Basic Definitions

of Taxation
• Assessment Year [sec 2(9)]:
Assessment year means the period of twelve months
starting from April 1 of every year and ending on March 31 of
the next year. For instance, the assessment year 2010-11 which
will commence on April 1, 2010 will end on March 31, 2011.
The period of assessment year is fixed by statute.

• Previous year [sec 3]

Income earned in the year is taxable in the next year. 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.
(sum )
• Persons leaving India [sec 174]

• Person [sec 2 (31)]

The term “person” includes

• an individual (a natural person i.e, a human being )
• a Hindu undivided family ( lineally descended family)
• a company
• a firm
• an association of persons or a body of individuals, whether incorporated or
not
• a local authority and (general clauses act 1897.. a municipal committee
district board body of port commissioners or other legal authority
entrusted by government) )
• every artificial judicial person not falling within any of the preceding
categories
• profit motive is not essential from 2002/03
• Assessee [Sec 2(7)]
• Assessee means a person by whom any tax or any other sum of money
(i.e., penalty or interest) is payable under the act. The term includes the
following persons.
• 4.1. First Category: A person (all the above) by whom any tax or any other
sum of money is payable under the act.
• 4.2. Second Category: A person in respect of whom any proceeding under
the Act has been taken (whether or not he is liable for any tax, interest of
penalty). Proceedings may be taken:
• a. either for the assessment of the amount of his income or the loss
sustained by him ; or
• b. of the income (or loss) of any other person in respect of whom he is
assessable ; or
• c. of the amount of refund due to him or to such other person
• 4.3, Third Category: Every person who is deemed to be an assessee. For
example, a representative assessee is deemed to be an assessee by virtue of
section 160(2)
• 4.4 Fourth Category: Every person who is deemed to be an assessee in
default under any provision of the Act. For instance, under section 201(1)
any person who does not deduct tax at source or after deducting fails to
pay such tax is deemed to be assessee in default. Like wise, under section
218 if a person does not pay advance tax, then he shall be deemed to be an
assessee in default
• Charge of income tax [Sec 4]

The following basic principles are followed while charging income tax
• Annual tax – IT is an annual tax on income tax
• Tax rate of assessment year – Income of previous year is chargeable in the
next following assessment year at the tax rates applicable for the
assessment year. This rule is however subject to some exceptions
• Rates fixed Finance Act- Tax rates are fixed by the annual Finance Act and
not by the Income tax Act.
• Tax on person- Tax is charged on every person
• Tax on total income – The tax is levied on the “total income” of every
assessee computed in accordance with the provisions of the Act.
• Provisions as on April 1 of the assessment year applicable for computing
income for the assessment year. Example….
• Income [Sec 2(24)]
The definition of the term “income” in section 2 (24) is inclusive and
exclusive.
• According to the Shorter Oxford English Dictionary English, “income”
means “that which comes in as the periodical product of one’s work,
business, lands, or investments; annual of periodical receipts accruing to a
person or a corporation”
• For the purpose of taxation, ‘income’ is broadly defined as the true
increase in the amount of wealth which comes to a person during a stated
period of time.
• Regular and definite source:
• Different forms of income:
• Receipt vs. Accrual:
• Illegal income:
• Disputed title:
• Relief or reimbursement of expenses not treated as income: (not)
• Surplus from mutual activity (not)
• Appropriation of payment between capital and interest
• Lump sum receipt
• Temporary and permanent income
• Personal Gift (50000)
• Tax free income (X n Y example.)
• Receipt on account of Dharmada (not)
• Devaluation of currency
• Income includes loss
• Prize on winning a motor rally (1973/74)
• Retention money
• Revenue receipt vs. capital receipt: sec 45

Receipts which are termed as “income” under section 2

(24)
• Profits and Gains
• Dividend
• Voluntary contributions received by a trust
• Perquisites in the hands of employee (house
property)
• Any special allowance (conveyance allowance)
• Any benefit or perquisite to a director.
• Gross Total Income
• As per section 14, income of a person is computed under the following five
heads.
• Salaries
• Income from House Property
• Income under the head “Business and Profession”
• Capital Gains
• Income from other sources

The aggregate income under these heads is termed as “gross total income”.
Income has to be brought under one of the heads under section 14 and can be
charged to tax only if it is chargeable under the computing section
corresponding to that head.
Expenditure incurred in relation to exempt income not deductible [Sec 14 (A)]
1962/63

• Total income and tax liability: [Sec 2 (45)] --------PHOTO COPY

• COMPUTAION OF TAX LIABILITY
• Tax rates are given in the Finance act 2010. Besides these tax rates,
some incomes are taxable at special rates given in the Income Tax
Act. For example long term capital gains are taxable at the rate of 20
% (sec 112)
• Winning lotteries, races, care game, etc. are chargeable at the rate of
30 % (sec 115 BB )
• Royalty income in the hands of a foreign company is taxable at the
rate of 10 % or 20 % or 30 %[115A (1)(b)]
• Surcharge rates are as follows for the assessment year 2010/11

Individuals/HUF/AOP/BOI Nil
Artificial Juridical person Nil
Co operative society, local authority Nil
Firm Nil
Domestic Company if net income does not exceed Rs 1 Crore Nil
Domestic Company if net income exceeds Rs 1 crore 10%*
Foreign Company if net income does not exceed Rs 1 crore Nil
Foreign Company if net income does not exceed Rs 1 crore 2.5%*
 • Marginal relief is available
• Surcharge – minimum alternate tax(115 JA/B) – surcharge
minimum alternate tax for the AY 2010/11 as follows

Domestic Company if book profit does not exceed Rs 1 Nil

crore 10%
Domestic Company if net income exceeds Rs 1 crore Nil
Foreign Company if net income does not exceed Rs 1 crore 2.5%
Foreign Company if net income does not exceed Rs 1 crore

Surcharge – dividend tax and distribution tax under 115-0 or under section
115R(2) from the FY 2009/10 will be 10 percent irrespective of quantum of
dividend.
Education Cess – secondary and higher education cess in income tax.
EC is 2 % of Income tax and secondary and higher education cess is 1 %
of income tax.
MARGINAL RELIEF –
In case of a domestic company if net income exceeds rs 1 crore , surcharge is 10 %
on IT. Likewise in foreign company paying 2.5 % . This surcharge is also
applicable in the case of minimum alternate tax, if book profits exceed rs 1 crore.
 • To avoid hardship the company which is having slightly higher than rs 1
crore the following said relief is provided
• The marginal relief will be applicable in case of net income falls in the
following range.

Domestic Company
RS 100 lakh- Rs 104.4776 lakh
Foreign Company
RS 100 lakh- Rs 101.6949 lakh
In case of minimum alternate tax marginal relief will be applicable in case
of book profits fall in th following range.

Domestic
Company RS 100 lakh- Rs 101.796407 lakh

Foreign RS 100 lakh- Rs 100.44313 lakh

Company
• Rounding off of Income [ Sec 288 A]:::::
• Agriculture income : Agriculture income is not taxable in India. Sec2
(1A)
• Difference between exemption and deduction:
• If an income is exempt from tax, it is not included in the computation of
income.. Exemption can never exceed the amount of income. Deduction is
generally given from income chargeable to tax. Deduction can be less than
or equal to or more than amount of income. If amount deductible is more
than the amount of income, the resulting amount will be taken as loss.
• Assessment [Sec (8)]
The word assessment means computation of tax and procedure for
imposing tax liability. Under the Act, there are seven kinds of assessments-
self assessment, provisional assessment, regular assessment, best judgment
assessment, reassessment, jeopardy assessment under section 172 ,174 to
176 and precautionary assessment..
Manufacture [Sec 2(290]
From the AY 2009/10 , the term manufacture would mean a change in a non
living physical object (or article or thing) in to a new and distinct object
( or article or thing ) having a different name, character and use, or
bringing into existence of new and distinct object( or article or thing) with
a different chemical composition or integral structure.
• Fair market value [Sec 2 (22B)]
• FMV in relation to a capital asset means the price that the capital asset
would ordinarily fetch on sale in the open market on the relevant date.
• Capital receipts vs. revenue receipts:
The distinction between these two is vital because capital receipts are exempt
from tax unless they are expressly taxable (for example capital gains are
taxable (sec 45) even if they are capital receipt). On the other hand
revenue receipts are taxable unless they are expressly exempt form Tax.
For instance incomes exempt under section 10.

A/c to the shorter Oxford English Dictionary while the word capital means
“accumulated wealth employed reproductively”, the word revenue means
“ the return, yield, or profit of any lands, property or any other important
source of income; that which comes in to one as a return from property or
possession; income form any source”.

The essential difference between capital and revenue is that capital is a fund;
revenue is a flow

Broad Prepositions are followed with respect to this concept.

1) Circulating capital and fixed capital
2) Receipt in the hands of recipient is material.
3) Payers motive irrelevant
4) Receipt in lieu of source income
5) Lump sum payment
6) Nature of receipt under company’s law irrelevent
7) Income of wasting assets( mines)
8) Insurance receipt (assets)
9) Changes in rate of exchange of currency
10)Annuities
11)Compensation
12)Compensation on termination
13)Compensation for acquisition
14) Earnest Deposit
• Some instances of Capital receipts :
• Excess collections by an electricity company
• Sale of loom hours
• License to prospect the land
• Profits after the sale of business
• Damages from supplier of machine
• Some instances of Revenue receipts :
• Compensation for loss of a trading asset
• Subsidy from government
• Surplus due to reduction in export duty
• Acquisition of land from dealers
• Forfeiture of security deposit. (trading activity )
• Capital Expenditure and revenue Expenditure:

• Few instances of Capital Expenditure:

• Incoming Partner
• Shifting of a plan
• Unsuccessful attempt to bore a tubewell
• Construction of pucca road
• Expenditure on raising new shares
• Betterment charges
• Commission for acquiring office
• Pre- commencement expenditure
• Acquisition of leasehold right

• Few instances of Revenue Expenditure:

• Compensation on account of negligence
• Construction of school building
• Repair of road
• Loss of office
• Winding up petition
• Technical fees
• Fluorescent light
• Construction of railway sight
• Marketing research
• Lump sum amount to film star

Income under the heading “Profits and gains of business or profession” or “

income from other sources” is to be computed in accordance with the
method of accounting regularly employed by the assessee

TYPES OF ACOUNTING METHODS (mercantile and cash system)

CHOICE OF ACCOUNTING METHOD
ACCOUNTING STANDARDS
METHOD OF ACCOUNTING IRREVELANT IN SOME CASES
Definitions of amalgamation , demerger, infrastructure capital company
and infrastructure capital fund

Amalgamation: amalgamation is a blending of two of more existing

undertakings into one undertaking. The shareholders of each blending
company become substantially the share holders in the company which is to
carry on the business of blended undertaking.
A/c to the income tax act [ sec 2 (1B) ]
Conditions: All the properties, Liabilities and ¾ th share holdings

Demerger: [Sec 2. (19AA)] The company whose undertaking is transferred

pursuant to demerger is known as “demerged” company. The company to
which the undertaking is transferred is known as resulting company.
Conditions should be satisfied :
1. Entities involved should be companies:
2. Sections 391 to 394 of the companies Act should be satisfied.
3. It involves transfer of an undertaking.
4. All the properties should be transferred to the resulting company.
5. The resulting company should take over all the liabilities of the undertaking.
6. Liabilities / properties are to be transferred at book value.
7. Shares in the resulting company are issued to the share holders.
8. Person holding 75 percent shares in the demerged company to become
shareholders in the resulting company.
9. Transfer should be on going basis.

Infrastructure capital company[ Sec 2 (26A)]

It means such a company which makes investments by way of acquiring shares
or providing long term finance to any of the following undertakings or
enterprises.
Section 80-IA(4),(1),(10).. Three star hotel or a hospital with not less than 100
beds capacity
Infrastructure capital fund
It means such fund operating under a trust deed (which is registered under the
Registration Act) established to raise moneys by the trustees for investments
by way of acquiring or providing long term finance to any of the following
enteeprises or undertakings.