Summer Internship Report

1

LIST OF TABLES

NO. TITLE PG. NO

1 TAXABILITY OF INDIVIDUALS

2 DEDUCTIONS FROM SALARY INCOME

FOR MEN

FOR WOMEN

FOR SENIOR CITIZEN

2

LIST OF FIGURES

1 TYPES OF E-FILLING

2 E-FILLING PROSESS

3

CHAPTER ONE – INTRODUCTION

"It was only for the good of his subjects that he collected taxes from them, just as

the Sun draws moisture from the Earth to give it back a thousand fold" –

                                    --Kalidas in Raghuvansh eulogizing KING DALIP.

The government of India imposes an income tax on taxable income of

individuals, Hindu Undivided Families (HUFs), companies, firms, co-operative

societies and trusts (identified as body of individuals and association of persons)

and any other artificial person. Levy of tax is separate on each of the persons. The

levy is governed by the Indian Income Tax Act, 1961. The Indian Income Tax

Department is governed by the Central Board for Direct Taxes (CBDT) and is

part of the Department of Revenue under the Ministry of Finance, Govt. of India.

There were 33 million income taxpayers in 2008.

It is a matter of general belief that taxes on income and wealth are of

recent origin but there is enough evidence to show that taxes on income in some

form or the other were levied even in primitive and ancient communities. The

origin of the word "Tax" is from "Taxation" which means an estimate. These were

levied either on the sale and purchase of merchandise or livestock and were

collected in a haphazard manner from time to time. Nearly 2000 years ago, there

went out a decree from Ceaser Augustus that all the world should be taxed. In

Greece, Germany and Roman Empires, taxes were also levied sometime on the

basis of turnover and sometimes on occupations. For many centuries, revenue

from taxes went to the Monarch. In Northern England, taxes were levied on land

and on moveable property such as the Saladin title in 1188. Later on, these were

supplemented by introduction of poll taxes, and indirect taxes known as "Ancient

Customs" which were duties on wool, leather and hides. These levies and taxes in

various forms and on various commodities and professions were imposed to meet

4

the needs of the Governments to meet their military and civil expenditure and not

only to ensure safety to the subjects but also to meet the common needs of the

citizens like maintenance of roads, administration of justice and such other

functions of the State.

HISTORY

In India, the system of direct taxation as it is known today has been in

force in one form or another even from ancient times. There are references both in

Manu Smriti and Arthasastra to a variety of tax measures. Manu, the ancient sage

and law-giver stated that the king could levy taxes, according to Sastras. The wise

sage advised that taxes should be related to the income and expenditure of the

subject. He, however, cautioned the king against excessive taxation and stated that

both extremes should be avoided namely either complete absence of taxes or

exorbitant taxation. According to him, the king should arrange the collection of

taxes in such a manner that the subjects did not feel the pinch of paying taxes. He

laid down that traders and artisans should pay 1/5 th of their profits in silver and

gold, while the agriculturists were to pay 1/6th, 1/8th and 1/10th of their produce

depending upon their circumstances. The detailed analysis given by Manu on the

subject clearly shows the existence of a well-planned taxation system, even in

ancient times. Not only this, taxes were also levied on various classes of people

like actors, dancers, singers and even dancing girls. Taxes were paid in the shape

of gold-coins, cattle, grains, raw-materials and also by rendering personal service.

The learned author K.B.Sarkar commends the system of taxation in ancient India

in his book "Public Finance in Ancient India", (1978 Edition) as follows:-

"Most of the taxes of Ancient India were highly productive. The admixture of

direct taxes with indirect Taxes secured elasticity in the tax system, although

more emphasis was laid on direct tax. The tax-structure was a broad based one

5

and covered most people within its fold. The taxes were varied and the large

variety of taxes reflected the life of a large and composite population".

However, it is Kautilya’s Arthasastra, which deals with the system of taxation in a

real elaborate and planned manner. This well known treatise on state crafts

written sometime in 300 B.C., when the Mauryan Empire was as its glorious

upwards move, is truly amazing, for its deep study of the civilization of that time

and the suggestions given which should guide a king in running the State in a

most efficient and fruitful manner. A major portion of Arthasastra is devoted by

Kautilya to financial matters including financial administration. According to

famous statesman, the Mauryan system, so far as it applied to agriculture, was a

sort of state landlordism and the collection of land revenue formed an important

source of revenue to the State. The State not only collected a part of the

agricultural produce which was normally one sixth but also levied water rates,

octroi duties, tolls and customs duties. Taxes were also collected on forest

produce as well as from mining of metals etc. Salt tax was an important source of

revenue and it was collected at the place of its extraction.

Kautilya described in detail, the trade and commerce carried on with foreign

countries and the active interest of the Mauryan Empire to promote such trade.

Goods were imported from China, Ceylon and other countries and levy known as

a vartanam was collected on all foreign commodities imported in the country.

There was another levy called Dvarodaya which was paid by the concerned

businessman for the import of foreign goods. In addition, ferry fees of all kinds

were levied to augment the tax collection.

Collection of Income-tax was well organized and it constituted a major part of the

revenue of the State. A big portion was collected in the form of income-tax from

dancers, musicians, actors and dancing girls, etc. This taxation was not

6

progressive but proportional to the fluctuating income. An excess Profits Tax was

also collected. General Sales-tax was also levied on sales and the sale and the

purchase of buildings was also subject to tax. Even gambling operations were

centralized and tax was collected on these operations. A tax called yatravetana

was levied on pilgrims. Though revenues were collected from all possible

sources, the underlying philosophy was not to exploit or over-tax people but to

provide them as well as to the State and the King, immunity from external and

internal danger. The revenues collected in this manner were spent on social

services such as laying of roads, setting up of educational institutions, setting up

of new villages and such other activities beneficial to the community.

The reason why Kautilya gave so much importance to public finance and the

taxation system in the Arthasastra is not far to seek. According to him, the power

of the government depended upon the strength of its treasury. He states – "From

the treasury, comes the power of the government, and the Earth whose ornament

is the treasury, is acquired by means of the Treasury and Army". However, he

regarded revenue and taxes as the earning of the sovereign for the services which

were to be rendered by him to the people and to afford them protection and to

maintain law and order. Kautilya emphasized that the King was only a trustee of

the land and his duty was to protect it and to make it more and more productive so

that land revenue could be collected as a principal source of income for the State.

According to him, tax was not a compulsory contribution to be made by the

subject to the State but the relationship was based on Dharma and it was the

King’s sacred duty to protect its citizens in view of the tax collected and if the

King failed in his duty, the subject had a right to stop paying taxes, and even to

demand refund of the taxes paid.

Kautilya has also described in great detail the system of tax administration in the

Mauryan Empire. It is remarkable that the present day tax system is in many ways

7

similar to the system of taxation in vogue about 2300 years ago. According to the

Arthasastra, each tax was specific and there was no scope for arbitrariness.

Precision determined the schedule of each payment, and its time, manner and

quantity being all pre-determined. The land revenue was fixed at 1/6 share of the

produce and import and export duties were determined on advalorem basis. The

import duties on foreign goods were roughly 20 per cent of their value. Similarly,

tolls, road cess, ferry charges and other levies were all fixed. Kautilya’s concept

of taxation is more or less akin to the modern system of taxation. His overall

emphasis was on equity and justice in taxation. The affluent had to pay higher

taxes as compared to the not so fortunate. People who were suffering from

diseases or were minor and students were exempted from tax or given suitable

remissions. The revenue collectors maintained up-to-date records of collection

and exemptions. The total revenue of the State was collected from a large number

of sources as enumerated above. There were also other sources like profits from

Stand land (Sita) religious taxes (Bali) and taxes paid in cash (Kara). Vanikpath

was the income from roads and traffic paid as tolls.

He placed land revenues and taxes on commerce under the head of tax revenues.

These were fixed taxes and included half yearly taxes like Bhadra, Padika, and

Vasantika. Custom duties and duties on sales, taxes on trade and professions and

direct taxes comprised the taxes on commerce. The non-tax revenues consisted of

produce of sown lands, profits accuring from the manufacture of oil, sugarcane

and beverage by the State, and other transactions carried on by the State.

Commodities utilized on marriage occasions, the articles needed for sacrificial

ceremonies and special kinds of gifts were exempted from taxation. All kinds of

liquor were subject to a toll of 5 percent. Tax evaders and other offenders were

fined to the tune of 600 panas.

8

Kautilya also laid down that during war or emergencies like famine or floods, etc.

the taxation system should be made more stringent and the king could also raise

war loans. The land revenue could be raised from 1/6 th to 1/4th during the

emergencies. The people engaged in commerce were to pay big donations to war

efforts.

Taking an overall view, it can be said without fear of contradiction that Kautilya’s

Arthasastra was the first authoritative text on public finance, administration and

the fiscal laws in this country. His concept of tax revenue and the on-tax revenue

was a unique contribution in the field of tax administration. It was he, who gave

the tax revenues its due importance in the running of the State and its far-reaching

contribution to the prosperity and stability of the Empire. It is truly a unique

treatise. It lays down in precise terms the art of state craft including economic and

financial administration.

9

CHAPTER TWO: REVIEW OF RELATED LITERATURE

Charges to Income-tax

Every Person whose total income exceeds the maximum amount which is not

chargeable to the income tax is an assesse, and shall be chargeable to the income

tax at the rate or rates prescribed under the finance act for the relevant assessment

year, shall be determined on basis of his residential status.

Income tax is a tax payable, at the rate enacted by the Union Budget (Finance

Act) for every Assessment Year, on the Total Income earned in the Previous Year

by every Person.

The changeability is based on nature of income, i.e., whether it is revenue or

capital. The principles of taxation of income are-:

Income Tax Rates/Slabs Rate (%)

For men:

→ Up to 1, 80,000 = NIL,

→ 1, 80,001 – 5, 00,000 = 10%,

→ 5, 00,001 – 8, 00,000 = 20%,

→ 8, 00,001 upwards = 30%,

Up to 1, 90,000 (for resident women) = NIL,

Up to 2, 50,000 (for resident individual of 60 years or above) = 0,

10

Up to 5, 00,000 (for very senior citizen of 80 years or above) = 0.

Education cess is applicable @ 3 per cent on income tax, surcharge = NA

Definitions

Person

The income tax is charged in respect of the total income of the previous year of

every 'person'. Here the person means--

1. an individual : a natural human being i.e. male, female minor or a person

of sound or unsound mind

2. a Hindu undivided family (HUF)

3. a company :

any Indian company

anybody corporate incorporated by under the laws of a country outside

India

any institution, association or body whether Indian or non Indian,

which is declared by general or special order of the board to be a

company

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 which is or was assessable or was assesses

under this act as a company for any assessment year commencing on

or before the 1st day of April. 1970

4. a firm i.e. a partnership firm

5. an association of persons or a body of individuals whether incorporated or

not

6. A local authority-- means a municipal committee, district board, body of

port commissioners, or other authority legally entitled to or entrusted by

11

the government with the control and management of a municipal or local

fund.

7. Every artificial, juridical person, not falling within any of the above

categories.

Previous year

The Financial Year in which the income is earned is known as the previous year.

Any financial year begins from 1st of April and ends on subsequent 31st March.

The financial year beginning on 1st of April 2003 and ending on 31st March 2004

is the previous year for the assessment year 2004-2005.

Assessment year

Assessment year means the period of twelve months commencing on 1st April

every year and ending on 31st March of the next year. Income of previous year of

an assessee is taxed during the following assessment year at the rates prescribed

by the relevant Finance Act.

Assessee

Income Tax Act 1961 (Act no. 43) defines 'assessee' as a person by whom any tax

or any other sum of money is payable under this Act, and includes -

Every person in respect of whom any proceeding under this Act has been

taken for the assessment of his income or of the income of any other

person in respect of which he is assessable, or of the loss sustained by him

or by such other person, or the amount of refund due to him or to such

other person;

Every person who is deemed to be an assessee under any provision of this

Act;

12

Every person who is deemed to be an assessee in default under any

provision of this Act;

Company

Section 2(17) of the act defines company. The term company includes:

1. any Indian company

2. any corporate incorporated by or under the laws of country outside India

3. any institution, association or body which is or was assessable or was

assessed as a company for any assessment year under the 1922 Act or

under the 1961 act any institution, association or body, whether

incorporated or not and whether Indian or non Indian, which is declared

by general or special order of the board to be a company only for such

assessment year or assessment years

Residence Rules

an individual is treated as resident in a year if present in India

1. for 182 days during the year or

2. For 60 days during the year and 365 days during the preceding four years.

Individuals fulfilling neither of these conditions are nonresidents. (The

rules are slightly more liberal for Indian citizens residing abroad or

leaving India for employment abroad.)

A resident who was not present in India for 730 days during the preceding seven

years or who was nonresident in nine out of ten preceding years I treated as not

ordinarily resident. In effect, a newcomer to India remains not ordinarily resident.

For tax purposes, an individual may be resident, nonresident or not ordinarily

13

resident.

Non-Residents and Non-Resident Indians

Residents are on worldwide income. Nonresidents are taxed only on income that

is received in India or arises or is deemed to arise in India. A person not ordinarily

resident is taxed like a nonresident but is also liable to tax on income accruing

abroad if it is from a business controlled in or a profession set up in India.

Capital gains on transfer of assets acquired in foreign exchange are not taxable in

certain cases.

Non-resident Indians are not required to file a tax return if their income consists

of only interest and dividends, provided taxes due on such income are deducted at

source.

It is possible for non-resident Indians to avail of these special provisions even

after becoming residents by following certain procedures laid down by the

Income Tax act.

Taxability of individuals is summarized in the table below

Status Indian Income Foreign Income

Resident and ordinarily resident Taxable Taxable

Resident but not ordinary resident Taxable Not Taxable

Non-Resident Taxable Not Taxable

14

Heads of Income

Income

There is no specific definition of income but for statutory purposes there are

certain items which are listed under the head income. These items include those

heads also which normally will not be termed as income but for taxation we

consider them as income. These items are included under section 2(24) of the

income tax act, 1961. As per the definition in section 2(24), the term income

means and includes:

profits and gains

dividends

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

the value of any perquisite or profit in lieu of salary taxable under clause

(2) and (3) of section 17 of the act

any special allowance or benefit, other than those included above

any allowance granted to the assessee either to meet his personal expenses

at the place where the duties of his office or employment of profits are

ordinarily performed by him or at a place where he ordinarily resides or to

compensate him for the increased cost of living

capital gains

any sum chargeable to income tax under section 28 of the income tax act

any winnings from lotteries, crossword puzzles, races, including horse

races, card games and games of any sort or from gambling or betting of

any form or nature whatsoever

15

any received as contribution to the assessee's provident fund or

superannuation fund or any fund for the welfare of employees or any other

fund set up under the provisions of the employees state insurance act

profits on sale of a license granted under the imports (control) order, 1955

made under the imports and exports (control) act, 1947

Individual Heads of Income

Income from Salary

What is Salary?

Income under heads of salary is defined as remuneration received by an individual

for services rendered by him to undertake a contract whether it is expressed or

implied. According to Income Tax Act there are following conditions where all

such remuneration are chargeable to income tax:

When due from the former employer or present employer in the previous

year, whether paid or not

When paid or allowed in the previous year, by or on behalf of a former

employer or present employer, though not due or before it becomes due.

When arrears of salary is paid in the previous year by or on behalf of a

former employer or present employer, if not charged to tax in the period to

which it relates.

What Income Comes Under Head of Salary?

Under section 17 of the Income Tax Act, 1961 there are following incomes which

come under head of salary:

Salary (including advance salary)

Wages

Fees

16

Commissions

Pensions

Annuity

Perquisite

Gratuity

Annual Bonus

Income From Provident Fund

Leave Encashment

Allowance

Awards

What is Leave Encashment?

Leave encashment is the salary received by an individual for leave period. It is a

chargeable income whether he is a government employee or not. Under section

10(10AA) (i) there is also a provision of exemption in case of leave encashment

depending upon whether he is a government employee or other employees.

What is Annuity?

It is an annual income received by the employee from his employer. It may be

paid by the employer as voluntarily or on account of contractual agreement. It is

not taxable until the right to receive the same arises. Under section 56, Income

Tax Act, 1961 other annuities come under a will or granted by a life insurance

company or accruing as a result of contract which comes as income under from

other sources.

What is Gratuity?

It is salary received by an individual paid by the employee at the time of his

retirement or by his legal heir in the case of death of the employee.

17

What is Allowance?

It is the amount received by an individual paid by his/her employer in addition to

salary. Under section 15 of the Income Tax Act, 1961 these allowance are taxable

excluding few condition where they are entitled of deduction/ exemptions.

Under Income Tax Act following types of allowance are defined

House Rent Allowance:

Under sections 10(13A) of Income Tax Act, 1961 allowance is defined as an

amount received by an employee paid by his/ her employer as a rent of his/her

house. It is a taxable income. There is no exemption in tax if he is living in his

own house or house for which he is not paying rent. There are following amount

which are exempt from tax:

Actual house rent paid by that individual

Rent paid for the accommodation over 10% of the salary

50% of the salary if house is placed at Delhi, Mumbai, Kolkata, Chennai

or 40% of the salary in it is placed in any other city

Entertainment Allowance:

It is the amount paid by employer for availing entertainment services. Under

section 16(ii) of Income Tax Act, 1961 it is entitled to deduction in tax from is

salary. But in this case deduction is given to his gross salary which also includes

entertainment allowance. Deduction in tax against this allowance can be divided

into two parts:

In case of Government employee entitled to minimum deduction of

Entertainment allowance received

20% of basic salary excluding any other allowance

Rs. 5000 In case of other employee entitled to minimum deduction of

18

(a) Entertainment allowance received

20% of basic salary excluding any other allowance

Rs. 7500

Entertainment allowance received during 1954-1955

Other Special Allowances

Children Education Allowance

Tribal Area Allowance

Hostel Expenditure Allowance

Remote Area Allowance

Compensatory Field Area Allowance

Counter Insurgency Allowance

Border Area Allowance

Hilly Area Allowance

Allowances for there is a provision of exempt in income tax are:

Allowance given to a citizen of India, who is a government employee, for

rendering services outside India

Allowances given to Judges of High Courts

Allowance given Judges of Supreme Court

Allowances received by an employee of UNO

What is Perquisite

under section 17(2) of Income Tax Act, 1961 perquisite is defined as:

Amount paid for the rent-free accommodation provided to the assessee by

his employer

Any concession in the matter of rent respecting any accommodation

provided to the assessee by his employer

19

Any benefit or amenity granted or provided free of cost or at concessional

rate in any of the following cases:

1. By a company to an employee, who is a director thereof

2. By a company to an employee being a person who has a substantial

interest in the company

3. By any employer to an employee whose income under the head 'Salaries'

exceeds Rs.24000 excluding the value of non monetary benefits or

amenities

4. Any sum paid by the employer in respect of any obligation which, but for

such payment, would have been payable by the assessee

5. Any sum payable by the employer whether directly or through a fund,

other than a recognized provident fund or EPF, to effect an assurance on

the life of the assessee or to effect a contract for an annuity

There are following perquisites which are tax free:

Medical facility

Medical reimbursement

Refreshments

Subsidized Lunch/ Dinner provided by employer

Facilities For Recreation

Telephone Bills

Products at concessional rate to employee sold by his/ her employer

Insurance premium paid by employer

Loans to employees by given by employer

Transportation

Training

House without rent

20

Residence Facility to member of Parliament, judges of High Court/

Supreme Court

Conveyance to member of Parliament, judges of High Court/ Supreme

Court

Contribution of employers to employee's pension, annuity schemes and

group insurance

Deductions from Salary income

certain deductions are available while determining the taxable salary income.

A) Standard Deduction

Income tax slabs 2009-2010 (for Men) in India:

Income Tax Slab (in Rs.) Tax

0 to 1,60,000 No Tax

1,60,001 to 3,00,000 10%

3,00,001 to 5,00,000 20%

Above 5,00,000 30%

Income tax slabs 2009-2010 (for Women) in India:

Income Tax Slab (in Rs.) Tax

0 to 1,90,000 No Tax

1,90,001 to 3,00,000 10%

3,00,001 to 5,00,000 20%

Above 5,00,000 30%

21

Income tax slabs 2009-2010 (for Senior Citizens) in India:

Income Tax Slab (in Rs.) Tax

0 to 2,40,000 No Tax

2,40,001 to 3,00,000 10%

3,00,001 to 5,00,000 20%

Above 5,00,000 30%

B) Professional Tax

Professional tax, which is paid, is allowed as deduction.

C) Arrears salary

if salary is received in arrears or in advance, it can be spread over the years to

which it relates and be taxed accordingly as per section 89(1) of the Income tax

Act.

Income from House Property

The annual value of property, consisting of any buildings or lands appurtenant

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 are chargeable to income tax, shall be chargeable

to income tax under the head "Income from House Property".

Is income from any property covered under this section?

No. Only the income from buildings or part of a building, held by the assessee as

the owner and the income from land appurtenant to the buildings is covered under

22

this section. Income from other property such as open land is out of the purview

of this section. Income from such land will be taxed under the head, 'income from

other sources.'

When the property is used by the owner for his business or profession, the income

of which business or profession is chargeable to income tax, the income of that

property is not charged in the hands of the owner. Similarly, when a firm carries

on business or profession in a building owned by a partner, no income from such

property is added to the income of the partner, unless the firm pays the partner

any rent for the same. If the assessee is not the owner of the building but is a

lessee and he sublets the property, he would be taxed under the head 'Income from

other sources'.

'Buildings' Includes

The term 'buildings' includes any building (whether occupied or intended for self-

occupation), office building, godown, storehouse, warehouse, factory, halls,

shops, stalls, platforms, cinema halls, auditorium etc. Income arising out of the

building or a part of the building is covered under this section.

"Land appurtenant"

Land appurtenant includes land adjoining to or forming a part of the building. It

would depend on the nature of the land, whether it is appurtenant to the residential

building, factory building, hotel building, club house, theatre etc. and will include

courtyards, compound, garages, car parking spaces, cattle shed, stable, drying

grounds, playgrounds and gymkhana.

23

Income arising from vacant land

Any income, arising out of vacant land, is not covered under this section even

though it may be received as rent, ground rent or lease rent. Such income would

be assessable as income from other sources. Even rent, arising out of open spaces,

or quarry rent, is taxed as income from other sources.

When is the income from house property wholly exempt from tax?

In the following cases, income from house property is completely exempt from

any tax liability:

A. Income from any farmhouse forming part of agricultural income;

B. Annual value of any one palace in the occupation of an ex-ruler;

C. Property Income of a local authority;

D. Property Income of an authority, constituted for the purpose of dealing

with and satisfying the need for housing accommodation or for the

purposes of planning development or improvement of cities, towns and

villages or for both. (The Finance Act, 2002, w.e.f. 1.4.2003 shall delete

this provision.);

E. Property income of any registered trade union;

F. Property income of a member of a Scheduled Tribe;

G. Property income of a statutory corporation or an institution or association

financed by the Government for promoting the interests of the members

either of the Scheduled Castes or Scheduled tribes or both;

H. Property income of a corporation, established by the Central Govt. or any

State Govt. for promoting the interests of members of a minority group;

I. Property income of a cooperative society, formed for promoting the

interests of the members either of the Scheduled Castes or Scheduled

tribes or both;

24

J. Property Income, derived from the letting of godowns or warehouses for

storage, processing or facilitating the marketing of commodities by an

authority constituted under any law for the marketing of commodities;

K. Property income of an institution for the development of Khadi and village

Industries;'

L. Self-occupied house property of an assessee, which has not been rented

throughout the previous year;

M. Income from house property held for any charitable purposes;

N. Property Income of any political party.

What are the deductions permitted to be made from Income from house

property"?

S 24 lays down that 'income chargeable under the head 'Income from house

property' shall be computed after making the following deductions:

1. A sum equal to 30% of the annual value;

2. If the property has been acquired, constructed, repaired, renewed or

reconstructed with borrowed capital, the amount of any interest payable on

such capital. Where such property has been acquired, constructed,

repaired, renewed or reconstructed with borrowed capital, on or after 1st

April 2003, the amount of deduction under this clause shall not exceed Rs

1, 50,000.

The amount of deduction shall not exceed Rs 30,000 where the property consists

of a house or part of a house, which the owner occupies for his own residence or

which cannot be occupied by him because his employment, business or profession

is carried on at any other place and he has to reside at that other place in a

building which is not his own.

25

Income from business or professions

Conditions for an income to fall under the head of income from profits and gains

of business

For charging the income under the head "Profits and Gains of business," the

following conditions should be satisfied:

There should be a business or profession.

The business or profession should be carried on by the assessee.

The business or profession should have been carried on by the assessee at

any time during the previous year.

Income chargeable to income tax under the head 'Profits and gains of

business or profession

The following income would be chargeable under the head "Profits and gains of

business or profession":

The profits and gains of any business or profession, which was carried on

by the assessee at any time during the previous year;

Any compensation or other payment, due or received by the following:-

A. Any person, by whatever name called, managing the whole or

substantially the whole of the affairs of an Indian company, at or in

connection with the termination of his management or the

modification of the terms and conditions relating thereto;

B. Any person, by whatever name called, managing the whole or

substantially the whole of the affairs in India of any other company, at

or in connection with the termination of his office or the modification

of the terms and conditions relating thereto;

C. Any person, by whatever name called, holding an agency in India for

any part of the activities relating to the business of any other person, at

26

or in connection with the termination of any agency or the

modification of the terms and conditions relating thereto;

D. Any person, for or in connection with the vesting in the Government,

or in any corporation owned or controlled by the Government, under

any law for the time being in force, of the management of any property

or business;

Income, derived by a trade, professional or similar association from

specific services performed for its members;

Profits on sale of a license granted under the Imports (Control) Order,

1955, made under the Imports and Exports (Control) Act, 1947;

Cash assistance (by whatever name called), received or receivable by any

person against exports under any scheme of the Government of India;

Any duty of customs or excise repaid or repayable as drawback to any

person against exports under the Customs and Central Excise Duties

Drawback Rules, 1971;

The value of any benefit or perquisite, whether convertible into money or

not, arising from business or the exercise of a profession;

Any interest, salary, bonus, commission or remuneration, by whatever

name called, due to, or received by, a partner of a firm from such firm.

Deductions allowed in computing income from profits and gains of business

or profession

S 30: The deductions that are allowed while computing income from 'profits and

gains from business or profession' in respect of rent, rates, taxes, repairs and

insurance for premises, which are used for the purpose of business or profession

while computing income from 'profits and gains from business or profession' are

as follows:

Where the premises are occupied by the assessee:

27

1. As a tenant, the rent paid for such premises; and further if he has

undertaken to bear the cost of repairs to the premises, the amount

paid on account of such repairs; excluding expenditure in the

nature of capital expenditure.

2. Otherwise than as a tenant, the amount paid by him on account of

current repairs to the premises; excluding expenditure in the nature

of capital expenditure.

Any sums, paid on account of land revenue, local rates or municipal taxes;

The amount of any premium, paid in respect of insurance against risk of

damage or destruction of the premises.

What deductions shall be allowed in respect of repairs and insurance of

machinery, plant and furniture?

S 31: The following deductions shall be allowed in respect of repairs and

insurance of machinery, plant and furniture:

The amount paid on account of current repairs thereto; excluding

expenditure in the nature of capital expenditure.

The amount of any premium, paid in respect of insurance against damage

or destruction thereof.

Income from Capital Gains

Capital Assets

S 2(14): Capital asset means property of any kind held by an assessee whether or

not connected with his business or profession. It however does not include the

following:

1. Any stock-in-trade, consumable stores or raw materials held for the

purpose of his business or profession;

28

2. Personal effects, i.e., movable property (including wearing apparel and

furniture, excluding jewellery), held for personal use by the assessee or

any member of his family dependent on him.

3. Agricultural land in India, not being land situated in the following:-

a. In any area which is comprised within the jurisdiction of a

municipality (whether known as a municipality, municipal

corporation, notified area committee, town area committee, town

committee, or by any other name) or a cantonment board and,

which has a population of not less than ten thousand according to

the last preceding census of which the relevant figures have been

published before the first day of the previous year; or

b. In any area within such distance, not being more than eight

kilometers, from the local limits of any municipality or cantonment

board referred to in item (a), as the Central Government may,

having regard to the extent of, and scope for, urbanization of that

area and other relevant considerations, specify in this behalf by

notification in the Official Gazette;

4. 6.5 per cent Gold Bonds, 1977, or 7 per cent Gold Bonds, 1980, or

National, Defense Gold Bonds, 1980, issued by the Central Government;

5. Special Bearer Bonds, 1991, issued by the Central Government;

6. Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified

by the Central Government.

The assets, which do not fall within the term "capital assets", and which can

give rise to a tax-free surplus

Any stock-in-trade, consumable stores or raw materials, held for the

purpose of his business or profession;

29

Personal effects, i.e., movable property (including wearing apparel and

furniture, excluding jewellery), held for personal use by the assessee or

any member of his family dependent on him;

Agricultural land in India, not being land situated in the following: -

o In any area which is comprised within the jurisdiction of a

municipality (whether known as a municipality, municipal

corporation, notified area committee, town area committee, town

committee, or by any other name) or a cantonment board and

which has a population of not less than ten thousand according to

the last preceding census of which the relevant figures have been

published before the first day of the previous year; or

o In any area within such distance, not being more than eight

kilometers, from the local limits of any municipality or cantonment

board referred to in item (a), as the Central Government may,

having regard to the extent of, and scope for, urbanization of that

area and other relevant considerations, specify in this behalf by

notification in the Official Gazette;

6.5 per cent Gold Bonds, 1977, or 7 per cent Gold Bonds, 1980, or

National, Defense Gold Bonds, 1980, issued by the Central Government;

Special Bearer Bonds, 1991, issued by the Central Government;

Gold Deposit Bonds, issued under the Gold Deposit Scheme, 1999

notified by the Central Government.

30

The method of computation of short-term and long-term capital gain, as

applicable from the assessment year 1993-94 onwards, is as follows:

Computation of Short-term capital

gain

Computation of Long-term capital

gain

1. Find out the full value of

consideration

1. Find out the full value of

consideration

2. Deduct the following:

  a. Expenditure incurred wholly and

exclusively in connection with such

transfer.

  b. Cost of acquisition. c. Cost of

improvement

2. Deduct the following:

  a. Expenditure incurred wholly and

exclusively in connection with such

transfer

  b. Indexed Cost of acquisition

  c. Indexed Cost of improvement.

3. From the resulting sum deduct the

exemption provided by section 54B,

54D and 54G.

3. From the resulting sum deduct the

exemption provided by section 54, 54B,

54D, 54EC, 54ED, 54F and 54G.

4. The balancing amount is the short-

term capital gain.

4. The balancing amount is the long-

term capital gain.

Full value of consideration: Whole price without any deduction whatsoever.

Expenditure incurred wholly and exclusively in connection with such transfer:

Expenditure incurred which is necessary to affect such transfer e.g. stamp duty,

registration etc.

Cost of acquisition of an asset: Value for which it was acquired. Expenses of

capital nature for completing or acquiring the title to the property may be included

in the cost of acquisition.

31

Cost of improvement:

a. In relation to goodwill of a business or a right to manufacture, produce or

process any article or thing, the cost of improvement is taken to be nil.

b. In relation to any other capital asset-

1. Where the capital asset became the property of the assessee before

April 1, 1981 the cost of improvement includes all expenditure of

capital nature incurred in making any addition/alteration to the

capital asset on or after April 1, 1981 by the owner.

2. In any other case, the cost of improvement refers to all expenditure

of a capital nature that is incurred in making any additions or

alterations to the capital asset by the assessee or the previous

owner.

What is the indexed cost of acquisition?

S 48 defines "indexed cost of acquisition" as the amount, which bears to the cost

of acquisition the same proportion as Cost Inflation Index for the year, in which

the asset is transferred, bears to the Cost Inflation Index for the first year in which

the asset was held by the assessee or for the year beginning on the 1st day of

April, 1981, whichever is later.

The Cost Inflation Index, in relation to a previous year, means such Index as the

Central Government may, having regard to 75% of average rise in the Consumer

Price Index for urban non-manual employees for the immediately preceding

previous year to such previous year, by notification in the Official Gazette.

32

What is the indexed cost of improvement?

S 48 defines indexed cost of improvement as the amount, which bears to the cost

of improvement the same proportion as Cost Inflation Index for the year, in which

the asset is transferred, bears to the Cost Inflation Index for the year in which the

improvement to the asset takes place.

Cost Inflation Index, in relation to a previous year, means such Index as the

Central Government may, having regard to 75% of average rise in the Consumer

Price Index for urban non-manual employees for the immediately preceding

previous year to such previous year, by notification in the Official Gazette,

specify in this behalf.

Income from other sources

1. Dividend;

2. Any annuity due or commuted value of any annuity paid under section

280D.

3. Any winning from lotteries, crossword puzzles, races including horse

races, card games and other games of any sort or from gambling or betting

of any form or nature whatsoever.

4. Any sum, received by the assessee from his employees as contributions to

any provident fund or Superannuation fund or any fund set up under the

provisions of the Employees State Insurance Act, 1948 (34 of 1948), or

any officer fund for the welfare of such employees, if such income is not

chargeable to income-tax under the head "Profits and gains of business or

profession";

5. Income from machinery, plant or furniture belonging to the assessee and

let on hire, if the income is not chargeable to income -- tax under the head

"Profits and gains of business or profession";

33

6. Where an assessee lets on hire machinery, plant or furniture belonging to

him and also buildings, and the letting of the buildings is inseparable from

the letting of the said machinery, plant or furniture, the income from such

letting, if it is not chargeable to income tax under the head "Profits and

gains of business or profession."

7. Any sum received under a Key man insurance policy, including the sum

allocated by way of bonus on such policy, if such income is not chargeable

to income tax under the heads "Profits and gains of business and

profession" or under the head "Salaries". (Key man insurance policy

means a life insurance policy taken by a person on the life of another

person who is/ was the employee of the 1st mentioned person or who

is/was connected in any manner whatsoever with the business of the 1st

mentioned person.)

So, basically "income from other sources" is the residuary head of income,

which takes within its ambit any income, which does not specifically fall

under any other head of income.

Deductions allowed under the head 'Income from other sources’

The income, chargeable under the head 'income from other sources,' shall be

computed after making the following deductions:

In the case of interest on securities, any reasonable sum, paid by way of

commission or remuneration to a banker or to any other person for the

purpose of realizing such dividend or interest on behalf of the assessee;

In the case of income, received by the assessee from his employees as

contributions to any provident fund or Superannuation fund or any fund

set up under the provisions of the Employees'' State Insurance Act, 1948,

or any other fund for the welfare of such employees, which is chargeable

34

to income tax under the head "Income from other sources" deductions so

far, as may be in accordance with provisions of S 36(1) (va).

In the case of income from machinery, plant or furniture belonging to the

assessee and let on hire, if the income is not chargeable to income -- tax

under the head "Profits and gains of business or profession or where an

assessee lets on hire machinery, plant or furniture belonging to him and

also buildings, and the letting of the buildings is inseparable from the

letting of the said machinery, plant or furniture, the income from such

letting, if it is not chargeable to income tax under the head "Profits and

gains of business or profession", deductions, so far as may, be in

accordance with the provisions of clause (a), clause (3)of Section 30,

Section 31, and subsections (1) and (2) of Section 32 and subject to the

provisions of S 38.

In the case of income in the nature of family pension, a deduction of a sum

equal to thirty three and one third per cent of such income or fifteen

thousand rupees, whichever is less.

Any other expenditure (not being capital expenditure) laid out or used

wholly and exclusively for the purpose of making or earning such income.

Deduction

Section 80CCC

Any individual who makes a contribution for any annuity plan of the Life

Insurance Corporation of India or any other insurer is eligible for a deduction of

the amount paid or Rs. 10,000, whichever is less. When an individual or his

nominee receives any amount under the following circumstances it will be taxed

as the income of the individual or his nominee, in the year of withdrawal or the

year in which the pension is received:

35

On the surrender of the annuity plan or

As pension received from the annuity plan.

The limit of investment is proposed to increase from Rs 10,000 to Rs

1,00,000 subject to overall cap of Rs 1,00,000 provided under section

80CCE.

Section 80CCD

the deduction for contributions to a pension scheme of the Central Government is

available only to those individual who have been employed by the central

government on or after 1st January 2004, and will be allowed for any amount

deposited in such a pension scheme. But, in this case, deduction of more than 10

per cent of the employee's salary shall not be allowed.

The contributions to the fund are also made by the Central Government.

Deduction will be available for any contribution which is made by the Central

Government or 10 per cent of the employee's salary, whichever is less.

When the individual or his nominee receives any amount out of the scheme which

meets the following descriptions, it shall be taxed in the hands of the recipient.

On closure/ opting out of the pension scheme; or

As pension received from the annuity plan.

The term 'salary' here includes Dearness Allowance (if considered for retirement

benefits), but it excludes other allowances and perquisites.

The aggregate deduction under the Sections 80C, 80CCC and 80CCD cannot

36

exceed Rs 1 lakh as whole.

Section 80D

Additional deduction of Rs 15,000 under Section 80D is allowed to an

individual who pays medical insurance premium for his/ her parent or

parents.

Any Premium which is paid for medical insurance that has been taken on the

health of the assessee, his spouse, dependent parents or dependent children, is

allowed as a deduction, subject to a ceiling of Rs 10,000.

Where any premium is paid for medical insurance for a senior citizen, an

enhanced deduction of Rs 15,000 is allowed. The deduction is available only if

the premium is paid by cheque.

Under section 80D, the deduction has been increased to Rs 15,000 and

for senior citizen it is now Rs 20,000.

Section 80DD

Deduction under this section is available to an individual who:

Incurs any expenditure for the medical treatment, training and

rehabilitation of a disabled dependant; or

Deposits any amount in schemes like Life Insurance Corporation for the

maintenance of a disabled dependant. An annuity or a lump sum amount is

paid to the dependant or to a nominee for the benefit of the dependant in

the event of the death of the individual depositing the money, from the

said scheme,

37

A deduction of Rs 50,000 is available. Where the dependant is with a severe

disability, a deduction of Rs 1,00,000 is allowed. (As per AY 2009-10)

If the death of the dependant occurs before that of the assessee, the amount in the

scheme is returned to the individual and is taxable in his hands in the year that it

is received.

An individual should furnish a copy of the issued certificate by the medical board

constituted either by the Central government or a state government in the

prescribed form, along with the return of income of the year for which the

deduction is claimed.

The term 'dependent' here refers to the spouse, children, parents and siblings of

the assessee who are dependent on him for maintenance and who themselves

haven't claimed a deduction for the disability in computing their total incomes.

This deduction is also available to Hindu Undivided Families (HUF).

Section 80DDB

An individual, resident in India spending any amount for the medical treatment of

specified diseases affecting him or his spouse, children, parents, brothers and

sisters and who are dependent on him, will be eligible for a deduction of the

amount actually spent or Rs 40,000, whichever is less.

Note: - For the complete list of disease specified, refer to Rule 11DD of the

Income Tax Rules.

For any amount spent on the treatment of a dependent senior citizen an individual

is eligible for a deduction of the amount spent or Rs 60,000, whichever is less is

38

available.

The individual should furnish a certificate in Form 10-I with the return of income

issued by a specialist working in a government hospital.

If any amount of medical expenditure is borne by the employer or is reimbursed

under an insurance scheme, the eligibility of the deduction is the reduction to that

extent. This deduction is also available to Hindu Undivided Families (HUF).

Section 80E

Deduction under section 80E of the Income-tax Act allowed in respect

of interest on loans taken for pursuing higher education in specified

fields of study to be extended covering all fields of study, including

vocational studies, pursued after completion of schooling.

Under this section, deduction is available for payment of interest on a loan taken

for higher education from any financial institution or an approved charitable

institution. The loan should be taken for either pursuing a full-time graduate or

post-graduate course in engineering, medicine or management, or a post-graduate

course in applied science or pure science.

The deduction is available for the first year when the interest is paid and for the

subsequent seven years. Up to March 2005, deduction was available for the

repayment of principal and interest aggregating to Rs 40,000 a year.

Section 80U

it is deduction in the case of a person with a disability. An individual who is

suffering from a permanent disability or mental retardation as specified in the

persons with disabilities (Equal Opportunities, Protection of Rights and Full

39

Participation) Act, 1995 or the National Trust for Welfare of Persons with

Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities Act, 1999,

shall be allowed a deduction of Rs 50,000. In case of severe disability it is Rs.

75,000.

The assessee should furnish a certificate from a medical board constituted by

either the Central or the State Government, along with the return of income for

the year for which the deduction is claimed.

40

CHAPTER THREE: - DESIGN OF RESARCH

E-filing of income tax return was introduced by Income tax department couple of

years ago. Using e-filing is a simple and very easy way of filing the return for

everyone. However, if you look at stats only 16% of tax payers file their return

through e-filing while the rest of the tax payers take the conventional physical

route.

There are several reasons for that, one being the penetration of computers and

accessibility of internet is very low in certain parts of India. However, even in

large metros where the accessibility of Internet is very much, only 30-35 percent

of the tax payers opt for filing their taxes online.

Thus the real problem is not the poor internet access or non availability of

computer. It is the mindset and misconception of the people which they have

about filing their tax returns online.

What is e-Filing?

• The process of electronically filing Income tax returns through the internet

is known as e-Filing.

• It is mandatory for Companies and Firms requiring statutory audit u/s

44AB to submit the Income tax returns electronically from AY 2007-08

onwards.

– Any Company/Firm requiring statutory audit u/s 44AB return

submitted without an e-Filing receipt will not be accepted.

• E-filing is possible with or without digital signature.

41

• Digital signature is mandatory for Companies from AY2010-11 onwards.

Types of e-Filing

• There are three ways to file returns electronically

• Option 1: Use digital signature in which case no paper return is required to

be submitted

• Option 2: File without digital signature in which case ITR-V form is to

submitted to CPC Bangalore within 120 days of efiling. This is a single

page receipt cum verification form.

Option 3: File through an e-return intermediary who would do e-Filing and also

assist the Assessee file the ITR V Form.

42

Process of Efilling

43

44

e-Filing Process – At a glance

• Select appropriate type of Return Form

• Download Return Preparation Software for selected Return Form.

• Fill your return offline and generate a XML file.

• Register and create a user id/password

• Login and click on relevant form on left panel and select "Submit Return"

• Browse to select XML file and click on "Upload" button

• On successful upload acknowledgement details would be displayed. Click

on "Print" to generate printout of acknowledgement/ITR-V Form.

• Incase the return is digitally signed; on generation of "Acknowledgement"

the Return Filing process gets completed. You may take a printout of the

Acknowledgement for your record.

• In case the return is not digitally signed, on successful uploading of e-

Return, the ITR-V Form would be generated which needs to be printed by

the tax payers. This is an acknowledgement cum verification form (ITR-

V). A duly signed ITR-V form should be submitted to CPC using

Ordinary Post or Speed Post within 120 days of transmitting the data

electronically. This completes the Return filing process for non-digitally

signed Returns.

45

CHAPTER FOUR: CONCLUSION AND SUGGESTION

All registered e-filing portals send the tax returns uploaded by assesses to the

Income Tax Department. The government website uses the latest software to

make it fully secure. For example www.taxyogi.com uses 128 bit encryption to

transmit data. There is very little chance of it being hacked.

You need digital signature only when you file your return completely online. You

don't need one if you e-file your return and then post a signed ITR V form to the

income-tax office in Bangalore. The new rule, which requires a taxpayer to send

the ITR V by post within 120 days, has made the submission process very simple

and convenient.

This is purely a fictitious assumption. Every year income tax department pull out

random list of people to scrutinize. Whether the person has filed income tax

returns electronically or through traditional paper filing method have no bearing

on this list. In fact, digital filing can help in automatically tallying Returns

Particulars filed by you and that filed by your Employer, Banks and other

Financial Institutions.

E-filing through the government site is free but it's difficult to use in terms of

usability. Some private portals also offer free filing. For example you can avail

free e-filing at www.taxyogi.com. Others offer various packages. Alternately a lot

of people utilize the service of tax professionals and chartered accountants which

may be much more expensive. Also, consider the cost of your time and the

environmental cost that mother earth pays for every return that is filed physically.

E-filing is also an environment friendly way.

E-filed returns can be revised in the same way as those filed in any other manner.

All e-filing portals allow you to file revised tax returns.

46

So e-filling is a safest, simplest, fast, and accurate way to income tax return.

BIBLIOGRAPHY

47

www.finance.indiamart.com

www. incometax india.gov.in

www. incometax indiapr.gov.in

BOOKS REFFERED