E-Smart Learning (Neha Sharma)

Basic Concepts
Sec 2(9) Assessment Year
Assessment year means the period which starts from 1st April and ending on 31st March of
the next year.Income of P.Y. of an assessee is taxed during the next following assessment
year.
For Example.
Assessment Year 2016-17
Assessment Year 2015-16
Sec 3 Previous Year (P.Y.)
The year in which income is earned is known as previous year and the next year in which
income is taxable is known as assessment year.
For Example.
Income earned by an individual during the previous year 2015-16 is taxable in the
immediately following assessment year 2016-17 at the rates applicable for the assessment
year 2016-17. Income earned during the P.Y. 2016-17 by a company will be taxable in the
A.Y. 2017-18 at the rates applicable for the assessment year 2017-18.
Uniform P.Y. (i.e 1st April to 31st March) has to be followed by all the assesses for all sources
of income.
It is not mandatory to maintain books of account on the basis of financial year.
For Example.
For the A.Y. 2016-17, income earned by S Ltd. during the P.Y 2015-16 is chargeable to tax.
S Ltd. may maintain books of account on the basis of any other year but for the purpose of
income tax, income of the P.Y. 2015-16 is taxable for the A.Y. 2016-17.
If S Ltd. maintains books of account on the calendar year basis, then taxable income shall be
determined as follows:
Accounting Year
2013
2014
2015
2016

Income as per books

of account
55000
64000
70000
88000

E-Smart Learning (Neha Sharma)

Quarterwise Breakup of Income

Jan.-March
April-Dec.
10000
12000
18000
42000
21000
48000
26000
45000
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Calculation of Taxable Income for Income Tax:
A.Y.

P.Y.

2014-15
2015-16
2016-17

2013-14
2014-15
2015-16

Income
12000+18000 = 30000
42000+21000=63000
48000+26000=74000

New
Business/
Profession

First P.Y.

From the date of setting up of

Business/Profession(or when source of
income came into existance) and ends on 31st
March.

Second &
subsequent
P.Y.

From 1st April to

31st March
(always of 12
months each)

Q.1. Z sets up a new business on 12th March, 2016. Determine the P.Y for the A.Y. 2016-17.
Q.2.Y was employed by a company on 5th Feb., 2016. Before 5th Feb, 2016 he was
unemployed and does not have any source of income. Determine the P.Y. for the A.Y. 201617 & 2017-18.
Cases where income of P.Y is not taxable in the immediately following A.Y.:
1.
2.
3.
4.

Income of non resident from shipping

Income of persons leaving India either permanently or for a long period of time
Income of bodies formed for short duration
Income of a person trying to alienate his assets with a view to avoiding payment of
tax
5. Income of a discontinued business.

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Sec 172 Shipping business of non residents
Conditions:
1. The assessee is a nonresident.
2. He owns a ship or ship is
chartered by the non resident.

3. The ship carries passengers,

livestock, mail or goods
shipped at a port in India.
4. The non resident may ( or
may not) have an agent/
representative in India.

7.5% of amount received (or receivable) on account of such carriage (including demurrage
charge or handling charge or similar amount) by the non resident shall be deemed to be the
income of the non resident.
The master of ship shall submit a return of income before the departure of the ship from
the Indian port and such ROI may be submitted within 30 days of the departure of the ship,
if the A.O. is satisfied that it will be difficult to submit the return before departure and if
satisfactory arrangement for payment of tax has been made. Port Clearance shall not be
granted by the Collector of Customs if ROI not submitted.
Sec.174 Persons leaving India
If it appears to A.O that an individual may leave India during the current A.Y or shortly after
its expiry.
He has no present intention of returning.
Income from 1st April to Probable date of departure shall be chargeable.
Sec. 174A Association/Bodies formed for short duration
1. AOP/BOI/Artificial Jurisdiction person formed for particular event/purpose.
2. It appears to AO that such body will dissolve in same year or within short expiry.
3. The Income from 1st April to the date of its dissolution shall be chargeable to tax in
that A.Y.
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Sec. 175 Person likely to transfer property to avoid tax
1. It appears to AO that person is likely to charge, sell, transfer, dispose of any of his
asset.
2. Such asset may be movable/immovable
3. Intention of such transaction is to avoid Income Tax liability.
4. Income from 1st April to the date when proceeding is started under section 175 is
taxable in that assessment year.
Sec.176 Discontinued Business
1. A business or profession is discontinued in any A.Y.
2. Income from 1st April to the date of discontinuation may be taxable at the discretion
of the AO in the normal A.Y. or the A.Y. in which business is discontinued.
A financial year is a previous year as well as an assessment year.
Financial Year
2015-16

2016-17

Previous Year
For the income received or
accrued during 1st
April,2015 to 31st March
2016
For the income received or
accrued during 1st April
2016 to 31st March 2017

Assessment Year
For the income received or
accrued in the immediately
preceding P.Y. i.e. 1st April
2014 to 31st March 2015
For the income received or
accrued in the immediately
preceding P.Y. i.e. 1st April
2015 to 31st March 2016

2014-15

Previous Year
of 2014-15

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Assessment
Year of
2013-14

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Sec2(31) Person

Individual

Firm

Hindu Undivided
Family (HUF)

AOP/BOI (wether
incorporated or
not)

Company

Local Authority

Every Artificial
Juridical Person
Individual
1. Natural Person.
2. Inclusions:
a. Minor
b. Unsound mind
c. Group of Individuals
d. Trustees of discretionary trust.
HUF
1.
2.
3.
4.

Persons lineally descended from a common ancestor.

Includes Wives and unmarried daughter.
Profit of HUF taxable as distinct entity.
Once assessed, it continues till partition.

Company
Under Sec. 2(17), company is:
a. Any Indian co., or,
b. Any Body Corporate incorporated under the laws of a foreign country ,or,
c. Any institution, association or a body which is assessed or was assessable/assessed as
a co. for any A.Y. commencing on or before 1st April,1970,or,

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d. Any institution, association or a body, whether incorporated or not and whether
Indian or non Indian, which is declared by general or special order of the CBDT to be
a company.
Firm
Sec.4 of the Indian Partnership Act,1932 relationship between persons who have agreed to
share the profits of business carried on by all or any of them acting for all.
AOP/BOI
An association in which two or more persons join in a common purpose or common action.
It can have co. /firm/individual as members.
BOI means body formed by Individuals.Only Individual can become member of BOI.
Every Artificial Juridical Person
1. Residuary Classification.
2. Includes Dieties, Bar Council, all artificial persons with a juridical personality.
Sec. 2(7) Assessee

Person

A person in respect of
whom any proceedings
has been taken.
Assessee

Deemed Assessee

Deemed Assessee in
default

Proceeding may be taken:

1. Either for the assessment of the amount of his income or of the loss sustained by
him; or
2. Of the income or loss of any other person in respect of whom he is assessable; or
3. Of the amount of refund due to him or to such other person.
Every person who is deemed to be an assessee in default under any provision of the Act.
For eg. A person who fails to deduct TDS or fails to pay tax etc.

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Some concepts related to charging tax on Income
1. Income tax is an annual tax on income.
2. Income of P.Y. is chargeable to tax in the next following A.Y. at the tax rates
applicable for the A.Y. (Exceptions explained)
3. Provisions for computation of taxable income are given by the Income Tax Act but
Tax rates are fixed by the Finance Act. For eg. The Finance Act,2016 provides tax
rates as follows:
a. Part I of the Ist Sch. Income tax rates for different assesses.
b. Part II of the Ist Sch.- Rates for deduction of tax at source.
c. Part III of the Ist Sch. Rates for payment of advance tax.
4. Tax is charged on every person.
5. Tax is levied on total Income.
Income
Definition of Income under sec. 2(24) is inclusive and not exhaustive.
1. Periodical monetary return with some sort of regularity.
2. May be recurring in nature.
3. True increase in wealth during a fixed period of time.
Broad Principles which clarify the concept of income
1.
2.
3.
4.
5.
6.
7.

Regular and definite source.

Different forms of income.( cash or kind)
Receipt vs Accrual.
Illegal Income.
Disputed Title.
Relief or reimbursement of expenses not treated as income.
Diversion of income by overriding title vs Application of income.
Example.
A and B prepare an article for publication in a renowned tax and law monthly
magazine, on the understanding that remuneration will be shared equally. The article
is published in 1st July,2015 issue of magazine. On 5th Sept. 2015, A received the
entire remuneration of Rs.16000, a half of which is later on paid by A to B .The
payment of Rs.8000 (being 50% of 16000) by A to B is diversion of income by
overriding title. The taxable income of A will be Rs.8000 (payment of 8000 to B will
not be treated as income of A as it is diverted by an overriding title)
Any expenditure of investment by A out of his 8000 will be an Application of Income.
8. Surplus from mutual activity cannot be taken as taxable income.(Eg. Club)
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9. Temporary and permanent income.
10. Lump sum receipt or installment.
11. Tax free Income. Eg. 20000 Tax free Salary of A+ 2000 Tax paid by employer B =
22000 Taxable income in hands of A.
12. Receipt on account of Dharmada,gaushala and pathshala not liable to tax.
13.Devaluation of currency, extra money is taxable.
14.Income includes loss.
15. Appropriation of payment between capital and interest if not made then payment is
considered as outstanding intt. Payment and taxable as income.
16.Same income cannot be taxed twice.
17.Income should be real and not fictional.
18.Source of income need not exist in the assessment year.
19.Pin Money is not treated as income.
20.Revenue receipt vs Capital receipt.
21.Prize on winning a motor rally.
22.Burden of proof.( Department /assessee)
Under section 2(24) ,the term income specifically includes the following:
1.
2.
3.
4.
5.
6.
7.

Profits and Gains.

Dividend.
Voluntary contribution received by a trust.(no specific direction of use)
Perquisites in the hands of employee.
Any special allowance or benefit. (conveyance allowance etc.)
City Compensatory Allowance/Dearness Allowance.
Any benefit or perquisite to a Director.
a. If given by Co. to a Director.
b. If given by Co. to a person having substantial interest in the co. or a relative of such
person.
8. Any benefit or perquisite to a representative assessee.
9. Capital Gain under section 45 is treated as income.
10.Insurance profit under section 44 is treated as income.
11.Winnings from lottery, crossword puzzle, races, card games, gambling , betting etc.
12.Employees contribution towards PF taxable as income of employer.
13.Amount received under Keyman Insurance Policy.
14.Amount exceeding Rs.50,000 by way of gift.
15.Consideration for issue of share.

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16.Assistance in the form of a subsidy /grant is taxable as income if the following
conditions are satisfied:
a. Assistance in the form of subsidy or cash incentive or duty drawback or waiver of
concession or reimbursement.
b. Received from CG or SG or any authority or body.
c. Cash or Kind.
d. It is not a subsidy or grant or reimbursement which is taken into consideration for
determination of actual cost within the parameters of Explanation 10 to section
43(1).
e. It is not a subsidy or grant by the CG for the purpose of the corpus of a trust or
institution established by the CG or SG .
Some Points to be considered:
1. Subsidy received by X ltd, a manufacturing co. from CG to acquire Plant &
Machinery is not covered under this provision ( as the amount of subsidy is
deducted from the actual cost for the purpose of claiming
depreciation/investment allowance by virtue of Explaination 10 to section
43(1).
2. LPG subsidy received by consumers of LPG (directly in bank account) or any
other welfare subsidy received by individuals are not covered by the aforesaid
amendment.
3. R Ltd. Has taken loan from PNB to purchase land to set up an industrial
undertaking in West Bengal. In the previous year 2015-16, R Ltd. Gets a waiver
of Rs. 1 crore from PNB as the project becomes financially non viable. The
waiver of Rs. 1 Crore is not taxable under section 2(24)(xviii) as it is not given
by CG/SG/body/authority.

Salaries

Profits &
Gains of
Business or
Profession

Capital
Gains

E-Smart Learning (Neha Sharma)

Gross
Total
Income

Income from
House
Property

Income
from other
sources

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Expenditure in respect of income not chargeable to tax
Section 14A provides that no deduction shall be made in respect of expenditure incurred by
an assessee in relation to income which does not form part of the total income under the
Act.
If Income is not taxable then exp incurred to earn that income is not deductible.
Rate of exchange for conversion of foreign income
Cases
1. If tax is deducted at source by payer
under the provisions of sections 192
to 196D.
2. It Tax is not deducted at sourcea. Salary income

The telegraphic transfer buying rate

adopted by SBI on the dates given below
On the date on which tax is required to be
deducted.

The last day of the month immediately

preceding the month in which salary is
due(or is paid in advance/arrears)

b. Interest on securities

The last day of the month immediately

preceding the month in which the income is
due.

c. Income from House

Property,business/professional
income and income from other
sources(where foreign income is
brought in India before the end of
P.Y.)

The amount actually credited by the bank in

Indian currency is taken as income.(TT rate is
irrelevant)

d. Income from house property,

Business/professional income and
income from other sources(where
foreign income is not brought in India
before the end of the P.Y.)

On the last date of the P.Y.

e. Income of non resident engaged in the The last day of the month immediately
business of operation of ships
preceding the month in which such income
is deemed to accrue or arise in India.
f. Dividend from non Indian companies
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The last day of the month immediately

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and deemed dividend under
sec.2(22)(e) from any company

preceding the month in which such dividend

is declared,distributed or paid.

g. Capital Gains

The last day of the month immediately

preceding the month in which the capital
asset is transferred.
Sec. 288A The taxable income shall be rounded off to the nearest multiple of ten rupees
and for this purpose any part of a rupee consisting of paise shall be ignored .If the last
figure in that amount is 5 or more, the amount shall be increased to the next higher
amount which is multiple of ten and if the last figure is less than 5 , the amount shall be
reduced to the next lower amount which is a multiple of ten.
8514.99 8510
8515.00 8520
8515.99 8520
8519.99 8520
8524.99 - 8520
COMPUTATION OF INCOME FOR AN ASSESSMENT YEAR
Rs.
1. Income from Salaries
Income from Salary
Income by way of allowances
Taxable value of perquisites
Gross Salary
Less: Deduction under sec. 16
Entertainment Allowance
Professional Tax
Income from Salaries

..
..
..
..

2. Income from House Property

Adjusted Net annual value
Less: Deduction under section 24
Income from House Property

.
..

3. Profits and gains of business or profession

Net profit as per profit and loss account
Add: Amounts which are debited to P & L A/c but are not

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Rs.

..

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allowable as deduction under the Act
Less: Expenditure which are not debited to P & L A/c but are
allowable as deduction under the Act
Less: Income which are credited to P & L A/c but are exempt
under section 10 or are taxable under other heads of Income
Add: Those income which are not credited to P & L A/c but are
taxable under the head Profits and gains of business or
profession
Profits and gains of business or profession
4. Capital Gains
Amount of capital gains
Less: Amount exempt under sections
54,54B,54D,54EC,54F,54G,54GA,54GB and 54H
Income from Capital Gains
5. Income from other sources
Gross income
Less: Deductions under section 57
Income from other sources
Total (i.e. 1+2+3+4+5)
Less: Adjustment on account of set off and carry forward of losses
Gross total income
Less: Deductions under sections 80C to 80U
Total income or net income (rounded off)
COMPUTATION OF TAX LIABILITY
Tax on net income
Less: Rebate under section 87A (in case of a resident individual
having net income not exceeding Rs.5 lakh)
Income tax after rebate under section 87A
Add: Surcharge
Tax and surcharge
Add: Education Cess(2% of tax and surcharge)
Add: Secondary and higher education cess(1% of tax and surcharge)
Less: Rebate under sections 86,89,90,90A and 91
Tax
Less: Pre paid taxes
# Tax paid on self assessment
#Tax deducted or collected at source
#Tax paid in advance
Tax liability (rounded off)
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.
.

..

..
..
..

.........
..
.
........
.
.
.
.
.
.
.
.
.
.
.
.
.........
.
.
.
.
.
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Computation of Tax for A.Y. 2016-17
Ind./HUF/AOP/BOI (60-80 years)
Upto 3 lakhs
Nil
3 Lakhs 5 Lakhs
10%
5 Lakhs - 10 Lakhs
20%
Above 10 Lakhs
30%
Basic Exemption Limit for Non Resident is Rs.2.5 Lakhs.
Ind./HUF/AOP/BOI (80 years and above)
Upto 5 Lakhs
Nil
5 Lakhs 10 Lakhs
20%
Above 10 Lakhs
30%
Basic Exemption Limit for Non Resident is Rs.2.5 Lakhs.
Ind./HUF/AOP/BOI (Upto 60 Years) (Resident or Non Resident)
Upto 2.5 Lakhs
2.5 Lakhs 5 Lakhs
5 Lakhs 10 Lakhs
Above 10 Lakhs

Nil
10%
20%
30%

Section 87A

Taxable Income

Upto 5 Lakhs

Above 5 Lakhs

Rebate

Tax on Total
Income

OR

Rs. 2000

Not Applicable

From A.Y. 2017-18 Rebate will be Rs.5000 or Tax on Total Income whichever is less.
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Firm 30%

Domestic
company

30%

Non Domestic
Company

40%

Company

Dividend Distribution is taxable @ 15%.

Surcharge on Income Tax
Taxable
Income

1 crore or less

More than 1
crore

See Table
Below

Depends on
status of
assessee

Status of assessee

Taxable Income 1 crore or

less
Domestic Co.
7% of Income Tax
Non Domestic Co.
2% of Income Tax
Any person other than a Co.
12% of Income Tax
Education Cess 3% (on Income Tax + Surcharge)

Taxable Income more than

1 crore
12% of Income Tax
5% of Income Tax
12% of Income Tax

Sec 288B Amount payable or refund shall be rounded off to the nearest ten rupees.
Agricultural Income is not taxable. Detailed discussion in chapter.
Difference between Exemption and Deduction
Exemption
Exempt income is not included in
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Deduction
It is given from income chargeable to tax.
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computation of income.
It can never exceed amount of income.

It can be more or less than amount of

income.

Capital & Revenue Receipts

Capital receipts are exempt from tax unless they are expressly taxable.
Revenue receipts are taxable unless they are expressly exempt from tax.
Act does not define capital & revenue receipts. One has to consider natural meaning &
decided cases to understand these terms.
1. One has to consider the nature of receipt in the hands of receipient.
2. The motive of payer is not relevant.
3. Receipt on account of circulating capital Revenue Receipt.
Receipt on account of fixed capital- Capital Receipt.
4. Receipt in lieu of source of income Capital Receipt. For eg. A is paid Rs.350000 as
compensation by the company for the loss of employment.
Receipt in lieu of income is a revenue receipt. For eg. Compensation paid for
temporary disablement.
5. Nature of payment like lump sum, installment, large payment is not relevant.
6. If an amount paid is not allowed as permissible deduction in the assessment of a
person making payment, it cannot determine the character of receipt.
7. Insurance receipt- If policy relates to capital asset, then receipt under General
Insurance Policy is capital in nature.
If policy relates to circulating asset then receipt is considered as revenue receipt. For
eg. Compensation for the loss of machine due to fire- Capital Receipt.
Compensation for the loss of goods due to theft Revenue.
The onus of proving is normally on IT Deptt.
Method of accounting employed by the assessee regularly is taken into consideration
for computation of income chargeable under the head PGBP or Income from other
sources.
Accounting Methods

Mercantile System
Cash System

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In mercantile system, recording of Income & Expenditure at the time of occurrence.
Profit under this system is profit actually earned during P.Y. though not necessarily
realized in cash.
In Cash system, recording of revenue & expenditure at the time of receipt or
payment.
If mercantile system is followed the income will be calculated on accrual & exp. On
due basis. If Cash system is followed then income will be calculated on receipt & exp.
On payment basis.
The CBDT has notified the Income Disclosure & Tax Accounting Standards vide
Notification No. 32/2015 dated 31st March, 2015. These standards are applicable for
computation of income chargeable under the head PGBP or Income from Other
Sources & not for the purpose of maintenance of books of account.
Amalgamation 2(1B)
Conditions:1. All the properties of amalgamating co. immediately before the amalgamation
should become the property of amalgamated co. by virtue of amalgamation.
2. All liabilities of amalgamating co. immediately before the amalgamation should
become the liabilities of amalgamated co. by the virtue of amalgamation.
3. Share holders holding atleast (in value)* of shares in amalgamating co. should
become share holders of amalgamated co. by virtue of amalgamation.
*other than share already held by amalgamated co. or by its nominee.

holds 20%

A Ltd.

Shareholders of (100-20) i.e. 80% = 60%

B Ltd.

Demerger 2(19 AA)

Demerger in simple terms means transfer by a demerged co. of its one or more undertaking
to the resulting co. (Under scheme of arrangement u/s 391 to 394 of Co.s Act 1956) in
following manner:
1.
2.
3.
4.

Propety & Liabilities

Demerged co. undertaking
Resulting Co.
Such transfer are made at Book value appearing immediately before the demerger.
Resulting Co. Shares on Proportionate basis
Shareholders of Demerged Co.
Shareholders holding of shares (in value)* become share holder of resulting co.
*other than shares already held by nominee for resulting co. or its subsidiary.

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5. Transfer is on a going concern basis.
6. The demerger is in accordance with the conditions, if any, notified u/s 72A(5)
How to Calculate Tax
Case 1. Taxable Income of Mr. A (50 years) is Rs. 10,86,920. Determine tax for A.Y. 2016-17.
Case 2. Mr. B (age 50 years) is working in C Ltd. His taxable income is Rs. 10,62,540.
Determine tax for A.Y. 2016-17.

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