BASIC CONCEPTS

BASIC  CONCEPTS OF TAX

What is assessment year?

“Assessment year “means the period starting from April and ending on March 31 of the next year. For Example, the assessment year 2011-12, which commenced on 1^st April 2011 , will end on 31^st March 2012. (1st April 2010 to 31^st March 2011 , this period is called Financial Year.)  Assessment year 2011-12 means financial year of April 2010 to 31^st Mar 2011.

Income of previous year of an assesses is taxed during the next following assessment year at the rates prescribed by the relevant Finance Act.

What is previous year?

Income earned in a year is taxable in the next year. The year in which income is earned is known as previous year and the next year in which income is taxable is known as assessment year.

Who are included in “person”?

The term person includes:

1.     An individual

2.     A Hindu Undivided Family.

3.     A company,

4.     A firm,

5.     An association of persons or a body of individuals, whether incorporated or not;

6.     Every artificial judicial person not falling within any of the preceding categories.

These are seven categories of persons chargeable to tax under the Act. The aforesaid definition is inclusive and not exhaustive.  Therefore, any person , not falling in the above mentioned seven categories, may still fall in the four corners of the term “person” and accordingly may be liable to tax under section 4.

Who is regarded as assesses?

“Assesses” means a person by whom income-tax or any other sum of money is payable under the Act. It includes :-

a)     Every person in respect of whom any proceeding under the Act has been taken for the assessment of his income or loss or the amount of refund due to him.

b)    A person who is assessable in respect of income or loss of another personf.

c)     A person who is deemed to be an assessee, or an assessee in default   under any provision of the Act.

How to charge tax on income?

To know the procedure for charging tax on income, one should be familiar with the following ;

1)    Annual tax :- Income tax is an annual tax on income.

2)    Tax rate of assessment year :- Income of previous year is chargeable to tax in the next following assessment year at the tax rates applicable for the assessment year.  This rule is however , subject to some exceptions.

3)    Rates fixed by Finance Act:- Tax rates fixed by the annual Finance Act and not by the Income –Tax Act.  For instance, tax rates for the assessment year 2011-12 are fixed by the Finance Act, 2011.  If however, on the first day of April of the assessment year, the new Finance Bill has not been placed on the statute book, the provisions in force in the preceding assessment year or the provisions proposed in the Finance Bill before Parliament , whichever is more beneficial to the assessee, will apply until the new provision become effective.

4)    Tax on person:- Tax is charged on every person.

5)    Tax on total income:- Tax is levied on the total income of every assessee computed in accordance with the provisions of the Act.

6)    Provisions as on April 1 of the assessment year applicable for computing income for the assessment year:- Thje legal position is summarized below –

A)    Rule One :- For computing income – Total income is calculated in accordance with the provisions of the Income Tax Act , as they stand on the first day of April of the assessment year.

B)    Rule Two :- For other purposes- The above rule is applicable only for the purpose of computing taxable income. If ,however , an amendment is made which is purely nor for computing taxable income, then it is applicable from the date of the amendment.

What is Gross Total Income?

As per section 14, income of a person is computed under the following five heads:-

1.     Salaries

2.     Income form house property.

3.     Profit and gains of business or profession.

4.     Capital gains.

5.     Income from other sources.

The aggregate income under these heads is termed as “gross total income”.  In other words, gross total income means total income computed in accordance with the provisions of the Act before making any deduction under section 80C to 80U.

What is Agriculture Income?

Agricultural income in India is not chargeable to tax.  It is defined by section 2(1A).

What is difference between exemption and deduction?

If an income is exempt from tax, it is not included in the computation of income. Exemption can never exceed the amount of income. Deduction is generally given from income chargeable to tax. Deduction can be less than or equal to or more than the amount of income. If the amount deductible is more than the amount of income, the resulting amount will be taken as loss.

How far method of accounting is relevant in computing income?

Income chargeable under the head “ Profits and gains of business or profession” or “ Income from other sources” is to be computed in accordance with the method of accounting regularly employed by the assesses.

Types of accounting methods: Mainly there are two type of accounting methods. 1) Mercantile system and 2) Cash Systems.

1)    Mercantile System- Under mercantile system, income and expenditure are recorded at the time of occurrence during the previous year. For instance, income accrued during the previous year is recorded whether it is received during the previous year or during a year preceding or following the previous year. Similarly, expenditure is recorded if it becomes due during the previous year, irrespective of the fact whether it is paid during the previous year or not. The profit calculated under mercantile system is, thus, profit actually earned during the previous year, though not necessarily realized in cash.

2)    Cash system - Under cash system of accounting , revenue and expenses are recorded only when received or paid. For instance, income received during the previous year is included in taxable income whether it is earned during the previous year or it is earned during a year preceding or following the previous year. Similarly, expenditure is deductible from the taxable income only if it is paid during the previous year, irrespective of the fact whether it relates to the previous year or not. Income under cash system of accounting is, therefore, excess of receipts over disbursements during the previous year.