naraakas

CHAPTER -1 : INTRODUCTION TO INCOME TAX & COMPUTATION OF TOTAL INCOME

What is tax?
Tax means “a financial charge or other levy” upon a person (taxpayer) by a government.
A tax is not optional payment, but an enforced contribution.

Purposes of tax
Taxes are the main source of revenue for every type of government. Governments use tax
revenue (money) to carry out many of its functions. Some of these include

- expenditures on war,
- the enforcement of law and public order,
- protection of property,
- economic infrastructure (roads, legal tender, enforcement of contracts, etc.),
- public works and
- the operation of government itself.

Types of taxes
- Direct taxes like House Tax, Income tax, wealth tax etc.
- Indirect taxes like sales tax, service tax, custom, excise etc.
- Various kinds of cesses

What is Direct tax?
- The direct tax generally means a tax paid directly to the government by the persons on
whom it is imposed. Here the burden of tax bears the person on whom it is imposed. Thus
direct tax is borne entirely and directly by the person who pays it.

What is Indirect tax?
- The indirect tax generally means a tax paid indirectly to the government by the persons
who avails services or buys products. It is imposed on, and paid by, the persons providing
services or goods but recovered by the buyer or consumers of such goods and services.

What is cess?
Cess is a kind of small tax imposed and collected for the specific purpose like Primary education
cess/ Secondary Higher education cess/ Krishi Cess/ Swach Bharat Cess Etc.

Constitutional Provisions regarding Income Tax

Seventh Schedule to Article 246 of the Indian constitution distributes the power of levy of taxes
amongst the State and central government via three lists:-

a. List I – Union List – States matter on which Central Government can create Law.
b. List II – State List - States matter on which State Government can create Law.
c. List III- Concurrent List - Both Central Government and state Government can create Law.

CA GURPREET KAUR – 72101-96112 Page 1
B.COM (H), FCA, ISA, IFRS (DIPLOMA)

CHAPTER -1 : INTRODUCTION TO INCOME TAX & COMPUTATION OF TOTAL INCOME

There in 1961, Income Tax Act was passed by parliament to levy taxes on the income of persons.
Income Tax Act, 1961 contains provisions for determination of taxable income and tax liability,
procedure for assessment, appeals, penalties and prosecutions.

Central Board of Direct Taxes (CBDT)
Generally every Act gives power to an authority (Board) for proper implementation and
administration of the provisions of the Act. Section 295 of the Income Tax Act, 1961 has given
powers to “Central Board of Direct Taxes” to implement the provisions of this Act properly and
to make various rules under this Act (subject to the control of Central Government). Further, this
Act prescribes powers and duties of various income tax authorities and officers.

CBDT issues notifications from time to time. These notifications become rules and are
collectively known as Income Tax Rules, 1962.

Further, CBDT issues circulars from time to time for the purpose of clarifications regarding
various provisions of this Act. These circulars work as guidance for income tax authorities and
officer and binds income tax department only. They are not binding upon assessees but assessees
can take benefits of these circulars.

Note: CBDT has no powers to amend Income Tax Act, 1961.

Amendment in Income Tax Act, 1961
Income Tax Act, 1961 is a law related to income of the various persons and revenue of the
government. Therefore it changes time to time according to the various market conditions and
government needs. Such amendments are introduced every year in the form of Financial Act.

Every year a budget is presented before the parliament by finance minister and one of the most
important components of the budget is financial bill. This bill contains various amendments
which are proposed to be made in the direct taxes and indirect taxes.

This bill also mentions the rate of income tax. Schedule I to this bill provides rates of income tax
in 3 parts:

PART 1
It gives the rates of income tax for various assessees for the current assessment year. Means it
provides the rates of income tax for the income earned during the previous year.

- For example, the Finance Act, 2015 has given the rates of income tax for assessment year
2015-16 (1st April, 2015 to 31st March, 2016). Here the previous year is 2014-15

PART 2
It gives the rates of deduction of tax at source (TDS) from the income earned in the current
financial year.

-

CA GURPREET KAUR – 72101-96112 Page 2
B.COM (H), FCA, ISA, IFRS (DIPLOMA)

CHAPTER -1 : INTRODUCTION TO INCOME TAX & COMPUTATION OF TOTAL INCOME

- For example, the Finance Act, 2015 has given the rates at which tax is to be deducted at
source from the income earned during financial year 2014-15 (1st April, 2014 to 31st
March, 2015). Here the previous year is 2014-15.

PART 3
It gives the rates of deduction of tax from the income chargeable under the head “salaries”.
These rates are applicable for the computation of advance tax to be paid in the current financial
year.

- For example, the Finance Act, 2015 has given the rates for the computation of advance
tax for the assessment year 2016-17 (1st April, 2016 to 31st March, 2017). Here the
previous year is 2015-16.

Note:
- Generally Part 3 of the Schedule I of a particular Finance Act becomes Part 1 of the
subsequent Finance Act.

INCOME-TAX ACT, 1961

[43 OF 1961]

Short title, extent and commencement (Section 1)
(1) This Act may be called the Income-tax Act, 1961.
(2) It extends to the whole of India.
(3) Save as otherwise provided in this Act, it shall come into force on the 1st day of April,
1962.

Certain Definitions (Section 2)

ASSESSEE [Clause (7)]
Assessee means a person by whom any tax or any other sum of money (like fine, interest,
penalty etc.) is payable under this Act, and includes—

- every person in respect of whom any proceeding under this Act has been taken for the
o assessment of his income or
o assessment of the income of any other person in respect of which he is assessable,
or
o assessment of the loss sustained by him or by such other person, or
o assessment of the amount of refund due to him or to such other person ;

- every person who is deemed to be
o an assessee under any provision of this Act ;
o an “assessee in default” under any provision of this Act ;

Accordingly, assessee is a person by whom tax or any other sum is payable under the Act or any
refund is due under the Act.

CA GURPREET KAUR – 72101-96112 Page 3
B.COM (H), FCA, ISA, IFRS (DIPLOMA)

CHAPTER -1 : INTRODUCTION TO INCOME TAX & COMPUTATION OF TOTAL INCOME

Note:
- The proceedings must be initiated under the provisions of the Act. A single enquiry letter
issued by the Income-tax Department without reference to any specific provision of the
Act does not constitute proceeding under the Act and, as such, till proceedings are
initiated under the Act, the person may not become an assessee within the ambit of
Section 2(7) of the Act.

PERSON [Clause (31)]
Person includes—

(i) an individual (male, female, minor, lunatic etc.)
(ii) a Hindu undivided family (HUF),
(iii) a company,
(iv) a partnership firm (whether registered or not),
(v) an association of persons (AOP) or a body of individuals (BOI) (whether

incorporated or not)
(vi) a local authority (like municipal committee, district board etc.) and
(vii) every other artificial juridical person (like deity, unregistered charitable trusts,

unregistered clubs, religious body etc.)

Note: an AOP or a BOI or a local authority or an artificial juridical person shall be deemed
- to be a person, whether or not such person or body or authority or juridical person
was formed or established or incorporated with the object of deriving income, profits
or gains;

- HUF consists of all persons lineally descended from a common ancestor and includes
their wives and unmarried daughters.

- The difference between Association of persons and body of individuals is that
whereas an association implies a voluntary getting together for a definite purpose, a
body of individuals would be just a body without an intention to get-together.
Moreover, the members of body of individuals can be individuals only whereas the
members of an association of persons can be individual or non-individuals (i.e.
artificial persons).

- an association of persons or a body of individuals or a local authority or an artificial
juridical person shall be deemed to be a person, whether or not such person or body
or authority or juridical person was formed or established or incorporated with the
object of deriving income, profits or gains.

PRINCIPAL OFFICER [Clause (35)]
Principal officer, used with reference to a local authority or a company or any other public body
or any association of persons or any body of individuals, means—

(a) the secretary, treasurer, manager or agent of the authority, company, association or body, or

(b) any person connected with the management or administration of the local authority,
company, association or body

CA GURPREET KAUR – 72101-96112 Page 4
B.COM (H), FCA, ISA, IFRS (DIPLOMA)

CHAPTER -1 : INTRODUCTION TO INCOME TAX & COMPUTATION OF TOTAL INCOME

o upon whom the Assessing Officer has served a notice of his intention of treating
him as the principal officer thereof

Note:
- In order to make a person the principal officer, the connection must be with the
management or administration of the company.
- It is not necessary that the person concerned should be actually managing or
administering the company. It is sufficient that the person is connected with such
management or administration.
- What is important is that the person so connected must be served by the Assessing
Officer with a notice setting out his intention to treat such person as the principal officer
of the company.
- Therefore, the requirements of law are fulfilled if the person concerned can be treated as
the principal officer, the Assessing Officer indicates his intention to him, treating him as
the principal officer.

ASSESSMENT YEAR [Clause (9)]
Assessment year means the period of twelve months commencing on the 1st day of April every
year;
(Income of previous year of an assessee is taxed during the following assessment year at the rates
prescribed by the relevant Finance Act.)

PREVIOUS YEAR (SECTION 3)
For the purposes of this Act, “previous year” means the financial year immediately preceding the
assessment year.

Previous year in case of new business or new source of income

In the case of
- a business or profession newly set up or
- a source of income newly coming into existence,

the previous year shall be the period
- beginning with the date of setting up of the business or profession or the date on which
the source of income newly comes into existence and
- ending with the end of financial year.

Kind of companies under Income Tax Act, 1961

COMPANY [SECTION 2(17)]

Company means—
(i) any Indian company, or
(ii) any body corporate incorporated by or under the laws outside India, or
(iii) any institution, association or body
 which is or was assessable or was assessed as a company for any
assessment year under the Indian Income-tax Act, 1922, or

CA GURPREET KAUR – 72101-96112 Page 5
B.COM (H), FCA, ISA, IFRS (DIPLOMA)

CHAPTER -1 : INTRODUCTION TO INCOME TAX & COMPUTATION OF TOTAL INCOME

 which is or was assessable or was assessed under this Act as a company
for any assessment year commencing on or before the 1st day of April,
1970, or

(iv) any institution, association or body, whether incorporated or not and whether
Indian or on-Indian, which is declared by general or special order of the Board to
be a company.
ote: Such institution, association or body shall be deemed to be a company only
for such assessment year or assessment years as may be specified in the
declaration

DOMESTIC COMPANY [SECTION 2(22A)]

Domestic company means
- an Indian company, or any other company which, has made the prescribed arrangements
for the declaration and payment of the dividends within India (including dividends on
preference shares) payable out of income liable to tax under this Act

Prescribed arrangement of Dividend
(i) Share register of the company for the shareholders shall be regularly maintained
at its principal place of business within India in respect of any assessment year
form a date not later than 1st April of such year.
(ii) The AGM for passing the accounts and for declaring the dividends shall be held
only at a place within India.
(iii) The dividend declared shall be payable only within India to all shareholders.

FOREIGN COMPANY [SECTION 2(23A)]

Foreign company means a company which is not a domestic company.

INDIAN COMPANY [SECTION 2(26)]

Indian company means a company formed and registered under the Companies Act, 1956 (now
Companies Act, 2013), and includes—

(i) a company formed and registered under any law relating to companies formerly in force in
any part of India (other than the State of Jammu and Kashmir and the Union territories
specified in sub-clause (v) below);

(ii) a corporation (like LIC, UTI etc.) established by or under a Central, State or Provincial Act
(iii) any institution, association or body which is declared by the Board to be a company under

clause (17);
(iv) in the case of the State of Jammu and Kashmir, a company formed and registered under

any law for the time being in force in that State ;
(v) in the case of any of the Union territories of Dadra and Nagar Haveli, Goa, Daman and

Diu, and Pondicherry, a company formed and registered under any law for the time being
in force in that Union territory.

CA GURPREET KAUR – 72101-96112 Page 6
B.COM (H), FCA, ISA, IFRS (DIPLOMA)

CHAPTER -1 : INTRODUCTION TO INCOME TAX & COMPUTATION OF TOTAL INCOME

Note:
In all the above cases, to be an Indian company, the registered or principal office of the

company, corporation, institution, association or body shall be in India.

COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED
(Widely held company) [Section 2(18)]

A company is said to be a company in which the public are substantially interested—
(a) if it is a company
o owned by the Government or the RBI or
o in which not less than 40% of the shares are held by the Government or the RBI
or a corporation owned by RBI; or
(b) section 25 companies (non profit companies); or
(c) if it is a company
o having no share capital and
o it is declared by order of the Board to be a company in which the public are
substantially interested.
(d) Nidhi company or Mutual Benefit Society ; or
(e) if it is a company,
o wherein shares (not being preference shares) carrying not less than 50% of the
voting power have been allotted unconditionally to or have been acquired
unconditionally by, and were throughout the relevant previous year beneficially
held by, one or more co-operative societies ;
(f) if it is a company which is not a private company as defined in the Companies Act, 1956,
and the conditions specified either in item (A) or in item (B) are fulfilled, namely :—
(A) it is listed company on the last day of the relevant previous year;
(B) shares in the company (not being preference shares) carrying not less than 50% of
the voting power have been allotted or acquired by, and were throughout the relevant
previous year beneficially held by—
(a)the Government, or
(b)a corporation established by a Central, State or Provincial Act, or
(c) any widely held company or any subsidiary company of such widely held
company if the whole of the share capital of such subsidiary company has been
held by the parent company or by its nominees throughout the previous year.

Note:
In case of an Indian company whose business consists mainly

o in the construction of ships or
o in the manufacture or processing of goods or
o in mining or
o in the generation or distribution of electricity or any other form of power,
item (B) shall have effect as if for the words “not less than 50%”, the words “not less
than 40%” had been substituted.

CA GURPREET KAUR – 72101-96112 Page 7
B.COM (H), FCA, ISA, IFRS (DIPLOMA)

CHAPTER -1 : INTRODUCTION TO INCOME TAX & COMPUTATION OF TOTAL INCOME

CONCEPT OF INCOME

Income Tax is a financial charge on the income of a person. So the question is that what income
will be considered as “income” for tax purposes?

Income Tax Act, 1961 defines income u/s 2(24). The said definition is an inclusive definition
and not an exhaustive one. It includes a big list of incomes. But any kind of receipt can be taxed
under this act (whether such kind of receipt is included in the list or not) if such receipt comes
within the general meaning of the term “Income”.

According to Section 14, all income shall, for the purposes of charge of income-tax and
computation of total income, be classified under the following 5 heads of income:—

i. Salaries
ii. Income from house property
iii. Profits and gains of business or profession
iv. Capital gains
v. Income from other sources

Points to remember
- Income may be in cash or in kind
- Income may be on receipt basis or on accrual basis. Accrual basis means where income is
not actually received but right to receive income arises.
- Both legal and illegal income stands on the same footing from tax point of view. Means
even illegal income is taxable.
- Income may be temporary or permanent
- Income may be lump sum or in installments
- Income may be in the nature of revenue receipt or in the nature of capital receipt
o Revenue receipts are generally taxable unless they are exempted under any
specific provisions of this act.
o Capital receipts are generally exempted unless they are taxable under any specific
provisions of this act.
- Income includes loss. Thus to carry forward loss, one must file return of losses.
- Generally the word “income” connotes a periodical receipt with some sort of regularity
from some definite source. Mere windfalls unexpected receipts do not constitute income.

But from assessment year 1972-73, certain casual and non recurring receipts are also
covered under the term income like income from lotteries, gambling, betting, card-games,
crossword puzzles etc.

Accrue/Arise or Due

- Accrue refers to the right to receive income, whereas due refers to the right to enforce
payment of the accrued income. Therefore, income can be said to be accrue when it
becomes due. For example salary for work done in December will accrue throughout the
month, day to day, but will become due on the salary bill being passed on 31st December
or 1st January. Similarly, on Government securities, interest payable on specified dates

CA GURPREET KAUR – 72101-96112 Page 8
B.COM (H), FCA, ISA, IFRS (DIPLOMA)

CHAPTER -1 : INTRODUCTION TO INCOME TAX & COMPUTATION OF TOTAL INCOME

arise during the period of holding, day to day, but will become due for payment on the
specified dates.

- Accrual of business or profession income depends upon the method of accounting
employed by the assessee during the previous year- [CIT v. Ashokbhai Chimanbhai
[1965] (SC]).

- It must be noted that income which has been taxed on accrual basis cannot be assessed
again on receipt basis, as it will amount to double taxation.

Charge of income-tax (Section 4)

Sub-Section (1)
Where any Central Act (financial act) enacts that

- income-tax shall be charged for any assessment year at any rate or rates, than
o income-tax shall be charged for that assessment year at the rates prescribed in
such financial act;
o such income-tax shall be charged in accordance with the provisions of this Act
(Income Tax Act, 1961);
o income-tax shall be charged in respect of the total income of the previous year
of every person.

Where by virtue of any provision of this Act
- income-tax is to be charged in respect of the income of a period other than the previous
year,
o income-tax shall be charged accordingly.

Sub-Section (2)
In respect of income chargeable under sub-section (1),

- income-tax shall be deducted at the source or paid in advance, where it is so
deductible or payable under any provision of this Act.

Exceptions of Section 4
Thus according to Section 4, income-tax shall be charged in respect of the total income of the
previous year of every person. But there are some exceptions to this rule. In certain cases,
income shall be charged within the same assessment year. These cases are:

(a) In case of shipping business by non-resident (Section 172)
In this ships are allowed to leave the port only after paying taxes or after making proper
arrangements for payment of taxes. (here 7.5% of the amount paid or payable on account
of carriage (whether living or non living) will be deemed to be the taxable income).

(b) In case of a person leaving India for uncertain period (Section 174)
When it appears to the Assessing Officer that any individual may leave India during the
current assessment year or shortly after its expiry and that he has no present intention of
returning to India,

CA GURPREET KAUR – 72101-96112 Page 9
B.COM (H), FCA, ISA, IFRS (DIPLOMA)

CHAPTER -1 : INTRODUCTION TO INCOME TAX & COMPUTATION OF TOTAL INCOME

o the total income of such individual (for the period from the expiry of the previous
year) for that assessment year up to the probable date of his departure from India
shall be chargeable to tax in that assessment year.

The total income of each completed previous year or part of any previous year included
in such period shall be chargeable to tax at the rate or rates in force in that assessment
year, and separate assessments shall be made in respect of each such completed previous
year or part of any previous year.

(c) Assessment of association of persons or body of individuals or artificial juridical
person formed for a particular event or purpose (Section 174A)
Where it appears to the Assessing Officer that any AOP or a BOI or an artificial juridical
person (formed or established or incorporated for a particular event or purpose) is likely
to be dissolved in the assessment year in which such AOP or a BOI or an artificial
juridical person was formed or established or incorporated or immediately after such
assessment year,
o the total income of such association or body or juridical person (for the period
from the expiry of the previous year) for that assessment year up to the date of its
dissolution shall be chargeable to tax in that assessment year.

(d) Assessment of persons likely to transfer property to avoid tax (Section 175)
If it appears to the Assessing Officer during any current assessment year that any person
is likely to charge, sell, transfer, dispose of or otherwise part with any of his assets with a
view to avoiding payment of any liability under the provisions of this Act,
o the total income of such person (for the period from the expiry of the previous
year) for that assessment year to the date when the Assessing Officer commences
proceedings under this section shall be chargeable to tax in that assessment year.

(e) In case of discontinued business (Section 176)
Where any business or profession is discontinued in any assessment year, the income of
the period from the expiry of the previous year for that assessment year up to the date of
such discontinuance may, at the discretion of the Assessing Officer, be charged to tax in
that assessment year.
Any person discontinuing any business or profession shall give to the Assessing Officer
notice of such discontinuance within fifteen days thereof.

CA GURPREET KAUR – 72101-96112 Page 10
B.COM (H), FCA, ISA, IFRS (DIPLOMA)

CHAPTER -1 : INTRODUCTION TO INCOME TAX & COMPUTATION OF TOTAL INCOME

Computation of Tax Liability for the Assessment Year 2016-17 Amount
Particulars
XXXX
I. Income From Salary XXXX
XXXX
XXXX
II. Income From House Property XXXX
III. Profits and Gains from Business and Profession
IV. Income From Capital Gains XXXX
XXXX
XXXX XXXX
V. Income From Other Sources
XXXX
HEADS OF INCOME XXXX
ADD :- Clubbing of Income
LESS :- Setoff & Carry Forward of Losses
GROSS TOTAL INCOME
LESS :- Deductions U/s 80
TOTAL TAXABLE INCOME

COMPUTATION OF TAX LIABILITY

DIVIDE TOTAL INCOME INTO FOUR PARTS Specific Tax Rates
- LONG TERM Normal Tax Rates
- SHORT TERM
- CASUAL INCOME
- ANY OTHER INCOME

TAX AMOUNT XXXXXX
xxxxx
Less : Rebate U/s 87A (If Applicable) Page 11

Add : Surcharge (if Applicable )

CA GURPREET KAUR – 72101-96112
B.COM (H), FCA, ISA, IFRS (DIPLOMA)

CHAPTER -1 : INTRODUCTION TO INCOME TAX & COMPUTATION OF TOTAL INCOME

Tax amount after surcharge XXXXY
Less : Marginal Relief (if Applicable) xxxxxx
Tax xxxxx
Add : Primary education Cess & SHEC of above amt. xxxxxx
xxxxxx
ADD :- Interest xxxxx
ADD:- Penalty xxxxxx
TOTAL AMOUNT PAYABLE xxxxxx
LESS :- TDS/ADVANCE TAX/TCS/SELF ASSESSMENT TAX
xxxxxx
Relief under section 91/90 xxxxxx
NET TAX LIABILITY

RATES OF INCOME-TAX
Rates of income tax

Normal rates of income tax (these are Special rates of income tax (these are
specified by the relevant Finance Act): specified by the Income Tax Act): These
These are the rates which may vary from are the rates which do not vary from
person to person. Normal income is person to person, but are chargeable at the
always taxed by using normal rates of same rate irrespective of type of person.
tax. Special incomes (e.g. capital gains,
lotteries etc.) are taxed by using special
rates of tax.

CA GURPREET KAUR – 72101-96112 Page 12
B.COM (H), FCA, ISA, IFRS (DIPLOMA)

CHAPTER -1 : INTRODUCTION TO INCOME TAX & COMPUTATION OF TOTAL INCOME

Income Tax Slabs and Rates for Assessment Year 2016-17 (Previous Year 2015-16)
I. Individual resident (age less than 60 years) or any NRI or HUF or AOP or BOI or AJP

Income Slabs Income Tax Rate

i. Where the total income does not exceed Rs. 2,50,000/-. NIL

Where the total income exceeds Rs. 2,50,000/- but does not
ii. 10%

exceed Rs. 5,00,000/-.

iii. Where the total income exceeds Rs. 5,00,000/- but does not 20%
exceed Rs. 10,00,000/-.

iv. Where the total income exceeds Rs. 10,00,000/-. 30%

Surcharge: 12% of the Income Tax, where total taxable income is more than Rs. 1 crore.

Education Cess: 3% of the total of Income Tax and Surcharge.

*Abbreviations used:

NRI - Non Resident Individual; HUF - Hindu Undivided Family; AOP - Association of Persons;

BOI - Body of Individuals; AJP - Artificial Judicial Person

II. Individual resident who is of the age of 60 years or more but below the age of 80 years at
any time during the previous year (i.e. born on or after 1st April 1934 but before 1st April
1954)

Income Slabs Income Tax
Rate

i. Where the total income does not exceed Rs. 3,00,000/-. NIL

Where the total income exceeds Rs. 3,00,000/- but does not exceed Rs.
ii. 10%

5,00,000/-

Where the total income exceeds Rs. 5,00,000/- but does not exceed Rs. 20%
iii. 10,00,000/-

iv. Where the total income exceeds Rs. 10,00,000/- 30%

Surcharge: 12% of the Income Tax, where total taxable income is more than Rs. 1 crore.

CA GURPREET KAUR – 72101-96112 Page 13
B.COM (H), FCA, ISA, IFRS (DIPLOMA)

CHAPTER -1 : INTRODUCTION TO INCOME TAX & COMPUTATION OF TOTAL INCOME

Education Cess: 3% of the total of Income Tax and Surcharge.

III. Individual resident who is of the age of 80 years or more at any time during the
previous year (i.e. born before 1st April 1934)

Income Slabs Income Tax
Rate

i. Where the total income does not exceed Rs. 5,00,000/-. NIL

Where the total income exceeds Rs. 5,00,000/- but does not exceed Rs.
ii. 20%

10,00,000/-

iii. Where the total income exceeds Rs. 10,00,000/- 30%

Surcharge: 12% of the Income Tax, where total taxable income is more than Rs. 1 crore.
Education Cess: 3% of the total of Income Tax and Surcharge.

IV. Co-operative Society Income Tax
Income Slabs Rate

i. Where the total income does not exceed Rs. 10,000/-. 10%

ii. Where the total income exceeds Rs. 10,000/- but does not exceed Rs. 20%
20,000/-.

iii. Where the total income exceeds Rs. 20,000/- 30%

Surcharge: 12% of the Income Tax, where total taxable income is more than Rs. 1 crore.
Education Cess: 3% of the total of Income Tax and Surcharge.

V. Firm

i. Income-tax: 30% of total income.
ii. Surcharge: 12% of the Income Tax, where total taxable income is more than Rs. 1 crore.
iii. Education Cess: 3% of the total of Income Tax and Surcharge.

VI. Local Authority

i. Income-tax: 30% of total income.
ii. Surcharge: 12% of the Income Tax, where total taxable income is more than Rs. 1 crore.
iii. Education Cess: 3% of the total of Income Tax and Surcharge.

VI. Domestic Company
i. Income-tax: 30% of total income.

CA GURPREET KAUR – 72101-96112 Page 14
B.COM (H), FCA, ISA, IFRS (DIPLOMA)

CHAPTER -1 : INTRODUCTION TO INCOME TAX & COMPUTATION OF TOTAL INCOME

ii. Surcharge: The amount of income tax as computed in accordance with above rates, and after
being reduced by the amount of tax rebate shall be increased by a surcharge

- At the rate of 7% of such income tax, provided that the total income exceeds Rs. 1 crore.
- At the rate of 12% of such income tax, provided that the total income exceeds Rs. 10

crores.

iii. Education Cess: 3% of the total of Income Tax and Surcharge.

VII. Company other than a Domestic Company (Foreign Company)

i. Income-tax:
- @ 50% of on so much of the total income as consist of
(a) royalties received from Government or an Indian concern in pursuance of an
agreement made by it with the Government or the Indian concern after the 31st
day of March, 1961 but before the 1st day of April, 1976; or
(b)fees for rendering technical services received from Government or an Indian
concern in pursuance of an agreement made by it with the Government or the
Indian concern after the 29th day of February, 1964 but before the 1st day of
April, 1976, and where such agreement has, in either case, been approved by the
Central Government.
- @ 40% of the balance

ii. Surcharge: The amount of income tax as computed in accordance with above rates, and after
being reduced by the amount of tax rebate shall be increased by a surcharge as under

- At the rate of 2% of such income tax, provided that the total income exceeds Rs. 1 crore.
- At the rate of 5% of such income tax, provided that the total income exceeds Rs. 10

crores.

iii. Education Cess: 3% of the total of Income Tax and Surcharge.

Marginal Relief

In case assessee, having a Net Income of exceeding Rs. 1 Crore or 10 crore as the case may be,
then the net amount payable as income tax and surcharge shall not exceed the total amount
payable as income tax on total income of Rs. 1 Crore / 10 crore by more than the amount of
income that exceed Rs. 1 Crore/10 Crore.

Computation of Marginal Relief

Step 1: First compute the tax liability on the Total Income as per Normal Provision (BUT TILL
SURCHARGE ONLY)

Step 2: After that compute the tax liability on the basic limit of surcharge i.e. 1 crore or 10 crore
as the case may be. (BUT TILL SURCHARGE ONLY- APPLICABLE ONLY IN CASE OF
RS. 10 CRORE CASE)

Step 3: now add incremental income over 1 crore or 10 crore as the case may be. i.e. if income is
1.02 crore then add 0.02 crore in tax liability calculated in step 2.

CA GURPREET KAUR – 72101-96112 Page 15
B.COM (H), FCA, ISA, IFRS (DIPLOMA)

CHAPTER -1 : INTRODUCTION TO INCOME TAX & COMPUTATION OF TOTAL INCOME

Step 4 : Compare the tax liability of step 1 and step 3. if step 3 amount is lower than step 1,
marginal relief can be availed.
Step 5 : Marginal relief = Tax Liability of Step 1 – Tax Liability of Step 3.

SPECIAL RATES

PARTICULARS AMOUNT
LONG TERM CAPITAL GAIN
20%
- WITH INDEXATION 10%
- WITHOUT INDEXATION 15%
SHORT TERM CAPITAL GAIN U/s 111A 30%
CASUAL INCOME

Rebate of maximum Rs. 2000 for resident individuals having total income up to Rs.5lakh
[Section 87A] [W.e.f.A.Y. 2014-15]

Rebate from the tax payable by an assessee shall be allowed, if the following condition and
satisfied:

(1) The assessee is an individual
(2) He is resident in India,
(3) His total income does not exceed Rs.500000.

Quantum of rebate: The rebate shall be equal to:

(1) The amount of income-tax payable on the total income for any assessment year or
(2) Rs.2000,
Which ever is less.

Rounding off of Total Income [Section 288A]

CA GURPREET KAUR – 72101-96112 Page 16
B.COM (H), FCA, ISA, IFRS (DIPLOMA)

CHAPTER -1 : INTRODUCTION TO INCOME TAX & COMPUTATION OF TOTAL INCOME

The total income, as computed above, shall be rounded off to the nearest multiple of ten rupees.
Rounding off of tax, etc [Section 288B]
The amount of tax (including tax deductible at source or payable in advance), interest, penalty,
fine or any other sum payable, and the amount of refund due, under the provisions of the
Income-tax Act, shall be rounded off to the nearest multiple of ten rupees.
Deduction U/s 80C

PRACTICAL QUESTION

Question 1: Determine the category of the following
• Delhi University
• SGI Paints Private Limited
• HDFC Bank Limited
• Sachin and Ishika carry on his business without entering into partnership
• Investing Idea, a firm consisting of 5 partners
• A joint family consisting of Dilon Singh, Mrs. Dilon Singh & their son Aayush Singh
• Muncipial corporation of Delhi

Question 2: An assessee commences his business on:

(a) 4.9.2014; (b) 1.12.2015; (c) 1.2.2016.
In each case, what will be his assessment year?

Question 3 : What will be the previous year in relation to assessment year 2016-17 in the
following cases-

(a) A businessman keep his accounts on financial year basis.
(b) A newly started business commencing its operation from 1.1.2016.
(c) A person gives Rs. 5,00,000 as loan @ 10% p.a. interest on 1.9.2015.
Ans: (a) 1.4.2015 to 31.3.2016; (b) 1.1.2016 to 31.3.2016; and ( c) 1.9.2015 to 31.3.2016.

Question 4 : Which period will be treated as previous year for Income-tax purposes for the
assessment year 2016-17 in the following cases:

(a) Sumit starts a new business on 1.11.2015 and prepares final account on 30.6.2016.

CA GURPREET KAUR – 72101-96112 Page 17
B.COM (H), FCA, ISA, IFRS (DIPLOMA)

CHAPTER -1 : INTRODUCTION TO INCOME TAX & COMPUTATION OF TOTAL INCOME

(b) Meenal joined service in a company on 1.1.2016 at Rs. 15,000 per month. His next
increment in salary will be on 1.1.2017.

(c) Ashish Maheswari keep his account on the basis of financial year.
(d) Abhay Verma is a registered doctor and keeps his Income and Expenditure Account on

calendar year basis.
(e) Jyoti Gupta bought a house on 1.8.2015 and let it out at Rs800 per month.
Ans: (a) 1.11.2015 to 31.3.2016; (b) 1.1.2016 to 31.3.2016; ( c ) 1.4.2015 to 31.3.2016; (d)
1.4.2016 to 31.3.2016; and (e) 1.8.2015 to 31.3. 2016.

Question 5 : ‘X’, who is a famous singer, came to India from America for the first time on
26.1.2016. He gave many performances in India from which he got Rs. 4,00,000. When he was
to return to America, the Income-tax Officer gave him a notice and asked him to pay Income-tax
immediately. He said in his reply, ‘My previous year ends on 31.3.2016 and my tax liability will
be in the assessment year 2016-17.’ What is your opinion in this regard?

Ans: Under the exceptions, his income will be assessed in the financial year 2015-16 itself.

Question 6 : ‘R’, who has been permanently in India, migrated to USA on 18.11.2015. Explain
how he will be taxed with regard to the income earned between 1.4.2015 and 18.11.2015.

Ans: Under the exception, his income will be assessed in the financial year 2015-16 itself and
two separate assessment shall be made, one for the previous year 2014-15 whose assessment
year is 2015-16 and another for previous year 1.4.2015 to 18.11.2015 for which assessment year
shall also be 2015-16 but tax shall be levied at the rates prescribed for payment of advance tax
for the financial year 2015-16.

Question 7: Total income of R aged 70 a resident in India for the assessment year 2016-17 is Rs.
10,90,450.

Question 8: Total income of Mrs. R aged 50 a non-resident of India is Rs. 2,94,000. Compute her
tax liability for the assessment year 2016-17.

Question 9: Total income of R aged 56 is Rs. 7,26,500. Compute his tax liability for the
assessment year 2016-17.

Question 10 : Mr. X is having following Income particulars for the Asstt Year 2016-17

Income Under the head Salary 300000
Income under the head House Property 100000
Income Under the head Capital Gain 200000
Deduction U/s 80 C 50000
Compute Tax payable

Question 11 : Mr. Y is having following Income particulars for the Asstt Year 2016-17

CA GURPREET KAUR – 72101-96112 Page 18
B.COM (H), FCA, ISA, IFRS (DIPLOMA)

CHAPTER -1 : INTRODUCTION TO INCOME TAX & COMPUTATION OF TOTAL INCOME

Income Under the head Salary 300000
Income under the head other sources 10000
Long Term Capital Gain (with Indexation)
Deduction U/s 80 C 200000
Compute Tax payable 150000

Question 12 : Z Ltd is having following Income particulars for the Asstt. Year 2016-17

Business Income (without Indexation) 10,00,000
Long Term Capital Gain 20,00,000
House Property 1,00,000
Lottery Income 3,00,000
Compute Tax payable

Question 13 : X Ltd is having following Income particulars for the Asstt. Year 2016-17

Business Income 1,00,00,000
Short Term Capital Gain U/s 111A 20,00,000
House Property 1,00,000
Compute Tax Payable

Question 14 : X & Co., Partnership Firm is having following Income particulars for the Asstt.
Year 2016-17

Business Income 1,00,00,000
Long Term Capital Gain U/s 112 1,00,000
Short Term Capital Gain U/s 111A 20,00,000
House Property 1,00,000
Compute Tax payable

Question 15 : Mr X is having following Income particulars for the Asstt. Year 2016-17

Business Income 1,02,00,000
Compute Tax payable & Marginal Relief

Question 16 : X Ltd is having following Income particulars for the Asstt. Year 2016-17

Business Income 1,01,00,000

Compute Tax payable & Marginal Relief

Past Year Question

2012-Dec
(a) Explain the difference between ‘Total Income’ and ‘Gross Total Income’.

CA GURPREET KAUR – 72101-96112 Page 19
B.COM (H), FCA, ISA, IFRS (DIPLOMA)

CHAPTER -1 : INTRODUCTION TO INCOME TAX & COMPUTATION OF TOTAL INCOME

2010-June
1. State the Elements/Sources of Income Tax Law.

2013-Dec
(a) What are the circumstances in which previous year and assessment year will be the same?

OBJECTIVE & THEORY QUESTION

1. The basic source of income-tax law is –
(a). Income-tax Act, 1961
(b). Circulars/Notifications issued by CBDT
(c). Judgments of Courts

2. A domestic company means –
(a). Only an Indian company
(b). Only a foreign company which has made the prescribed arrangements for declaration and
payment of dividends in India
(c). Indian company and a foreign company which has made the prescribed arrangements for
declaration and payment of dividends in India

3. The rates of income tax are mentioned in –
(a). Income-tax Act, 1961
(b). The Annual Finance Acts
(c). Both in the Income-tax Act, 1961 and the Annual Finance Acts.

4. The surcharge applicable in the case of an individual is –
(a). 10% of tax payable
(b). 10% of tax payable if total income exceeds ` 10 lakh
(c). 12% of the tax payable if total income exceeds ` 1 crore

5. In respect of a resident assessee, who is of the age of 60 years or more but less than 80
years at any time during the previous year 2015-16, -
(a). Higher basic exemption of ` 2,50,000 is available
(b). Higher basic exemption of ` 3,00,000 is available
(c). Higher basic exemption of ` 5,00,000 is available.

6. The rate of tax applicable to a domestic company for A.Y. 2016-17 is –
(a). 30%
(b). 35%
(c). 40%

7. The surcharge applicable to a domestic company for A.Y. 2016-17 is –
(a). 5%, if total income exceeds ` 1 crore.
(b). 10%, if total income exceeds ` 10 crore
(c). 7%, if the total income exceeds ` 1 crore but does not exceed ` 10 crore, and 12%, if the
total income exceeds ` 10 crore.

CA GURPREET KAUR – 72101-96112 Page 20
B.COM (H), FCA, ISA, IFRS (DIPLOMA)

CHAPTER -1 : INTRODUCTION TO INCOME TAX & COMPUTATION OF TOTAL INCOME

8. The surcharge applicable to a foreign company for A.Y. 2016-17 is –
(a). 5%, if the total income exceeds ` 1 crore.
(b). 2%, if the total income exceeds ` 1 crore but does not exceed ` 10 crore and 5% if the
total income exceeds ` 10 crore.
(c). 2%, if the total income exceeds ` 10 crore.

9. The rate of tax applicable to a firm for A.Y. 2016-17 is –
(a). 30%
(b). 35%
(c) 40%

10. Education cess @ 2% and secondary and higher education cess @ 1% is payable on
(a) Income-tax only
(b) Income-tax plus surcharge, if applicable, minus rebate under section 87A, if applicable.
(c) Surcharge only

11. Where the total income of an artificial juridical person is ` 3,10,000, the income-tax
payable is ` …………… and surcharge payable is ` …………..
(a) ` 6,000; surcharge – nil.
(b) ` 11,000; surcharge – ` 1100.
(c) ` 93,000; surcharge – ` 4650.

Answers 1. a; 2. c; 3. c; 4. c; 5. b; 6. a; 7. c; 8. b; 9. a. 10. b. 11. a.

FILL IN THE BLANKS
1. Compensation received for the loss of a capital asset is a receipt of a _______ nature
2. ___________ is levied on the total income of the previous year of every person.
3. Aggregate of incomes computed under the 5 heads of income after applying clubbing

provisions and making adjustments of set off and carry forward of losses is known as
________.
4. The year in which income is earned is known as ___________.
5. _________ are binding on the department, not on the assessee but assessee can take
benefit of these circulars.
6. Income of a business commenced on 1st March, 2016 will be assessed during the
assessment year___________.
7. The total income of Mrs. D a resident in India who is 59 years old is Rs. 10,31,540 is
__________.
8. Previous Year means the _________ immediately proceeding the assessment year.
9. The first previous year of a newly setup business can be _________ __________ 12
months.
10. An assessee is always a_______________.
11. There is a surcharge on income tax if the total income of the assessment year 2016-17 of
a non – company assessee _________________.
12. The circulars issued by CBDT are binding on _________________.

CA GURPREET KAUR – 72101-96112 Page 21
B.COM (H), FCA, ISA, IFRS (DIPLOMA)

CHAPTER -1 : INTRODUCTION TO INCOME TAX & COMPUTATION OF TOTAL INCOME

13. Mr. J leaves India permanently on 14.05.2015. The assessment year for the income
earned till 14.05.2015 in this case shall be ____________.

Answers
1.Capital, 2. Income Tax, 3. Gross Total Income, 4. Previous Year, 5. Circulars, 6. 2014-15,
7.1,34,462 8.financial year 9. Less than 10. Person 11. Exceed 1 Crore. 12.Income Tax
Authorities. 13. Asstt Year 2015-16

Elaborative Question

1. Define the following terms under the Income-tax Act, 1961 –
(i) Assessee (ii) Person (iii) Previous year (iv) Year of accrual of dividend (v) Marginal
relief

2. “Income of a previous year will be charged to tax in the assessment year following the
previous year”- Discuss the exceptions to this general rule.

3. ‘Every assessee is a person, but every person need not be an assessee’. Critically examine
the statement with reference to the relevant definitions under the provisions of the
Income Tax Act, 1951.

CA GURPREET KAUR – 72101-96112 Page 22
B.COM (H), FCA, ISA, IFRS (DIPLOMA)

CHAPTER -1 : INTRODUCTION TO INCOME TAX & COMPUTATION OF TOTAL INCOME

SUMMARY
------------------------------------------------------------------------------------------------------------
-------------------

CA GURPREET KAUR – 72101-96112 Page 23
B.COM (H), FCA, ISA, IFRS (DIPLOMA)