[Write short notes on (a) Assessment year and Previous Year (b) Charge of income tax (c) Marginal rate of return (d) Capital asset (e) Agricultural income (f) Person and Assessee (g) Revenue Vs Capital expenditure (h) Heads of Income, Gross Total Income and Total Income (i) Capital receipts (j) Revenue Receipts Vs Capital Receipts (k) Tax Return (l) Method of accounting (m) Tax evasion vs. Tax avoidance (n) NRI, Ordinarily resident and Not-ordinarily resident (o) Income tax authorities (p) CBDT (q) Income tax rate for the Assessment year 2020 – 2021 (Refer your book or consult teacher) (r) Permanent account number (PAN)]
(a) Assessment year and Previous Year
(b) Charge of Income Tax (Sec. 4)
Section 4 is the charging section for
the Income-tax Act, 1961 (the Act). It provides for the charge and collection/
payment of Income Tax India. The important provisions of this section are:
Ø Where any Central Act enacts for any
Assessment Year that income-tax shall be charged at any rate or rates,
Ø Income-tax at that rate or rates
(including additional tax) shall be charged for that year in accordance with
and subject to all the provisions of the Act.
Ø In respect of the Total Income of the
Previous Year of every Person
Ø However, if by virtue of any provision
of the Act, Income Tax India is to be charged in respect of the income of a
period other than the previous year, then it shall be charged accordingly.
Ø The Income-tax chargeable as above
shall be deducted at source or paid in advance if so required under any
provision of the Act.
(c) Maximum marginal rate
Maximum Marginal rate is the rate of income tax including
surcharge applicable to the highest slab of income in the case of an
individual, AOP or BOI as specified in the Finance Act of the relevant previous
year. At present, the maximum marginal rate is 30% excluding surcharge. The
maximum marginal rates of various individuals are listed below:
a)
For an individual having total income less
than or equal to Rs. 50 lakhs – 31.2% including surcharge and cess.
b)
For an individual having total income more
than 50 lakhs but less than or equal to Rs. 1 Crore – 34.32% including
surcharge and cess.
c)
For an individual having total income more
than 1 crore but less than or equal to Rs. 2 Crores – 35.88% including
surcharge and cess.
d)
For an individual having total income more
than 2 crores but less than or equal to Rs. 5 Crores – 39% including surcharge
and cess.
e)
For an individual having total income more
than 5 crores – 42.44% including surcharge and cess.
(d) Meaning of Capital Assets under Sec. 2(14) means:
Capital asset means property of any kind held by an assessee, whether or not connected with his business or profession. It includes plant and machinery, building – whether business premises or residential, all assets of a business, goodwill, patent rights etc. This definition of a capital asset is very wide and includes all types of properties, whether movable or immovable, tangible or intangible, fixed or floating but does not include the following.
1. Stock-in-trade,
consumable stores or raw materials held for business or profession.
2. Personal movable properties viz.
furniture, motor vehicles, refrigerators, musical instruments etc. held for the
personal use of the assessee or his family. But personal property does not
include the following:
Ø Jewellery
Ø Residential house property
Ø Archaeological collections, drawings,
paintings, sculptures, or any work of art.
3. Rural Agricultural land:
Ø Land within the jurisdiction of a
municipality or cantonment board having a population of 10,000 or more or
Ø Land situated within 8 kilometers from
the local limits.
4. 6½ per cent Gold Bonds, 1977 or 7 per cent Gold Bonds, 1980 or National Defence Gold Bonds, 1980 issued by the Central Government.
5. Gold Bonds issued by Government of India including gold deposit bonds issued under the gold deposit scheme, 1999 notified by the central Government.
6. Special Bearer Bonds, 1991 issued by the Government of India.
7. Deposit Certificates issued under the Gold Monetization Scheme, 2016 w.e.f. The assessment year 2017-18
(e) Agriculture Income [Section 2 (1A)]
Agriculture income is fully exempted from tax
u/s 10(1) and as such does not form part of total income. As per Section 2(1A),
agriculture income includes:
a)
Any
rent or revenue derived from land which is situated in India and is used for
agricultural purpose;
b)
Any
income derived from such land by agriculture or by the process employed to
render the product fit for market or by the sale of such produce by the
cultivator or receiver of rent in Kind.
c)
Any
income derived from any building provided the following conditions were
satisfied:
Ø The building is or on the immediate
vicinity of the agricultural land;
Ø It is occupied by the cultivator or
receiver of rent or revenue
Ø It is used as a dwelling house or
storehouse or outhouse ;
Ø The land is assessed to land revenue
and it is not situated within the specified area.
(f) Person and Assessee
(g) Revenue Vs Capital Expenditure
Revenue Expenditure: Revenue expenditure is outlay or
expenses incurred in the day to day running of a company. In most cases,
revenue expenditure involves the procurement of services and goods that will be
used within a financial year. Revenue expenditure does not improve or increase
the income-generating abilities of a company rather at best it leads to the
maintenance of the current organisational revenue-generating capacity.
All expenses of a revenue nature are recorded
in the profit and loss account as either operating expenses, marketing and
selling expenses and administrative expenses. Revenue expenses play a role in
determining the profit earned or a loss by a company.
Revenue expenses are routine and recurring in
nature and some examples of revenue expenditure include payments in staff wages
and salaries, heating and lighting, depreciation, legal and professional fees,
travel and subsistence, insurance, administrative expenses, most of the marketing
and public relations expenses, audit fees, office supplies, staff training
costs, staff recruitment costs and minor or immaterial items of equipment.
Capital Expenditure: Capital expenditure represents
outlay on fixed assets. Capital expenditure can be an outlay of resources on
the investment of long-term income-generating capability of the company.
Investment in fixed assets will lead to an increase or improvement in the
investing company's revenue-generating capacity. Capital expenditure can also be
in the form of significant acquisitions or purchases of more expensive items of
equipment that will last longer than a financial year.
All capital expenditure is recorded on the
balance sheet. Capital expenditure will be depreciated or amortised annually to
ensure that an expense is charged to the profit and loss account to reflect the
capital expenditure's usage by the company.
Some of the examples of capital expenditure
include outlay on land and buildings, plant and equipment, vehicles, computer
equipment, product development costs, finance leases and software development
costs.
General Principles cum difference between capital and revenue
expenditure
To decide whether an expenditure is a capital
and revenue in nature the following points should be considered.
1.
Acquisition of Fixed Assets v. Routine Expenditure- Capital expenditure is incurred in
acquiring extending or improving a fixed asset, whereas revenue expenditure is
incurred in the normal course of business as business expenditure.
2.
Several previous years vs. one previous year- Capital expenditure produces benefits
for several previous years, whereas revenue expenditure is consumed within a
previous year.
3.
Improvement v. Maintenance- Capital
expenditure makes improvements in earning capacity of a business. Revenue
expenditure, on the other hand, maintains the profit-making capacity of a
business.
4.
Non-recurring v. Recurring- usually
capital expenditure is a non-recurring outlay, whereas revenue expenditure is
recurring outlay.
(h) Heads of Income, Gross Total Income and Total Income
Section 14: As per section 14, all income, for
purposes of income-tax, will be classified under the following heads of income.
(i)
Income under the head Salaries (Sections 15 to
17),
(ii)
Income from House Property (Sections 22 to 27),
(iii)
Profits and gains of business or profession
(Sections 28 to 44)
(iv) Capital gains (Sections 45 to 55)
(v)
Income from other sources (Sections 56 to 59)
Incomes earn under different heads are
calculated separately and then aggregated. The aggregate of incomes computed
under the above 5 heads, after applying clubbing provisions and making
adjustments of set-off and carry forward of losses, is known, as gross total
income (GTI) [Sec. 80B]
From the gross total income computed above,
deductions allowed under Sections 80C to 80U is deducted to find the total
income and on this income tax is calculated.
(i) Capital Receipts
A receipt in place of the source of income is
a capital receipt. E.g., Compensation for the loss of employment is a capital
receipt. The capital receipt is generally referable to fixed capital. E.g.,
Sale price on the sale of assets, which assessee uses as a fixed asset in his
business is a capital receipt. Capital receipts are never taxable. That’s why amount
received from an insurance company at the time of maturity is not taxed under
Section 10(10D). Similarly, the loan taken is also not taxed. However, some of
the capital receipts are taxable since they have been specifically provided in
the definition of Income such as tax on Capital gains on sale of a Capital
asset.
(j) Revenue Vs Capital Receipts:
Any
receipt of money can either be categorized as revenue or capital. Revenue
receipts are always fully taxable unless a specific exemption has been provided
for that. Capital receipts are never taxable. That’s why amount received from
an insurance company at the time of maturity is not taxed under Section
10(10D). Similarly, the loan taken is also not taxed. However, some of the
capital receipts are taxable since they have been specifically provided in the
definition of Income such as tax on Capital gains on sale of a Capital asset.
DIFFERENCE BETWEEN CAPITAL RECEIPT AND
REVENUE RECEIPT
|
Capital Receipt |
Revenue Receipts |
|
Ø
A
capital receipt is generally referable to fixed capital. E.g., Sale price on
the sale of assets, which assessee uses as a fixed asset in his business is a
capital receipt |
Ø
Revenue
receipt refers to circulating capital. E.g., the Sale price of the stock in
trade is a revenue receipt |
|
Ø
Payment
received towards the compensation for the extinction of a profit-earning
source is a capital receipt |
Ø
Payment
received to compensate the loss of earnings is a revenue receipt |
|
Ø
A
receipt in place of the source of income is a capital receipt. E.g.,
Compensation for the loss of employment is a capital receipt. |
Ø
A
receipt in place of income is a revenue receipt |
|
Ø
Capital
receipts are exempt from tax unless they are expressively taxable like in the
case of capital gains |
Ø
Revenue
receipts are always taxable unless expressly exempt from tax under section 10
|
(k) Tax Return
The tax form or forms used to file income taxes with the Internal
Revenue Service (IRS). Tax returns often are set up in a worksheet format,
where the income figures used to calculate the tax liability are written into
the documents themselves. Tax returns must be filed every year for an
individual or business that received income during the year, whether through regular
income (wages), interest, dividends, capital gains, or other profits. A return of excess
taxes paid during a given tax year; this is more accurately known as a
"tax refund".
(l) Method of Accounting [Section 145]
As per section 145, for income-tax purposes, only one of the following
two methods of accounting can be followed:
a) Mercantile system;
b) Cash system.
Further, the profits from business and profession will have to be
computed in accordance with accounting standards which may be prescribed by the
Central Government from time to time. The Central Government has since notified
the following two accounting standards to be followed by all assessee who is
following mercantile system of accounting:
a) Accounting Standard I relating to
disclosure of accounting policies.
b) Accounting Standard II relating to
disclosure of prior period and extraordinary items and changes in accounting
policies.
(m) Tax Evasions, Tax Avoidance, Tax mitigation and Tax Planning
The
methods adopted to reduce the tax
liability can be broadly put into
four categories: "Tax Evasion";” Tax Avoidance”, "Tax
Mitigation", "Tax Planning". The difference between these four methods sometimes
becomes blurred owing to the perception of the tax authorities and/or
taxpayer.
Tax
Evasion: Tax Evasion term is usually used to mean 'illegal arrangements
where liability to tax is hidden or ignored i.e. the taxpayer pays less than he
is legally obligated to pay or by hiding income or information from the tax
authority. Thus, here the tax
liability is reduced by
"illegal and fraudulent" means. For example: understatement of income.
Tax
Avoidance: Tax Avoidance refers to the legal means to avoid or
reduce tax liability, which would
be otherwise incurred, by taking advantage of some provision or lack of provision
in the law. Thus, in this case, the taxpayer tries to reduce his tax liability but here the arrangement will be
legal, but may not be as per the intent of the law. Thus, in this
case, a taxpayer does not hide the key facts but is still able to avoid or reduce tax liability on account of some loopholes or
otherwise. For example: misinterpreting
the provisions of the IT Act.
Tax
Mitigation: "Tax Mitigation" is a situation where the taxpayer takes advantage of a fiscal
incentive afforded to him by the tax legislation by actually submitting to the
conditions and economic consequences that the particular tax legislation
entails. A good example of tax mitigation is the setting up of a business
undertaking by a taxpayer in a specified area such as Special
Economic Zone (SEZ).
Tax
Planning: Tax Planning is defined as "arrangement of a person's
business and/or private affairs to minimize tax
liability". For example
availing deduction.
(n) Income Tax Authorities
Section 116 of
the Income Tax Act, 1961 provides for the administrative and judicial
authorities for the administration of this Act. The Direct Tax Laws Act, 1987
has brought far-reaching changes in the organizational structure. The
implementation of the Act lies in the hands of these authorities. The change in
designation of certain authorities and the creation of certain new posts in the
structure are the main features of amendments made by The Direct Tax Laws Act,
1987. The new feature of authorities has been properly depicted in a chart on
the facing page. These authorities have been grouped into two main wings:
(i) Administrative
[Income Tax Authorities] [Sec. 116]
a) the Central Board of Direct Taxes constituted under the Central Boards of Revenue Act, 1963 (54 of 1963),
b) Directors-General of Income-tax or Chief Commissioners of Income-tax,
c) Directors of Income-tax or Commissioners of Income-tax or Commissioners of Income-tax (Appeals),
d) Additional Directors of Income-tax or Additional Commissioners of Income-tax or Additional Commissioners of Income-tax (Appeals),
e) Joint Directors of Income-tax or Joint Commissioners of Income-tax.
f) Deputy Directors of Income-tax or Deputy Commissioners of Income-tax or Deputy Commissioners of Income-tax (Appeals),
g) Assistant Directors of Income-tax or Assistant Commissioners of Income-tax,
h) Income-tax Officers,
i) Tax Recovery Officers,
j) Inspectors of Income-tax.
(ii)
Assessing Officer [Sec. 2(7A)]
"Assessing Officer" means
the Assistant Commissioner or Deputy Commissioner or Assistant Director or
Deputy Director or the Income-tax Officer who is vested with the relevant
jurisdiction by directions or orders issued under sub-section (1) or
sub-section (2) of section 120 or any other provision of this Act, and the
Joint Commissioner or Joint Director who is directed under clause (b) of
sub-section (4) of that section to exercise or perform all or any of the powers
and functions conferred on, or assigned to, an Assessing Officer under this
Act;
(o) Central Board of Direct Taxes
The Central Board of Direct Taxes (CBDT) is the
highest executive authority. It is subject to the overall control of the
Central Government. It is authorized to discharge all those functions
prescribed in the Act and those which are entrusted to it by the Central
Government. The Central Board of Direct Taxes consists of a Chairman and
following six Members:
a) Chairman
b) Member (Income-tax)
c) Member (Legislation & Computerisation)
d) Member (Personnel & Vigilance)
e) Member (Investigation)
f) Member (Revenue)
g) Member (Audit & Judicial)