Rise of American Accounts. "Hollywood. "

Direct Tax

Features of Income. The following features of income can help a person to understand the concept of income :

1. Definite source. Income has been compared with a fruit of a tree or a crop from the field. Fruit comes from a tree and crop from fields. Thus the source of income is definite in both cases. The existence of a source for income is somewhat essential to bring a receipt under the charge of tax.

2. Income must come from outside. No one can earn income from himself. There can be no income from transactions between head office and branch office. Contributions made by members for the mutual benefit and found surplus cannot be termed as income of such group.

3. Tainted income. Income earned legally or illegally remains income and it will be taxed according to the provisions of the Act. Assessment of illegal income of a person does not grant him immunity from the applicability of the provisions of other Act.

4. Diversion of income vs . application of income. Diversion of income means that a part of the income or whole of such income does not reach the assessee. It is diverted to some other person due to some legal obligation. Whereas the application of income means after receiving the income spending it. The amount paid by a person to his step-mother out of rent of property which he has inherited under the provisions of will from his father, is diversion of income but if there is no such provision in the will and he promises to pay some money to his step-mother, it is application of income.

5. Temporary or permanent. Whether the income is permanent or temporary, it is immaterial from the tax point of view.

6. Re - imbursement of payment made on behalf of others. Any payment received as re - imbursement of any payment or expense made on behalf of any other person is not treated as income. However, any reason - imbursement of any personal expense incurred for self is an income.

7. Dispute regarding the title. In case a person is receiving some income but his title to such receipts is disputed, it will not free him from tax liability. The recipient of such income has to pay tax.

8. Income in money or money's worth. The income may be in cash or in kind. It is taxable in both cases. In case income is earned in - kind, it's valuation is to be made as per Income-tax Rules.

In the absence of any specific rule, it's valuation is to be made as per market price.

9. Income of an assessee, i.e., priest, from offerings made by the devotees from time to time has been held as income but any spontaneous offerings made out of respect, love and affection is of personal nature, hence not included in income.

10. Treatment of Gifts. W.e.f. 1-10-2009 in case of individual or H.U.F., subject to certain exceptions, the following three kinds of gifts are treated as income under the head Other Sources u/s 56(2)(8):

a. Monetary Gifts. Any sum of money received from any person or persons without consideration exceeding Rs 50,000 in aggregate during a previous year, then

Income = The whole of such sum of. money

b. Gift of immovable property. Any immovable property received from any person without consideration having stamp duty value exceeding Rs 50,000 , then

Income = The stamp value of such immovable property

c. Gift of property ( specified ) other than immovable property

Case 1. Without consideration. Any property ( specified ) other than immovable property received from any person without consideration, the aggregate F. M. V. of which exceeds Rs 50,000, then

Income = The whole of the aggregate F. M. V. of such property.

Case 2 . For inadequate consideration. Any property ( specified ) other than immovable property received from any person for inadequate consideration i.e., for a consideration less than the aggregate F. M. V. of the property and such consideration is less than the aggregate F. M. V. of the property by an amount exceeding Rs 50,000 , then

Income = The aggregate F. M. V. of such property - Actual consideration .

However, the above gift received from a relative, on the occasion of marriage of individual , under will/ inheritance, in contemplation of death of the payer, received from specified funds / institutions are not treated as income of the recipient.

11. Income includes loss. Income in monetary terms is ' positive ' and can be called ' positive income ' . However, ' loss ' represents ' negative income ' and is very well included in the income. A loss can be set off or adjusted against positive income as per rules provided under Income Tax Act.

12. Surplus from mutual activity. Mutual activity refers to an activity or value where contributions are made to a common pool / fund. The contributors are also entitled to any surplus left in that pool / fund. Such a surplus cannot be deemed as income unless specifically provided under the Act. For example in the following cases, surplus from mutual activity is treated as income :

a. Income of a trade, professional or similar association by rendering specific services to its members [ Section 28 (3) ]

b. Profits and Gains derived from any insurance business carried on by a mutual insurance company or a cooperative society.

c. Profits and gains derived from any banking business ( including providing credit facilities) carried on by a cooperative society with its members.

13. No Double Taxation of Income. Unless specifically provided in the Income Tax Act, 1961 , an income cannot be put to tax twice in the hands of same person.

Tax Treatment of Income. For the purposes of treatment of income for tax purposes it can be divided into three categories :

A. Taxable Income. These incomes form part of total income and are fully taxable. These are treated u/s 14 to 69 of the Act. These are salaries, rent, business profits, professional gain, capital gain, interest, dividend, winnings from lotteries, races etc.

B. Exempted Incomes. These incomes do not form part of total income either fully or partially. Hence no tax is payable on such incomes.

C. Rebateable ( Tax free ) Incomes. These incomes form part of total income and are fully taxable. Tax is calculated on total income out of which a rebate of tax at average rate is allowed. The rebateable incomes given u/s 86 of the Act is :

Share of income received by a member of an association of persons provided the total income of such AOP is assessed to tax at the rates applicable to an individual.

11. Heads of Income. [ Section 14 ]

Section 14 of Income-tax Act 1961 provides for the computation of total income of an assessee which is divided under five heads of income . Each head of income has its own method of computation. These five heads are :

1. Income from ' Salaries '

2. Income from ' House Property '

3. Income from ' Profits and Gains of Business or Profession '

4. Income from ' Capital Gains ' and

5. Income from ' Other Sources ' .

Income from all these heads shall be computed separately according to the provisions given in the Act. Income computed under these heads shall be aggregated after adjusting past and present losses and the total so arrived at is known as ' Gross Total Income '.

Out of Gross Total Income, Income - tax Act 1961 allows certain deductions under section 80 . After allowing these deductions the figure which we arrive at is called ' Total Income' and on this figure tax liability is computed at the prescribed rates.

These five heads of income are water tight compartments. Income from one source of Income, which is to be included in a particular head, cannot be included in any other head. Each head of income has its own deductions. After computing income from various sources of income within a particular head it's own deductions are allowed and thus we arrive at income from that head.

12. Gross Total Income [ Section 80B(5) ]

Section 14 of the Act provides that for the purpose of charge of Income-tax and computation of total income, all incomes shall be classified under following five heads of income :

1. Income under the head " Salaries "

2. Income under the head " House Property "

3. Income under the head " Profits and gains of Business or Profession ".

4. Income under the head " Capital Gains "

5. Income under the head " Other Sources"

After aggregating income under various heads ( Duly applying provisions) , losses are adjusted and the resultant figure is called " Gross Total Income " ( GTI ). ' Gross Total Income ' may also be understood as the total income of an assessee before making any deduction under section 80C to 80U of the Act. Thus,

G.T.I. = Salary Income add House Property Income add Business or Profession Income add Capital Gains add Other Sources Income less Set-off of Losses.

13. Total Income [ Section 2 (45) ]

' Total income ' means the total amount of income referred to in section 5, computed in the manner laid down in this Act. In other words, ' Total Income ' means income remaining after allowing deductions ( i.e., U/s 80C to 80U) from Gross Total Income. It is important to note that income tax is charged on total income at prescribed rate (s). Thus,

Total income = Gross Total Income (GTI) less Deductions under Chapter VIA ( i.e ., Secs 80C to 80U)

. Rounding off of Total Income [ Section 288A ]

Total income or total taxable income of the assessee shall be rounded - off to the nearest multiple of 10 , i.e ., if the last figure in the total income is five or more, it would be raised to the next higher multiple of 10 and if the last figure of total income is less than five, the same shall be reduced to lower amount which should be a multiple of ten.

. Rounding Off of Tax [ Section 288 B ]

As per the Taxation Laws ( Amendment) Act, 2005 , ( w. e. f. July 13 , 2006 ) the amount of tax payable including tax deductible at source : advance tax, interest, fine, penalty, the amount of any refund etc. shall be rounded to the nearest rupee ten, i.e., last figure of rupee five or above shall be raised to rupee ten whereas if the last figure is upto rupee four and nintynine paisa, it shall be ignored.

14. Assessment Year [ Section 2(9) ]

" Assessment year " means the period of 12 months commencing on the 1st day of April every year.

In India, the Govt. maintains its accounts for a period of 12 months i.e from 1st April to 31st March every year. As such it is known as financial year. The income tax department has also selected same year for its assessment procedure .

The Assessment year is the financial year of the Govt. of India during which income of a person relating to the relevant previous year is asssesssed to tax. Every person who is liable to pay tax under this Act. files return of income by prescribed dates. These returns are processed by the income tax department officials and officers. This processing is called assessment. Under this income returned by the assessee is checked and verified.

Tax is calculated and compared with the amount paid and assessment order is issued. The year in which whole of this process is undertaken is called assessment year.

15. Previous Year [ Section 2 (34) r. w. Section 3 ]

The term previous year is very important because it is the income earned during previous year which is to be assesssed to tax in the assessment year. As the word ' Previous ' means ' coming before ' , hence it can be simply said that the previous year is the financial year preceding the assessment year e. g. for assessment year 2016-17 the previous year should be the financial year ending on 31st March 2016.

In simple words, it may be said that the year in which income is earned is called previous year and the next year in which such income is computed and put to tax is known as assessment year. For example, income earned by an assessee in the previous year 2015-2016 is taxable in the assessment year relevant to the previous year 2015-2016 and so it is taxable in the assessment year 2016-2017. The simple rule is that the income of a previous year is taxed in its relevant assessment year subject to certain exceptions.

a. Previous year in case of a continuing business. It is the financial year preceding the assessment year. As such for the assessment year 2016-2017, the previous year for a continuing business 2015 - 16 i.e 1-4-2015 to 31-3-2016.

b. Newly set up business or profession. The assessee is free to set up a new business or start a new profession on any day and the first previous year in case of a newly set up business / profession or newly created source of income shall be on the day it is set up and end on 31st March next following. So the first previous year may be of 12 months or less than 12 months but all subsequent previous years shall be of 12 months duration and always be starting on 1st April each year.

c. In case of a newly created source of income. In such case the previous year shall be the period between the day on which source comes into existence and 31st March next following :

Important Point : With effect from A. Y. 1989-90, all assessses are compulsorily required to follow the financial year as the previous year for income - tax purposes for any or all sources of income. However, prior to that, assessses were allowed to follow different previous years for different sources of income.

.EXCEPTIONS.

The general rule is that the income earned during a previous year is taxed in its relevant assessment year. But there are certain exceptions to this general rule. In these cases income is taxed in the same year in which it is earned. These exceptions are :

1. Shipping business income of non - resident ship - owners [ Section 172 ]

In case a non - resident shipping company, which has no representative in India, earns income by carrying passengers, livestock, mail or goods loaded from any Indian port, such ship will not be allowed to leave the port till the tax on such income has been paid or alternative arrangements to pay tax are made. As such income is assessed to tax at current year's rates. 7.5% of the amount received or amount receivable by the ship - owners or charters as fare / freight ( including amount on account of demmurage charge or handling charge) shall be deemed to be the income accruing in India on account of such carriage.

The master of the ship is required to furnish a return of such income to the Assessing Officer before the departure of the ship. However, such return can be furnished within 30 days of the departure of the ship from Indian port if the Assessing Officer is satisfied that is not possible to submit such return before the departure of the ship and satisfactory arrangements have been made for filing of the return and payment of tax by any other person.

A port clearance certificate shall not be granted to the ship until the Collector of Customs or other officer duly authorised to grant the same is satisfied that tax has been duly paid or that satisfactory arrangements have been made for the payment of tax and filing of return within 30 days of the departure of ship from Indian port

Income of such person shall be computed as per section 44B.

2. In case of persons leaving India [ Section 174 ]

In case I. T. O. has the reasons to believe that an individual will leave India with no intention to return during the current assessment year, the total income of such individual for the period between the expiry of last previous year and till the date of his departure, will be taxable in the current assessment year.

3. Assessment of any association of persons, body of individuals or Artificial Juridical person formed or established only for a limited period [ Section 174A ]

In case an Assessing Officer finds that any association of persons, body of individuals or Artificial Juridical person has been formed or established only for a limited period or for a particular event and it is likely to be dissolved or discontinued in the same year after the accomplishment of such event or purpose, the assessment of such person can be made in same year.

4. In case of persons who are likely to transfer their assets to avoid tax [ Section 175 ]

If it appears to the I. T. O. that any person is likely to sell, transfer, dispose of or to part with any of his assets with the intention to avoid payment of any tax liability, he may commence proceeding to assess the income for the period between the expiry of last previous year and the date of commencement of such proceedings.

5. In case of discontinued business [ Section 176 ]

In case any business or profession is discontinued during an assessment year, the income of the period from the expiry of last previous year till the date of discontinuation may be assessed to tax in the current assessment year at discretion of the assessing officer.