INCOME TAX ACT 1961

DEFINITIONS

Income tax: Income tax is a tax payable on the income earned by a person during the previous year

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Person: [section 2 (31)] a person includes

  1. an individual
  2. a Hindu Undivided Family
  3. a company
  4. a firm
  5. an Association of Persons or Body of Individuals
  6. a Local Authority
  7. every artificial juridical person, not falling within any of the preceding sub-clause

 

Assessee: [section 2 (7)]

Assessee means a person by whom any tax or any other some of money is payable under Income Tax Act 1961.

Assessment: [section 2 (8)]

Assessment is the process of:

i)                    Computation of total income or loss of an assessee.

ii)                  Determining the total tax liability on the total income.

iii)                Determining the tax payable or amount refundable.

Assessment Year: [section 2 (9)]

Assessment year means the period of 12 months commencing on the 1st day of April every year.

Previous year: [section 2 (34) and 3]

Previous year is the period of 12 months just preceding the assessment year. However in case of newly setup business, the previous year may be of duration shorter than 12 months.

Rules of Residential Status of an Individual

The taxability of a person depends on his residential status. For this there are separate rules for each entity.

An individual may be resident or non resident. A resident individual may be ordinarily resident or not ordinarily resident.

 

Step 1: To decide whether individual is resident:

An individual may be resident in India if he satisfies any one of the following two optional conditions:

1)      His total stay in India during the previous year is 182 days or more. This stay need not be continuous.

1)      His total stay in India is 60 days or more during the previous year and 365 days or more during the 4 previous years preceding the previous year.

Exceptions:

There are two exceptions in whose case condition (2) dose not apply (i.e. he becomes resident in India only if his total stay during the previous year is 182 days or more)

i)                    An Indian citizen or a person of Indian origin goes abroad either as a crewmember of on an Indian ship or for employment abroad.

ii)                  An Indian citizen or a person of Indian origin who comes on a visit to India during the previous year.

Step 2: To decide whether individual is ordinarily resident or not ordinarily resident:

If the individual is resident during the previous year, we have to check whether he is ordinarily resident or not ordinarily resident. For becoming ordinarily resident he has to satisfy two compulsory conditions:

1)      His total stay in India during the 7 previous years preceding the previous year is 730 days or more. (This stay needs not to be continuous.)

2)      He should be the resident in India (according to the optional conditions of the residence) in at least 2 out of 10 previous years preceding the previous year.

To become ordinarily resident he has to satisfy both the conditions. Otherwise he is resident but not ordinarily resident.

Rules of Residential Status of Other Persons

A] Company

1)      An Indian company is always resident and ordinarily resident in India only if the control and management of its affairs is situated wholly in India during the previous year. Once resident a company is automatically become ordinarily resident.

2)      A foreign company can be non-resident if the control and management of its affairs situated even partially outside India during the previous year.

 

B] HUF, FIRM, LO, AOP, BOI, AJP:

These entities become resident in India if the control and management of its affairs is situated even partially in India during the previous year. Hence they become non-resident if the control and management of its affairs is situated wholly outside in India.

Once become resident they automatically become ordinarily resident except HUF.

The ordinarily or not-ordinarily residence of a HUF depends on the residential status of the Karta as an Individual as follows:

i)                    If the karta is ordinarily resident during the previous year, the HUF also is ordinarily resident.

ii)                  If the karta is either not-ordinarily resident or non-resident, the HUF becomes not-ordinarily resident.

SCOPE OF TOTAL INCOME


Particulars ROR NOR NR
1. Income received in India T T T
2. Income earned in India T T T
3. Income deemed to be received in India T T T
4. Income deemed to be earned in India T T T
5. Income earned and received abroad
i) Other than from business or profession T NT NT
ii) From business controlled from India T T NT
iii) From Profession setup in India T T NT
iv) From business controlled from abroad T NT NT
v) From business setup abroad T NT NT

INCOME FROM SALARIES

The following incomes are chargeable to income tax under the head “salaries” [sec 15]

  1. Any salary due to an assessee in the previous year, whether paid or not
  2. Any salary paid or allowed to him in the previous year, whether due or not.
  3. Any arrears of salary paid or allowed to him in the previous year.

Salary [section 17 (1)]

The term salary includes:

  1. Wages
  2. Any annuity or pension
  3. Any gratuity
  4. Any fees, commission, perquisites or profit in addition to salary.
  5. Any advance of salary
  6. Any leave salary
  7. “Annual accretion” in the PF to the extent taxable as income deemed to be received
  8. “Transferred balance” of an employee participating in PF to the extent taxable as income deemed to be received.
  9. Contribution made by the Central Government to the account of an employee under a pension scheme.

Perquisites [section 17 (2)]

Perquisite is a benefit received by an employee from the employer in addition to salary or wages either in cash or in kind without actually payment of money.

Illustration of perquisites

  1. Provision of a motorcar or free use of a car
  2. Provision of house, free of cost or at a concessional rent.
  3. Free gas, electricity
  4. Free services of servant at house
  5. Free educational facilities of children
  6. Free transport to an employee or his family
  7. Club bills paid by employer
  8. Income Tax due on salary paid by employer

Profits in lieu of salary [section 17 (3)]

A profit in lieu of salary is not a regular payment received by the employee from the employer. It is something, which the employee receives instead of or in place of salary.

Deductions allowable in “income from salaries” [Section 16]

Section 16 lays down following deductions are allowable while computing the income under the head “Salaries”

  1. Entertainment Allowance [Section 16(ii)]

This deduction is available only to government employees, which are as follows

i)                    A sum equal to 1/5th of his basic salary or

ii)                   Rs. 5,000 or

iii)                Actual sum received as entertainment allowance during the year.

Whichever is the least.

  1. Professional Tax

This deduction is on account of any sum paid by the assessee on account of tax on employment.

INCOME FROM HOUSE PROPERTY

This is income, which arise to an owner from occupation of house property.

Conditions For House Property Income

  1. The house property should contain a building in the nature of a permanent structure and/or land-attached thereto.
  2. Property should be owned by the assesee.
  3. The assesee must not use the property to run his business.

Points to be noted:

  1. If the assesee transfers his property to his spouse or dependents/children without due compensation, it will still be considered his own property.
  2. A member of a housing co-operative society is considered to be the owner of his flat.

– House property may be Self Occupied Property (SOP) or Let Out Property (LOP)

– If the assessee has only one SOP his Annual Value is considered to be nil.

– If the assesee has more than one SOP, then any one of these SOP of his choice shall be considered to have AV=0 and the rest will be valued as if they have been given out on rent. These are called Deemed Let Out Properties (DLOP).

– The choice of property for AV=0 doesn’t depend on where the assesee actually stays. However the SOP should not be given out for use by a friend or relative at any point of time during the previous year.

The Annual value of a property is taxed under these heads:

  1. Reasonable Letting Value (RLV): This is the rent that the property can earn on a reasonable basis from year to year. (not considering any extreme increase or decrease in the value of the property during a particular year).
  1. Actual Rent (AR) obtained by the property.

– A LOP is valued at RLV or AR whichever is higher.

– When the AR is higher than the RLV but due to the vacancy of the property falls below the RLV, the AR is taken as the AV though it may be lesser then RLV.

– In deciding the RLV following points are considered:

  1. Standard rent: Where the Rent Control Act is in force.
  2. Municipal Ratable Value of the property: where the net value is given we have to calculate the gross value.
  3. The rent, which a similar property can earn in the same or similar locality.

– In the case of SOP, which is DLOP, since there is no actual rent, hence the RLV is taken as AV. In the case of DLOP & LOP municipal taxes actually paid during the previous year are allowed as a deduction to find out the Net Annual Value (NAV). The municipal taxes must be paid by the owner and they may or may not relate to the previous year.

Deductions Allowed in NAV

  1. Standard deduction of 30% of NAV
  2. Any interest or loan paid or payable during the previous year provided this loan is taken for acquiring or constructing or repairing or renovating the property.

In the case of LOP where AV is taken to be nil the deduction for interest payable is limited to Rs. 30,000 This limit of 30,000 is estimated to Rs. 1,50,000 where the loan is taken either for acquiring or constructing the house property and the following conditions are fulfilled:

i)                    The loan is taken on or after 1.4.1999

ii)                  The acquisition or construction of the property is completed within 3 years for the end of the financial year in which the loan is taken.

CENTRAL SALES TAX ACT 1956

To attract Central Sales Tax:

  1. There must be a business which commercial in nature. [Section 2 (aa)]
  2. There must be a dealer [Section 2 (b)]
  3. Sale is of goods. Goods may be declared goods. [Section 2 (c)]
  4. There must be sales [Section 2 (g)]
  5. CST is on sales price [Section 2 (h)]
  6. Sales must be of interstate trade or commerce [Section 3]
  7. Sales should not take place inside a state [Section 4]
  8. Sales should not be import or export trade [Section 5]
  9. If above conditions are fulfilled dealer is liable to pay tax [Section 6]

10.  Subsequent sales of purchases from registered dealer will not have any tax liability. [Section 6 (2)]

Definitions

 

Business [Section 2(aa)] the term business includes

– Any trade, commerce or manufacture OR any adventure, OR concern in nature of trade, commerce or manufacture, whether or not it is carried on with a motive to make profit AND whether or not any profit or gain accrues from it.

– Any transaction in connection with or incidental or ancillary to such trade, commerce, manufacture or adventure.

 

Examples of business:

Transaction                                                                Reason

Sale of computer by a computer firm                         It is a commercial activity

Plantation of teak trees                                               It is a commercial activity

Running of Restaurant                                                It is a commercial activity

Running of a cyber café                                              Transaction incidental to business

Govt. medical stores supplying medicine

To Govt. institutions for price                                                It is a commercial activity

Sales of machines by loss                                            It is a commercial activity

Purchase of an office premises                                   Transaction incidental to business

Jewellery purchased to gift their clients                     Transaction ancillary to business

Examples of not a business:

Transaction                                                                Reason

Purchase of computer for personal use                       not a commercial activity

Export of ice creams                                                   Export – Import trade

Plating of saplings around office                                not a commercial activity

Dealer [Section 2(b)]

Dealer means any person who carries on (whether regularly or otherwise) the business of buying, selling, supplying or distributing goods, directly or indirectly for cash, deferred payment, commission, remuneration or other valuable consideration.

The term dealer includes:

  1. An individual, a Hindu Undivided Family, a company, a firm, an Association of Persons or Body of Individuals, a Local Authority
  2. A factor, broker, commission agent, delcreder agent or any other mercantile agent by whatever name called, belonging to any principal whether disclosed or not.
  3. An auctioneer who carries on the business of auctioning goods belonging to any principal whether disclosed or not.

 

Examples of dealers:

Persons                                                                       Reason

Traders in machinery parts                                          Deals on goods

Auctioneer                                                                  Specifically included in definition

TEA Board                                                                 Sales of tea eve if no profit

Sales of illegal goods                                                  Deals on goods

Buy two sarees for sales                                             Deals on goods

Examples of not a dealer:

Persons                                                                       Reason

Photographer                                                               Does work of art (upto 1st print only)

Sculptor                                                                       Does work of art

Transporter                                                                  Not his usual business to sale vehicle

Tailor                                                                           So far as only labour work is concern

Financier                                                                     Does work of financing

Educational Institution                                               Activity of buying and selling is not their business but they are incidental

Sales [Section 2 (g)] Sales includes

  1. A transfer of property in any goods for cash, deferred payment or other valuable consideration.
  2. A transfer of property in goods involved in the execution of works contract.
  3. A delivery of goods on hire purchase or any system of payment by installments.
  4. A transfer of the right to use any goods for any purpose for cash, deferred payment or other valuable consideration.
  5. A supply of goods by any unincorporated association of persons to a member for cash, deferred payment or other valuable consideration.
  6. A supply of goods, by way of or as part of any service or in any other manner for cash, deferred payment or other valuable consideration.

Examples of Sales

Transactions                                                              Reason

Sales of spare parts                                                     Transfer of goods for price

Supply of Ad films                                                     Contract for work and labour

Dentures of patient                                                     Works contract

Compulsory acquisition of property by Govt.            It is a sale

Catering services in marriage function                        Specifically included in definition

Sales of machine on hire purchase                              Specifically included in definition

Sales of illegal gold coins                                           Sales of value

Examples of not a sale

Transactions                                                              Reason

Supply of machinery parts during warranty period    Included in the sale price of machine

Free samples of medicines to doctors                         No consideration

Pledge of goods                                                          No transfer of property

Making garment by a tailor                                         It is a labour job

Transfer of goods from factory’s branch                    No consideration

Erection of plant and machinery                                 Specifically excluded

Sales Price  [Section 2 (h)]

Sales price is total consideration received or receivable. It includes cost of goods, all incidental charges for anything done on or before the delivery. However it does not include cost of freight or delivery or installation cost. Trade discount allowed is to be deducted from sales price.

Declared Goods  [Section 2 (c)]

“Declared Goods” means goods declared under section 14 to be of special importance in inter-state trade.

MVAT ACT 2002

Definitions

Business [Section 2 (40] same as of Sales Tax Act

 

Dealer [Section 2 (8] same as of Sales Tax Act

 

Goods [Section 2 (12]

Goods mean every kind of movable property except newspapers, money lottery tickets, stock, shares, securities, and actionable claims. It excludes immovable property like land, building etc. However growing crops, livestock, grass, trees and plants including the produced are included.

Importer [Section 2 (13]

Importer means a dealer who brings any goods into the state OR to whom any goods dispatched from any place outside the state.

 

Manufacturer [Section 2 (15]

Manufacturing means producing, making, extracting, altering, ornamenting and finishing. It also includes processing, treating or adapting any goods.

 

Resale [Section 2 (22]

Resale means the sale of purchased goods:

i)                    in the same form in which they were purchased.

ii)                  Without doing any thing to them which results in manufacture.

 

Purchase Price [Section 2 (20]

Purchase price is total consideration paid or payable for any purchase made. It includes cost of goods, all incidental charges for anything done on or before the delivery. However it does not include cost of freight or delivery or installation cost.

 

Turnover of Sales [Section 2 (33]

Turnover of Sales means total consideration received or receivable for any sale made after deducting the amount of:

i)                    Sales price, if any, refunded by the seller, in respect of any goods purchased and returned by the purchaser, within a prescribed period.

ii)                  Deposit, if any, refunded by the seller, in respect of any goods sold by the seller, within a prescribed period.

 

Sale [Section 2 (24] same as of Sales Tax Act (add “within the state” in the definition)

 

Sale Price [Section 2 (25] same as of Sales Tax Act

 

Service [Section 2 (27]

Services means any service as my be notified by the state government, from time to time in the Official Gazette.

LEVY OF TAX

The limit for following two types of dealers is as follows:

1. Importers: It means purchaser of goods from out of Maharashtra

i)                    Turnover of total sales Rs. 1,00,000 (Taxable + Non taxable)

ii)                  Value of taxable goods sold or purchased is not less than 10,000

 

2. Others: It means purchaser of goods from within Maharashtra

iii)                Turnover of total sales Rs. 5,00,000 (Taxable + Non taxable)

iv)                Value of taxable goods sold or purchased is not less than 10,000

 

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