Concepts related to income/income tax Flashcards
Sources of Income Tax Law
Income Tax Act, 1961
Income tax rules 1962
Notifications - Delegated legislation (power given to executive) issued by the CBDT, binding and have equal force of law as the rules
Circulars by the CBDT - merely clarifications and not binding
Case Laws
Manuals
Self Contained IT Act
Dispute Resolution:
CIT, CIT Appeal
AO
ITAT
What is income?
Income only looks at receipts and not receipts minus expenditure.
What are the five heads of income? Why do we need them?
There cannot be a universal rule for computation of income from all sources. There are five heads:
1. Salary
2. House Property
3. PGBP
4. Capital Gains
5. Other Sources
They are mutually exclusive, self contained. No income can fall under more than one head. However, in practice, this is not followed.
Structure of Computation of Total Income
Dear - Definition of Income under Section 2(24)
Professor - Person + Taxable Income (Section 10)
Really - Residential Status
Shows - Scope of total income
How - Head of income determination
All - Aggregation of income
Calculations - Clubbing
Systematically - Set off/Carry forward
Generate - Gross Total Income
Deductions - Deductions
Computation of Tax and other processes
- Calculate Total Income
- Apply the tax rate
- Get the tax amount
- Deductions in the form of relief/rebates. Add cess and surcharge
- Post deductions, one arrives at the net tax liability.
- Deduct TDC, TCS, Advance Tax, get credit
- Payable amount because 5-6. If 5 is less than 6, then you get surplus sent back to you.
- File return
- Notice
Types of Returns
Section 139
Regular Return
Return of loss
Belated Return (filed after due date)
Revised Return (filed any time before return is being assessed by dept)
139(5) filed in response to AO
Due date to file regular return
Company and other persons whose accounts need to be audited - October 31st
Every person entered into international transaction or specified domestic transaction - November 30
Any other person - July 31st
Fees for late filing
5000, but if income does not exceed 5 lakh, then 1000.
What are exemptions and dedcations
Refer to ways in which taxpayers can reduce their taxable income and reduce the amount of tax they owe. Exemptions are completely exempt from tax. Certain types of income such as agricultural income are exempt from tax up to a limit. This results in zero tax liability. Deductions are amounts that can be subtracted from a taxpayer’s total income to arrive at their total income.
Difference between Deduction and Exemption
- Counted (Exemption not counted in gross total income, deduction subtracted)
- Time (comes before taxation, comes after taxation)
- Loss (does not recognize in exemption, When filing deductions, you recognise losses. No income tax if income below a certain amount)
- Assets (Losses not recognised, department not concered if you get losses or profit. In case of deductions, losses are recognised and set offs are allowed in the current FY, and you can also carry it forward to adjust in income in the next FY. Losses therefore can be assets).
What is clubbing of income
Under section 64, the income tax act specifies certain cases where the income of one person is statutorily required to be included in the income of another person if some conditions are satisfied. Created to prevent tax avoidance, sometimes people make transfers in other person’s name.
Husband wife clubbing
in case of transfer between spouses without consideration, the income of such assets is clubbed in the hands of the transferor.
Transfer of income without transfer of asset
The asset is not transferred, the income generated is transferred - Clubbing will take place
Transfer of asset but recovable
income will taxed in the hand of the transferor, but not if the asset is not revocable in the life of the beneficiery, or in the lifetime of the transferee.
Remuneration to spouse from a concern in which individual has substantial interest.
What is substantial interest? During the previous year if at ANY TIME the individial or his relatives held not less than 20% (20% or more) equity shares with voting rights or 20% or more share in profits.
Would be clubbed in the individual
Clubbing of loans?
Imagine one spouse (let’s say A) runs a successful business. Spouse B doesn’t really work in the business but receives a large salary from it. Tax authorities might see this as a way for Spouse A to reduce their tax liability by shifting income to Spouse B, who might be in a lower tax bracket. The clubbing rules for remuneration are designed to prevent this.
However, if Spouse B lends their own money to Spouse A’s business and earns interest, this is considered a genuine financial transaction and the interest income is taxed in Spouse B’s hands, not clubbed with Spouse A’s income under this specific remuneration rule. Similarly, dividends earned by Spouse B from shares they own are their income, not linked to Spouse A’s business operations in the same way as remuneration for work.
Minor Clubbing
If the minor is a person with disability, no clubbing. If not, clubbing with the parent whose income is higher. If marriage does not subsist, then the clubbing is with the parent who maintains the child.
What happens when business incurs losses
Tax liability can be reduced if a business incurs losses since expenditure is higher than receipts in that case.
Set off meaning
Adjusting the losses incurred by a person against his profit or income in a particular assessment year. Can be adjusted within multiple sources in the same head or across different heads.
Exception for set offs?
Losses under the head of PGBP cannot be set off against the salary head. This acts as a safeguard for the government.
Carry Forward
If some losses are not set off and remain unabsorbed, because the assessee has not gained required profit or because the income generated is also less, the losses can be carried forward to the next year. It can only be set off under the head where it was incurred.
Carry forward and return
Return must be filed within the stipulated time. If return is not filed within the time then no carry forward allowed. Cannot be backdated or rectified.
What is GTI
Section 80 B (5) defines GTI. includes income received or receivable by you in the previous year adjusted for clubbing and carry forward amounts from previous years. DOES NOT include deductions from Section 80C to 80U.
