A person who is a non-resident provided royalty is payable in respect of any right/information/property used for the purpose of the business or profession carried on in India or earning any income from any source in India, shall be income which is deemed to accrue or arise in India in the hands of the recipient. (i) Fees for technical services payable by: (i) Government; or (ii) A person who is a resident in India, excepting where services are utilised for a business or profession carried on outside India or earning any income from any source outside India; or (iii) A person who is a non-resident provided fee is payable in respect of services for a business or profession carried on in India or earning any income from any source in India, shall be income which is deemed to accrue or arise in India in the hands of the recipient. Highlights of provisions of Incidence of Tax An analysis of the above provisions would highlight the following: (a) Any income which is either received in India or deemed to be received in India is taxable in India, irrespective of the residential status. (b) Any income which is either earned in India or is deemed to be earned in India is taxable in India, irrespective of the residential status. (c) For a Resident in India (for individual & HUF, resident and ordinarily resident in India) all global income, wherever earned/received is taxable in India. (d) For a non-resident, an income is taxable only if it is either earned in India or it is received in India. (e) For not ordinarily resident, income earned and received outside India will be taxable, only when it is from a business or profession controlled or set up in India. Particulars Whether taxable or not ROR RNOR NR 1. Income received or deemed to be received in India whether earned in India or elsewhere. Yes Yes Yes 2. Income which accrues or arises or is deemed to accrue or arise in India during the previous year, whether received in India or elsewhere. Yes Yes Yes 3. Income which accrues or arises outside India and received outside India from a business controlled from India. Yes Yes No 4. Income which accrues or arises outside India and received outside India in the previous year from any other source. Yes No No 5. Income which accrues or arises outside India and received outside India during the years preceding the previous year and remitted to India during the previous year. No No No Test yourself: 1. Give reason and state the following statements are true or false: (a) An Indian company is always resident in India. (b) A foreign company in always non-resident in India. (c) Salary payable by a company to an Indian citizen for services rendered outside India is an income which is deemed to accrue or arise in India. (d) Salary payable by the Government to an Indian citizen who is non-resident in India for service rendered outside India is not taxable in India. 2. Dividend paid by an Indian company outside India is: [MCQ] (a) Taxable in India in the hands of the recipient (b) Exempt in the hands of recipient (c) Taxable in the hands of the company and exempt in the hands of the recipient 3. Determine the taxable income in following cases: Nature of Income Amt. (`) ROR NROR NR Profits from a business in Bombay managed from London 30,000 Pension for services rendered in India but received in Burma. 15,000 Interest on U.K. Government Bonds half of which is received in India. 4,000 Income from property situated in Pakistan received there. 20,000 Past foreign untaxed income brought to India during the previous year. 7,000 Income from agricultural land in Nepal received there and then brought to India. 30,000 9

10 Income from profession in Kenya which was set up in India, received there. 12,000 Total 4. Determine the taxable income in following cases: Nature of Income Amt. (`) ROR NROR NR Rent from a property in Delhi received in USA 80,000 Income from a business in USA controlled from Delhi. 1,20,000 Income from a business in Bangalore controlled from USA 1,80,000 Rent from a property in USA received there but subsequently remitted to India 60,000 Interest from deposits with an Indian company received in USA 20,000 Profits for the year of a business in USA remitted to India during the previous year ,000 (Not taxed earlier) Gifts received from his parents 45,000 Total 5. Determine the taxable income in following cases: Nature of Income Amt. (`) ROR NROR NR Profits from business in Iran received in India 5,000 Income from house property in Iran received in India 500 Income from house property in Pakistan deposited in a bank there 1,000 Profits of business established in Pakistan deposited in a bank there, this business is controlled in 20,000 India (out of ` 20,000 a sum of ` 10,000 is remitted in India) Income from profession in India but received in England 2,000 Profits earned from business in Kanpur 6,000 Income from agriculture in England, it is all spent on the education of children in London 5,000 Total 10