H. N. MOTIWALLA 1

Scope of Income tax

Basis of charge

Concept of Total Income

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SCOPE OF INCOME TAX________________________________________________

• The Income tax Act 1961 replaces the Indian Income tax Act, 1922

• The objects of the revision was to simplify the income tax laws

• To simplify the Income tax Act, 1961, Direct Tax Code is offing

• Applicable to whole of India.

• S. 2(25A) of the Act defines India.

• Includes all States, Union Territories, Territorial waters and air space above it territory and territorial waters.

• Consists of Twenty three chapters – 298 sections and 14 schedules.

• S. 2 defines 48 definitions.

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BASIS OF CHARGE_______________________________________________

• S. 2(9) defines “assessment year” means the period of twelve months commencing on the 1st day of April every yea. It is one year head of the previous year.

• Though tax is levied in the “assessment year, the income that is the subject matter of charge is the income of the “previous year” during which income is earned”.

• As per S. 3, “previous year” means the “financial year” immediately preceding the assessment year

• Business set up during the previous year.

• At the rate or rates prescribed by the Finance Act.

• S. 4 gives power to deduct tax at source or Advance tax on the principle – “As you earn”

• Charge is on a person.

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CONTD._______________________________________________

• S. 2(31) defines a person.

• “Person” includes (i) an Individual (ii) a HUF (iii) a company (iv) a firm (v) an AOP/BOI (vi) a local authority and (vii) every artificial judicial person.

• Charge is on Income of previous year, exceptions:

(i) Shipping business of non residents - (S. 172)

(ii) Persons leaving India – (S. 174)

(iii) Persons trying to alienate their assets – (S. 175)

(iv) Discontinued business or dissolution – (S. 176)

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CONCEPT OF TOTAL INCOME______________________________________________

• Charge is on total income

• S. 2(45) defines “Total Income”. It means the total amount of income referred to in S. 5, computed in the manner laid down in this Act.

• “In the manner laid down in this Act”.

• Inclusion in and exclusion from “Total Income”.

• Inclusions:

(i) Deemed Income

(ii) Fictionally regarded as Income of the assessee.

(iii) Income which are exempt but included for rate purpose

• Exclusion:

(i) S. 10

(ii) Ss. 11 to 13.

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SCOPE OF TOTAL INCOME (S. 5)_______________________________________________

• Subject to the provisions of this Act.

• Charge on the basis of status.

i) Resident

ii) Resident but not ordinary resident.

iii) Non resident

.

• In case of resident

i) Income is received or deemed to be received in India

ii) Accrues or arises or deemed to accrue or arises in India.

iii) Accrues or arises to him outside India.

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CONTD….._______________________________________________

• In case of resident but not ordinary resident.- Income mentioned in (i) and (ii) of resident and- Income accrues or arises to him outside India if it is derived from a

business controlled in or profession set up in India.

• In case of non-resident.i) Income is received or deemed to be received in India.ii) Accrues or arises or deemed to accrue or arise in India

• Income from whatever source derived.- source has not been defined.- S. 14 classifies the head of Income – Five heads- Each head there could be different sources.- Income to be computed head wise.

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CONTD ….._______________________________________________

• Receipt Vs. Deemed Receipt• Deemed receipt

i) S. 7(1) Annual accretions to the balance at the credit of an employee

participating in recognized provident Fund.ii) S.7(ii) So much of the ‘transferred balance” to the credit of an

employee participating in a recognized provident fundiii) S.7(iii) Contribution by Cent. Govt. to the pension scheme u/s.

80CCDiv) S.41(1) Any sum received or any benefit obtained in a year in

recoupment of any loss, expenditure or liability incurred in earlier years.

v) S. 41(4) Recovery of bad debts written off in earlier year.

(vi) S. 198 - All TDS.

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CRITERIA FOR DECIDING RESIDENTIAL STATUS_______________________________________________

• For an Individual - Two:

i) In India for a period or periods amounting in all to 182 days or more in

that year.

or

ii) having within the four years preceding that year in India for all 365

days or more and 60 days or more in that year.

But any person, being citizen of India, who leaves India in any previous year as a member of crew of an Indian ship or for the purpose of employment outside India the period of 182 days instead of 60 days to be considered

or

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CONTD….._____________________________________________

A person being a citizen of India or a person of Indian origin, who being outside India, comes on a visit to India , the period of 182 days instead of 60 days to be considered.

• For HUF/Firm/AOP/BOI

Said to be resident, when control and management of its affairs is situated either wholly or partly in India.

• For a company : Two

i) It is an Indian co; or

ii) During the year, the control and management of its affairs is situated

wholly in India.

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CONTD….._____________________________________________

• Not ordinarily resident

• For Individual – who has been non-resident in India in 9 out 10 previous years preceding that year or has during the 7 previous years preceding that year been in India for less than 730 days.

• For HUF – Manager/Karta’s status be considered.

• Control and Management:

- Where head and brain is situate - which directs the affairs of policy,

finance, disposal of profits etc.

- Not only a de jure control and management but a de facto control and management

- Control is not shareholding control.

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CONTD….._____________________________________________

• Deemed income for all assessee:

i) S.8 any dividend declared, or distributed, or paid by a co. u/s.2(22).

ii) Interim dividend – if unconditionally made available by the co. to its

members

• Deemed to accrue or arise in India

- S. 9(1) Income shall be deemed to accrue or arise in India.

i) Through or from any business connection in India; or

ii) Through or from any property in India; or

iii) Through or from any asset or source in India; or

iv) Through the transfer of a capital asset situate in India.

- Vodafone International holdings BV UOI [341 ITR 1 (SC)]

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CONTD….._____________________________________________

- “Through” shall mean & include “by means of” “in consequence of” or “by reason of” [Expl. 4].

- An asset or a capital asset being any share or interest in a company or entity outside India shall be deemed to have been situated in India,

if the share or interest derives its value substantially from the assets located in India. [ Expl. 5]

- Business of which all the operations are not carried out in India – onlysuch part of income as is attributable to the operations carried out in India [Expl. 1(a)]

- No Income shall be deemed to accrue or arise in India to NR, if operations are confined to purchase of goods in India for export [Expl. 1(b)]

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CONTD….._____________________________________________

- In business of news agency or publishing, no income shall deemed to accrue or arise in India to NR, if activities are confined to the collection of news and views in India and for transmission out of India [Expl. 1(c) ]

- No income shall be deemed to accrue or arise in India if NR is non citizen Individual or a firm in which he is a partner or a co. in which he is a shareholder, if activities are confined to shooting of any cinematograph film in India [ Expl. 1(d)]

- As per Explanation 2, “business connections” shall include any business activity carried out through a person acting on behalf of the non resident:

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CONTD….._____________________________________________

i) has and habitually exercises in India, an authority to conclude

contracts; or

ii) has no such authority but habitually maintains in India a stock of

goods/merchandise and regularly delivers the same; or

iii) habitually secures orders in India.

• S. 9(i)(ii) – salaries if it is earned in India i.e. if services are rendered in India, and for rest or leave period which preceded and succeeded by services rendered in India,

• S. 9(i)(iii) – If salaries payable by Govt. to citizen of India for services outside India.

• S. 9(i)(iv) – Dividend payable by Indian co. – Not applicable due to S.115-O.

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