Basics of Income Tax

CHAPTER : Basics of Income Tax CONCEPT 1: Short Title, Extent and Commencement [Section 1] a) Short title : Income Tax Act 1961 b) Extent : Whole of India c) Commencement : 1 st April, 1962 CONCEPT 2: Definition of India [Section 2(25A)] India means a) India as referred in Article of the constitution (i.e) States & the Union Territories. b) Territorial waters, seabed and subsoil underlying such waters. Territorial waters extend upto 12 nautical miles from baseline. c) Continental shelf- Continental shelf refers to the seabed and subsoil up to the edge of continental margin or 200 nautical miles from the baseline, whichever is near. d) Exclusive Economic Zone- Exclusive economic zone extends upto 200 nautical miles or upto continental margin from the baseline, whichever is near. Lower part of the sea is called the continental shelf and the upper part is exclusive economic zone e) Any other maritime zone as defined in Continental Shelf, Exclusive economic zone and other Maritime Zones Act, 1976. f) Air space above territory and territorial waters. Mobile- +91 9873730234 Page 1

CONCEPT 3: Definition of Income [Section 2(24)] Income specifically includes: S.No Income Chapter 1 Profits and gains PGBP 2 Dividend Dividend Income 3* Voluntary contributions received by a trust Trust 4 Perquisites and profits in lieu of salary Salary Income 5 Any special allowance or benefits to employees to meet Salary Income official expenses 6 City compensatory allowances or DA Salary Income 7 Value of perquisite or any other benefits given to directors Salary Income or any other person having substantial interest by a company 8 Any benefit or perquisite to representative assesses 9 Sums chargeable u/s 28,41 & 59 of Income Tax Act PGBP/income from other sources 10 * Income from capital gains Capital gains 11 * Insurance profits 12 Banking income of co-operative society 13 Winning from lottery Income from other sources 14 Employee s contribution towards PF Income from other sources 15 * Amount received under key man insurance PGBP, Salary 16 Gift received in excess of Rs.50,000 Income from other sources 17 * Consideration received for issue of shares as exceeds FMV Income from other of such shares Section [56(2)(Vii)(b)] (w.e.f. AY 2013-14) sources 18 * Forfeited amount received in connection with transfer of Income from other capital asset where the transfer doesn t materialize. Section sources [56(2)(ix)] (w.e.f. AY 2015-16) * Capital Receipts Included in Definition of Income (See Concept 12 d) Concept 4: Definition of assessee [section 2(7)] Assessee means a person (explained in Concept 6) by whom any tax or any other sum is payable under this act and includes: Mobile- +91 9873730234 Page 2

a) Every person, in respect of whom any proceeding under this act has been taken for assessment of his income or income of any other person in respect of which he is assessable or loss sustained by him or by such person or refund due to him or to such person. b) Every person who is deemed to an assessee under provisions of this act (Deemed assessee) c) Every person who is deemed to be an assessee in default under provisions of this act Examples : a) A was liable to pay income tax of Rs 5,000 on income earned by him in AY 15-16- A is an assessee. b) A was liable to pay income tax of Rs 5,000 on income earned by his minor son B in AY 15-16- A is an assessee. c) Proceeding has been initiated against A for assessment of his income or loss or refund due to him- A is an assessee (whether A was liable to pay tax or not is irrelevant) d) Proceeding has been initiated against A for assessment of income or loss or refund of tax due to B, his minor son- A is an assessee Concept 5: Previous year [Section 3] & Assessment year [Section 2(9)] a) Assessment year: Means a period of twelve months commencing on the 1 st of April every year (i.e) period of 1 st April of a calendar year to 31 st March next calendar year. Example:- 1 st April 2014-31 st March, 2015. b) Previous Year : Means financial year preceding the assessment year. Example : If the Assessment Year is 2008-2009 (01-Apr-08 to 31-Mar-09), then its corresponding previous year is 2007-2008 (01-Apr-07 to 31-Mar-08) Note : In case of a business/profession newly set up or a source of income newly coming into existence in a financial year, the previous year Mobile- +91 9873730234 Page 3

shall be the period beginning from the date of setting up the new business/profession or the date in which source of income comes into existence till the date in which that financial year ends. Example: Business started/new income came into existence on 12 th Aug 2015, then the previous year will be 12 th Aug 2015 to 31 st March 2016. Concept 6: Person [Section 2(51)] A person includes: a) An individual b) A Hindu Undivided Family HUF) c) A Company d) A Firm e) An AOP (Association of Persons) or BOI (Body of Individuals) whether incorporated or not. f) A local authority g) Every artificial judicial person not falling in any of the above clauses Note 1: An AOP / a BOI / a local authority or any artificial judicial person whether or not they are formed with an objective of earning income. Note 2 : The above definition is inclusive and not exhaustive. The word person has been held to include the crown, the government of an Indian state, the secretary for state for India when engaged in commercial enterprises and a society registered under Societies Registration Act. Note 3:- Definition of An Assessee starts with Assessee means a person, so in order to be an assessee under this act one has to a person as explained here. Concept 7: Basics of Charge [Section 4] Income Tax shall be charged at the rates prescribed for the assessment year in respect of Total Income earned in the previous year. Example: For PY 2014-2015, Income tax shall be charged at rates prescribed for AY 2015-16 on income earned during PY 2014-2015 Mobile- +91 9873730234 Page 4

Exception: In the following cases, income tax may be charged at rates relevant to year which is one year before the assessment year:- 1. Income of Non-resident from shipping [Section 172] 2. Income of persons leaving India permanently or for an unforeseen future [sec 174] 3. Income of bodies formed for a particular event [sec 174A] 4. Income of a person trying to transfer property to avoid tax [sec 175] 5. Income of discontinued business [sec 176] In all the above cases, it is difficult to track the assessee after the end of the previous year. So, the assessment year may be considered same as the previous year. Concept 8:- Calculation of Gross Total Income (GTI) and Total Income (TI) a) Gross Total Income of a person is computed by adding the Income earned by him under following heads:- 1) Income under the Head Salary 2) Income from House Property 3) Income from Business and Profession 4) Income under the head Capital Gains 5) Income from Other Sources b) Total Income (TI) of a person is calculated by reducing the deductions available under chapter VI A (Section 80C to 80U) of the Act from Gross Total Income. c) As discussed in Concept 7, tax shall be computed on Total Income earned by a person in previous year on rates applicable for the corresponding assessment year. Concept 9:- Calculation of Tax on Total Income (FY 2015-16 i.e AY 2016-17) Category 1:- Individuals a) Senior Citizen (Indian Resident aged 60 years or more at any time during the year, but less than 80 years) Total Income (In Rs.) Tax Rate (%) Upto 3,00,000 Nil 3,00,001-5,00,000 10% 5,00,001-10,00,000 20% More than 10,00,000 30% Mobile- +91 9873730234 Page 5

b) Very Senior Citizen (Indian Resident aged 80 years or more at any time during the year) Total Income (In Rs.) Tax Rate (%) Upto 5,00,000 Nil 5,00,001-10,00,000 20% More than 10,00,000 30% c) Other Individuals (Men or women or transgender less than 60 years of age, whether Resident of India or Not) Total Income (In Rs.) Tax Rate (%) Upto 2,50,000 Nil 2,50,001-5,00,000 10% 5,00,001-10,00,000 20% More than 10,00,000 30% Note 1:- The tax slab given in c shall also apply to HINDU Undivided Family (HUF), Association of Person (AOP) and Body of Individuals (BOI) Note 2:- For resident individuals having Total Income upto Rs. 5,00,000/- a tax rebate upto Rs. 2,000/- is available under Section 87 A Note 3:- Individuals whose Total Income is more than 1 crore rupees, are liable to pay surcharge on Tax at the rate 12% on the tax amount. (Concept of Tax on Super Rich) Note 4:- If due to Increase in Income over 1 Crore and consequential applicability of surcharge, the Individual s tax liability increases more than his income over rupees one crore, then such individual shall be provided marginal relief from tax liability in order to ensure that the increase in tax is not more than increase in Total Income above Rupees one crore (Concept of Marginal relief) Note 5:- In addition to above, all the individuals are liable to pay Education Cess (Edu Cess) calculated at 2% of such Tax plus surcharge, if any and also Mobile- +91 9873730234 Page 6

Secondary and Higher Education Cess (S&H Edu Cess) calculated at 1% of such tax plus surcharge, if any. Note 6:- In case an assessee has reached the age of 60 during the Previous year 2015-2016 then both slab a and slab c shall apply to him. In such a case, the slab which is more beneficial to him or her shall apply (slab a) Note 7:- In case an assessee has reached the age of 80 during the Previous year 2015-2016 then both slab a and slab b shall apply to him. In such a case, the slab which is more beneficial to him or her shall apply (slab b) Some Examples which will clear the concept Example 1:- Total Income of Mr. A (Age 58) is Rs. 3,00,000 in Financial year 2015-16. Calculate Tax liability thereon. Solution: - Since Assessee is an Individual less than age of 60, slab (c ) will be applicable. Tax on TI upto 2,50,000 Tax on remaining income of Rs. 50,000 (3,00,000-2,50,000) @ 10% = Rs. 5,000 Since Total Income is not more than 5,00,000, rebate under 87 A = Rs. 2,000 Net Tax= (Rs. 5,000- Rs. 2,000) = Rs. 3,000 Surcharge (Since Total Income is not more than Rs. 1,00,00,000) Tax Plus Surcharge (3,000+ Nil) = Rs. 3,000 Education Cess @ 2% of (3,000+Nil) = Rs. 60 Secondary and Higher Education cess @ 1% of (3,000+Nil) = Rs. 30 Total Tax plus cess payable (3,000+60+30) = Rs. 3,090 So Total Tax liability of Mr. A is Rs. 3,090 in AY 2016-17. Mobile- +91 9873730234 Page 7

Example 2:- Total Income of Mrs. A (Age 65) is Rs. 8,90,000 in Financial year 2015-16. Calculate Tax liability thereon. Solution: - Since Assessee is an Individual more than age of 60 but less than the age of 80, slab (a) will be applicable. Tax on TI upto 3,00,00 Tax on TI between 3,00,001-5,00,000 @ 10% =Rs. 20,000 Tax on remaining income of Rs. 3,90,000 (8,90,000-5,00,000) @ 20% = Rs. 78,000 Since Total Income is more than 5,00,000, rebate under 87 A Net Tax= Rs.(20,000 + 78,000- Nil) = Rs.98,000 Surcharge (Since Total Income is not more than Rs. 1,00,00,000) Tax Plus Surcharge (98,000+ Nil) Education Cess @ 2% of (98,000+Nil) = Rs.98,000 = Rs.1,960 Secondary and Higher Education cess @ 1% of (98,000+Nil) = Rs. 980 Total Tax plus cess payable (98,000+1,960+980) =Rs. 1,00,940 So Total Tax liability of Mrs. A is Rs. 1,00,940/- in AY 2016-17. Example 3:- Total Income of Mr. X (Age 82) is Rs. 15,50,000 in Financial year 2015-16. Calculate Tax liability thereon. Solution: - Since Assessee is an Individual more than 80, slab (b) will be applicable. Tax on TI upto 5,00,000 Tax on TI between 5,00,001-10,00,000 @ 20% = Rs. 1,00,000 Tax on remaining income of Rs. 5,50,000 (15,50,000-10,00,000) @ 30% = Rs.1,65,000 Since Total Income is more than 5,00,000, rebate under 87 A Net Tax= Rs.(1,00,000+1,65,000- Nil) = Rs.2,65,000 Mobile- +91 9873730234 Page 8

Surcharge (Since Total Income is not more than Rs. 1,00,00,000) Tax Plus Surcharge (2,65,000+ Nil) Education Cess @ 2% of (2,65,000+Nil) Secondary and Higher Education cess @ 1% of (2,65,000+Nil) = Rs.2,65,000 = Rs.5,300 = Rs.2,650 Total Tax plus cess payable (2,65,000+5,300+2,650) =Rs. 2,72,950 So Total Tax liability of Mr. X is Rs. 2,72,950/- in AY 2016-17. Example 4:- Total Income of Mr. Y (Age 42) is Rs. 1,80,00,000 in Financial year 2015-16. Calculate Tax liability thereon. Solution: - Since Assessee is an Individual less than age of 60, slab (c ) will be applicable. Tax on TI upto 2,50,000 Tax on TI between 2,50,001-5,00,000 @ 10% = Rs.25,000 Tax on TI between 5,00,001-10,00,000 @ 20% = Rs. 1,00,000 Tax on remaining income of Rs. 1,70,00,000 (1,80,00,000-10,00,000) @ 30% = Rs.51,00,000 Since Total Income is more than 5,00,000, rebate under 87 A Net Tax= Rs.(25,000+1,00,000+51,00,000- Nil) = Rs.52,25,000 Surcharge @ 12% of Net Tax (TI is more than Rs.1,00,00,000) = Rs.6,27,000 Tax Plus Surcharge (52,25,000+ 6,27,000) Education Cess @ 2% of Rs. 58,52,000 Secondary and Higher Education cess @ 1% of Rs. 58,52,000 Total Tax plus cess payable (58,52,000+1,17,040+58,520) = Rs.58,52,000 = Rs.1,17,040 = Rs.58,520 =Rs.60,27,560 Mobile- +91 9873730234 Page 9

So Total Tax liability of Mr. Y is Rs. 60,27,560/- in AY 2016-17. Example 5:- (Concept of Marginal Relief) Total Income of Mrs. Y (Age 50) is Rs. 1,02,00,000 in Financial year 2015-16. Calculate Tax liability thereon. Solution: - Since Assessee is an Individual less than age of 60, slab (c ) will be applicable. Tax on TI upto 2,50,000 Tax on TI between 2,50,001-5,00,000 @ 10% = Rs.25,000 Tax on TI between 5,00,001-10,00,000 @ 20% = Rs. 1,00,000 Tax on remaining income of Rs. 92,00,000 (1,02,00,000-10,00,000) @ 30% = Rs.27,60,000 Since Total Income is more than 5,00,000, rebate under 87 A Net Tax= Rs.(25,000+1,00,000+27,60,000- Nil) = Rs.28,85,000 Surcharge @ 12% of Net Tax (TI is more than Rs. 1,00,00,000) = Rs.3,46,200 Tax Plus Surcharge (28,85,000+ 3,46,200) = Rs.32,31,200 * Marginal Relief = Rs. 2,06,200 Tax plus surcharge less Marginal Relief = Rs. 30,25,000 Education Cess @ 2% of Rs. 30,25,000 Secondary and Higher Education cess @ 1% of Rs. 30,25,000 Total Tax plus cess payable (30,25,000+60,500+30,250) = Rs.60,500 = Rs.30,250 =Rs.31,15,750 So Total Tax liability of Mrs. Y is Rs. 31,15,750/- in AY 2016-17. Mobile- +91 9873730234 Page 10

* Calculation of Marginal Relief In order to ensure that the increase in tax due to applicability of Surcharge is not more than increase in Total Income, a relief called Marginal Relief shall be provided to Mrs. Y. Now, presuming that Total Income of Mr. X is Rs. 1,00,00,000/- calculate her total income. Tax on TI upto 2,50,000 Tax on TI between 2,50,001-5,00,000 @ 10% = Rs.25,000 Tax on TI between 5,00,001-10,00,000 @ 20% = Rs. 1,00,000 Tax on remaining income of Rs. 90,00,000 (1,00,00,000-10,00,000) @ 30% = Rs.27,00,000 Since Total Income is more than 5,00,000, rebate under 87 A Net Tax= Rs.(25,000+1,00,000+27,00,000- Nil) = Rs.28,25,000 Surcharge (Since Total Income is not more than Rs. 1,00,00,000) Tax Plus Surcharge (28,25,000+Nil) = Rs.28,25,000 It must be observed that due to an increase in Total Income of Rs. 2,00,000 ( 1,02,00,000-1,00,00,000), the Tax plus surcharge payable by the assessee increased by Rs. 4,06,200 (32,31,200-28,25,000). In other words, increase in tax liability of Mrs.Y is more than her increase in Income over and above Rs. 1,00,00,000. In order to remove this hardship on assessee, the assessee shall be allowed Marginal Relief which shall be calculated as follows:- Marginal Relief= Increase in Tax due to Increase - Increase in Income above in Income above Rs. 1,00,00,000 Rs. 1,00,00,000 = Rs. 4,06,200- Rs. 2,00,000= Rs. 2,06,200/- Mobile- +91 9873730234 Page 11

Now, after Marginal Relief the increase in tax liability Rs. 2,00,000 (30,25,000-28,25,000) is equal to the assessee s increase in income Rs. 2,00,000 (1,02,00,000-1,00,00,000) An Individual shall avail the benefit of Marginal relief only if his income is falling in following limits in AY 2015-2016:- Category Income range for applicability of Marginal Relief Super Senior Citizen (80 years or Above) 1,00,00,001 to 1,05,06,024 Senior Citizen (60-80 years) 1,00,00,001 to 1,05,09,639 Other Individuals 1,00,00,001 to 1,05,10,542 Category 2:- Firm a) Firm refers to a Partnership firm including a LLP (Limited Liability Partnership). b) It is chargeable to tax a rate of 30%. c) No Surcharge is applicable on a Firm. d) Education Cess & Secondary and Higher Education Cess shall be charged at the rate of 2% and 1% respectively on the amount of tax calculated. Category 3:- Co- Operative Society a) As per Section 2(19) of the Income Tax Act, 1961, Co- Operative Society means a Co- Operative Society registered under Co- Operative Societies Act, 1912, or under any other law time being in force in any state for the registration of Co- Operative Society. b) Generally speaking, a Co- Operative Society is nothing but an autonomous association of persons united voluntarily to meet their common, economic, social or cultural needs through a jointly owned and democratically controlled enterprise. c) It is to be noted that, a co- operative society, if registered under Co- Operative Societies Act, 1912, or under any other law time being in force in any state, becomes a Co- operative society for the purpose of Income Tax Act and shall be chargeable to tax as a artificial judicial person at a rate of tax given in point f. Mobile- +91 9873730234 Page 12

d) An unregistered Co- Operative society is not a Co-operative society for the purpose of Income tax Act and shall be chargeable to tax as an Association of Person (AOP) at a rate of tax applicable for an Individual below 60 years of Age. (See Table c category- 1 (Individual)) e) Examples of Co- operative societies in India: Adarsh Co- Operative Bank, Amul, Mother Diary are examples of Co- Operative Societies in India. f) Tax slab for a Co- Operative Society:- Total Income (In Rs.) Tax Rate (%) Upto 10,000 10% 10,001-20,000 20% More than 20,000 30% g) Co- Operative Societies whose Total Income is more than 1 crore rupees, is liable to pay surcharge on Tax at the rate 12% on the tax amount. h) If due to Increase in Income over 1 Crore and consequential applicability of surcharge, the Co-operative Society s tax liability increases more than its income over rupees one crore, then such co- operative society shall be provided marginal relief from tax liability in order to ensure that the increase in tax is not more than increase in Total Income above Rupees one crore (Concept of Marginal relief). i) In addition to above, a co- operative society shall be liable to pay Education Cess (Edu Cess) calculated at 2% of such Tax plus surcharge, if any and also Secondary and Higher Education Cess (S&H Edu Cess) calculated at 1% of such tax plus surcharge, if any. Example: - Total Income of ABC Co- Operative Bank (A Co- operative Society) is Rs. 5,00,000/-. Calculate the Tax Liability. Solution:- Tax on Income upto Rs. 10,000 @ 10% = 1,000 Tax on Income between Rs. 10,000-20,000 @ 20% = 2,000 Tax on remaining Income (4,80,000 @ 30%) = 1,44,000 Mobile- +91 9873730234 Page 13

Total Tax = 1,47,000 Surcharge (TI doesn t exceed Rs, 1,00,00,000) Secondary Education Cess (2% of 1,47,000) = 2,940 Secondary & Higher Education Cess (2% of 1,47,000) = 1,470 Total Tax liability = Rs. 1,51,410 Category 4:- Local Authority a) Local authority is third level of Government In India after Central Govt & State Govt. b) Example of Local Authority- DDA, MCD, Etc c) A Local Authority shall be chargeable to tax at the rate of 30% on Total Income. d) A Local Authority whose Total Income is more than 1 crore rupees, is liable to pay surcharge on Tax at the rate 12% on the tax amount. e) If due to Increase in Income over 1 Crore and consequential applicability of surcharge, the Local Authority s tax liability increases more than its income over rupees one crore, then such local authority shall be provided marginal relief from tax liability in order to ensure that the increase in tax is not more than increase in Total Income above Rupees one crore (Concept of Marginal relief). f) In addition to above, a local authority shall be liable to pay Education Cess (Edu Cess) calculated at 2% of such Tax plus surcharge, if any and also Secondary and Higher Education Cess (S&H Edu Cess) calculated at 1% of such tax plus surcharge, if any. Category 4:- Company A company includes a Domestic Company, which is incorporated in India and also a foreign Company, which is incorporated outside India. Mobile- +91 9873730234 Page 14

There are two types of tax rates prescribed for a company- One is a Normal Rate and other is MAT rate (Minimum Alternate Tax Rate). Normal tax is calculated by applying Normal Tax rate on Total Income calculated as per provisions of the Act and Minimum Alternate Tax (MAT) is calculated by applying MAT rate on Book Profit calculated as per special provisions contained in the Act (Section 115JB) A Company has to pay Normal Tax or MAT, whichever is higher. Mobile- +91 9873730234 Page 15

The tax rate applicable to a Company is tabulated below:- Type of Co. Total Income (Rs.) Domestic Co. Upto 1 crore Domestic Co. More than 1 Crore but upto 10 crore Domestic Co. More than 10 Crore Normal Tax Rate 30% tax rate 30% tax rate 7% Surcharge 30% tax rate 12% Surcharge Foreign Co. Upto 1 crore 40% tax rate Foreign Co. More than 1 Crore but upto 10 crore Foreign Co. More than 10 Crore 40% tax rate 4% Surcharge 40% tax rate 7% Surcharge MAT Rate (Minimum Alternate Tax rate) 18.5% tax rate 18.5% tax rate 7% Surcharge 18.5% tax rate 12% Surcharge 18.5% tax rate 18.5% tax rate 7% Surcharge 18.5% tax rate 12% Surcharge Note 1:- Surcharge shall be calculated on Tax and Edu Cess and S&H Edu Cess shall be calculated on Tax plus Surcharge. Note 2:- Marginal Relief is available in all the above cases. Concept 10:- Deemed Assessee Deemed Assessee is a person who is deemed to be assessee on behalf of another person. Following are Deemed Assessee:- a) Legal representative of decreased person Mobile- +91 9873730234 Page 16

b) Agent of a Non- Resident c) Guardian of a Minor d) Trustee of a Trust e) Liquidator of a company In all the above cases the person who is representing the Assessee shall deemed to be assessee himself and all the provisions of the Income Tax Act shall apply on him as if he is the assessee. Concept 11:- Components of Income Tax Law The following are the Major Components of Income Tax law in India:- a) Income Tax Act, 1961:- The Ac applies to whole of India and contains provisions for determination of Taxable Income and tax liability thereon, procedure for assessment, appeals, penalties and prosecution. b) Income Tax Rules, 1962:- The Central Government has authorized CBDT (Central Board for Direct Taxes) to make Income Tax rules for the purpose of better execution of Income Tax Act, 1961. These rules are called Income Tax rules and are amended as and when required in public interest by CBDT. c) Circulars & Clarifications:- From Time to time, CBDT issues circulars and clarifications on various tax related issues for better understanding of Income Tax Law in India. d) Judiciary:- The Income Tax appellate Tribunal (ITAT), High Courts of different states and the supreme court give judgments on various issues of Income Tax. These decisions play an important role in understanding and interpretation of the Income Tax law in the country. Concept 12:- Miscellaneous Topics a) Income received in cash v/s Income Received in Kind:- i. Income may be received in cash or in kind. ii. Income received in kind is to be valued as per rules prescribed under Income Tax Law. Mobile- +91 9873730234 Page 17

iii. In case there is no prescribed rules for any particular income which is received in kind, then Market Price approach shall be applied whereby the market price of the item received in kind is to be taken as value of Income. b) Relevance of Method of Accounting in computing Income:- i. While computing Income under the head Income under the head salary, house property and capital gain, the method of accounting is irrelevant. Income under these heads shall be computed as per provisions of the Act, irrespective whether the assessee maintains books in accrual basis (mercantile basis) or cash basis or doesn t maintain books at all. ii. While calculating income under the head Business or Profession or Income from other source, the taxable income shall be calculated as per the books of accounts maintained by assessee in cash system of accounting or accrual system of accounting, whichever is consistently followed by him. c) Income by Mutual Activity:- i. A person cannot make taxable income out of a transaction made with himself. Taxable income is Income which comes from outside. ii. iii. iv. A surplus arising to a mutual concern from the services provided to its members cannot be taken as an income chargeable to tax under this act. Example: - The resident welfare society collects a total of Rs. 10,000/- from all residents of a housing society to conduct New Year party. The total expenses incurred by the society in the party was Rs. 9,000/-. The remaining Surplus of Rs. 1,000/- shall not be treated as an Income of the society as it is a surplus from services provided to its members. Exception: - Income derived by Trade or Professional Association from rendering specific services to its members shall be taxable. d) Revenue Receipt v/s Capital Receipt:- Mobile- +91 9873730234 Page 18

i. Capital Receipt has following features:- It is not expected to be received every year or after a regular interval. It is classified as a Liability in the Balance sheet. A capital receipt is not chargeable to tax unless it is specifically included in the definition of Income given in Section 2 (24) of the Act. ii. Revenue receipt has following features:- It is expected to be received every year or after a regular interval. It is a profit & loss A/c item and shown in credit side of profit and loss A/c. A revenue receipt is chargeable to tax even if it is not included in the definition of Income given in Section 2(24) of the Act. iii. Following are the Capital Receipts included in the definition of Income:- Voluntary contributions received by a trust S. No 3 (Concept 3) Income from capital gains S. No 10 (Concept 3) Insurance profits S. No 11 (Concept 3) Amount received under keyman insurance S. No 15 (Concept 3) Consideration received for issue of shares as exceeds FMV S. No 17 (Concept 3) of such shares Section [56(2)(Vii)(b)] (w.e.f. AY 2013-14) Forfeited amount received in connection with transfer of S. No 18 (Concept 3) capital asset where the transfer doesn t materialize. Section [56(2)(ix)] (w.e.f. AY 2015-16) e) Application of Income v/s Diversion of Income:- i. Application of Income means spending of Income after it is being earned by the assessee. Such amount shall not be excluded from total income of the assessee as it is merely application of earned income. ii. Diversion of Income is the process of diverting income before it is earned by the assessee. Such amount shall excluded from the Total Income of the assessee as the income is diverted to someone else before being earned y the assessee. Mobile- +91 9873730234 Page 19

iii. iv. There is a thin line of difference between application of Income & diversion of Income. In case of diversion of Income there is such an over- riding title of any person on the income that the income before being earned by the assessee reaches such person and hence not chargeable to tax in hands of the assessee. Example of Application of Income: - Mr. A is liable to pay Rs. 2,000/- per month to Ms. B (his ex- wife) as an alimony sum. Mr. A being an employee of Mr. C, instructs him to pay Rs.2,000/- per month out of his salary and disburse the remaining salary to him. Whether this amount of Rs.2,000/- per month be included in the Total Income of Mr. A or is it a case of diversion of income of Mr. A and not taxable in his hands? This is a case of Application of Income by Mr.A and not diversion of Income and hence it will be included in the Total Income of Mr. A. This is because this amount of Rs. 2,000/- per month is an obligation of Mr. A to pay to Ms. B out of his income and not an income in which Ms. B had over riding entitlement from Mr. C before being earned by Mr. A. In other words, this is an Income of Mr. A, which is applied by him to fulfill an obligation and hence included in his Total Income and a mere arrangement to make Mr. C make such payments directly to Ms. B won t make it a case of Diversion of Income. v. Example of Diversion of Income:- Ms ABC is a partnership firm in which A and his two sons B & C are partners. The partnership deed provides that after the death of Mr. A, B & C shall continue the business of the firm subject to a condition that 20 % of profit of the firm shall be given to Mrs. D (Wife of Mr. A/ Mother of B & C). After the death of Mr. A, whether this 20% amount of profit be included in the Total Income of Firm M/s ABC or is a case of diversion of income of M/s ABC and not taxable in its hands? This is a case if Diversion of Income and the said 20% amount shall not be included in the Total Income of M/s ABC (i.e.) it is deductible from its Total Income. This is because the clause mentioned in partnership deed has given an overriding title of the 20% profit to Mrs. D and such income is a precondition for the firm to continue its business. In other words, the said 20% reaches Mrs. Mobile- +91 9873730234 Page 20

D before it becomes income of the firm and hence it is a case of diversion of Income. f) Annual Amendments to Income Tax Act i. Although Income Tax Act is a permanent Act, it gets its operative effectiveness every year from the Finance Act passed every year. ii. The Finance bill is presented by the finance minister on the floor of Lok Sabha on the Budget day of the Budget session. The bill after getting approved from both houses of Parliament is signed by the president and becomes Finance Act. iii. For Example, the Finance Minister of India Mr. Arun Jaitley presented the Finance Bill (General Budget) of 2015 on 28 th February 2015. The bill contains financial proposals of the government for the Financial Year 2015-16 (i.e. AY 2016-2017). The bill after getting passed from both houses of the parliament when signed by the president becomes Finance Act, 2015. iv. The first Schedule of the Finance Bill contains the rate of Income Tax, TDS, etc. The 1 st schedule has four parts- Part I: - Contains rates of Income tax for current assessment year. Finance Act 2015, Schedule-I, Part I shall contain Tax rates for AY 2015-16 Part- II: - Contains rates of tax to be deducted at source for the income earned in current financial year. Finance Act 2015, Schedule- I, Part II shall contain Tax Deducted at Source rates for FY 2015-16 Part- III: - Contains rates of Income Tax for the income earned in next assessment year. Finance Act 2015, Schedule-I, Part III shall contain Income Tax rates for AY 2016-17. Part- IV: - Contains rules for calculating net agricultural income. Mobile- +91 9873730234 Page 21

Note: - Part-III of Schedule-I of Finance bill shall become part-i of Schedule I of next Finance Bill. g) Rounding off of Total Income:- i. Total Income shall be rounded off to the nearest multiple of 10 rupees. (i.e) Total Income of 9,30,804/- shall be rounded off to Rs. 9,30,800/- and Total Income of Rs. 2,12,209/- shall be rounded off to Rs. 2,12,210/- ii. iii. For this purpose any part of the rupees consisting of paisa shall be ignored. In case the Total Income ends with unit place value as 5, then such Total Income shall be rounded up. (i.e) Total Income of 5,15,805/- shall be rounded off to Rs. 5,15,810/- h) Rounding off of Tax, Interest, Penalty, Etc :- i. Tax (Including Cess, Surcharge, Interest, Fine Penalty, Etc) shall be rounded off to the nearest multiple of 10 rupees. (i.e.) Tax of 7,30,822/- shall be rounded off to Rs. 7,30,820/- and Total Income of Rs. 6,62,459/- shall be rounded off to Rs. 6,62,460/- ii. iii. For this purpose any part of the rupees consisting of paisa shall be ignored. In case the Total Tax liability ends with unit place value as 5, then such Total Income shall be rounded up. (i.e.) Tax of 1,11,805/- shall be rounded off to Rs. 1,11,810/- Mobile- +91 9873730234 Page 22