CHAPTER-1II STRUCTURE OF INCOME TAX I N I N D I A AND THE CO-OPERATIVE SOCIETIES PART-1 3.1 INTRODUCTION 3.2 A BRIEF HISTORY OF INCOME TAX IN INDIA 3.3 INCOME TAX ACT, 1961 3.4 SCHEME OF INCOME TAX LAW 3.4.1 SOME IMPORTANT CONCEPTS l.ASSESSEE 2. PERSON (Taxable Entity) 3. ASSESSMENT YEAR [Section 2(9)] 4. PREVIOUS YEAR (Section 3) 5. TOTAL INCOME [Section 2(45)] 3.4.2 CHARGE OF INCOME TAX 3.4.3 INCOME 3.4.4 TAX FREE INCOME (Section 10) 3.5 COMPUTATION OF INCOME UNDER DIFFERENT HEADS OF INCOME 3.5.1 INCOME FROM SALARIES (Section 15,16, & 17) 3.5.2 INCOME FROM HOUSE PROPERTY (Section 22 to 27) 3.5.3 PROFITS AND GAINS OF BUSINESS OR PROFESSION (Section 28to 44D) 3.5.4 CAPITAL GAINS [Section 45to 55] 3.5.5 INCOME FROM OTHER SOURCES [Section 56to59] 3.6 AGGREGATION, SET-OFF AND CARRY FORWARD OF LOSSES 3.7 DEDUCTION TO BE MADE IN COMPUTING TOTAL INCOME CONCLUSION
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CHAPTER-1II
S T R U C T U R E O F I N C O M E T A X
I N I N D I A A N D
T H E C O - O P E R A T I V E S O C I E T I E S
PART-1
3.1 INTRODUCTION
3.2 A BRIEF HISTORY OF INCOME TAX IN INDIA
3.3 INCOME TAX ACT, 1961
3.4 SCHEME OF INCOME TAX LAW
3.4.1 SOME IMPORTANT CONCEPTS
l.ASSESSEE
2. PERSON (Taxable Entity)
3. ASSESSMENT YEAR [Section 2(9)]
4. PREVIOUS YEAR (Section 3)
5. TOTAL INCOME [Section 2(45)]
3.4.2 CHARGE OF INCOME TAX
3.4.3 INCOME
3.4.4 TAX FREE INCOME (Section 10)
3.5 COMPUTATION OF INCOME UNDER DIFFERENT HEADS OF
INCOME
3.5.1 INCOME FROM SALARIES (Section 15,16, & 17)
3.5.2 INCOME FROM HOUSE PROPERTY (Section 22 to 27)
3.5.3 PROFITS AND GAINS OF BUSINESS OR PROFESSION (Section 28to 44D)
3.5.4 CAPITAL GAINS [Section 45to 55]
3.5.5 INCOME FROM OTHER SOURCES [Section 56to59]
3.6 AGGREGATION, SET-OFF AND CARRY FORWARD OF LOSSES
3.7 DEDUCTION TO BE MADE IN COMPUTING TOTAL INCOME
CONCLUSION
3.1 INTRODUCTION
The most important purpose of this chapter is to give a bird's eye view of
income-tax structure in India at present. This is expected to serve as a background
to understand the subsequent chapters. The chapter has been divided into two
parts. Part-I deals with the structure of income-tax in India. The part-II presents
briefly the income-tax provisions applicable to the Co-operative societies.
PART-I
In the Sovereign Democratic Republic of India, the Power of Government
to levy and collect taxes flows out of the constitution adopted in 1950. Article
245(1) of the Constitution of India authorized the parliament to make laws for the
whole of India and granted to it exclusive powers to make "laws with respect to
any of the matters enumerated in List-I in Seventh Schedule".
The List-I (called Union-List) of the Seventh Schedule to the constitution
of India consists of 97 entries and entry No.82 specifies taxes on Income other
than agricultural income. As per this provision in the Constitution of India, the
Income tax is levied and collected in India by the Union Government.
59
3.2. A BRIEF HISTORY OF INCOME TAX IN IN DIA
Income-tax is the very important direct tax in India. Its incidence docs not
fall on the poorer sections of the society like the indirect taxes such as Sales-tax,
and Excise duties .
The British rulers incurred some expenditure to suppress the freedom
movement started in India in 1857 called by them as "Soldiers mutiny". They
introduced income-tax for the first time in India in 1860 as a temporary measure to
tide over the financial difficulties. However, it became a permanent feature of the
tax system after passing the Indian Income-tax Act, 1886. Due to several
amendments made in this Act, it was repealed by passing the income-tax Act in
1918. Further, on the recommendations made by the All India Taxation Enquiry
Committee a new Income-tax Act was passed in 1922. This Act also did not
remain static. It underwent a number of amendments from time to time and hence
became very complicated, cumbersome and confusing one. It was, therefore,
refened to law commission in 1956 to suggest the measures for simplification of
the Act. The Direct Taxes Administration Committee was also appointed by the
Government for the suggestion of the means and measures to minimise the
inconveniences caused to tax payers and for preventing evasion of tax. It is on the
recommendations made by them that the new Income-tax Act, 1961 was passed
and it came into force from lsl April 1962 and is now applicable.
Inspite of the fact that the new Act of 1961 retained the basic structure of
old Act of 1922, vast changes are made in the Act, in the matter of the contents, as
compared to the old Act. It is mentioned that the provisions in the new Act
are simplified and logically arranged and some new provisions have been
1. Samal, Kishor C. (1992). Tax Structure and Budgetary Trends. New Delhi : Manak
Publications. Pp.63-64.
60
introduced with a view to simplify the taxation process and prevent avoidance and
evasion of tax.
The Finance Act passed every year prescribes the rates of income-tax to be
levied on the income of the relevant assessment year and for payment of advance
tax.
3.3 INCOME TAX ACT, 1961
The Income-Tax Act, 1961 as mentioned in its preamble, is "an Act to
consolidate and amend the law relating to Income-tax and Super Tax". It has 23
chapters, each dealing with separate subject and further divided into 298 Sections.
In addition, 12 Schedules were originally attached to the Act, of which schedules
6th and 9lh have since been deleted. The Act is also accompanied by 125 rules,
known as the Income-tax Rules 1962. These rules are divided into fifteen parts and
they supplement the main statute. These rules have been amended and altered
from time to time. Appendix-I attached to rules deals with depreciation rates,
while under appendix-II, a total of 57 different "Forms" arc provided. Since its
commencement in 1961 to the present date, almost 70 Finance Acts and adoption
orders have amended the Income Tax Act, and brought it into present shape.3
3.4 SCHEME OF INCOME TAX LAW £ ( ^
3.4.1 SOME IMPORTANT CONCEPTS Offf
1) Assessee: An 'assessee', as defined in Section. 2 (7) of the income tax Act,
1961 means a 'Person' from whom any tax or any other Sum of money is
2. Gupta, Rupram. (1981). Income Tax Law and Practice. Agra : Agra Book Store.
Pp.1-2.
3. Chaturvedi, .K & Pithisaria, S.M. (1995-96). Inametax Law {2^ Ecl.i), New Delhi :
Wishwa Prakashan. P-l. »>o t c
61
payable under the Act and includes every person in respect of whom any
proceeding under the Act has been taken for the assessment of his income or
loss and the amount of refund due to him. It also includes a person who is
assessable in respect of income or loss of another person or who is deemed to be
an assessee, or an assessee in default, under any provisions of the Act. The term
includes the following person;
2) Person (Taxable Entity)
Under Section. 2(31), the term 'Person' includes,
i) an individual ,
ii) a Hindu Undivided Family,
iii) a Company,
iv) a Firm,
v) an Association of Person's or a body of individuals whether incorporated or not,
vi) a Local authority ; and
vii) every artificial juridicial Person not falling within any of the preceding
category.
Every 'Person' who has taxable income is liable to pay tax.
3) Assessment Year [Section 2(9)]
"Assessment Year" means the period of 12 months starting from April lsl
and ending with 31sl March next year. The period of assessment year is fixed by
the law and remains so irrespective of the accounting year adopted by the assessee.
Income of previous year of an assessee is taxed during the immediately following
assessment year at the rates prescribed by the relevant Finance Act.
4. Singhania, K. Vinod. (1981). A New Approadi to Income Tax. New Delhi: Himalaya
Publication. P.M.
62
4) Previous Year (Section 3]
As the tax payable by an assessee for any assessment year is in respect of
the income of the previous year, the definition of previous year is very important.
Generally, the previous year means the financial year (commencing from 1st April
and ending with 31st March next) immediately preceding the assessment year. It is
uniform for all the assessees and all sources of income. For new business, it may
be less than 12 months in the first year. It commences with the date of
commencement of business and ends with 31sl March.
5) Total Income [Section 2(45)]
The 'total income' is the base on which income-tax is levied. The income
tax Act, 1961 defines total income to mean the total amount of income referred to
in Section 5 and computed in the manner laid down in the Act. Section 5 specifics
the income to be included in the total income of a person when such person is
"resident", or not ordinarily resident, or "non-resident."5
The scope of total income computed as per the provisions of the Act,
depends upon the residential status of an assessee.
The total income of a resident person in a particular year includes the
income from whatever source derived that the,
a) income which is received or deemed to be received in India in such a
year; or
5. Bhattacharya, Sukamar. (1982). Indian Income Tax and Practice Law. Agra : Wadhwa
& Company. P.51.
63
b) income which accrues or arises or is deemed to accrue or arise to him in
India during such year
c) income which accrues or arises to him outside India during such year.
In the case of a person who is not ordinarily resident, the income mentioned
in item (c) above should not be included unless it is derived from a business
controlled or profession set-up in India. In the case of non-resident person, the
income mentioned in items (a) and (b) should only be included.
3.4.2. CHARGE OF INCOME TAX
Section 4 pertains to the charge of income tax on the income and it is
explained as under:
1) The charge is on every person.
2) Income-tax shall be charged at the rates prescribed by the Finance Act, enacted
every year.
3) The Income that is taxed must pertain to the previous year.
4) Besides the tax that is chargeable on the income of the previous year, current
income may also be taxed whenever desired.
5) By virtue of this Section, income-tax is also deducted at source or is paid in
advance under certain provisions of the Act.
6) Each year of assessment is a self contained period and the assessment of one
year may or may not have a bearing on the assessment of the others.6
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3.4.3. INCOME
The term "income" in Section 2(24) is inclusive and not exhaustive.
Therefore, the term "income" not only includes those things which are included in
Section 2(24), but also includes such things which the term signifies
according to its general and natural meaning. As per Section 2(24), the term
"income" includes.
a) Profits and gains
b) Dividend
c) Voluntary contributions received by a trust created wholly or partly for
charitable or religious purposes or by an institution established wholly or partly
for such purposes not being contributions made with a specific direction that
they shall form part of the corpus of the trust.
d) The value of perquisites, or profit in lieu of salary.
c) The value of any benefits perquisites obtained from a company by a director or
a person who has substantial interest in the company or by relative of a director
or such person.
f) The value of any benefit or perquisite;(whether convertible into money or not)
obtained by any representative assessee [Section 160 (i),(iii),(iv)]or
beneficiary, or any amount paid by the representative assessee for the benefit
of the beneficiary, (which the beneficiary would have ordinarily been required
to pay)
g) Any sum chargeable under Section 28 (ii), (iii), 41 or 59.
h) The value of any benefit or perquisite, whether convertible into money or not,
arising from business or the exercise of a profession.
6. Pahwa, S.P. (197r4).Taxation of Co-operative Society. Allhabad : Central Law Agency.
P.61.
65
i) Any capital gains.
j) Insurance profit computed under Section 44.
k) Any annuity under Section 280 D.
1) Winning from lotteries, cross word Puzzles, races including horse races, card
games and other games of any Profit.
The aforesaid definition does not define the term "income" but merely
describes various receipts as income. It, therefore, follows that in addition to the
aforesaid receipts, any other receipt, is taxable under the Act, if it comes within
the general and natural meaning of term "income".
A study of the Following broad principles will be helpful to understand the
concept of income.
a) Regular and Definite Source
The term "income" connotes a periodical monetary return coming in with some
sort of regularity or expected regularity from definite source. This statement
must, however, be read with reference to the facts of each case.
b) Different Forms of Income
Income may be received in cash or in kind. When income is received in kind,
its valuation is to be made according to the rules prescribed in the Income-tax
rules. If, however, there is no prescribed rule, valuation is made on the basis of
market value.
7. ibid.
66
c) Receipts vs Accruals
Income arises either on receipt basis or on accrual basis. Income may accrue to
tax payer without its actual receipt. Moreover, in some cases income is deemed
to accrue or arise to a person without its actual accrual or receipt.
d) Illegal Income
The income'-tax law does not make any distinction between income accrued or
arisen from a legal source and income tainted with illegality.
e) Disputed title
Income-tax assessment cannot be held up or post-poncd merely because of
existence of a dispute regarding the title of income.
f) Relief or reimbursement of expenses not treated as income
Mere relief or reimbursement of expenses is not treated as income. For
instance, reimbursement of actual travelling expenses to an employee is not an
income.
g) Surplus from Mutual activity
A person cannot make a taxable profit out of a transaction with himself.
Income must, therefore, come from outside. A surplus arising to mutal concern
cannot be regarded as income chargeable to tax.
h) Temporary and Permanent Income
For the purpose of income-tax there is no distinction between temporary and
permanent income. Even temporary income is taxable.
67
i) Lump Sum Receipts
Income, whether received in lump sum or in instalments, is liable to tax. For
instance, arrears of bonus, received in lump sum, is income and taxable as
salary.
j) Personal Profit
Gift of a personal nature e.g. birthday, marriage gifts etc., is not income and
therefore, recipient of such gift is not liable to income-tax.
k) Tax-Free Income
If a person receives tax-free income on which tax is paid by the person making
payment on behalf of the recipient, it has to be grossed up for inclusion in his
total income. For instance, interest on tax-free commercial securities is grossed
up.
1) Receipt on Account of Dharmada
Receipt on account of dharmada, gauashala and pathashala is not income and,
therefore, not liable to tax.
m) Devaluation of Currency
If an assessee receives extra money on account of devaluation of currency, it is
taxable.
n) Income Includes Loss
Income includes loss while income and profit and gains represent "Plus
Income',' losses represent minus Income.
8. Singhania, K. Vinod. Op.Cit., Pp. 15-16.
68
3.4.4. TAX FREE INCOMES ( Section 10)
The Act provides a scheme of two fold exemption; total exemption and
partial exemption. There are certain incomes which are completely exempt from
tax, i.e., they do not form part of the total income, which arc covered by
Section.10. There are some incomes which are partially exempt form tax i.e., they
are included in the total income, but rebate of tax is given on such incomes at the
average rate applicable to the total income. They are covered under Section 86. It
may be noted that if the assessee wants to claim any exemption the burden of
proof that the income is exempt lies on him.
Section. 10 of the Act, enumerates incomes which are tax-free. They arc
also called exempted incomes. The following are such type of incomes which are
not to be included in computing the total income of an assessee:
1. Agricultural Income: Agricultural income is exempt from tax under Section 10
(A). Parliament has no power under the constitution to levy tax on agricultural
income.
2. Any sum received by a member of a Hindu-undivided family, out of the family
income [Section 10(2)]
3. The receipts which are of a casual and non-recurring nature are exempt from
tax to the extent of Rs. 5000 for all such receipts on the aggregate [Section
10(3)]
4. Certain interest incomes of foreigners [Section 10(4)]
5. Certain interest incomes received by a non-resident Indian CitizcnfScction 10
(4B)]
6. Travel concession received by an individual from his employer [Section
10(5)]
69
7. Any remuneration received by a non-resident individual who is not a citizen of
India for rendering service in connection with the shooting of a
cinematography film in India, subject to certain conditions [Section 10(5A)]
8. Certain incomes such as passage money, remuneration of foreigners [Section
10(6)]
9. Tax paid on behalf of foreign company by Government or an Indian concern in
respect of royalties or fees for technical Service [Section 10(6 A)]
10. Tax Paid on behalf of non-resident or a foreign Company by Government or an
Indian concern in pursuance of an agreement duly approved [Section 10(6B)]
11. Any fees received by a specified foreign company for technical service
rendered in pursuance of an agreement [Section 10(6C)]
12. Any perquisite or allowance paid or allowed by the Government to its
employees, servicing abroad [ Section 10(7)]
13.Remuneration received by an individual from a foreign state under Co
8. Allowance to Government employees outside India [Section 10(7)]
9. Children's education allowance [17(2)(iv)]
10. Tiffin allowance
11. Fixed Medical allowance
12. Servant allowance
PERQUISITES [Section 17(2)]
For the purpose of computing the income chargeable under the head
"Salaries", it is necessary to determine the value of perquisites. Some of the
perquisites are:
1. Rent-free accommodation.
2. Accommodation provided to the employee at concessional rent.
3. Motar Car for the Personal use of an employee.
4. Free service of a sweeper, a gardner or a watchman provided to employees.
5. Gas, Electricity, Water, etc., supplied free of charge.
6. Free transport to employees by an undertaking engaged in the carriage of
passengers or goods.
7. Any other benefit not included in the preceding items.
77
EXEMPTED PERQUISITES AND OTHER ALLOWANCES
Salary includes perquisites and allowances provided in the form of cash or
kind by the employer to his employees. The following allowances and perquisites
are exempted
1. Medical benefits in certain cases.
2. Refreshment during office hours in office premises.
3. Recreational benefits.
4. Telephone bill
5. Family Planning expenses
6. Perquisites to Government employees posted abroad.
7. Certain perquisites to High Court and Supreme Court Judges
8. Scholarship to children of employees paid by the employer.
9. Concessional or interest free loans from employer for construction or purchase
of a house.
DEDUCTION FROM SALARIES
The income chargeable under the head 'Salaries' is computed after making the
following deductions.
1. Standard deduction [Section 16(i)] : An assessee whose income from salary
before standard deduction-
(a) does not exceed Rs. 1,00,000 One-third of salary or Rs. 25,000, whichever is
less ;
(b) exceeds Rs. 1,00,000 but does not exceed Rs. 5,00,000- Rs. 20,000 ;
(c) exceeds Rs. 5,00,000 - Nil.
78
2. Entertainment Allowance [Section 16(h)] : Entertainment allowance granted
to an employee is included in the gross salary income and then the following
deduction is given :
(i) If the employee is a Government employee maximum of Rs. 5,000.
(ii) If the employee is not a Government servant, a maximum of Rs. 7,500.
3. Tax on Employment [Section 16(iii)] : Any sum paid by the assessee on
account of a tax on employment is allowed.
After these deductions, whatever remains is income from salary.
3.5.2. INCOME FROM HOUSE PROPERTY [Section 22 to 271
This is the second head of income. The income chargeable here is the
'annual value' of property consisting of any building or land appartanent thereto
of which the assessee is the owner, other than such portions of such property as he
may occupy for the purposes of any business or profession carried on by him the
profits of which arc chargeable to income tax.
TOTALLY EXEMPTED INCOME FROM HOUSE PROPERTY
Income from certain house property is exempted from income-tax
1) Income from agricultural building [Section 2(1 A) (c)]
2) The annual value of any one Palace in the occupation of Ruler [Section
10(19 A)]
3) Income from house property belonging to
a) a local authority [Section 10(20)]
b) an authority constituted for the purpose of planning development or
improvement of cities, towns and villages [Section 10(20A)]
79
c) scientific research association [Section 10(21)]
d) games or sports association [Section 10(23)]
e) a Registered Trade Union [Section 10 (24)]
4) In the case of an authority constituted under any law for the time being in force
for the marketing of commodities any income derived by it from the letting of
godowns or warehouses for storage, processing or facilitating the marketing of
commodities [Section 10(29)]
5) Income from house property held by trust wholly for charitable or religious
purpose [Section 11(1)]
6) Income from house property held by a political party [Section 13 A]
7) Income from house property used by the assessee for purposes of his business
or profession and the profits of which are chargeable to income tax.[ Section
22]
8) Income of one self-occupied house16 [Section 23(2) a(i) ]
DEDUCTIONS FROM HOUSE PROPERTY INCOME
Section 24 provides that the income under the head, "income from house
property" is to be computed after making the following deductions from annual
value determined under section 23.'7
1. In respect of repairs and collection of rent of the property, a sum equal to %
(One fourth) of annual value.
2. The premium paid to insure the property against risk of damage.
3. Where the property is subject to any annual charge not being a charge created
by the assessee voluntarily or a capital charge the amount of such charge.
4. Where the property is subject to a ground rent the amount of such ground rent.
16. MehotraiT.C& Goyal, S.P. Op.Cit., P .153.
17. Amendment made in the provision to Section 24(2) by Finance (No.2) Act. 1998.
80
5. Where the property has been acquired, constructed, repaired, renewed or
reconstructed with borrowed capital, the amount of interest payable on such
borrowing.18
6. Any sum paid on account of land revenue or any other tax levied by the State
Government in respect of the property.
7. Where the property is letout and it is vacant during a part of the year, that part
of the annual value which is proportionate to the period during which the
property is wholly unoccupied.
8. Irrecoverable rent subject to the conditions prescribed in the income tax rules.
None of the above deductions is allowable where the annual value of the
house kept for self-occupation is to be taken at 'Nil' under Section 23(2)(a)(i)
and 23(3). However interest on funds borrowed for the puipose of acquiring,
constructing or repairing the self-occupied house is allowed to certain extent
depending upon the date of completion of construction.
3.5.3. PROFITS AND GAINS OF BUSINESS OR PROFESSION [Sections 28 to
44D]
I . BUSINESS
As defined under Section 2(13) of the income tax Act, "Business" includes
any trade, commerce or manufacturer or any adventure or concern in the nature of
trade, commerce or manufacture.
18. "The Board has clarified that interest on house building advance taken by Central Government Servants under the House Building advance Rules can be allowed as deductions Under Section 24 (i)(vi) on accrual basis even-though such interest is payable later" [Circular No. 363 dated :24.6.1983 143 ITR (ST)2 ]
81
For the purpose of computing business income, business, if any, carried on
by an assessee will be treated as distinct and separate from any other business
carried on by him.19
II. PROFESSION
Under Section 2(36), "Profession" is defined to include vocation.
Incomefrom exercise of any profession or vocation which calls for intellectual or
manual skills, falls under this head. It covers cases of doctors, lawyers, chartered