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Income Tax
Liability 1.1
The legal position discussed is as applicable for financial year 2007-08
(Assessment Year 2008-09) unless specified otherwise. Income
tax is levied under Entry No. 82 of List I of Seventh Schedule to
Constitution (Union List), which reads, ‘Tax
on income other than agricultural income’. Entry No. 46 of List II of Seventh Schedule to
Constitution (State List) reads, ‘ Taxes
on agricultural income ‘. Income Tax Act, 1961
imposes tax on income other than agricultural income. Tax on
agricultural income can be imposed only by State Governments. Section 4 of Income
Tax Act, which is the charging section, states that where any Central
Act enacts that income tax shall be charged for any assessment year at
any rate or rates, income tax at that rate or those rates shall be
charged for that year in accordance with, and subject to the provisions
(including provisions for the levy of additional income tax) of this Act
(i.e. Income Tax Act) in respect of the total income of the previous
year of every person. Income tax
Rates fixed under Finance Act every year -
The ‘Central Act’ as referred to in section 4 of Income Tax Act is
the ‘Finance Act’ enacted every year. Income Tax is payable by every
assessee at the rates prescribed by Finance Act every year. The Finance
Bill is presented at the time of presenting Budget, usually on last day
of February every year. The relation between Finance Act and Budget is
so close that often people associate budget only with taxation. Really,
taxation is only one of the aspects of the Budget. 1.1-1 Who is
assessee ? - Assessee
means a person by whom any tax or any other sum of money is payable
under Income tax Act. It includes deemed assessee [section
2(7) of Income Tax Act] ‘Person’ includes
* Individual * HUF * Company * Partnership Firm * Association of Persons
(AOP) or body of individuals whether incorporated or not * Local
Authority like Municipality etc. * Artificial Judicial person not
falling in any of the aforesaid categories e.g. a Hindu deity [section
2(31) of Income Tax Act] 1.1-2
Different heads of income - All income is classified under
following heads of income - * Salaries * Income from House property *
Profits and gains of business or profession * Capital Gains * Income
from other sources (e.g. interest on securities, lotteries, races)
[section 14 of Income Tax Act] Calculation of
income tax - Income from
each of these sources is first calculated. All this income is added to
find out total income of the assessee. Permissible deductions are
reduced and then income-tax payable is calculated at the prescribed
rates. Income from one head
can be set off against loss from other head, unless specifically
prohibited. In Rajasthan State Warehousing Corporation v. CIT
2000 AIR SCW 629, it was held that if income is derived from various
heads, assessee is entitled to claim deduction permissible under
respective head whether or not computation under each head results in
taxable income. If income to assessee arises under any of the heads of
income but from different items e.g. different house properties or
different securities etc., and income from one or more items alone is
taxable whereas income from the other item is exempt under the Act, the
entire permissible expenditure in earning the income from that head is
deductible. - . - If assessee carries business in various ventures,
entire expenditure incurred on all ventures is deductible if all
ventures constitute one business 1.1-3 Previous
Year and Assessment Year -
One very confusing aspect of Income Tax for a common man is the
difference between Previous Year and Assessment Year. Assessment year means
the period of twelve months commencing on the 1st day of April every
year [section 2(9) of Income Tax Act] Previous year means
the financial year immediately preceding the assessment year. If a
business/profession is newly set up, previous year is the period from
date of setting up that business or profession and
ending with the financial year [section 3 of Income Tax Act] The Financial Year
for income tax purposes (called ‘Previous Year’) is always the year
ending 31st March. The ‘assessment year’ is next to the ‘Financial
Year’ or ‘Previous Year’ e.g. for Financial Year (FY) 2007-08 (1st
April 07 to 31st March 2008), the ‘Assessment Year’ (AY) is 2008-09. It may be noted that
an assessee can have separate accounting year for his own purposes e.g.
a Company can close its accounts on any day of the year, an individual
may start his year on Diwali or any other auspicious day. However, for
income tax purposes, the accounts must be closed only on 31st March. Broad mode of
computation of Income
Rate of Income Tax
payable 1.2
Major types of assessees and the tax payable is summarised here. 1.2-1
Individual - An
individual may get income from salary, house rent, business, profession,
interest etc. He does not have to pay income tax on dividend income at
all. An individual may carry out business under some different name.
However, this is only for convenience of business or trade. The income
of a proprietary firm is added to his income for purpose of income tax.
If a person gets salary from a partnership firm where he is a partner,
the income is treated as ‘business income’ though termed as
‘salary’. The
income tax rates are as follows : Tax
rates for the assessment year 2008-09 are as follows - For resident woman (who is below 65 years at any time during the previous
year) –
For
resident senior citizen (who is 65 years or more at any time during the
previous year) –
For
any other individual, every HUF/AOP/BOI/artificial juridical person –
Notes: 1.
Surcharge - Surcharge
is 10 per cent of income-tax if net income of an individual, Hindu
undivided family, association of persons, or body of individuals,
exceeds Rs. 10,00,000. If a person, having taxable income exceeding Rs.
10,00,000, is eligible for tax rebate under section 88E, then you have
to calculate income-tax on his income, then from the tax so calculated
deduct tax rebate under section 88E.
10 per cent of the balancing amount is surcharge. In the case of
an artificial juridical person, surcharge is 10 per cent of income-tax (i.e.,
income-tax minus rebate under section 88E), even if net income is
less than Rs. 10,00,000. Marginal
relief - In the
case of the aforesaid person having a net income of exceeding Rs.
10,00,000, the net amount payable as income-tax and surcharge shall not
exceed the total amount payable as income-tax on total income of Rs.
10,00,000 by more than the amount of income that exceeds Rs. 10,00,000. 2.
Education cess and SAH Education Cess -
Education cess is 2 per cent of income-tax (after rebate under section
88E) and surcharge. Secondary and higher education cess is 1 per cent of
income-tax (after tax rebate under section 88E) and surcharge. 1.2-2
HUF - An Hindu Undivided Family (HUF) consists of all
persons lineally descended from a common male ancestor. It is assessable
in respect of income derived from the joint family corpus. However,
income earned by individual members of HUF in their individual and
personal capacities is taxed as their personal income. Such income is
not treated as income of HUF. Thus, it is possible to have an income
from a proprietary firm (in individual capacity) as well as income from
a business of HUF. Both are eligible for separate tax exemptions.
Business of HUF can, of course, be conducted in a different name. In
such case, the HUF will be proprietor of the firm in the name of which
business is being conducted. It
may be noted that there is no question of ‘forming’ an HUF, as every
male Hindu automatically has ‘HUF’. A Hindu male can have his own
separate HUF even if his father or son has separate HUF. One HUF with
only one male member is permissible. Any ‘HUF’ can have business run
by head of the HUF called ‘karta’. If
an individual throws his separate property into the property of HUF,
income from such converted property will be included in the total income
of such individual. Hence, the HUF business should be from independent
source of capital and not from the funds provided by an individual
member of the HUF. Thus, if an HUF intends to conduct a business, its
financial resources have to be carefully planned. HUF
should start business with loans / gifts from unrelated persons /
bankers. Accounts and finances of HUF business should be kept separate.
Otherwise, there is a possibility that income of HUF will be clubbed
with the income of an individual. The
income of HUF is chargeable at the same rate as individual income as
stated above. Thus, if an individual splits his business - partly in his
individual capacity and partly in name of firm owned by HUF,
considerable tax saving is possible, if done systematically and
carefully. 1.2-3
Partnership Firm - Income of the partnership firm has to
be calculated after deducting salary and interest payable to partners at
prescribed rates. Specific provisions in respect of partnership firm
have been explained later. A
firm is taxable at the rate of 30 per cent for the assessment year
2008-09. Surcharge @ 10 per cent of income-tax [i.e., income-tax
after rebate under section 88E] is payable, if net income exceeds Rs. 1
crore. Marginal relief is available where net income exceeds Rs. 1
crore. In addition, Education cess is 2 per cent of income-tax (after
rebate under section 88E) and surcharge. Secondary and higher education
cess is 1 per cent of income-tax (after tax rebate under section 88E)
and surcharge. 1.2-4 Company - The tax on income is 30% for Indian company and 40% for foreign companies for assessment year 2008-09. Surcharge @ 10 per cent of income-tax [i.e., income-tax after rebate under section 88E] is payable, if net income exceeds Rs. 1 crore. Marginal relief is available where net income exceeds Rs. 1 crore. In addition, Education cess is 2 per cent of income-tax (after rebate under section 88E) and surcharge. Secondary and higher education cess is 1 per cent of income-tax (after tax rebate under section 88E) and surcharge. Dividend
Distribution Tax - A
domestic company paying dividend will have to pay dividend distribution
tax u/s 115-O. The rate applicable w.e.f. 1-4-2007 is
15% plus surcharge @ 1.5% plus education cess @ 2% plus SAH
education cess of 1% of income tax. Total 16.995%. Dividend distribution
tax is payable within 14 days from date of
declaration/distribution/payment of dividend whichever is earlier. The
dividend will be tax free at the hands of assessees. Mutual funds have to
pay dividend distribution tax u/s 115R of Income Tax Act. The rate as
applicable w.e.f. 1-4-2007 is 12.5% on income distributed to any
individual or HUF and 20% on income distributed to any other person. In
addition, surcharge, education cess @ 2% and SAH education cess @ 1%
will be payable. Total is 14.1625% in case of individual or HUF unit
holder and 22.66% in other cases. In case of
money market mutual fund or a liquid fund, rate is 25%. Including
surcharge and education cess, it is 28.325%. The dividend will be
tax free at the hands of assessees. Income distributed to
unit holders of open ended equity oriented funds or US 64 is exempt from
dividend distribution tax. 1.2-5 Minimum Alternate TaxMany companies charge
depreciation in their books on straight line method. Thus, the profit
shown is higher in the accounts maintained for company law purposes and
they can declare dividend. However, for income tax purposes, they charge
depreciation on WDV which is higher. Thus, for income tax purposes, they
may show low profit or even loss, while in balance sheet prepared for
company law purposes, they will show high profits, which is called
‘book profits. Hence, such companies have to pay minimum income tax
[section 115JB]. This tax is termed as ‘Minimum Alternate Tax’
(MAT). In Apollo Tyres
v. CIT (2002) 122 Taxman 562 (SC 3 member bench), it was held
that the assessing officer cannot reopen the accounts certified by
auditors and adopted in general meeting. He has limited powers of making
additions and reductions as provided in the section. [In this case, it
was held that assessing officer cannot add back the depreciation for
earlier years provided in accounts]. Rate
of minimum alternate tax,
as % of book profit is as follows, for Assessment Year 2008-09.
Marginal
Relief - If book
profit of a company for the assessment year 2008-09 exceeds Rs. 1 crore,
the minimum alternate tax cannot exceed the following : (Rs. 10 lakh +
Book profit – Rs. 1 crore) + EC + SAHC. 1.2-6
Co-operative societies
- Following rates are applicable to a co-operative society for the
assessment year 2008-09 -
No
surcharge applies, but education cess @ 2% of tax and SAH education cess
@ 1% of tax is payable. Various
exemptions are available to cooperative societies u/s 80P of Income Tax
Act. However, there is no exemption to urban cooperative banks. 1.7 Local authorities - Tax rate is 30%. No surcharge applies,
but education cess @ 2% of tax and SAH education cess @ 1% of tax is
payable. 1.2-7 Capital gains
The rates are 10% for short term capital gains and 20% for long term capital gains for AY 2008-09. Surcharge for AY 2008-09 is 10% in case of (a) individual/HUF/BOI/AOP if income exceeds Rs 10 lakhs and (b) in case of company/firm if income exceeds Rs one crore. In addition, education cess @ 2% of tax and SAH education cess @ 1% of tax is payable. 1.2-8 Wealth-tax
- Wealth tax for individual, HUF or a company is 1% in respect of wealth
over Rs 15 lakhs. There is no surcharge or education cess. One house or part of
house belonging to an individual or HUF is excluded for purpose of
wealth tax. The assets have to be valued as per Valuation Rules. |
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