Income tax basics

INCOME TAX LAW, THEORY AND
PRACTICE-I – Basic Concepts
Dr.V.Deepa, M.Com., M.Phil., Ph.D

PREVIOUS YEAR (SECTION 3)
Pervious year refers to twelve months immediately preceding the particular assessment
year. If the assessment year is 2020-21, then previous year will be 2019-20– Starting
from 1st April 2019 to 31st March 2020. Income earned in a year is taxable in the next
year. The year in which income is earned is known as previous year. Previous year
means the financial year immediately preceding the assessment
year. A tax payer’s income of the previous year is assessed to tax in the assessment
year.
In simple words, it may be said that the year in which income is earned is called
previous year and the next year in which such income is computed and put to tax is
known as assessment year.

ASSESSMENT YEAR (SECTION 2(9))
The income earned during any previous year is charged to tax in the immediately
succeeding assessment year. The tax is levied in each asst. year with respect to the total
income earned by the assessee in the previous year.
“Assessment Year” means the period of 12 months commencing on the 1st day of April
every year and ending on 31st March of the next year. The current assessment year
starts from 1st April 2020 and ends on 31st March 2021. The taxpayer’s income of the
previous year is assessed to tax in the assessment year at the rates prescribed in the
Finance Act for the assessment year.

Income Previous Year
1. Salary income for job joined on 1.7.2019. 01.07. 2019 to 31.03. 2020
2. New House completed on and let out from 1.10. 2019. 01.10. 2019 to 31.03. 2020
3. Income from examinership fee from university in April, 2019. 01.04. 2019 to 31.03. 2020
4. Business income April 2019 to March 2020 April 2019 to March 2020
1.Salary income for job joined on 1.7. 2019.
2.New House completed on and let out from 1.10. 2019.
3.Income from examiner ship fee from university in April, 2019.
4.Business income April 2019 to March 2020.
5.House property income April 2019 to March 2020.
Solution:

Find out the assessment year for the following previous years:
Income Previous Year
(i) Salary income of Mr.A April 2019 to March 2020
(ii) Business income of Mr.B April 2019 to March 2020
(iii) Newly set up business on 12.05. 2019
(iv) Newly set up business on Diwali 2019
(v) House property income April 2020 to March 2021

Income Previous year Assessment year
Salary income of Mr.A April 2019 to March 2020 2020-2021
Business income of Mr.B April 2019 to March 2020 2020-2021
Newly set up business on 12.05. 2019 to 31.03.20 2020-2021
Newly set up business on Diwali 2019 to 31.03.20 2020-2021
House property income April 2020 to March 2021 2021-2022
Solution:

RESIDENTIAL STATUS OF AN INDIVIDUAL
 Residential status of an assessee is ascertained as
per the provisions under sec 6 of the income tax
act 1961. Residential status is defined from
citizenship. A citizen of India may be non-
resident and a foreigner may be resident for
income tax purposes. Residence can change
from time to time but not the citizenship.

ADDITIONAL CONDITIONS
A resident individual becomes ordinarily resident in
India; he is to satisfy both the following conditions besides
satisfying any one of the above mentioned basic
conditions.
 He has been resident in India in at least two out of the
ten previous years preceding the relevant previous
year, and
 He has been in India for at least 730 days in all during
the seven previous years preceding the relevant PY.

When an Individual is
 Resident
If an individual satisfies any one or both of the basic conditions, then
he is said to be a ‘resident’.
 Resident and Ordinarily a Resident [Sec 6(1)]
After fulfillment of any one or both of the basic condition if an
individual fulfills both the additional conditions, then he is said to
be resident and ordinarily a resident.
 Resident but Not Ordinarily a Resident [Sec 6(6)]
After satisfying one or both of the basic conditions if an individual
satisfies one or none of the additional conditions, then he is said to be
resident but not ordinarily a resident.
 Non-Resident [Section 2(30)]
If any individual does not satisfy any one of the basic conditions
then he is said to be a non resident.

S.No Status Basic Conditions Additional Conditions
1. Resident Satisfied -
2. Resident and ordinary Resident [OR] Satisfied Satisfied
3. Resident and Not Ordinary Resident [NOR] Satisfied Not Satisfied
4. Non-Resident [NR] Not Satisfied -
Note:
1. In case an Indian citizen who goes abroad in the previous year for employment or as a member of the crew
of an Indian ship 60 days should be taken as 182 days.
1. In case an Indian citizen who stays abroad comes on a visit to India during the previous year 60 days should
be taken as 182 days.
Summary of conclusions for residential status

Example sum:1
Bharathy was born in India in the year 1985. From 2002 to 2015 he was in Canada. From 2015 to 31st
March 2020, he was in Australia. On 1st April 2020 he came to India and till date he is staying in India.
Identify his residential status for the Assessment year 2021-2022
Current previous year 1.4.2020-31.3.2021
Stay in india during the previous year = from 1.4.2020to 2021= 365 days
1st basic condition is = 182 days in India
Additional condition: 1. two years out of 10 preceding the Previous year
i.e.,any two years from 1.4.2010 to 31.3.2020 he should stay in India
But he came to India on 1.4.2020, he stayed in India for the 10 preceding the previous year is only
for 1 year, so he does not satisfy the 1st additional condition (from 1.4.2019 to 31.3.2020)
More than 182 days stayed in India in the previous year and he does not satisfy the both
additional coditions. So he comes under the Resident and Not Ordinary Resident

Mr. K, an Indian citizen leaves India for the first time on 31st May 2015and come
back on 15th May 2019. He again leaves India on 10th June 2020 to come back on 14th
January 2021. He is living in India since then. Determine his status for the P/Y 2020.
PY 1.4.2020 TO 31.3.2021
(APR- 30+MAY 31+JUN 10) +JAN 18+FEB 28+MAR 31=148 DAYS
1.4.2016 TO 31.3.2020 = 365 DAYS
17+30+31+31+30+31+30+31+31+28+31=321 days
NON RESIDENT

Ascertain the residential status of the assesse in the following cases for the
Assessment Year 2021-22:
 Angusamy is a citizen of India. He left for Iran on 18th April 2020 and could not
return to India till the end of the financial year 2020-21.
 Mr. Karthick left for USA on 10th March 2018, after having lived in India for 20
years. He returned to India on 10th September 2020.
 Saravanan is a citizen of India. He left on 15th May, 2020 for London for higher
studied. He came back to India on 25th May, 2021. He maintained a dwelling place in
India during his absence.
21+31+30+31+31+29+31=204 DAYS
PY 1.4.2020 TO 31.3.2021
15.5.2020 – 25.5.2021
APR 30+MAY 15=45

RESIDENTIAL STATUS OF HUF
PROBLEM
Head office of XY, a Hindu undivided family, is situated in Hongkong. The family is managed by Y who is resident in India in
1 year out of 10 years preceding the Previous Year 2020-2021.
Determine the residential status of the HUF for the P/Y 2020-2021 if the affairs of the family business are
 Wholly controlled from Hongkong: and
 Partly controlled from India.
SOLUTION
AY: 2021-2022 PY: 2020-2021
a) if the affairs of the family business are Wholly controlled from Hongkong:
The residential status of the HUF is “Non-Resident” for the assessment year 2020-2021 as the control and management of
its affairs has been wholly situated outside India.
b) if the affairs of the family business are Partly controlled from India.
The residential status of HUF is “Resident but not ordinarily Resident” for the Assessment year 2020-2021 as the control and
management of its affairs is partially done from India and Karta is not ordinarily Resident because he was resident for one out of
10 years preceeding the previous year

RESIDENTIAL STATUS OF FIRM
PROBLEM:
RAM & Co is a partnership firm registered in India and controlled from India. Out of the four partners 3 partners were in
Germany for more than 200 days during the previous year 2019-2020. Determine the residential status of the firm for the
previous year 2020-2021 and also discuss the residential status of the firm if
• All the four partners are non-resident during 2020-2021.
• All the four partners are resident during 2020-2021 and firm is controlled from outside India.
• All the four partners are resident but not ordinarily resident during 2020-2021.
SOLUTION:
AY: 2021-2022 PY: 2020-2021
The residential status of the firm is Resident for the PY 2020-2021 as the firm is controlled from India.
(i) If all the partners are non resident the residential status of a firm still will be “Resident”, as the firm is controlled from India.
Residential status of individual partners will be irrelevant.
(ii) The residential status of firm will be non-resident as the firm is controlled from outside India.
(iii) The firm will be resident during 2020-2021 as the business is controlled from India.

S.No Different Kinds of Incomes
Different Types of Status
Resident
Not Ordinarily
Resident
Non
Resident
1.
Income received or deemed to be received in India. It is immaterial whether it
is earned in India or in a foreign country.
Taxable Taxable Taxable
2.
Income earned in India whether received, paid in India or outside India.
Taxable Taxable Taxable
3.
Income earned and received outside India from a business controlled or
profession set up in India. Income may or may not be remitted to India
Taxable Taxable
Not
Taxable
4.
Income earned or received outside India from a business controlled or
profession set-up outside India.
Taxable Not Taxable
Not
Taxable
5.
Income earned and received outside India from any other source (except
income under point 3).
Taxable Not Taxable
Not
Taxable
6.
Income earned and received outside India in the years preceding the
previous year in question and if the same is remitted to India during the
current previous year.
Not Taxable Not Taxable
Not
Taxable

Which of the following incomes are taxable when the residential status of Ms. Anu
is Resident, NOR, NR
1. Income accrued in Canada but received in India ` 2,000.
2. ` 5,000 earned in India but received in Canada
3. ` 5,000 were earned in Africa and received there but brought to India
4. ` 10,000 earned and received in Sri Lanka from a business controlled from India
5. House property income (computed) from Sri Lanka ` 2,000
6. Past untaxed foreign income, brought to India during the previous year ` 4,000
7. Profit earned from a business in Kanpur ` 10,000

Particulars Resident Not ordinarily
Resident
Non -
Resident
1. Income accrued in Canada but received in India ` 2,000. 2,000 2,000 2,000
2. ` 5,000 earned in India but received in Canada 5,000 5,000 5,000
3. ` 5,000 were earned in Africa and received there but brought to
India
5,000 nil nil
4. ` 10,000 earned and received in Sri Lanka from a business
controlled from India
10,000 10,000 nil
5. House property income (computed) from Sri Lanka ` 2,000 2,000 nil nil
6. Past untaxed foreign income, brought to India during the previous
year ` 4,000
----- ----- -----
7. Profit earned form a business in Kanpur ` 10,000 10,000 10,000 10,000
Total 34,000 27,000 17,000

Shri Hanuman Prasad has the following incomes for the Previous Year ending on 31st March, 2021:
1. Income from salary in India from a company (he went to Australia for some months due to his
service and received salary for such period there) ` 50,000
2. Dividend from an Indian Company received in England and spent there `10,000
3. Income from house property in India received in Pakistan ` 20,000
4. Dividend from a foreign company received in England and deposited in a bank there ` 10,000
5. Income from business in Kolkata, managed from U.S.A ` 20,000
6. Income from business in U.S.A. (controlled from Kanpur Head Office) ` 12,000
7. Income was earned in Australia and received there, but brought into India ` 25,000
8. His Maternal uncle sent a Bank Draft from France as a gift to him on his marriage ` 20,000
You are required to compute his gross total income for the Assessment Year 2021-2022 if he is a
(i) Resident (ii) Not ordinary resident; or (iii) Non-resident.

S.No Particulars Resident NOR Non-Resident
1. Income from salary in India from a company 50,000 50,000 50,000
2. Dividend from an Indian Company received in England and spent
there `10,000
exempted exempted exempted
3. Income from house property in India received in Pakistan ` 20,000 20,000 20,000 20,000
4. Dividend from a foreign company received in England and deposited
in a bank there ` 10,000
10,000 --- ----
5. Income from business in Kolkata, managed from U.S.A ` 20,000 20,000 20,000 20,000
6. Income from business in U.S.A. (controlled from Kanpur Head
Office) ` 12,000
12,000 12,000 ----
7. Income was earned in Australia and received there, but brought into
India ` 25,000
25,000 --- ---
8. His Maternal uncle sent a Bank Draft from France as a gift to him on
his marriage ` 20,000
Exempted Exempted Exempted
Total 1,37,000 1,02,000 90,000

PROBLEM
1. Interest on German Development Bonds (one-third is received in India) ` 51,000
2. Income from agriculture in Bangladesh, remitted to India ` 31,000
3. Income from property in Canada received in U.S.A ` 1,10,000
4. Income earned from business in Kuwait, business being controlled from Mumbai
(` 25,000 is received in India) ` 65,000.
5. Dividend from Indian Company ` 15,000
6. Royalty received in Singapore from Mr. David, a resident in India, for technical
services provided for a business is controlled from Singapore `1,25,000
7. Profit from a business in Chennai; this business is controlled from Singapore `
1,25,000
8. Profit on sale of a building in India, but received in Nepal ` 2,50,000
9. Income from agricultural in Punjab, received in Mumbai ` 30,000
10. Profit from business in Indonesia; this business is controlled from Delhi (60% of
the profit deposited in a bank there and 40% is remitted to India) ` 40,000
11. Interest received from Mr.Dayal, a non-resident, on the loan provided to him for a
business in India ` 28,000
Compute the total income of Mr. Selvam for the Assessment Year 2021-2022 if he
is a
(i) Resident (ii) Not ordinary resident; or (iii) Non-resident.

Resident
1. Interest on German Development Bonds
2/3 Received in german
1/3 Received in India
34,000
17,000
----
17,000
----
17,000
2. Income from agriculture in Bangladesh, remitted to
India
31,000 --- ----
3. Income from property in Canada received in U.S.A
1,10,000
1,10,000 --- ----
4. Income earned from business in Kuwait
25,000 received in India
40,000 received in Kuwait
25,000
40,000
25,000
40,000
25,000
5. Dividend from Indian Company ` 15,000 Exempted Exempted Exempted
6. Royalty received in Singapore 1,25,000 --- ----
7. Profit from a business in Chennai; this business is
controlled from Singapore
1,25,000 1,25,000 1,25,000
8. Profit on sale of a building in India, but received in
Nepal
2,50,000 2,50,000 2,50,000
9. Income from agricultural in Punjab, received in
Mumbai

Mr. Ashok a foreign national furnishes the following particulars of his income relevant for the
Previous Year 2019-2020. Compute his gross total income for the Assessment Year 2020-2021 if he
is
a) Resident b) Not Ordinarily Resident and c) Non Resident.
1. Profit on sale of plant at London (One-half is received in India) ` 1,46,000
2. Profit on sale of plant at Delhi (One-half is received in London) ` 1,02,000
3. Salary from an Indian company received in London One-half is paid for services rendered in India)
` 60,000
4. Interest on UK development bonds (Entire amount is received in London) ` 40,000
5. Income from property in London received there ` 30,000
6. Profit from a business in Delhi managed form India ` 49,000
7. Income from agriculture in London received there, half of which is used for meeting hostel
expenses of Mr. Ashok’s son in England and remaining amount is later on remitted to India `
25,000
8. Dividend (Gross) received in London on May 6, 2019 from a company registered in India but
mainly operating in UK ` 17,000
9. Rental income from a property in Nepal deposited by the tenant in a foreign branch of an Indian
bank operating there ` 12,000
10.Gift from a relative in foreign currency (one-third of which is received in India and remaining

S.No Particulars Resident NOR Non-
Resident
1. Profit on sale of plant at London
1/2 Received in LONDON
1/2 Received in India
73,000
73,000
----
73,000
----
73,000
2. Profit on sale of plant at Delhi 1,02,000 --- ----
3. Salary from an Indian company received in London
Service rendered in India
Service rendered in London
30,000
30,000
30,000
---
30,000
----
4. Interest on UK development bonds (Entire amount is received in
London) 40,000 --- ---
5. Income from property in London received there ` 30,000 30,000 --- ---
6. Profit from a business in Delhi managed form India ` 49,000 49,000 49,000 49,000
7. Income from agriculture in London received there 25,000 --- ----
8. Dividend (Gross) received in London, from a company registered in
India but mainly operating in UK `
9. Rental income from a property in Nepal deposited by the tenant in a
foreign branch of an Indian bank operating there
12,000

Sri Ram a foreign national furnishes the following particulars of his income
relevant for the A.Y.2020-2021:
1. Income from property in New York received there ` 1, 20,000.
2. Income from business in Kolkata managed from Singapore ` 2, 40,000.
3. Profit on sale of machinery in California (one-half received in Kolkata) `
90,000.
4. Dividend (Gross) received in Thailand from a company registered in
India but mainly operating in Thiland ` 15,000.
5. Income from a house property in Dhaka deposited by the tenant there in
SBI ` 36,000.
6. Gift in foreign currency ` 3, 50,000 from a relative (one-half received in
India and the balance used in New York).
7. Income from agriculture in Burma ` 45,000 received there. 1/3rd used
while visiting there and 2/3rd remitted later to Kolkata.
8. Income from profession (as a management consultant) in Philippines
received there. The profession set up in India ` 2,20,000.
Compute his total income, if Sri Ram is:(a)A Resident (b) Not
Ordinarily Resident and (c) Non-Resident.

Following are the particulars of income of Mr. Ramesh for the Assessment Year 2020-
2021
Particulars `
Income from business in Mumbai.
Income from house property in Pune.
Pension from former employer for service rendered in India but
received in UK.
Profit from business in UK but controlled from Mumbai.
Out of this ` 20,000 were received in India.
Dividend from an Indian company but received in UK.
Income from agriculture in Nepal: received there but later on
remitted to India.
Interest on bonds issued by UK Government out of which 50% is
received in India
Past untaxed income of 2008-09 to 2010-11 brought in to India
during 2019-2020
Income from house property in UK and donated there to a
notified charitable institution
80,000
20,000
24,000
1,60,000
18,000
60,000
40,000
4,00,000
20,000

For the previous year ended on 31st March 2020 Mr.Bhuvanesh had the following incomes:
 Honorarium received from Govt. of India [Expenses incurred [` 5,000] ` 10,000
 Profits earned form a business in Kerala controlled from Canada ` 5,000
 Profits earned from a business in USA controlled from west Bengal ` 6,000
 Profit earned from a business in Bangladesh, controlled from Karachi and (Credited to his
personal account in the bank there) ` 4,000
 Dividend from an Italian company credited to his account in Switzerland ` 2,000
 Agriculture income from Thailand not remitted to India ` 6,000
Compute the total income for the Assessment Year 2020-2021 if he is a
(i) Resident
(ii) Not ordinary resident; or
(i) Non-resident.

Particulars Resident NOR Non-Resident
1. Honorarium received from Govt. of India [Expenses incurred [` 5,000]
(10,000 – 5,000)
5,000 5,000 5,000
2. Profits earned form a business in Kerala controlled from Canada `
5,000
5,000 5,000 5,000
3. Profits earned from a business in USA controlled from west Bengal `
6,000
6,000 6,000 ----
4. Profit earned from a business in Bangladesh, controlled from Karachi 4,000 --- ----
5. Dividend from an Italian company credited to his account in
Switzerland
2,000 --- ----
6. Agriculture income from Thailand not remitted to India 6,000 --- ----
Total 28,000 20,000 10,000

The following are the income of Shree for the previous year 2019-2020
1. Dividend from Indian company ` 10,000
2. Profit from business in Japan received in India ` 1, 20,000
3. Profit from business in Pakistan deposited in a bank there. This
business is controlled from India ` 2, 00,000
4. Profit from business in Indore (Controlled by London Head Office)
` 1,10,000
5. Interest received from a non resident Mr.Anbu on the loan provided
to him for a business carried on in India ` 50,000.
6. Income was earned in America and received there, but brought in
India ` 80,000
7. Share of income from Indian partnership firm ` 1,50,000
8. Income from house property in India received in America
(Computed) ` 62,000
9. Interest on debentures of an Indian company received in Dubai `
25,000
10. Capital gain on sale of agricultural land situated at Ajmer ` 48,000.
Compute his taxable income, if he is:
a) Resident, b)Not ordinarily resident , c)Non resident.

S.No Particulars Resident NOR Non-Resident
1. Dividend from Indian company ` 10,000 Exempted Exempted Exempted
2. Profit from business in Japan received in India ` 1, 20,000 1, 20,000 1, 20,000 1, 20,000
3. Profit from business in Pakistan deposited in a bank there. This business
is controlled from India ` 2, 00,000
2, 00,000 2, 00,000
4. Profit from business in Indore (Controlled by London Head Office) `
1,10,000
1,10,000 1,10,000 1,10,000
5. Interest received from a non resident Mr.Anbu on the loan provided to him
for a business carried on in India ` 50,000
50,000 50,000 50,000
6. Income was earned in America and received there, but brought in India `
80,000
80,000
7. Share of income from Indian partnership firm ` 1,50,000 Exempted Exempted Exempted
8. Income from house property in India received in America (Computed) `
62,000
62,000 62,000 62,000
9. Interest on debentures of an Indian company received in Dubai ` 25,000 25,000 25,000 25,000

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