Basics of Income Tax Notes For CA CSCMA Students

Basics of Income Tax
Notes by Munshigiri Education – One Step Solution for CA/CS/CMA Students

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CHAPTER : Basics of Income Tax
CONCEPT 1: Short Title, Extent and Commencement [Section 1]
a) Short title : Income Tax Act 1961

b) Extent : Whole of India
c) Commencement : 1st April, 1962
CONCEPT 2: Definition of India [Section 2(25A)]
India means
a) India as referred in Article of the constitution (i.e) States & the Union Territories.
b) Territorial waters, seabed and subsoil underlying such waters. Territorial waters
extend upto 12 nautical miles from baseline.
c) Continental shelf- Continental shelf refers to the seabed and subsoil up to the
edge of continental margin or 200 nautical miles from the baseline, whichever is
near.
d) Exclusive Economic Zone- Exclusive economic zone extends upto 200 nautical
miles or upto continental margin from the baseline, whichever is near.
• Lower part of the sea is called the continental shelf and the upper part is
exclusive economic zone
e) Any other maritime zone as defined in Continental Shelf, Exclusive economic zone
and other Maritime Zones Act, 1976.
f) Air space above territory and territorial waters.
Prepared by CA. S. Shekhar

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CONCEPT 3: Definition of Income [Section 2(24)]
Income specifically includes:
S.No Income Chapter

1 Profits and gains PGBP
2 Dividend Dividend Income
3* Voluntary contributions received by a trust Trust
4 Perquisites and profits in lieu of salary Salary Income
5 Any special allowance or benefits to employees to meet Salary Income
official expenses
6 City compensatory allowances or DA Salary Income
7 Value of perquisite or any other benefits given to directors Salary Income
or any other person having substantial interest by a
company
8 Any benefit or perquisite to representative assesses
9 Sums chargeable u/s 28,41 & 59 of Income Tax Act PGBP/income from
other sources
10 * Income from capital gains Capital gains
11 * Insurance profits
12 Banking income of co-operative society
13 Winning from lottery Income from other
sources
14 Employee’s contribution towards PF Income from other
sources
15 * Amount received under key man insurance PGBP, Salary
16 Gift received in excess of Rs.50,000 Income from other
sources
17 * Consideration received for issue of shares as exceeds FMV Income from other
of such shares Section [56(2)(Vii)(b)] – (w.e.f. AY 2013-14) sources
18 * Forfeited amount received in connection with transfer of Income from other
capital asset where the transfer doesn’t materialize. Section sources
[56(2)(ix)] – (w.e.f. AY 2015-16)
* Capital Receipts Included in Definition of Income (See Concept 12 d)
Concept 4: Definition of assessee [section 2(7)]
Assessee means a person (explained in Concept 6) by whom any tax or any other sum is
payable under this act and includes:

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a) Every person, in respect of whom any proceeding under this act has been taken
for assessment of his income or income of any other person in respect of which he
is assessable or loss sustained by him or by such person or refund due to him or
to such person.
b) Every person who is deemed to an assessee under provisions of this act (Deemed
assessee)
c) Every person who is deemed to be an assessee in default under provisions of this

act
Examples :
a) A was liable to pay income tax of Rs 5,000 on income earned by him in AY 15-16-
A is an assessee.
b) A was liable to pay income tax of Rs 5,000 on income earned by his minor son B
in AY 15-16- A is an assessee.
c) Proceeding has been initiated against A for assessment of his income or loss or
refund due to him- A is an assessee (whether A was liable to pay tax or not is
irrelevant)
d) Proceeding has been initiated against A for assessment of income or loss or
refund of tax due to B, his minor son- A is an assessee
Concept 5: Previous year [Section 3] & Assessment year [Section 2(9)]
a) Assessment year: Means a period of twelve months commencing on the 1st of April
every year (i.e) period of 1st April of a calendar year to 31st March next calendar
year. Example:- 1st April 2014- 31st March, 2015.
b) Previous Year : Means financial year preceding the assessment year. Example : If
the Assessment Year is 2008-2009 (01-Apr-08 to 31-Mar-09), then its
corresponding previous year is 2007-2008 (01-Apr-07 to 31-Mar-08)
• Note : In case of a business/profession newly set up or a source of

income newly coming into existence in a financial year, the previous year

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shall be the period beginning from the date of setting up the new
business/profession or the date in which source of income comes into
existence till the date in which that financial year ends. Example:
Business started/new income came into existence on 12thAug 2015, then
the previous year will be 12th Aug 2015 to 31st March 2016.
Concept 6: Person [Section 2(51)]
A person includes:
a) An individual
b) A Hindu Undivided Family HUF)
c) A Company
d) A Firm
e) An AOP (Association of Persons) or BOI (Body of Individuals) whether incorporated
or not.
f) A local authority
g) Every artificial judicial person not falling in any of the above clauses
• Note 1: An AOP / a BOI / a local authority or any artificial judicial person

whether or not they are formed with an objective of earning income.
• Note 2 : The above definition is inclusive and not exhaustive. The word
‘person’ has been held to include the crown, the government of an Indian
state, the secretary for state for India when engaged in commercial
enterprises and a society registered under Societies Registration Act.
• Note 3:- Definition of ‘An Assessee’ starts with ‘Assessee means a person’,
so in order to be an assessee under this act one has to a person as
explained here.
Concept 7: Basics of Charge [Section 4]
Income Tax shall be charged at the rates prescribed for the assessment year in respect
of Total Income earned in the previous year.
Example: For PY 2014-2015, Income tax shall be charged at rates prescribed for AY
2015-16 on income earned during PY 2014-2015

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Exception: In the following cases, income tax may be charged at rates relevant to year
which is one year before the assessment year:-
1. Income of Non-resident from shipping [Section 172]

2. Income of persons leaving India permanently or for an unforeseen future [sec 174]
3. Income of bodies formed for a particular event [sec 174A]
4. Income of a person trying to transfer property to avoid tax [sec 175]
5. Income of discontinued business [sec 176]
In all the above cases, it is difficult to track the assessee after the end of the previous
year. So, the assessment year may be considered same as the previous year.
Concept 8:- Calculation of Gross Total Income (GTI) and Total Income (TI)
a) Gross Total Income of a person is computed by adding the Income earned by him
under following heads:-
1) Income under the Head Salary
2) Income from House Property
3) Income from Business and Profession
4) Income under the head Capital Gains
5) Income from Other Sources
b) Total Income (TI) of a person is calculated by reducing the deductions available

under chapter VI A (Section 80C to 80U) of the Act from Gross Total Income.
c) As discussed in Concept 7, tax shall be computed on Total Income earned by a
person in previous year on rates applicable for the corresponding assessment
year.
Concept 9:- Calculation of Tax on Total Income (FY 2015-16 i.e AY 2016-17)
Category 1:- Individuals
a) Senior Citizen (Indian Resident aged 60 years or more at any time during the year
, but less than 80 years)
Total Income (In Rs.) Tax Rate (%)

Upto 3,00,000 Nil
3,00,001- 5,00,000 10%
5,00,001- 10,00,000 20%
More than 10,00,000 30%

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b) Very Senior Citizen (Indian Resident aged 80 years or more at any time during the
year)

Upto 5,00,000 Nil
5,00,001- 10,00,000 20%
More than 10,00,000 30%
c) Other Individuals (Men or women or transgender less than 60 years of age,

whether Resident of India or Not)

Upto 2,50,000 Nil
2,50,001- 5,00,000 10%
5,00,001- 10,00,000 20%
More than 10,00,000 30%
• Note 1:- The tax slab given in c shall also apply to HINDU Undivided Family (HUF),
Association of Person (AOP) and Body of Individuals (BOI)
• Note 2:- For resident individuals having Total Income upto Rs. 5,00,000/- a tax
rebate upto Rs. 2,000/- is available under Section 87 A
• Note 3:- Individuals whose Total Income is more than 1 crore rupees, are liable to
pay surcharge on Tax at the rate 12% on the tax amount. (Concept of Tax on
Super Rich)
• Note 4:- If due to Increase in Income over 1 Crore and consequential applicability
of surcharge, the Individual’s tax liability increases more than his income over
rupees one crore, then such individual shall be provided marginal relief from tax
liability in order to ensure that the increase in tax is not more than increase in
Total Income above Rupees one crore (Concept of Marginal relief)
• Note 5:- In addition to above, all the individuals are liable to pay Education Cess
(Edu Cess) calculated at 2% of such Tax plus surcharge, if any and also

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Secondary and Higher Education Cess (S&H Edu Cess) calculated at 1% of such
tax plus surcharge, if any.
• Note 6:- In case an assessee has reached the age of 60 during the Previous year
2015-2016 then both slab a and slab c shall apply to him. In such a case, the slab
which is more beneficial to him or her shall apply (slab a)
• Note 7:- In case an assessee has reached the age of 80 during the Previous year
2015-2016 then both slab a and slab b shall apply to him. In such a case, the
slab which is more beneficial to him or her shall apply (slab b)
Some Examples which will clear the concept
Example 1:- Total Income of Mr. A (Age 58) is Rs. 3,00,000 in Financial year 2015-16.
Calculate Tax liability thereon.
Solution: - Since Assessee is an Individual less than age of 60, slab (c ) will be
applicable.
Tax on TI upto 2,50,000 = Nil
Tax on remaining income of Rs. 50,000 (3,00,000-2,50,000) @ 10% = Rs. 5,000
Since Total Income is not more than 5,00,000, rebate under 87 A = Rs. 2,000
Net Tax= (Rs. 5,000- Rs. 2,000) = Rs. 3,000
Surcharge (Since Total Income is not more than Rs. 1,00,00,000) = Nil
Tax Plus Surcharge (3,000+ Nil) = Rs. 3,000
Education Cess @ 2% of (3,000+Nil) = Rs. 60
Secondary and Higher Education cess @ 1% of (3,000+Nil) = Rs. 30
Total Tax plus cess payable (3,000+60+30) = Rs. 3,090
So Total Tax liability of Mr. A is Rs. 3,090 in AY 2016-17.

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Example 2:- Total Income of Mrs. A (Age 65) is Rs. 8,90,000 in Financial year 2015-16.
Solution: - Since Assessee is an Individual more than age of 60 but less than the age of
80, slab (a) will be applicable.
Tax on TI between 3,00,001- 5,00,000 @ 10% =Rs. 20,000
Tax on remaining income of Rs. 3,90,000 (8,90,000-5,00,000) @ 20% = Rs. 78,000
Since Total Income is more than 5,00,000, rebate under 87 A = Nil
Net Tax= Rs.(20,000 + 78,000- Nil) = Rs.98,000
Tax Plus Surcharge (98,000+ Nil) = Rs.98,000
Education Cess @ 2% of (98,000+Nil) = Rs.1,960
Secondary and Higher Education cess @ 1% of (98,000+Nil) = Rs. 980
Total Tax plus cess payable (98,000+1,960+980) =Rs. 1,00,940
So Total Tax liability of Mrs. A is Rs. 1,00,940/- in AY 2016-17.
Example 3:- Total Income of Mr. X (Age 82) is Rs. 15,50,000 in Financial year 2015-16.
Solution: - Since Assessee is an Individual more than 80, slab (b) will be applicable.
Tax on TI between 5,00,001- 10,00,000 @ 20% = Rs. 1,00,000
Tax on remaining income of Rs. 5,50,000 (15,50,000-10,00,000) @ 30% = Rs.1,65,000
Net Tax= Rs.(1,00,000+1,65,000- Nil) = Rs.2,65,000

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Tax Plus Surcharge (2,65,000+ Nil) = Rs.2,65,000
Education Cess @ 2% of (2,65,000+Nil) = Rs.5,300
Secondary and Higher Education cess @ 1% of (2,65,000+Nil) = Rs.2,650
Total Tax plus cess payable (2,65,000+5,300+2,650) =Rs. 2,72,950
So Total Tax liability of Mr. X is Rs. 2,72,950/- in AY 2016-17.
Example 4:- Total Income of Mr. Y (Age 42) is Rs. 1,80,00,000 in Financial year 2015-16.
applicable.
Tax on TI between 2,50,001- 5,00,000 @ 10% = Rs.25,000
Tax on remaining income of Rs. 1,70,00,000 (1,80,00,000-10,00,000) @ 30% =

Rs.51,00,000
Net Tax= Rs.(25,000+1,00,000+51,00,000- Nil) = Rs.52,25,000
Surcharge @ 12% of Net Tax (TI is more than Rs.1,00,00,000) = Rs.6,27,000
Tax Plus Surcharge (52,25,000+ 6,27,000) = Rs.58,52,000
Education Cess @ 2% of Rs. 58,52,000 = Rs.1,17,040
Secondary and Higher Education cess @ 1% of Rs. 58,52,000 = Rs.58,520
Total Tax plus cess payable (58,52,000+1,17,040+58,520) =Rs.60,27,560

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So Total Tax liability of Mr. Y is Rs. 60,27,560/- in AY 2016-17.
Example 5:- (Concept of Marginal Relief) Total Income of Mrs. Y (Age 50) is Rs.
1,02,00,000 in Financial year 2015-16. Calculate Tax liability thereon.
applicable.
Tax on remaining income of Rs. 92,00,000 (1,02,00,000-10,00,000) @ 30% =

Rs.27,60,000
Net Tax= Rs.(25,000+1,00,000+27,60,000- Nil) = Rs.28,85,000
Surcharge @ 12% of Net Tax (TI is more than Rs. 1,00,00,000) = Rs.3,46,200
Tax Plus Surcharge (28,85,000+ 3,46,200) = Rs.32,31,200
* Marginal Relief = Rs. 2,06,200
Tax plus surcharge less Marginal Relief = Rs. 30,25,000
Education Cess @ 2% of Rs. 30,25,000 = Rs.60,500
Secondary and Higher Education cess @ 1% of Rs. 30,25,000 = Rs.30,250
Total Tax plus cess payable (30,25,000+60,500+30,250) =Rs.31,15,750
So Total Tax liability of Mrs. Y is Rs. 31,15,750/- in AY 2016-17.

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* Calculation of Marginal Relief
In order to ensure that the increase in tax due to applicability of Surcharge is not more
than increase in Total Income, a relief called Marginal Relief shall be provided to Mrs. Y.
Now, presuming that Total Income of Mr. X is Rs. 1,00,00,000/- calculate her total
income.
Tax on remaining income of Rs. 90,00,000 (1,00,00,000-10,00,000) @ 30% =

Rs.27,00,000
Net Tax= Rs.(25,000+1,00,000+27,00,000- Nil) = Rs.28,25,000
Tax Plus Surcharge (28,25,000+Nil) = Rs.28,25,000
It must be observed that due to an increase in Total Income of Rs. 2,00,000 (

1,02,00,000- 1,00,00,000), the Tax plus surcharge payable by the assessee increased by
Rs. 4,06,200 (32,31,200- 28,25,000). In other words, increase in tax liability of Mrs.Y is
more than her increase in Income over and above Rs. 1,00,00,000. In order to remove
this hardship on assessee, the assessee shall be allowed Marginal Relief which shall be
calculated as follows:-
Marginal Relief= Increase in Tax due to Increase - Increase in Income above

in Income above Rs. 1,00,00,000 Rs. 1,00,00,000
= Rs. 4,06,200- Rs. 2,00,000= Rs. 2,06,200/-

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Now, after Marginal Relief the increase in tax liability Rs. 2,00,000 (30,25,000-
28,25,000) is equal to the assessee’s increase in income Rs. 2,00,000 (1,02,00,000-
1,00,00,000)
An Individual shall avail the benefit of Marginal relief only if his income is falling in
following limits in AY 2015-2016:-
Category Income range for applicability of

Marginal Relief
Super Senior Citizen (80 years or Above) 1,00,00,001 to 1,05,06,024
Senior Citizen (60- 80 years) 1,00,00,001 to 1,05,09,639
Other Individuals 1,00,00,001 to 1,05,10,542
Category 2:- Firm
a) Firm refers to a Partnership firm including a LLP (Limited Liability Partnership).

b) It is chargeable to tax a rate of 30%.
c) No Surcharge is applicable on a Firm.
d) Education Cess & Secondary and Higher Education Cess shall be charged at the
rate of 2% and 1% respectively on the amount of tax calculated.
Category 3:- Co- Operative Society
a) As per Section 2(19) of the Income Tax Act, 1961, Co- Operative Society means a
Co- Operative Society registered under Co- Operative Societies Act, 1912, or under
any other law time being in force in any state for the registration of Co- Operative
Society.
b) Generally speaking, a Co- Operative Society is nothing but an autonomous
association of persons united voluntarily to meet their common, economic, social
or cultural needs through a jointly owned and democratically controlled
enterprise.
c) It is to be noted that, a co- operative society, if registered under Co- Operative
Societies Act, 1912, or under any other law time being in force in any state,
becomes a Co- operative society for the purpose of Income Tax Act and shall be
chargeable to tax as a ‘artificial judicial person’ at a rate of tax given in point f.

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d) An unregistered Co- Operative society is not a Co-operative society for the purpose
of Income tax Act and shall be chargeable to tax as an Association of Person (AOP)
at a rate of tax applicable for an Individual below 60 years of Age. (See Table c
category- 1 (Individual))
e) Examples of Co- operative societies in India: Adarsh Co- Operative Bank, Amul,
Mother Diary are examples of Co- Operative Societies in India.
f) Tax slab for a Co- Operative Society:-

Upto 10,000 10%
10,001- 20,000 20%
More than 20,000 30%
g) Co- Operative Societies whose Total Income is more than 1 crore rupees, is liable
to pay surcharge on Tax at the rate 12% on the tax amount.
h) If due to Increase in Income over 1 Crore and consequential applicability of

surcharge, the Co-operative Society’s tax liability increases more than its income
over rupees one crore, then such co- operative society shall be provided marginal
relief from tax liability in order to ensure that the increase in tax is not more than
increase in Total Income above Rupees one crore (Concept of Marginal relief).
i) In addition to above, a co- operative society shall be liable to pay Education Cess
(Edu Cess) calculated at 2% of such Tax plus surcharge, if any and also
Secondary and Higher Education Cess (S&H Edu Cess) calculated at 1% of such
tax plus surcharge, if any.
Example: - Total Income of ABC Co- Operative Bank (A Co- operative Society) is Rs.
5,00,000/-. Calculate the Tax Liability.
Solution:-
Tax on Income upto Rs. 10,000 @ 10% = 1,000
Tax on Income between Rs. 10,000- 20,000 @ 20% = 2,000
Tax on remaining Income (4,80,000 @ 30%) = 1,44,000

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Total Tax = 1,47,000
Surcharge (TI doesn’t exceed Rs, 1,00,00,000) = Nil
Secondary Education Cess (2% of 1,47,000) = 2,940
Secondary & Higher Education Cess (2% of 1,47,000) = 1,470
Total Tax liability = Rs. 1,51,410
Category 4:- Local Authority
a) Local authority is third level of Government In India after Central Govt & State
Govt.
b) Example of Local Authority- DDA, MCD, Etc
c) A Local Authority shall be chargeable to tax at the rate of 30% on Total Income.
d) A Local Authority whose Total Income is more than 1 crore rupees, is liable to pay
surcharge on Tax at the rate 12% on the tax amount.
e) If due to Increase in Income over 1 Crore and consequential applicability of

surcharge, the Local Authority’s tax liability increases more than its income over
rupees one crore, then such local authority shall be provided marginal relief from
tax liability in order to ensure that the increase in tax is not more than increase in
Total Income above Rupees one crore (Concept of Marginal relief).
f) In addition to above, a local authority shall be liable to pay Education Cess (Edu
Cess) calculated at 2% of such Tax plus surcharge, if any and also Secondary and
Higher Education Cess (S&H Edu Cess) calculated at 1% of such tax plus
surcharge, if any.
Category 4:- Company
A company includes a Domestic Company, which is incorporated in India and also a

foreign Company, which is incorporated outside India.

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There are two types of tax rates prescribed for a company- One is a Normal Rate and
other is MAT rate (Minimum Alternate Tax Rate). Normal tax is calculated by applying
Normal Tax rate on Total Income calculated as per provisions of the Act and Minimum
Alternate Tax (MAT) is calculated by applying MAT rate on ‘Book Profit’ calculated as per
special provisions contained in the Act (Section 115JB)
A Company has to pay Normal Tax or MAT, whichever is higher.

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The tax rate applicable to a Company is tabulated below:-
Type of Co. Total Income Normal Tax Rate MAT Rate (Minimum
(Rs.) Alternate Tax rate)
Domestic Co. Upto 1 crore • 30% tax rate • 18.5% tax rate
• 2% Edu Cess • 2% Edu Cess
• 1% S&H Edu Cess • 1% S&H Edu Cess
Domestic Co. More than 1 • 30% tax rate • 18.5% tax rate
Crore but upto • 7% Surcharge • 7% Surcharge
10 crore • 2% Edu Cess • 2% Edu Cess
Domestic Co. More than 10 • 30% tax rate • 18.5% tax rate
Crore • 12% Surcharge • 12% Surcharge
Foreign Co. Upto 1 crore • 40% tax rate • 18.5% tax rate
Foreign Co. More than 1 • 40% tax rate • 18.5% tax rate
Crore but upto • 4% Surcharge • 7% Surcharge
10 crore • 2% Edu Cess • 2% Edu Cess
Foreign Co. More than 10 • 40% tax rate • 18.5% tax rate
Crore • 7% Surcharge • 12% Surcharge
• Note 1:- Surcharge shall be calculated on Tax and Edu Cess and S&H Edu Cess
shall be calculated on Tax plus Surcharge.
• Note 2:- Marginal Relief is available in all the above cases.
Concept 10:- Deemed Assessee
Deemed Assessee is a person who is deemed to be assessee on behalf of another person.

Following are Deemed Assessee:-
a) Legal representative of decreased person

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b) Agent of a Non- Resident

c) Guardian of a Minor
d) Trustee of a Trust
e) Liquidator of a company
In all the above cases the person who is representing the Assessee shall deemed to be
assessee himself and all the provisions of the Income Tax Act shall apply on him as if he
is the assessee.
Concept 11:- Components of Income Tax Law
The following are the Major Components of Income Tax law in India:-
a) Income Tax Act, 1961:- The Ac applies to whole of India and contains provisions
for determination of Taxable Income and tax liability thereon, procedure for
assessment, appeals, penalties and prosecution.
b) Income Tax Rules, 1962:- The Central Government has authorized CBDT (Central
Board for Direct Taxes) to make Income Tax rules for the purpose of better
execution of Income Tax Act, 1961. These rules are called Income Tax rules and
are amended as and when required in public interest by CBDT.
c) Circulars & Clarifications:- From Time to time, CBDT issues circulars and
clarifications on various tax related issues for better understanding of Income Tax
Law in India.
d) Judiciary:- The Income Tax appellate Tribunal (ITAT), High Courts of different
states and the supreme court give judgments on various issues of Income Tax.
These decisions play an important role in understanding and interpretation of the
Income Tax law in the country.
Concept 12:- Miscellaneous Topics
a) Income received in cash v/s Income Received in Kind:-
i. Income may be received in cash or in kind.

ii. Income received in kind is to be valued as per rules prescribed under Income
Tax Law.
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iii. In case there is no prescribed rules for any particular income which is received
in kind, then Market Price approach shall be applied whereby the market price
of the item received in kind is to be taken as value of Income.
b) Relevance of Method of Accounting in computing Income:-
i. While computing Income under the head Income under the head salary, house
property and capital gain, the method of accounting is irrelevant. Income under
these heads shall be computed as per provisions of the Act, irrespective
whether the assessee maintains books in accrual basis (mercantile basis) or
cash basis or doesn’t maintain books at all.
ii. While calculating income under the head ‘Business or Profession’ or ‘Income
from other source’, the taxable income shall be calculated as per the books of
accounts maintained by assessee in ‘cash system’ of accounting or ‘accrual
system’ of accounting, whichever is consistently followed by him.
c) Income by Mutual Activity:-
i. A person cannot make taxable income out of a transaction made with himself.
Taxable income is Income which comes from outside.
ii. A surplus arising to a mutual concern from the services provided to its
members cannot be taken as an income chargeable to tax under this act.
iii. Example: - The resident welfare society collects a total of Rs. 10,000/- from all
residents of a housing society to conduct New Year party. The total expenses
incurred by the society in the party was Rs. 9,000/-. The remaining Surplus of
Rs. 1,000/- shall not be treated as an Income of the society as it is a surplus
from services provided to its members.
iv. Exception: - Income derived by Trade or Professional Association from

rendering specific services to its members shall be taxable.
d) Revenue Receipt v/s Capital Receipt:-

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i. Capital Receipt has following features:-

• It is not expected to be received every year or after a regular interval.
• It is classified as a Liability in the Balance sheet.
• A capital receipt is not chargeable to tax unless it is specifically
included in the definition of Income given in Section 2 (24) of the Act.
ii. Revenue receipt has following features:-

• It is expected to be received every year or after a regular interval.
• It is a profit & loss A/c item and shown in credit side of profit and
loss A/c.
• A revenue receipt is chargeable to tax even if it is not included in
the definition of Income given in Section 2(24) of the Act.
iii. Following are the Capital Receipts included in the definition of Income:-
Voluntary contributions received by a trust S. No 3 (Concept 3)

Income from capital gains S. No 10 (Concept 3)
Insurance profits S. No 11 (Concept 3)
Amount received under keyman insurance S. No 15 (Concept 3)
Consideration received for issue of shares as exceeds FMV S. No 17 (Concept 3)
of such shares Section [56(2)(Vii)(b)] – (w.e.f. AY 2013-14)
Forfeited amount received in connection with transfer of S. No 18 (Concept 3)
capital asset where the transfer doesn’t materialize. Section
[56(2)(ix)] – (w.e.f. AY 2015-16)
e) Application of Income v/s Diversion of Income:-
i. Application of Income means spending of Income after it is being earned by

the assessee. Such amount shall not be excluded from total income of the
assessee as it is merely application of earned income.
ii. Diversion of Income is the process of diverting income before it is earned by

the assessee. Such amount shall excluded from the Total Income of the
assessee as the income is diverted to someone else before being earned y the
assessee.

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iii. There is a thin line of difference between application of Income & diversion
of Income. In case of diversion of Income there is such an overriding title of
any person on the income that the income before being earned by the
assessee reaches such person and hence not chargeable to tax in hands of
the assessee.
iv. Example of Application of Income: - Mr. A is liable to pay Rs. 2,000/- per
month to Ms. B (his ex- wife) as an alimony sum. Mr. A being an employee
of Mr. C, instructs him to pay Rs.2,000/- per month out of his salary and
disburse the remaining salary to him. Whether this amount of Rs.2,000/-
per month be included in the Total Income of Mr. A or is it a case of
diversion of income of Mr. A and not taxable in his hands?
This is a case of Application of Income by Mr.A and not diversion of Income

and hence it will be included in the Total Income of Mr. A. This is because
this amount of Rs. 2,000/- per month is an obligation of Mr. A to pay to Ms.
B out of his income and not an income in which Ms. B had over riding
entitlement from Mr. C before being earned by Mr. A. In other words, this is
an Income of Mr. A, which is applied by him to fulfill an obligation and
hence included in his Total Income and a mere arrangement to make Mr. C
make such payments directly to Ms. B won’t make it a case of Diversion of
Income.
v. Example of Diversion of Income:- Ms ABC is a partnership firm in which A

and his two sons B & C are partners. The partnership deed provides that
after the death of Mr. A, B & C shall continue the business of the firm
subject to a condition that 20 % of profit of the firm shall be given to Mrs. D
(Wife of Mr. A/ Mother of B & C). After the death of Mr. A, whether this 20%
amount of profit be included in the Total Income of Firm M/s ABC or is a
case of diversion of income of M/s ABC and not taxable in its hands?
This is a case if Diversion of Income and the said 20% amount shall not be
included in the Total Income of M/s ABC (i.e.) it is deductible from its Total
Income. This is because the clause mentioned in partnership deed has given an
overriding title of the 20% profit to Mrs. D and such income is a precondition
for the firm to continue its business. In other words, the said 20% reaches Mrs.

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D before it becomes income of the firm and hence it is a case of diversion of

Income.
f) Annual Amendments to Income Tax Act
i. Although Income Tax Act is a permanent Act, it gets its operative

effectiveness every year from the Finance Act passed every year.
ii. The Finance bill is presented by the finance minister on the floor of Lok
Sabha on the Budget day of the Budget session. The bill after getting
approved from both houses of Parliament is signed by the president and
becomes Finance Act.
iii. For Example, the Finance Minister of India Mr. Arun Jaitley presented the
Finance Bill (General Budget) of 2015 on 28th February 2015. The bill
contains financial proposals of the government for the Financial Year 2015-
16 (i.e. AY 2016-2017). The bill after getting passed from both houses of the
parliament when signed by the president becomes Finance Act, 2015.
iv. The first Schedule of the Finance Bill contains the rate of Income Tax, TDS,
etc. The 1st schedule has four parts-
• Part I: - Contains rates of Income tax for current assessment year.

Finance Act 2015, Schedule-I, Part I shall contain Tax rates for AY
2015-16
• Part- II: - Contains rates of tax to be deducted at source for the

income earned in current financial year. Finance Act 2015, Schedule-
I, Part II shall contain Tax Deducted at Source rates for FY 2015-16
• Part- III: - Contains rates of Income Tax for the income earned in next
assessment year. Finance Act 2015, Schedule-I, Part III shall contain
Income Tax rates for AY 2016-17.
• Part- IV: - Contains rules for calculating net agricultural income.

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Note: - Part-III of Schedule-I of Finance bill shall become part-I of Schedule I of next
Finance Bill.
g) Rounding off of Total Income:-
i. Total Income shall be rounded off to the nearest multiple of 10 rupees. (i.e)
Total Income of 9,30,804/- shall be rounded off to Rs. 9,30,800/- and Total
Income of Rs. 2,12,209/- shall be rounded off to Rs. 2,12,210/-
ii. For this purpose any part of the rupees consisting of paisa shall be ignored.
iii. In case the Total Income ends with unit place value as 5, then such Total
Income shall be rounded up. (i.e) Total Income of 5,15,805/- shall be
rounded off to Rs. 5,15,810/-
h) Rounding off of Tax, Interest, Penalty, Etc :-
i. Tax (Including Cess, Surcharge, Interest, Fine Penalty, Etc) shall be rounded
off to the nearest multiple of 10 rupees. (i.e.) Tax of 7,30,822/- shall be
rounded off to Rs. 7,30,820/- and Total Income of Rs. 6,62,459/- shall be
rounded off to Rs. 6,62,460/-
ii. For this purpose any part of the rupees consisting of paisa shall be ignored.
iii. In case the Total Tax liability ends with unit place value as 5, then such
Total Income shall be rounded up. (i.e.) Tax of 1,11,805/- shall be rounded
off to Rs. 1,11,810/-

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Basics of Income Tax Notes For CA CSCMA Students

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Basics of Income Tax Notes For CA CSCMA Students

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Basics of Income Tax

Notes by Munshigiri Education – One Step Solution for CA/CS/CMA Students

CHAPTER : Basics of Income Tax

CONCEPT 1: Short Title, Extent and Commencement [Section 1]

a) Short title : Income Tax Act 1961

CONCEPT 2: Definition of India [Section 2(25A)]

Prepared by CA. S. Shekhar

CONCEPT 3: Definition of Income [Section 2(24)]

Income specifically includes:

S.No Income Chapter

* Capital Receipts Included in Definition of Income (See Concept 12 d)

Concept 4: Definition of assessee [section 2(7)]

Prepared by CA. S. Shekhar

c) Every person who is deemed to be an assessee in default under provisions of this

Concept 5: Previous year [Section 3] & Assessment year [Section 2(9)]

• Note : In case of a business/profession newly set up or a source of

Prepared by CA. S. Shekhar

Concept 6: Person [Section 2(51)]

• Note 1: An AOP / a BOI / a local authority or any artificial judicial person

Concept 7: Basics of Charge [Section 4]

Prepared by CA. S. Shekhar

1. Income of Non-resident from shipping [Section 172]

b) Total Income (TI) of a person is calculated by reducing the deductions available

Category 1:- Individuals

Total Income (In Rs.) Tax Rate (%)

Prepared by CA. S. Shekhar

Total Income (In Rs.) Tax Rate (%)

c) Other Individuals (Men or women or transgender less than 60 years of age,

Total Income (In Rs.) Tax Rate (%)

Prepared by CA. S. Shekhar

Some Examples which will clear the concept

Tax on TI upto 2,50,000 = Nil

Tax on remaining income of Rs. 50,000 (3,00,000-2,50,000) @ 10% = Rs. 5,000

Net Tax= (Rs. 5,000- Rs. 2,000) = Rs. 3,000

Tax Plus Surcharge (3,000+ Nil) = Rs. 3,000

Education Cess @ 2% of (3,000+Nil) = Rs. 60

Secondary and Higher Education cess @ 1% of (3,000+Nil) = Rs. 30

Total Tax plus cess payable (3,000+60+30) = Rs. 3,090

So Total Tax liability of Mr. A is Rs. 3,090 in AY 2016-17.

Prepared by CA. S. Shekhar

Tax on TI upto 3,00,00 = Nil

Tax on TI between 3,00,001- 5,00,000 @ 10% =Rs. 20,000

Tax on remaining income of Rs. 3,90,000 (8,90,000-5,00,000) @ 20% = Rs. 78,000

Since Total Income is more than 5,00,000, rebate under 87 A = Nil

Net Tax= Rs.(20,000 + 78,000- Nil) = Rs.98,000

Tax Plus Surcharge (98,000+ Nil) = Rs.98,000

Education Cess @ 2% of (98,000+Nil) = Rs.1,960

Secondary and Higher Education cess @ 1% of (98,000+Nil) = Rs. 980

Total Tax plus cess payable (98,000+1,960+980) =Rs. 1,00,940

So Total Tax liability of Mrs. A is Rs. 1,00,940/- in AY 2016-17.

Tax on TI upto 5,00,000 = Nil

Tax on TI between 5,00,001- 10,00,000 @ 20% = Rs. 1,00,000

Tax on remaining income of Rs. 5,50,000 (15,50,000-10,00,000) @ 30% = Rs.1,65,000

Since Total Income is more than 5,00,000, rebate under 87 A = Nil

Net Tax= Rs.(1,00,000+1,65,000- Nil) = Rs.2,65,000

Prepared by CA. S. Shekhar

Tax Plus Surcharge (2,65,000+ Nil) = Rs.2,65,000

Education Cess @ 2% of (2,65,000+Nil) = Rs.5,300

Secondary and Higher Education cess @ 1% of (2,65,000+Nil) = Rs.2,650

Total Tax plus cess payable (2,65,000+5,300+2,650) =Rs. 2,72,950

So Total Tax liability of Mr. X is Rs. 2,72,950/- in AY 2016-17.

Tax on TI upto 2,50,000 = Nil

Tax on TI between 2,50,001- 5,00,000 @ 10% = Rs.25,000