Friday, November 08, 2013

Income Tax Basic - Short Notes

Q. Write short notes on: (a) Assessment year (b) Previous Year (c) Charge of income tax (d) Capital asset  (e) Agricultural income (f) Person (g) Assessee (h) Revenue Vs Capital expenditure (i) Gross Total Income (j) Capital receipts (k) Revenue Receipts Vs Capital Receipts (l) Tax Return (m) Method of accounting

Ans: (a) Assessment Year: [Sec. 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. 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 a person relating to the relevant previous year is assessed 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 under taken is called Assessment Year. At present the Assessment Year 2013-2014 (1-4-2013 to 31-3-2014) is going on.
(b) Previous Year: [Sec. 3]
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 2013-2014 the  Previous Year should be the Financial Year ending 31st March 2013. The term previous year is very important because it is the earned during the previous year is to be assessed to tax in the assessment year. The simple rule is that the income of a previous year is taxed in its relevant assessment year. At present the previous Year 2012-2013 (1-4-2012 to 31-3-2013) is going on.

(c) Charge of Income Tax (Sec. 4)
Section 4 is the charging section for the Income tax Act, 1961 (the Act). It provides for the charge and collection/ payment of Income Tax India. The important Provisions of this section are:
Ø  Where any Central Act enacts for any Assessment Year that income-tax shall be charged at any rate or rates,
Ø  Income-tax at that rate or rates (including additional tax) shall be charged for that year in accordance with and subject to all the provisions of the Act.
Ø  In respect of the Total Income of the Previous Year of every Person
Ø  However, if by virtue of any provision of the Act, Income Tax India is to be charged in respect of the income of a period other than the previous year, then it shall be charged accordingly.
Ø  The Income-tax chargeable as above shall be deducted at source or paid in advance, if so required under any provision of the Act.

(d) Meaning of Capital Assets under Sec. 2(14) means:
Capital assets means Property of any kind held by an assessee which can be sold including property of his business or profession,
Except the Following:
1. Stock-in-trade, consumable stores or raw materials held for the purpose of business or profession.
2. Personal movable properties viz. furniture, motor vehicles, refrigerators, musical instruments etc. held for personal use of the assessee or his family. But personal property does not include the following:
Ø  Jewellery
Ø  Residential house property
Ø  Archaeological collections, drawings, paintings, sculptures, or any work of art.
3. Rural Agricultural land:
Ø  Land within the jurisdiction of a municipality or cantonment board having population of 10,000 or more or
Ø  Land situated within 8 kilometers from the local limits.
4. Special Bearer Bonds, 1991, 6.5% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or National Defense Bonds, 1980, Gold deposit bonds issued under Gold Deposit Scheme, 1999. It is not necessary that the assessee should be the initial subscriber to the Gold Bonds.

(e) Agriculture Income [Section 2 (1A)]
Agriculture income is fully exempted from tax u/s 10(1) and as such does not form part of total income. As per Section 2(1A) agriculture income includes:
a)      Any rent or revenue derived from land which is situated in India and is used for agricultural purpose;
b)      Any income derived from such land by agriculture or by the process employed to render the product fit for market or by sale of such produce by the cultivator or receiver of rent in Kind.
c)       Any income derived from any building provided the following conditions were satisfied:
Ø  The building is or on the immediate vicinity of the agricultural land;
Ø  It is occupied by the cultivator or receiver of rent or revenue
Ø  It is used as a dwelling house or store house or out house ;
Ø  The land is assessed to land revenue and it is not situated within the specified area.

(f) Person [Section 2(31)]
Person includes seven types of persons namely:
a.       An individual;
b.      An Hindu undivided family (HUF);
c.       A company;
d.      A firm;
e.      An association of persons (AOP) or a body of individuals (BOI);
f.        A local authority;
g.       Every artificial juridical person not falling within any of the preceding sub clauses.
The 2 basic differences between AOP and BOI are:
a) In BOI there are only individuals but in AOP there can be any type of persons.
b) BOI is creation of law whereas AOP can be created by different persons coming together for doing some income producing activity on the voluntary basis.

(g) Assessee [Section 2 (7)]
To mean a person by whom any tax or any other sum of money payable under the Act and include:
i)        Every person in respect of whom any proceeding has been initiated under the act for the assessment of his income or the income of any other person.
ii)       A person who is deemed to be assessee under any provision of the Act.
iii)     A person who is deemed to be an assessee in default in any of the provision of the Act.
The above explanation divides various types of assessee into three categories:
(a)    Ordinary assessee
(b)   Representative assessee or deemed assessee
(c)    Assessee-in-default

(h) Revenue Vs Capital Expenditure
Revenue Expenditure: Revenue expenditure is outlay or expenses incurred in the day to day running of a company. In most cases revenue expenditure involves the procurement of services and goods that will be used within a financial year. Revenue expenditure does not improve or increase the income generating abilities of a company rather at best it leads to the maintenance of the current organisational revenue generating capacity.
All expenses of a revenue nature are recorded in the profit and loss account as either operating expenses, marketing and selling expenses and administrative expenses. Revenue expenses play a role in determining the profit earned or a loss by a company.
Revenue expenses are routine and recurring in nature and some examples of revenue expenditure include payments in staff wages and salaries, heating and lighting, depreciation, legal and professional fees, travel and subsistence, insurance, administrative expenses, most of marketing and public relations expenses, audit fees, office supplies, staff training costs, staff recruitment costs and minor or immaterial items of equipment.

Capital Expenditure: Capital expenditure represents outlay on fixed assets. Capital expenditure can be outlay of resources on the investment of long-term income generating capability of the company. Investment in fixed assets will lead to an increase or improvement in the investing company's revenue generating capacity. Capital expenditure can also be in the form of significant acquisitions or purchases of more expensive items of equipment that will last longer than a financial year.
All capital expenditure is recorded on the balance sheet. Capital expenditure will be depreciated or amortised annually to ensure that an expense is charged to the profit and loss account to reflect the capital expenditure's usage by the company.
Some of the examples of capital expenditure include outlay on land and buildings, plant and equipment, vehicles, computer equipment, product development costs, finance leases and software development costs.

General Principles cum difference between capital and revenue expenditure
To decide whether expenditure is capital and revenue in nature the following points should be considered. 
1.      Acquisition of Fixed Assets v. Routine Expenditure- Capital expenditure is incurred in acquiring extending or improving a fixed asset, whereas revenue expenditure is incurred in the normal course of business as business expenditure.
2.      Several previous years vs. one previous year- Capital expenditure produces benefits for several previous years, whereas revenue expenditure is consumed within a previous year.
3.      Improvement v. Maintenance- Capital expenditure makes improvements in earning capacity of a business. Revenue expenditure, on the other hand, maintains the profit making capacity of a business.
4.      Non-recurring v. Recurring- usually capital expenditure is a non-recurring outlay, whereas revenue expenditure is recurring outlay. 

(i) Gross Total Income
Section 14: As per section 14, all income, for purposes of income-tax, will be classified under the following heads of income.
(i)      Salaries,
(ii)    Income from House Property,
(iii)   Profits and gains of business or profession
(iv)  Capital gains
(v)    Income from other sources
Aggregate of incomes computed under the above 5 heads, after applying clubbing provisions and making adjustments of set off and carry forward of losses, is known, as gross total income (GTI) [Sec. 80B]

(j) Capital Receipts
A receipt in lieu of source of income is a capital receipt. For e.g., Compensation for the loss of employment is a capital receipt. Capital receipt is generally referable to fixed capital. For e.g., Sale price on the sale of assets, which assessee uses as a fixed asset in his business is a capital receipt. Capital receipts are never taxable. That’s why amount received from insurance company at the time of maturity is not taxed under Section 10(10D). Similarly loan taken is also not taxed. However, some of the capital receipts are taxable since they have been specifically provided in the definition of Income such as tax on Capital gains on sale of Capital asset. 

(k) Revenue Vs Capital Receipts:
Any receipt of money can either be categorized as revenue or capital. Revenue receipts are always fully taxable unless specific exemption has been provided for that. Capital receipts are never taxable. That’s why amount received from insurance company at the time of maturity is not taxed under Section 10(10D). Similarly loan taken is also not taxed. However, some of the capital receipts are taxable since they have been specifically provided in the definition of Income such as tax on Capital gains on sale of Capital asset.

Capital Receipt
Revenue Receipts
Ø  Capital receipt is generally referable to fixed capital. For e.g., Sale price on the sale of assets, which assessee uses as a fixed asset in his business is a capital receipt
Ø  Revenue receipt refers to circulating capital. For e.g., Sale price of the stock in trade is a revenue receipt
Ø  Payment received towards the compensation for the extinction of a profit earning source is a capital receipt
Ø  Payment received to compensate loss of earnings is a revenue receipt
Ø  A receipt in lieu of source of income is a capital receipt. For e.g., Compensation for the loss of employment is a capital receipt.
Ø  A receipt in lieu of income is a revenue receipt
Ø  Capital receipts are exempt from tax unless they are expressively taxable like in the case of capital gains
Ø  Revenue receipts are always taxable unless expressly exempt from tax under section 10

(l) Tax Return
The tax form or forms used to file income taxes with the Internal Revenue Service (IRS). Tax returns often are set up in a worksheet format, where the income figures used to calculate the tax liability are written into the documents themselves. Tax returns must be filed every year for an individual or business that received income during the year, whether through regular income (wages), interest, dividends, capital gains, or other profits.
A return of excess taxes paid during a given tax year; this is more accurately known as a "tax refund".

(m) Method of Accounting [Section 145]
As per section 145, for income-tax purposes, only one of the following two methods of accounting can be followed:
a)      Mercantile system;
b)      Cash system.
Further, the profits from business and profession will have to be computed in accordance with accounting standards which may be prescribed by the Central Government from time to time. The Central Government has since notified the following two accounting standards to be followed by all assessee who are following mercantile system of accounting:
a)      Accounting Standard I relating to disclosure of accounting policies.

b)      Accounting Standard II relating to disclosure of prior period and extraordinary items and changes in accounting policies.