TAXATION- BASICS (for UPSC)

BASICS

Income-tax is levied on an assessee’s total income. Such total income has to be computed as per the provisions contained in the Income-tax Act, 1961. Let us go step by step to understand the procedure of computation of total income for the purpose of levy of income-tax -

Step 1 – Determination of residential status

Step 2 – Classification of income under different heads

Step 3 – Exclusion of income not chargeable to tax

Step 4 – Computation of income under each head

Step 5 – Clubbing of income of spouse, minor child etc

Step 6 – Set-off or carry forward and set-off of losses

Step 7 – Computation of Gross Total Income

Step 8 – Deductions from Gross Total Income

Step 9 – Total income

Step 10 – Application of the rates of tax on the total income

Step 11 - Surcharge / Rebate under section 87A

Step 12 – Education cess and secondary and higher education cess on income-tax

Step 13 – Advance tax and tax deducted at source

IMPORTANT DEFINITIONS IN THE INCOME TAX ACT, 1961

(only few imp. included here for UPSC)

Assessee [Section 2(7)] 

Assessee means a person by whom any tax or any other sum of money is payable under this Act. It includes every person in respect of whom any proceeding has been taken for the assessment of his income or assessment of fringe benefits. Sometimes, a person becomes assessable in respect of the income of some other persons. In such a case also, he may be considered as an assessee. This term also includes every person who is deemed to be an assessee or an assessee in default under any provision of this Act. 

Person [Section 2(31)] 

The definition of ‘assessee’ leads us to the definition of ‘person’ as the former is closely connected with the latter. The term ‘person’ is important from another point of view also viz., the charge of income-tax is on every ‘person’. The definition is inclusive i.e. a person includes, 

(i) an individual, 

(ii) a Hindu Undivided Family (HUF), 

(iii) a company, 

(iv) a firm, 

(v) an AOP or a BOI, whether incorporated or not, 

(vi) a local authority, and 

(vii) every artificial juridical person e.g., an idol or deity. 

We may briefly consider some of the above seven categories of assessees each of which constitutes a separate unit of assessment.

Income [Section 2(24)] 

Section 2(24) of the Act gives a statutory definition of income. This definition is inclusive and not exhaustive. Thus, it gives scope to include more items in the definition of income as circumstances may warrant. At present, the following items of receipts are included in income:—

(1) Profits and gains. 

(2) Dividends. 

(3) Voluntary contributions received by a trust/institution created wholly or partly for charitable or religious purposes or by an association or institution referred to in section 10(21) or section (23C)(iiiad)/(iiiae)/(iv)/(v)/(vi)/(via) or an electoral trust.

(4) The value of any perquisite or profit in lieu of salary taxable under section 17. 

(5) Any special allowance or benefit other than the perquisite included above, specifically granted to the assessee to meet expenses wholly, necessarily and exclusively for the performance of the duties of an office or employment of profit. 

(6) Any allowance granted to the assessee to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at a place where he ordinarily resides or to compensate him for the increased cost of living.

(7) The value of any benefit or perquisite whether convertible into money or not, obtained from a company either by a director or by a person who has a substantial interest in the company or by a relative of the director or such person and any sum paid by any such company in respect of any obligation which, but for such payment would have been payable by the director or other person aforesaid. 

(8) The value of any benefit or perquisite, whether convertible into money or not, which is obtained by any representative assessee mentioned under section 160(1)(iii) and (iv), or by any beneficiary or any amount paid by the representative assessee for the benefit of the beneficiary which the beneficiary would have ordinarily been required to pay. 

(9) Deemed profits chargeable to tax under section 41 or section 59. 

(10) Profits and gains of business or profession chargeable to tax under section 28. 

(11) Any capital gains chargeable under section 45. 

(12) The profits and gains of any insurance business carried on by Mutual Insurance Company or by a cooperative society, computed in accordance with Section 44 or any surplus taken to be such profits and gains by virtue of the provisions contained in the first Schedule to the Act. 

(13) The profits and gains of any business of banking (including providing credit facilities) carried on by a co-operative society with its members. 

(14) Any winnings from lotteries, cross-word puzzles, races including horse races, card games and other games of any sort or from gambling, or betting of any form or nature whatsoever. For this purpose, (i) “Lottery” includes winnings, from prizes awarded to any person by draw of lots or by chance or in any other manner whatsoever, under any scheme or arrangement by whatever name called; (ii) “Card game and other game of any sort” includes any game show, an entertainment programme on television or electronic mode, in which people compete to win prizes or any other similar game. 

(15) Any sum received by the assessee from his employees as contributions to any provident fund (PF) or superannuation fund or Employees State Insurance Fund (ESI) or any other fund for the welfare of such employees. 

(16) Any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy will constitute income. “Keyman insurance policy” means a life insurance policy taken by a person on the life of another person where the latter is or was an employee or is or was connected in any manner whatsoever with the former’s business. 

(17) Any sum referred to clause (va) of section 28. Thus, any sum, whether received or receivable in cash or kind, under an agreement for not carrying out any activity in relation to any business; or not sharing any know-how, patent, copy right, trade-mark, licence, franchise, or any other business or commercial right of a similar nature, or information or technique likely to assist in the manufacture or processing of goods or provision of services, shall be chargeable to income tax under the head “profits and gains of business or profession”. 

(18) Any sum of money or value of property referred to in section 56(2)(vii) or section 56(2)(viia) [Refer to Unit 5 of Chapter 4 “Income from Other Sources”]. 

(19) Any consideration received for issue of shares as exceeds the fair market value of the shares referred to in section 56(2)(viib) [Refer to Unit 5 of Chapter 4 “Income from Other Sources”]. 

(20) Any sum of money referred to in section 56(2)(ix) [Refer to Unit 5 of Chapter 4 “Income from Other Sources”]. 

(21) Assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement, by whatever name called, by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee is included in the definition of income.

NOTE- Subsidy or Grant which are not included in the definition of income u/s 2(24)

• Subsidy or grant or reimbursement taken into account for determination of actual cost of depreciable asset.
•  Subsidy or grant by the Central Government for the purpose of the corpus of a trust or institution established by a Central Govt. or State Govt., as the case may be.

India [Section 2(25A)] 

The term 'India' means – 

(i) the territory of India as per article 1 of the Constitution, 

(ii) its territorial waters, seabed and subsoil underlying such waters, 

(iii) continental shelf, 

(iv) exclusive economic zone or 

(v) any other specified maritime zone and the air space above its territory and territorial waters. 

Specified maritime zone means the maritime zone as referred to in the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976.