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Direct Tax

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Direct Tax Project on Scope of Total Income, Income From Salaries, Income From Business & Profession

Direct Tax Project on Scope of Total Income, Income From Salaries, Income From Business & Profession

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Direct Tax

  1. 1. 1 INTRODUCTION The taxes are the basic source of revenue for the Government. Revenue raised from the taxes are utilized for meeting the expense of Government like, provision of education, infrastructure facilities such as roads, dams etc. Tax is the financial charge imposed by the Government on income, commodity or activity. Government imposes two types of taxes namely Direct taxes and Indirect taxes. Under direct taxes, person who pays the tax bears the burden of it example: Income tax, Wealth Tax etc. while in Indirect Taxes the person who consumes the goods or services example: Service Tax, Value Added Tax, Excise Duty etc. The first Income Tax Act in India was introduced in 1860. The present law of income tax is contained in Income Tax Act, 1961. This Act is the charging Statute of Income Tax in India. It provides for levy, administration, collection and recovery of Income Tax. The Income Tax Law comprises The Income Tax Act 1961, Income Tax Rules 1962, Notifications and Circulars issued by Central Board of Direct Taxes (CBDT), Annual Finance Acts and Judicial pronouncements by Supreme Court and High Courts. Direct Taxes, as the name suggests, are taxes that are directly paid to the government by the taxpayer. It is a tax applied on individuals and organizations directly by the government e.g. income tax, corporation tax, wealth tax etc. DIRECT TAXES Income Tax Income Tax is paid by an individual based on his/her taxable income in a given financial year. Under the Income Tax Act, the term ‘individual’ also includes Hindu Undivided Families (HUFs), Co-operative Societies, Trusts and any artificial judicial person. Taxable income refers to total income minus applicable deductions and exemptions. Tax is payable if the taxable income is above the minimum taxable limit and is paid as per the differing rates announced for each tax slab for the financial year.
  2. 2. 2 CorporationTax Corporation Tax is paid by Companies and Businesses operating in India on the income earned worldwide in a given financial year. The rates of taxation vary based on whether the company is incorporated in India or abroad. Wealth Tax Wealth tax is applicable on individuals, HUFs or companies on the value of their assets in a given financial year on the date of valuation. It is taxed at the rate of 1% of the net wealth of any assesse exceeding Rs 30,00,000. ‘Net wealth’ here includes, unproductive assets like cash in hand above Rs 50,000, second residential property not rented out, cars, gold jewellery or bullion, boats, yachts, aircrafts or urban land. It does not include productive assets like commercial property, stocks, bonds, fixed deposits, mutual funds etc. Capital Gains Tax The profits made on sale of property are taxable under Capital Gains Tax. Property here includes stocks, bonds, residential property, precious metals etc. It is taxed at two different rates based on how long the property was owned by the taxpayer – Short Term Capital Gains Tax and Long Term Capital Gains Tax. This deciding period of ownership varies greatly for different classes of property.
  3. 3. 3 DEFINITION DEFINITION of'Direct Tax’ A tax that is paid directly by an individual or organization to the imposing entity. A taxpayer pays a direct tax to a government for different purposes, including real property tax, personal property tax, income tax or taxes on assets. Direct taxes are different from indirect taxes, where the tax is levied on one entity, such as a seller, and paid by another, such a sales tax paid by the buyer in a retail setting. BREAKING DOWN 'Direct Tax’ A direct tax cannot be shifted to another individual or entity. The individual or organization upon which the tax is levied is responsible for the fulfillment of the tax payment. Indirect taxes, on the other hand, can be shifted from one taxpayer to another. DEFINITION of'Income Tax' A tax that governments impose on financial income generated by all entities within their jurisdiction. By law, businesses and individuals must file an income tax return every year to determine whether they owe any taxes or are eligible for a tax refund. Income tax is a key source of funds that the government uses to fund its activities and serve the public BREAKING DOWN 'Income Tax' Most countries employ a progressive income tax system in which higher income earners pay a higher tax rate compared to their lower earning counterparts. The first income tax imposed in America was during the War of 1812. Its original purpose was to fund the repayment of a $100 million debt that was incurred through war-related expenses. After the war, the tax was repealed, but income tax became permanent during the early 20th century.
  4. 4. 4 DIFFERENCE BETWEEN DIRECT TAX AND INDIRECT TAX Basis of Comparison Direct Tax Indirect Tax Meaning Direct tax is referred to as the tax, which is paid by the person to the government to whom it is levied and charged on the income and wealth of persons. Indirect Tax is referred to as the tax, which is paid by the taxpayer to the government indirectly, charged on goods and services. Burden The person on whom it is levied bears its burden. The burden of tax can be shifted to another person. Types Wealth Tax, Income Tax, Property Tax, Corporate Tax, Import and Export Duties. Central Sales tax, VAT (Value Added Tax), Service Tax, STT (Security Transaction Tax), Excise Duty, Custom Duty. Evasion Tax evasion is possible. Tax evasion is hardly possible because it is included in the price of goods and services. Inflation Direct tax helps in reducing inflation. Indirect taxes promotes inflation. Levied on Persons, i.e. Individual, HUF (Hindu Undivided Family), Company, Firm etc. Consumers of goods and services. Nature Progressive Regressive
  5. 5. 5 MERITS OF DIRECT TAX Following are the important advantages or merits of Direct Taxes:-  Equity There is social justice in the allocation of tax burden in case of direct taxes as they are based on the principle of ability to pay. Persons in a similar economic situation are taxed at the same rate. Persons with different economic standing are taxed at a different rate. Hence, there is both horizontal and vertical equity under direct taxation. Progressive direct taxation can reduce income inequalities and bring about adequate social & economic justice.  Certainty As far as direct taxes are concerned, the tax payer is certain as to how much he is expected to pay, as the tax rates are decided in advance. The Government can also estimate the tax revenue from direct taxes with a fair accuracy. Accordingly, the Government can make adjustments in its income and expenditure.  Relatively Elastic The direct taxes are relatively elastic. With an increase in income and wealth of individuals and companies, the yield from direct taxes will also increase. Elasticity also implies that the government's revenue can be increased by raising the rates of taxation. An increase in tax rates would increase the tax revenue.  Creates Public Consciousness They have educative value. In the case of direct taxes, the taxpayers are made to feel directly the burden of taxes and hence take keen interest in how public funds are spent. The taxpayers are likely to be more aware about their rights and responsibilities as citizens of the state.
  6. 6. 6  Economical Direct taxes are generally economical to collect. For instances, in the case of personal income tax, the tax can be deducted at source from the income or salaries of the individuals. Therefore, the government does not have to spend much in tax collection as far as personal income tax is concerned. However, in the case of indirect taxes, the government has to set up an elaborate machinery to collect taxes.  Anti-inflationary The direct taxes can help to control inflation. During inflationary periods, the government may increase the tax rate. With an increase in tax rate, the consumption demand may decline, which in turn may reduce inflation.
  7. 7. 7 DEMERITS OF DIRECT TAX Though direct taxes possess above mentioned merits, the economist have criticised them on the following grounds:-  Tax Evasion In India, there is good amount of tax evasion. The tax evasion is due to High tax rates, Documentation and formalities, Poor and corrupt tax administration. It is easier for the businessmen to evade direct taxes. They invariable suppress correct information about their incomes by manipulating their accounts and evade tax on it. In less developed countries like India, due to high rate of progressive tax evasion & avoidance are extensive and led to rise in black money.  Arbitrary Rates The direct taxes tend to be arbitrary. Critics point out that there cannot be any objective basis for determining tax rates of direct taxes. Also, the exemption limits in the case of personal income tax, wealth tax, etc., are determined in an arbitrary manner. A precise degree of progression in taxation is also difficult to achieve. Therefore direct taxes may not always fulfill the canon of equity.  Inconvenient Direct taxes are inconvenient in the sense that they involve several procedures and formalities in filing of returns. For most people payment of direct tax is not only inconvenient, it is psychological painful also. When people are required to pay a sizeable part of their income as a tax to the state, they feel very much hurt and their propensity to evade tax remains high. Further everyone who is required to pay a direct tax has to furnish appropriate evidence in support of the statement of his income & wealth & for this he has to maintain his accounts in proper form. Direct tax is considered inconvenient by some people because they have to make few lump sum payments to the governments, whereas their income receipts are distributed over the whole year.
  8. 8. 8  Narrow Coverage In India, there is a narrow coverage of direct taxes. It is estimated that only three percent of the population pay personal income tax. Due to low coverage, the government does not get enough funds for public expenditure. Estate duty & wealth tax are equally narrow based and thus revenue proceeds from these taxes are invariably small.  Affects CapitalFormation The direct taxes can affect savings and investment. Due to taxes, the net income of the people gets reduced. This in turn reduces savings. Reduction in savings results in low investment. The low investment affects capital formation in the country.  Effecton Willingness and Ability to Work Highly progressive direct taxes reduce people's ability and willingness to work and save. This in turn may have a negative impact on investment and productive capacity in the economy. If tax burden is high, people's consumption level gets adversely affected and this has an impact on their ability to work and save. High taxes also discourage people from working harder in order to earn and save more.  SectoralImbalance In India, there is Sectoral imbalance as far as direct taxes are concerned. Certain sectors like the corporate sector is heavily taxed, whereas, the agriculture sector is 100% tax free. Even the large rich farmers are exempted from payment of personal income tax.
  9. 9. 9 SCOPE OF TOTAL INCOME The following points should be noted in regard to scope of income: While S. 4 makes the total income of the previous year chargeable to tax, S. 5 defines the scope of the total income so chargeable to tax. It determines the extent and scope of income which is chargeable to tax. The term “scope of income” means which items of income are included and which are excluded while computing tax liability. The scope of income depends upon the residential status of the person. There are three broad categories of persons: a) Resident and ordinary resident b) Non- resident and c) Resident but not ordinarily resident. Section 5 lays down what types of income would be taxable in the case of assessees belonging to each of these categories. It should be noted that section 5 specifically states that the income is to be computed “subject to the provisions of this act”. Thus, if any item of income is exempt under the provisions of the act, it is to be excluded from the scope of income. RESIDENT AND ORDINARY RESIDENT A resident and ordinary resident is taxable in respect of any income, from whatever source derived, which: (a) Is received, or deemed to be received in India, in the previous year, by or on behalf of such person; or (b) Accrues or arises, or is deemed to accrue or arise to him, in India, during the previous year; or (c) Accrues or arises to him outside India, during the previous year. Thus, in the case of a ‘resident and ordinary resident’, his total income includes any income received, or accruing or arising in India, and any income accruing or arising outside India (or
  10. 10. 10 deemed to be so received, or accruing or arising, as the case may be). In short, the entire ‘World Income’ (Indian Income+ Foreign Income) of an ordinary resident is to be included in his total income. RESIDENT BUT NOT ORDINARY RESIDENT A person not ordinary resident in India, is taxable in respect of any income, from whatever source derived, which- (a) Is received, or deemed to be received, in India, in the previous year, by or on behalf of such person: or (b) Accrues or arises, or is deemed to accrue or arise to him, in India, during the previous year; or (c) Accrues or arises to him, outside India, from a business controlled from or a profession set up in India. Thus, in the case of a not ordinary resident, while the Indian Income is to be included in the total income, the foreign income is to be included only if it is derived from a business controlled in or a profession set up in India. So, the liability of a ‘Not-Ordinary Resident’ in respect of the Foreign Income is much less as compared with that of the ‘Ordinary Resident’. NON-RESIDENT A resident who is a non-resident, is taxable in respect of any income, from whatever source derived, which- (a) Is received in India, or is deemed to be received in India, in the previous year, by or on behalf of such person; or (b) Accrues or arises, or is deemed to accrue or arise to him, in India, during the previous year. Thus, in the case of a ‘non-resident’ his taxable income includes only his Indian income during that year. The Foreign Income of a non-resident is not taxable under The Indian Income-Tax Act. So, the liability of a non-resident is the lowest among all the types of residents under The Income Tax Act.
  11. 11. 11 RESIDENTIAL STATUS AND TAXABILITY OF INCOME NATURE OF INCOME RESIDENT & ORDINARY RESIDENT RESIDENT BUT NOT ORDINARY RESIDENT NON RESIDENT Income received in India Taxable Taxable Taxable Income which accrues or arises in India Taxable Taxable Taxable Income deemed to be received in India Taxable Taxable Taxable Income deemed to accrue in India Taxable Taxable Taxable Income which accrues and arises outside India from a business controlled from India/ profession set up in India. Taxable Taxable Not Taxable Any other income which accrues or arises outside India Taxable Not Taxable Not Taxable
  12. 12. 12 NOTE: 1) Indian income is taxable in all cases, whether of an ordinary resident, or a not-ordinary resident, or a non-resident. Indian income includes income received or accruing or arising in India, or deemed to be received in India. 2) Foreign income of an ordinary resident is wholly taxable. 3) Foreign income of a not-ordinary resident is taxable only if derived from a business controlled or profession set up in India. 4) Foreign income of a non-resident is not taxable at all. [As per S.1, the Act extends to whole of India i.e. it applies to all residents of India and to all income arising in India. hence all income earned by a resident (whether arising in or outside India), while all income arising in India is taxable (whether earned by a resident or a non- resident).]
  13. 13. 13 Illustration From the following income of Mr. Rohit for the previous year 2014-15, compute his gross total income for the assessment year 2015-16 if he is- (a) Resident and ordinary resident (b) Resident but not ordinary resident (c) Non-resident Income 1. Dividend received from Mac-Donalds Ltd. a USA Company in USA 18000 2. Rent received from house in Kolkata 60000 3. Income from agriculture in Sri Lanka 50000 4. Income from business in Dhaka, controlled from Mumbai 60000 5. Rent from office property in UK credited to bank account in Switzerland 20000 6. Income from profession in Nairobi received in Nairobi which was set up in India 30000 7. Past untaxed foreign income brought to India, during the previous year 10000 8. Royalties from Indian Companies 40000
  14. 14. 14 Solution: Name: Mr. Rohit Previous Year: 2014-15 Assessment Year: 2015-16 Computation Of Total Income Income R&OR R but NOR NR 1.Dividend received from Mac- Donalds Ltd. USA Company in USA 2.Rent received from house in Kolkata 3.Income from Agriculture in Sri Lanka 4.Income from business in Dhaka controlled from Mumbai 5.Rent from office property in UK credited to bank account in Switzerland 6.Income from profession in Nairobi received in Nairobi which was set up in India 7.Past untaxed foreign income brought to India during the previous year 8.Royalties from Indian Companies Gross Total Income Foreign Indian Foreign Foreign Foreign Foreign Remittance (Not Income) Indian 18000 60000 50000 60000 20000 30000 - 40000 278000 - 60000 - 60000 - 30000 - 40000 190000 - 60000 - - - - - 40000 100000
  15. 15. 15 INCOME FROM SALARY MEANING The meaning of the term ‘salary’ for purposes of income tax is much wider than what is normally understood. Every payment made by an employer to his employee for service rendered would be chargeable to tax as income from salaries. The term ‘salary’ for the purposes of Income-tax Act, 1961 will include both monetary payments (e.g. basic salary, bonus, commission, allowances etc.) as well as non-monetary facilities (e.g. housing accommodation, medical facility, interest free loans etc). (1) Employer-employee relationship: Before an income can become chargeable under the head ‘salaries’, it is vital that there should exist between the payer and the payee, the relationship of an employer and an employee. Consider the following examples: (a) Sujatha, an actress, is employed in Chopra Films, where she is paid a monthly remuneration of `2 lakh. She acts in various films produced by various producers. The remuneration for acting in such films is directly paid to Chopra Films by the different producers. In this case, `2 lakh will constitute salary in the hands of Sujatha, since the relationship of employer and employee exists between Chopra Films and Sujatha. (b) In the above example, if Sujatha acts in various films and gets fees from different producers, the same income will be chargeable as income from profession since the relationship of employer and employee does not exist between Sujatha and the film producers. (c) Commission received by a Director from a company is salary if the Director is an employee of the company. If, however, the Director is not an employee of the company, the said commission cannot be charged as salary but has to be charged either as income from business or as income from other sources depending upon the facts. (d) Salary paid to a partner by a firm is nothing but an appropriation of profits. Any salary, bonus, commission or remuneration by whatever name called due to or received by
  16. 16. 16 partner of a firm shall not be regarded as salary. The same is to be charged as income from profits and gains of business or profession. This is primarily because the relationship between the firm and its partners is not that of an employer and employee. (2) Full-time or part-time employment: It does not matter whether the employee is a full-time employee or a part-time one. Once the relationship of employer and employee exists, the income is to be charged under the head “salaries”. If, for example, an employee works with more than one employer, salaries received from all the employers should be clubbed and brought to charge for the relevant previous years. (3) Foregoing ofsalary: Once salary accrues, the subsequent waiver by the employee does not absolve him from liability to income-tax. Such waiver is only an application and hence, chargeable to tax. Example: Mr. A, an employee instructs his employer that he is not interested in receiving the salary for April 2013 and the same might be donated to a charitable institution. In this case, Mr. A cannot claim that he cannot be charged in respect of the salary for April 2013. It is only due to his instruction that the donation was made to a charitable institution by his employer. It is only an application of income. Hence, the salary for the month of April 2013 will be taxable in the hands of Mr. A. He is however, entitled to claim a deduction under section 80G for the amount donated to the institution. (4) Surrender of salary: However, if an employee surrenders his salary to the Central Government under section 2 of the Voluntary Surrender of Salaries (Exemption from Taxation) Act, 1961, the salary so surrendered would be exempt while computing his taxable income. (5) Salary paid tax-free: This, in other words, means that the employer bears the burden of the tax on the salary of the employee. In such a case, the income from salaries in the hands of the employee will consist of his salary income and also the tax on this salary paid by the employer.
  17. 17. 17 DEFINITION OF SALARY The term ‘salary’ has been defined differently for different purposes in the Act. The definition as to what constitutes salary is very wide. As already discussed earlier, it is an inclusive definition and includes monetary as well as non-monetary items. There are different definitions of ‘salary’ say for calculating exemption in respect of gratuity, house rent allowance etc. ‘Salary’ under section 17(1), includes the following: (i) Wages, (ii) Any annuity or pension, (iii) Any gratuity, (iv) Any fees, commission, perquisite or profits in lieu of or in addition to any salary or wages, (v) Any advance of salary, (vi) Any payment received in respect of any period of leave not availed by him i.e. leave salary or leave encashment, (vii) The portion of the annual accretion in any previous year to the balance at the credit of an employee participating in a recognised provident fund to the extent it is taxable and (viii) Transferred balance in recognized provident fund to the extent it is taxable, (ix) The contribution made by the Central Government or any other employer in the previous year to the account of an employee under a pension scheme referred to in section 80CCD. BASIS OF CHARGE 1. Section 15 deals with the basis of charge. Salary is chargeable to tax either on ‘due’ basis or on ‘receipt’ basis, whichever is earlier. 2. However, where any salary, paid in advance, is assessed in the year of payment, it cannot be subsequently brought to tax in the year in which it becomes due.
  18. 18. 18 3. If the salary paid in arrears has already been assessed on due basis, the same cannot be taxed again when it is paid. Examples: i. If A draws his salary in advance for the month of April 2014 in the month of March 2014 itself, the same becomes chargeable on receipt basis and is to be assessed as income of the P.Y.2013-14 i.e., A.Y.2014-15. However, the salary for the A.Y.2015-16 will not include that of April 2014. ii. If the salary due for March 2014 is received by A later in the month of April 2014, it is still chargeable as income of the P.Y.2013-14 i.e. A.Y.2014-15 on due basis. Obviously, salary for the A.Y.2015-16 will not include that of March 2014. ADVANCE SALARY Advance salary is taxable when it is received by the employee irrespective of the fact whether it is due or not. It may so happen that when advance salary is included and charged in a particular previous year, the rate of tax at which the employee is assessed may be higher than the normal rate of tax to which he would have been assessed. Section 89(1) provides for relief in these types of cases. LOAN OR ADVANCE AGAINST SALARY Loan is different from salary. When an employee takes a loan from his employer, which is repayable in certain specified installments, the loan amount cannot be brought to tax as salary of the employee. Similarly, advance against salary is different from advance salary. It is an advance taken by the employee from his employer. This advance is generally adjusted with his salary over a specified time period. It cannot be taxed as salary. ARREARS OF SALARY Normally speaking, salary arrears must be charged on due basis. However, there are circumstances when it may not be possible to bring the same to charge on due basis. For example if the Pay Commission is appointed by the Central Government and it recommends
  19. 19. 19 revision of salaries of employees, the arrears received in that connection will be charged on receipt basis. Here, also relief under section 89(1) is available. PROVIDENT FUND Provident fund scheme is a scheme intended to give substantial benefits to an employee at the time of his retirement. Under this scheme, a specified sum is deducted from the salary of the employee as his contribution towards the fund. The employer also generally contributes the same amount out of his pocket, to the fund. The contribution of the employer and the employee are invested in approved securities. Interest earned thereon is also credited to the account of the employee. Thus, the credit balance in a provident fund account of an employee consists of the following: (i) Employee’s contribution (ii) Interest on employee’s contribution (iii) Employer’s contribution (iv) Interest on employer’s contribution. The accumulated balance is paid to the employee at the time of his retirement or resignation. In the case of death of the employee, the same is paid to his legal heirs. The provident fund represents an important source of small savings available to the Government. Hence, the Income-tax Act, 1961 gives certain deductions on savings in a provident fund account. The following are the types of provident funds: (i) Statutory Provident Fund (SPF) (ii) Recognised Provident Fund (RPF) (iii) Unrecognised Provident Fund (URPF)
  20. 20. 20 The tax treatment is given below: PARTICLUARS STATUTORY PF RECOGNOSED PF UNRECOGNISED PF EMPLOYEE’S CONTRIBUTION Ignore Ignore Ignore EMPLOYER’S CONTRIBUTION Fully Exempt Exempt Upto 12% [Basic Salary+ DA (In Terms)+ Turnover Commission] Fully Exempt INTEREST CREDITED Fully Exempt Exempt Upto 9.5% Fully Exempt LUMPSUM RECEIVED Exempt u/s 10(11) Exempt u/s 10(12) Taxable (Divided In 4 Parts)
  21. 21. 21 LUMPSUM RECEIVED FROM UNRECOGNISED PF CONTRIBUTION INTEREST Employee’s Employer’s On On Contribution Contribution Employer’s Employee’s Contribution Contribution IGNORE TAXABLE AS IFS TAXABLE AS IFOS LUMPSUM RECEIVED FROM RECOGNISED PROVIDENT FUND AFTER 5 YEARS WITHIN 5 YEARS EXEMPT DUE TO: OTHERWISE  Ill health of employee  Discontinuation of business by employer TAXABLE  Any other reason beyond control of employee
  22. 22. 22 GRATUITY Gratuity is a voluntary payment made by an employer in appreciation of services rendered by the employee. Now-a-days gratuity has become a normal payment applicable to all employees. In fact, Payment of Gratuity Act, 1972 is a statutory recognition of the concept of gratuity. Almost all employers enter into an agreement with employees to pay gratuity GRATUITY Government POGA Other Employees Employees Employees Fully Exempt 15 26⁄ X Last Salary X Completed 1 2⁄ X Average X completed pm. years of salary years of service service Actual Received Actual received Maximum Rs. 1000000 Maximum Rs. 1000000 (WHICHEVER IS LESS) (WHICHEVER IS LESS) Last Salary pm. Average Salary = Basic salary = Average basic salary + + DA (all) Average DA (in terms) + Average Turnover Commission Average of last 10 months preceding the month of retirement
  23. 23. 23 DEDUCTIONS FROM SALARY The income chargeable under the head ‘Salaries’ is computed after making the following deductions: 1) Entertainment allowance [Section 16(ii)] 2) Professional tax [Section 16(iii)] (1) Entertainment allowance – Entertainment allowance received is fully taxable and is first to be included in the salary and thereafter the following deduction is to be made: However deduction in respect of entertainment allowance is available in case of Government employees. The amount of deduction will be lower of: i. One-fifth of his basic salary or ii. 5,000 or iii. Entertainment allowance received. Deduction is permissible even if the amount received as entertainment allowance is not proved to have been spent. (2) Professionaltax on employment – Professional tax or taxes on employment levied by a State under Article 276 of the Constitution is allowed as deduction only when it is actually paid by the employee during the previous year. If professional tax is reimbursed or directly paid by the employer on behalf of the employee, the amount so paid is first included as salary income and then allowed as a deduction under section 16.
  24. 24. 24 INCOME FROM BUSINESS AND PROFESSION MEANING OF ‘BUSINESS’, ‘PROFESSION’ AND ‘PROFITS’ (i) The tax payable by an assessee on his income under this head is in respect of the profits and gains of any business or profession, carried on by him or on his behalf during the previous year. The term “business” has been defined in section 2(13) to “include any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture”. But the term “profession” has not been defined in the Act. It means an occupation requiring some degree of learning. Thus, a painter, a sculptor, an author, an auditor, a lawyer, a doctor, an architect and, even an astrologer are persons who can be said to be carrying on a profession but not business. The term ‘profession’ includes vocation as well [Section 2(36)]. However, it is not material whether a person is carrying on a ‘business’ or ‘profession’ or ‘vocation’ since for purposes of assessment, profits from all these sources are treated and taxed alike. (ii) Business necessarily means a continuous exercise of an activity; nevertheless, profit from a single venture in the nature of trade would also be assessable under this head if the venture had come to an end or after the entire cost had been recouped. For example, where a person had purchased a piece of land, got it surveyed, laid down a scheme of development, divided it into a number of building plots and sold some of the plots from time to time, though he would not be charged tax on a notional profit made on the individual sale of plots, he would be liable to pay tax on the surplus after all the plots have been sold and the venture has come to an end or after he has recovered the cost of all the plots and expenditure incidental thereto and has a surplus left. (iii) Profits may be realised in money or in money’s worth, i.e., in cash or in kind. Where profit is realised in any form other than cash, the cash equivalent of the receipt on the date of receipt must be taken as the value of the income received in kind. Capital receipts are not generally to be taken into account while computing profits under this head. Payment voluntarily made by persons who were under no obligation to pay anything at all would be income in the hands of the recipient, if they were received in the course of a business or by the exercise of a profession or vocation. Thus, any amount paid to a lawyer by a person who
  25. 25. 25 was not a client, but who has been benefited by the lawyer’s professional service to another would be assessable as the lawyer’s income. (iv) Application of the gains of trade is immaterial. Gains made even for the benefit of the community by a public body would be liable to tax. To attract the provisions of section 28, it is necessary that the business, profession or vocation should be carried on at least for some time during the accounting year but not necessarily throughout that year and not necessarily by the assessee-owner personally, but it should be under his direction and control. (v) The charge is not on the gross receipts but on the profits and gains in their natural and proper sense. Profits are ascertained on ordinary principles of commercial trading and commercial accounting. According to section 145, income has to be computed in accordance with the method of accounting regularly and consistently employed by the assessee. The assessee may account for his receipts on the cash basis or mercantile basis. (vi) The Act, however, contains certain provisions for determining how the income is to be assessed. These must be followed in every case of business or profession. The illegality of a business, profession or vocation does not exempt its profits from tax: the revenue is not concerned with the taint of illegality in the income or its source. Income is taxable even if the assessee is carrying on the business, profession or vocation without any profit motive. The liability to tax arises once income arises to the assessee; the motive or purpose of earning the income is immaterial. Thus, profit motive is not essential for describing the income from that activity as income from business or profession. (vii) The profits of each distinct business must be computed separately but the tax chargeable under this section is not on the separate income of every distinct business but on the aggregate profits of all the business carried on by the assessee. Profits should be computed after deducting the losses and expenses incurred for earning the income in the regular course of the business, profession, or vocation unless the loss or expenses is expressly or by necessary implication, disallowed by the Act. (viii) Income arising from business assets which are temporarily let out e.g., an oil mill, cinema theatre, hotel, ginning or textile factory, rice mill or jute press would be assessable as business income. But if the commercial asset is permanently let the income is taxable as income from house property or income from other sources, depending on the facts and circumstances of the case.
  26. 26. 26 INCOME CHARGEABLE UNDER THIS HEAD [SECTION 28] The various items of income chargeable to tax as income under the head ‘profits and gains of business or profession’ are as under: (i) Income arising to any person by way of profits and gains from the business, profession or vocation carried on by him at any time during the previous year. (ii) Any compensation or other payment due to or received by: (a) Any person, by whatever name called, managing the whole or substantially the whole of (i) The affairs of an Indian company or (ii) The affairs in India of any other company at or in connection with the termination of his management or office or the modification of any of the terms and conditions relating thereto; (b) any person, by whatever name called, holding an agency in India for any part of the activities relating to the business of any other person at or in connection with the termination of the agency or the modification of any of the terms and conditions relating thereto ; (c) any person, for or in connection with the vesting in the Government or any corporation owned or controlled by the Government under any law for the time being in force, of the management of any property or business; By taxing compensation received on termination of agency or on the takeover of management (which is a capital receipt) as income from business, section 28(ii) provides exception to the general rule that capital receipts are not income taxable in the hands of the recipient. (iii) Income derived by any trade, professional or similar associations from specific services rendered by them to their members. It may be noted that this forms an exception to the general principle governing the assessment of income of mutual associations such as chambers of commerce, stock brokers’ associations etc. As a result a trade, professional or similar association performing specific services for its members is to be deemed as carrying on business in respect of these services and on that assumption the income arising there from is to be subjected to tax. For this purpose, it is not necessary that the income received by the association should be definitely or directly related to these services.
  27. 27. 27 (iv) Profits on sale of a licence granted under the Imports (Control) Order, 1955 made under the Imports and Exports (Control) Act, 1947. (v) Cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India. (vi) Any Customs duty or Excise duty drawback repaid or repayable to any person against export under the Customs and Central Excise Duties Drawback Rules, 1971. (vii) Any profit on the transfer of the Duty Entitlement Pass Book Scheme, being Duty Remission Scheme, under the export and import policy formulated and announced under section 5 of the Foreign Trade (Development and Regulation) Act, 1992. (viii) Any profit on the transfer of Duty Free Replenishment Certificate, being Duty Remission Scheme, under the export and import policy formulated and announced under section 5 of the Foreign Trade (Development and Regulation) Act, 1992. (ix) The value of any benefit or perquisite whether convertible into money or not, arising from business or the exercise of any profession. (x) Any interest, salary, bonus, commission or remuneration, by whatever name called, due to or received by a partner of a firm from such firm will be deemed to be income from business. However, where any interest, salary, bonus, commission or remuneration by whatever name called, or any part thereof has not been allowed to be deducted under section 40(b), in the computation of the income of the firm the income to be taxed shall be adjusted to the extent of the amount disallowed. In other words, suppose a firm pays interest to a partner at 20% simple interest p.a. The allowable rate of interest is 12% p.a. Hence the excess 8% paid will be disallowed in the hands of the firm. Since the excess interest has suffered tax in the hands of the firm, the same will not be taxed in the hands of the partner. (xi) Any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy will be taxable as income from business. “Keyman insurance policy” means a life insurance policy taken by a person on the life of another person who is or was the employee of the first mentioned person or is or was connected in any manner whatsoever with the business of the first mentioned person.
  28. 28. 28 (xii) Any sum received or receivable, in cash or kind, on account of any capital asset (in respect of which deduction has been allowed under section 35AD) being demolished destroyed, discarded or transferred. ADMISSIBLE DEDUCTIONS RENT, RATES, REPAIRS AND INSURANCE FOR BUILDINGS [SECTION 30] RENT, RATES, REPAIRS AND INSURANCE FOR BUILDINGS USED FOR BUSINESS ALLOWED NOT USED FOR BUSINESS NOT ALLOWED
  29. 29. 29 REPAIRS AND INSURANCE OF MACHINERY, PLANT AND FURNITURE [SECTION 31] DEPRECIATION [SECTION 32] REPAIRS AND INSURANCE OF MACHINERY, PLANT AND FURNITURE USED FOR BUSINESS ALLOWED NOT USED FOR BUSINESS NOT ALLOWED ASSET ELLIGIBLE TANGIBLE BUILDING FURNITURE & FIXTURES PLANT & MACHINERY INTANGIBLE KNOWHOW PATENTS COPYRIGHTS TRADEMARKS LICENSE FRANCHISE
  30. 30. 30 PLANT & MACHINERY Plant & Machinery includes Motor Vehicle, Ship, Aircraft, Surgical Equipment, Scientific Apparatus but does not include Livestock, Tea Bushes, Building, Furniture & Fixtures RATE OF DEPRICIATION A. B. FURNITURE& FIXTURES = 10% C. PLANT & MACHINERY i. BUILDING TEMPORARY STRUCTURE 100% RESIDENTIAL BUILDING 5% NORMAL 10% MOTOR CAR HIRING BUSINESS 30% NORMAL 15%
  31. 31. 31 ii. SHIP = 20% iii. AIRCRAFT = 40% iv. GLASS CONTAINER = 50% v. COMPUTER & SOFTWARE = 60% vi. vii. ENERGY SAVING DEVICES = 80% viii. POLLUTION CONTROL EQUIPMENT = 100% ix. GENERAL RATE = 15% D. INTANGIBLE ASSET = 25% BOOKS ANNUAL PUBLICATION 100% LIBRARY BUSINESS 100% NORMALLY 60%
  32. 32. 32 METHOD OF DEPRECIATION FIM INDIVIDUAL ASSET POWER UNITS OPTIONAL WDV BLOCK OF ASSET SYSTEM MANDATORY FOR ALL ASSESSEE OTHER METHODS NOT ALLOWED ASSET PURCHASED & PUT TO USE FOR 180 DAYS OR MORE FULL DEPRECIATION LESS THAN 180 DAYS HALF DEPRECIATION
  33. 33. 33 (VIII) EXPENDITURE ON SCIENTIFIC RESEARCH [SECTION 35] DONATION/ CONTIBUTION FOR SCIENTIFIC RESEARCH TO A COMPANY APPROVED FOR SCIENTIFIC RESEARCH 125% TO NATIONAL LABORATORY FOR SCIENTIFIC RESEARCH 200% TO SCIENTIFIC RESEARCH UNIVERSITY SCIENTIFIC REASEARCH COLLEGE 175% FOR SOCIAL AND STATISTICAL REASEARCH 125%
  34. 34. 34 ILLUTRATION Mr. More gives following P & L A/c for the year ending 31-3-2015: Particulars Rs. Particulars Rs. To Rent: By Gross Profit 4,38,000 Factory 45,000 By Dividend On Shares 6,000 Godown 18,000 By Sale Of Import License 30,000 Showroom 25,000 By Cash Compensatory Subsidy For Export 15,000 Proprietor House 36,000 By Custom Duty Drawback 8,000 To Insurance: By Gifts & Presents From Business Associates 7,000 Factory 5,000 By Gifts From Father- In- Law 2,000 Godown 8,000 By Interest From Customers For Late Payment 15,000 Showroom 1,00,000 By Amount Received Under Endowment Life Insurance Policy (Including Bonus Rs. 60,000) 1,00,000 To Municipal Tax: By Salary From Partnership Firm 2,00,000 Godown 41,000 By Interest On Capital From Partnership Firm 85,000 Proprietor House 6,000 By Salary From ABC Ltd. 50,000 To Repairs: By Gift From ABC Ltd. 40,000 Factory 8,000 By Rent From Subletting 4,000
  35. 35. 35 Proprietor House 30,000 By Income From Lottery Prize 20,000 To Insurance Of P&M 7,000 40,000 To Insurance Of Furniture 1,000 To Repairs Of P&M 3,000 To Depreciation 35,000 To Scientific Research Expense 20,000 To Sundry Expenses 20,000 To Salary 1,30,000 To Net Profit 5,22,000 Total 10,60,000 Total 10,60,000 Additional information: 1. Depreciation allowed according to income tax amounted to Rs. 40000 2. Salary to son reasonable Rs. 100000 You are required to prepare statement of income from business for the AY 2015-16
  36. 36. 36 SOLUTION: Name of Assessee: Mr. More Previous Year: 2014-15 Assessment year 2015-16 Statement of income from business PARTICULARS Rs. Rs. Net Profit As Per P& L 5,22,000 Add: Non- Business Expenses 1. Rent: Proprietor’s House 36000 2. Municipal Tax: Proprietor House 6000 3. Repairs: Proprietor House 30000 4. Depreciation 35000 5. Salary To Son 30000 137000 657000 Less: Non- Business Income 1. Dividend On Shares 6000 2. Gift From Father In Law 2000 3. Endowment Life Insurance Policy 100000 4. Share In Net Profit From Partnership Firm 50000 5. Salary From ABC Ltd. 40000 6. Gift From ABC Ltd. 4000 7. Rent From Sub-Letting 20000 8. Income From Lottery Prize 40000 (262000) 395000 Less: Unrecorded Business Expenses 1. Depreciation As Per IT (40000) Taxable Income From Business 355000
  37. 37. 37 CONCLUSION The taxes are the basic source of revenue for the Government. Revenue raised from the taxes are utilized for meeting the expense of Government like, provision of education, infrastructure facilities such as roads, dams etc. Direct Taxes are taxes that are directly paid to the government by the taxpayer. It is a tax applied on individuals and organizations directly by the government e.g. income tax, corporation tax, wealth tax etc. The term scope of income means which items of income are included and which are excluded while computing tax liability. Every payment made by an employer to his employee for service rendered would be chargeable to tax as income from salaries. The term salary for the purposes of tax will include both monetary payments (e.g. basic salary, bonus, commission, allowances etc.) as well as non-monetary facilities (e.g. housing accommodation, medical facility, interest free loans etc). The tax payable by an assessee on his income under the head of income from business and profession is in respect of the profits and gains of any business or profession, carried on by him or on his behalf during the previous year.
  38. 38. 38 BIBLIOGRAPHY  Direct Tax-Manan Prakashan  https://in.finance.yahoo.com/news/basics-explained--what-are-direct-and-indirect- taxes-064840748.html  http://www.investopedia.com/terms/d/directtax.asp#ixzz3lXLBu3hV  http://www.investopedia.com/terms/i/incometax.asp#ixzz3lXNaWKEk  http://keydifferences.com/difference-between-direct-tax-and-indirect-tax.html  http://kalyan-city.blogspot.in/2010/12/direct-taxes-meaning-merits-and.html  http://www.dvsca.net/admin/pdffiles/13597250832- Scope%20of%20Total%20Income%20and%20Residential%20status.pdf  http://www.icaiknowledgegateway.org/littledms/folder1/chapter-4-income-from- salaries.pdf  http://www.icaiknowledgegateway.org/littledms/folder1/chapter-6-profits-and-gains- of-business-or-profession.pdf

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