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Department of Management, AIGS

INCOME TAX-I
CHAPTER-1: BASIC CONCEPTS OF INCOME TAX

BRIEF HISTORY OF INCOME TAX IN INDIA

 In India, Sir James Wilson, who became first British-India’s First Finance Minister,
introduced income tax for the first time in 1860 in order to meet the expenses and losses
suffered by the rulers on account of Military Mutiny (Freedom Movement) of 1857. It was
introduced as a temporary revenue measure only for five years.
 Thereafter; several amendments were made in it from time to time. In 1886, a separate
Income tax act was passed. This act remained in force up to, with various amendments
from time to time.
 In 1918, a new income tax was passed and again it was replaced by another new act which
was passed in 1922.This Act remained in force up to the assessment year 1961-62 with
numerous amendments.
 The Income Tax Act of 1922 had become very complicated on account of innumerable
amendments. The Government of India therefore referred it to the law commission in 1956
with a view to simplify and prevent the evasion of tax. The law commission submitted its
report-in September 1958, but in the meantime the Government of India had appointed
the Direct Taxes Administration Enquiry Committee submitted its report in 1956.In
consultation with the Ministry of Law finally the Income Tax Act, 1961 was passed.
 The Income Tax Act 1961 has been brought into force with 1 April 1962. It applies to the
whole of India including Jammu and Kashmir.
 Income Tax Act 1961 contains 298 sections and XIV (14) schedules.

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SHORT TITLE, EXTENT AND COMMENCEMENT (SEC 1):

1.1 Short Title: This may be called the Income Tax Act, 1961,

1.2 Extent: It extends to whole of India. (It also means people of Jammu and Kashmir earning

income is required to pay income tax to Government of India).

1.3 Commencement: This act comes into force on 1st day of April, 1962.

INCOME-TAX LAW IN INDIA

The income tax law in India consists of the following components:
1. Income tax Acts
2. Income tax rules
3. Finance Act
4. Circulars, notifications etc.
5. Legal decision of courts.

 Finance Act:
Every year, the Finance Minister of the Government of India presents the Budget to the
Parliament. Once the Finance Bill is approved by the Parliament and gets the assent of the
President of India, it becomes the Finance Act.

 Income-tax Rules:
The administration of direct taxes is looked after by the Central Board of Direct Taxes
(CBDT). The CBDT is empowered to make rules for carrying out the purposes of the Act. For
the proper administration of the Income-tax Act, the CBDT frames rules from time to time.
These rules are collectively called Income-tax Rules, 1962.

 Circulars and Notifications:

Circulars are issued by the CBDT from time to time to deal with certain specific problems
and to clarify doubts regarding the scope and meaning of the provisions. These circulars are
issued for the guidance of the officers and/or assesses.

MEANING OF TAX

Tax is a levy imposed on the individual by an appropriate authority. It is a form of revenue to the

Government.

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DEFINITION OF TAX
According to Taylor: ‘Tax means a compulsory donation by public without any direct benefit for

such donation’

INCOME TAX:

 Income tax is tax on income. Income tax is a very important direct tax. It is an important
and most significant source of revenue of the Government.
 The government needs money to maintain law and order in the country; safeguard the
security of the country from foreign powers and promote the welfare of the people. It is
the foremost duty of the government to bring out such welfare and development
programmes which will bridge the gap between the rich and the poor.
 For this purpose, mobilization of funds from various sources is required. These sources
may be direct or indirect. Income tax is one of the most important tools to achieve
balanced socio-economic growth.

OBJECTIVES OF INCOME TAX:

1. To reduce inequalities in the distribution of income and wealth.

2. To bring out equity between classes of tax payers.
3. To accelerate the economic growth and development of country.
4. To make available of funds for economic development.
5. To encourage investment in new capital goods.
6. To channelize investment into those sectors which contribute the most economic growth.

TYPES OF TAXES

Direct Tax: it refers to the type of tax in which the incidence (i.e., liability for payment of tax)
and impact (i.e., actual payment of tax) is on the same person. It is a form of tax which can be
traced to the payer and it flows directly from the tax-payer to the Government.

Indirect Tax: refers to the type of tax in which the incidence and impact of are on different
persons. It is a form of tax which cannot be traced to the payer and it flows from the payer to
the Government indirectly - i.e., through others. Here the incidence and impact of tax falls on
the same person. Example Direct Tax, Wealth Tax, Property Tax etc.

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DIFFERENCE BETWEEN DIRECT TAX AND INDIRECT TAX

THREE IMPORTANT TERMINOLOGIES IN TAX

Tax Avoidance:
Tax avoidance means taking undue advantage of the loopholes, lacunae or drafting mistakes
for reducing tax liability and thus avoiding payment of tax which is lawfully payable. Generally,
it is done by twisting or interpreting the provisions of law and avoiding payment of tax. Tax
avoidance takes into account the loopholes of law. Though it has a legal sanction, it means
following the provisions of law in letter but killing the spirit of the law.

Tax Evasion:
Tax evasion means avoiding tax by illegal means. Generally, it involves suppression of facts,
falsifying records, fraud or collusion. It is an attempt to evade tax liability with the help of unfair
means. Tax evasion is illegal and would result in punishment by way of penalty, fines and
sometimes prosecution.

Tax Planning:
Tax planning may be defined as an arrangement of one’s financial affairs in such a way that
without violating in any way the legal provisions of an Act, full advantage is taken of all
exemptions, deduction, rebates and reliefs permitted under the Act, so that the burden of the
taxation on an assessee, as far as possible, is the least. It is within the framework of law.

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CANNONS OF TAXATION

Cannons of taxation, also known as principles of taxation, refer to the guidelines laid down by
various economists and statesmen for framing rules of taxation. Adam Smith, in his book "An
inquiry into the nature and causes of the wealth of nations" laid down four cannons of taxation
viz.,

(1) Cannon of ability,

(2) Cannon of economy,
(3) Cannon of convenience and
(4) Cannon of certainty.

To these cannons of taxation, modern economists have added five more viz.,
(1) Cannon of productivity,
(2) Cannon of elasticity,
(3) Cannon of flexibility,
(4) Cannon of diversity and
(5) Cannon of simplicity.

A brief explanation of these canons is given below.

1. Cannon of ability: - It states that the taxes imposed must be proportional to the ability of
the citizens to pay. The taxpayers should not be made to pay tax beyond their capacity to
pay. The tax should be based upon the principle of equity and justice.
According to this principle a person with high income has higher capacity to pay tax and
should be made to pay more tax and a person with low income has less capacity to pay tax
and should be made to pay less tax.

2. Cannon of economy: - It states that the cost of collecting tax must be less and economical.

3. Cannon of convenience: - It states that maximum convenience must be provided to the

taxpayer to pay tax. For example, a salaried employee should be allowed to pay tax when he
receives salary, a buyer should be allowed to pay tax when he buys the product and a farmer
must be allowed to pay tax when he harvests the crop and so on.

4. Cannon of certainty: - It states that the payer of tax must have a certain idea about the mode,
time, place and the amount of tax payable by him.

5. Cannon of productivity: - It states that the taxes imposed must be capable of producing
more revenues and should not affect the production and distribution of the country.

6. Cannon of elasticity: - It states that rates of tax should be more elastic i.e., a slight reduction

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in tax rates should enable collection of more taxes.

7. Cannon of flexibility: - It states that tax policy should enable adjustments if needed.

8. Cannon of diversity: - It states that tax structure should be diversified i.e., there must be a
diverse variety of taxes so that all categories of people are brought under the tax net.

9. Cannon of simplicity: - It states that the tax rules and procedures must be simple so that the
tax payers are able to understand the details of taxes easily

IMPORTANT DEFINITIONS

Assessment Year: Section 2(9)

“Assessment year” means the period starting from April 1 and ending on March 31 of the next
year. Eg: Assessment year 2024-25 which commences on April 1, 2024 and ends on March 31,
2025. Income of previous year of an assessee is taxed during the assessment year at the rates
prescribed by the relevant Finance Act for tax rates.

Previous year: section 3

Income earned in a particular 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. In other words, previous year is the financial year immediately preceding the assessment year.

Exceptions to the general rule that previous year’s income is taxable during the assessment year
In the following situations income of an assessee is liable to be assessed to tax in the same
year in which he earns the income:
a. Income of non-residents from shipping;
b. Income of persons leaving India either permanently or for a long period of time;
c. Income of bodies formed for short duration;
d. Income of a person trying to alienate his assets with a view to avoiding payment of tax;
e. Income of a discontinued business.

Person: Section 2(31)

The term “person” includes:

i) An individual: An individual means a natural person or a human being, who may be male,
female, minor child or a lunatic.

ii) A Hindu undivided family: A Hindu Undivided Family means a Hindu family which consists
of all persons lineally descended from a common ancestor including their wives and unmarried
daughters.

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iii) A company: A company may be defined as an artificial person created by law with perpetual
succession, a common seal and shares carrying limited liability.

iv) A firm: A firm means a partnership firm which is defined under the Partnership Act. There are
two conditions for partnership firm
(i) There must be registered partnership deed
(ii) Profit sharing ratio must be included in deed.

v) An association of persons (AOP) or a body of individuals (BOI), whether incorporated or

not: An association of persons means two or more persons joining for a common purpose for
the purpose of earning income. It may consist two or more individuals or any other person, i.e.,
an individual and a company or two or more companies.

vi) A local authority: Local authority includes Municipality, Municipal Corporation, District
Board, etc.

vii) Every artificial juridical person not falling within any of the preceding categories: An idol
or deity is assessable as an artificial juridical person, but through persons managing them.
Similarly, all other artificial persons, with a juristic personality are artificial persons, like
universities.

Assessee: Section 2(7)

Every person in respect of whom, any proceeding under the act has been taken for the
assessment of his income or of the income of any other person in respect of which he is
assessable or of the loss sustained by him or by such other person or the amount of refund due
to him or to such other person may be called an assessee.

Deemed Assessee:
A person who is deemed to be an assessee for some other person is called “Deemed
Assessee”.

Assessee In Default:
When a person is responsible for doing any work under the Income Tax Act and he fails to do it,
he is called an “Assessee in default”.

Assessment [Section 2(8)]

This is the procedure by which the income of an assessee is determined by the Assessing
Officer.

Basis Of Charge of Income Tax Sec: 4

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.

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3. Rates fixed by Finance Act - Tax rates are fixed by the annual Finance Act and not by the
Income-tax Act. For instance, the Finance Act, 2013, fixes tax rates for the Assessment
year 2022-23.

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.

INCOME: Section2 (24)

The definition of the term “income” in section 2(24) is inclusive and not exhaustive.
Therefore, the term “income” not only includes those things that are included in section 2(24)
but also includes those things that the term signifies according to its general and natural
meaning. Income, in general, means a periodic monetary return which accrues or is expected
to accrue regularly from definite sources. However, under the Income-tax Act, 1961, even
certain income which do not arise regularly are treated as income for tax purposes e.g.,
Winnings from lotteries, crossword puzzles.

Gross Total Income Sec: 80b (5)

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

 Income from Salary

 Income from House Property
 Income from Profits and Gains from Business or Profession
 Income from Capital Gains
 Income from Other Sources

If the income is not derived from any of the above sources, it is not taxable under the act. The
aggregate income under these heads is termed as “gross total income”.

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PROCEDURE FOR COMPUTING THE TOTAL INCOME:

For computing the total income of an assessee and the tax payable by him, following procedure
is followed –

1. Classify the income under each of the five heads and then deduct from the income under
each head the deductions permissible under the Act in respect of that head of income. The
balance of amount left under each head of income is its assessable income.

2. Total up to the assessable income of each head and the aggregate of all these assessable
incomes is called the Gross Total Income.

3. From the Gross Total Income deduct the deductions permissible under Sec. 80C to 80U of
the Act for computing the total income. The balance left after subtracting the allowable
deductions is called the ‘Total Income’.

4. The amount of income tax payable is then calculated on this total income according to the
rates prescribed by the Finance Act for the relevant assessment year and the rates prescribed
under different sections of the Act.

Total Income Sec: 2(45)

Total income means the amount left after making the deductions under section 80C to 80U
from the gross total income.

Casual Income
Any receipt which is of a casual and non-recurring nature is called casual income.
Casual income includes the following receipts:
1. Winning from lotteries,
2. Winning from crossword puzzles,
3. Winning from races (including horse races),
4. Winning from card games and other games of any sort
5. Winning from gambling or betting of any form or nature.

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SLAB RATES APPLICABLE FOR A.Y.2024-25 ARE AS FOLLOWS

Income Tax Slab Rate FY 2024-25 For New Regime

For the Financial Year 2023-24 (Assessment Year 2024-25) under the New Regime, the income
tax slab rates are structured as follows:

Income Slabs Income Tax Rates for FY 2023-24 (AY 2024-25)

Up to ₹3,00,000 Nil

₹3,00,000 to ₹6,00,000 5% on income exceeding ₹3,00,000

₹6,00,000 to ₹9,00,000 ₹15,000 + 10% on income exceeding ₹6,00,000

₹9,00,000 to ₹12,00,000 ₹45,000 + 15% on income exceeding ₹9,00,000

₹12,00,000 to ₹15,00,000 ₹90,000 + 20% on income exceeding ₹12,00,000

Above ₹15,00,000 ₹150,000 + 30% on income exceeding ₹15,00,000

This structure clearly shows how taxes are calculated at each income slab, ensuring a
progressive tax rate that increases with higher income brackets.

Income Tax Slab Rate FY 2024-25 For Old Tax Regime

The income tax slab rates for the Old Tax Regime vary based on age groups. Here are the details
for individuals aged between 60 and 80 years:

Old Tax Regime for Individuals Below 60 Years & HUF

Income Slabs Tax Rate for Individuals Below 60 Years and NRIs

Up to ₹2.5 lakh NIL

₹2.5 lakh – ₹5 lakh 5%

₹5 lakh – ₹10 lakh 20%

Above ₹10 lakh 30%

Note:

 The income tax exemption limit is up to ₹2,50,000 for individuals, HUFs below 60 years
of age, and NRIs.

 Surcharge and cess are applicable as per rules.

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Old Tax Regime for Senior Citizens (60-80 Years)

Income Slabs Tax Slabs for Senior Citizens (60 to <80 Years)

₹0 – ₹3 lakh NIL

₹3 lakh – ₹5 lakh 5%

₹5 lakh – ₹10 lakh 20%

Above ₹10 lakh 30%

Note:

 The income tax exemption limit is up to ₹3 lakh for senior citizens aged 60 to less than
80 years.

 Surcharge and cess are applicable as per rules.

Old Tax Regime for Super Senior Citizens (80+ Years)

Income Slabs Tax Slabs for Super Senior Citizens (>80 Years)

₹0 – ₹5 lakh NIL

₹5 lakh – ₹10 lakh 20%

Above ₹10 lakh 30%

Note:

 The income tax exemption limit is up to ₹5 lakh for super senior citizens aged 80 years
and above.

 Surcharge and cess are applicable as per rules.

Comparison of Tax Rates under the New tax regime & Old tax regime for FY 2024-25

Slabs Old Tax Regime

<60 years & NRIs >60 to <80 years > 80 years FY 2024-25

₹0 – ₹2,50,000 NIL NIL NIL NIL

₹2,50,000 – ₹3,00,000 5% NIL NIL NIL

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₹3,00,000 – ₹5,00,000 5% 5% (tax rebate NIL 5%

u/s 87A is
available)

₹5,00,000 – ₹6,00,000 20% 20% 20% 5%

₹6,00,000 – ₹7,50,000 20% 20% 20% 10%

₹7,50,000 – ₹9,00,000 20% 20% 20% 10%

₹9,00,000 – ₹10,00,000 20% 20% 20% 15%

₹10,00,000 – ₹12,00,000 30% 30% 30% 15%

₹12,00,000 – ₹12,50,000 30% 30% 30% 20%

₹12,50,000 – ₹15,00,000 30% 30% 30% 20%

>₹15,00,000 30% 30% 30% 30%

How to Calculate Income Tax?

Priya’s total taxable income is Rs 7,00,000, after accounting for various income sources like
her salary, income from investments, and any rental earnings. She has also taken into account
all applicable deductions under Section 80. Priya is curious about her tax obligations for FY
2022-23 (AY 2023-24).

Income Slabs Tax Rate Calculated Tax

Up to Rs 2,50,000 No tax –

Rs 2,50,000 to Rs 5,00,000 5% (Rs 5,00,000 – Rs 2,50,000) Rs 12,500

Rs 5,00,000 to Rs 7,00,000 20% (Rs 7,00,000 – Rs 5,00,000) Rs 40,000

Above Rs 10,00,000 30% –

Total Taxable Amount Rs 52,500

Health and Education Cess 4% of Rs 52,500 Rs 2,100

Total Tax for FY 2022-23 Rs 54,600

Note: Priya is entitled to an income tax exemption of up to Rs 2,50,000 as an individual

taxpayer. The exemption limits differ for senior citizens (Rs 3,00,000) and super senior citizens
(Rs 5,00,000).

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KEY FEATURES OF THE NEW TAX REGIME

 Uniform Tax Rates: The New tax regime offers the same tax rates for all individual
categories, including regular individuals, senior citizens, and super senior citizens.

 Tax Rebate for Low-Income Individuals: Individuals with a net taxable income of up to
Rs 5 lakh qualify for a tax rebate under section 87A, resulting in zero tax liability under
both the New and the Old tax regimes.

 Rebate in Budget 2024: For the current financial year 2024, there have been no
amendments to the enhanced rebate introduced in Budget 2023. As per the updated
provisions, incomes up to Rs 7 lakh remain exempt from tax under the new regime,
effective from FY 2023-24.

 Surcharge on High Income: A surcharge is applied when income exceeds certain

thresholds, with the rates being:

o 10% for income above Rs 50 lakh

o 15% for income above Rs 1 crore

o 25% for income above Rs 2 crore

o 37% for income above Rs 5 crore

 In the current financial year 2024, following the changes implemented in Budget 2023,
the maximum surcharge rate in the New tax regime for incomes over Rs 5 crore has been
reduced to 25% from the previous 37%, with this adjustment taking effect from April 1,
2023.

o Exclusions from High Surcharge Rates: Surcharge rates of 25% or 37% do not
apply to income taxable under specific sections related to capital gains on shares
and income of Foreign Institutional Investors, capping the surcharge at 15% for
such incomes.

o Surcharge Cap for Certain Incomes: From the Assessment Year 2023-24, the
maximum surcharge on tax payable for dividend income or capital gains, as
mentioned in Section 112, as well as for an Association of Persons (AOP)
consisting entirely of companies, is capped at 15%.

o Health and Education Cess: 4% is levied on all cases’ total income tax liability
and surcharge.

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AGRICULTURE INCOME

Agriculture income is exempt under the Indian Income Tax Act. This means that income earned
from agricultural operations is not taxed. The reason for exemption of agriculture income from
Central Taxation is that the Constitution gives exclusive power to make laws with respect to
taxes on agricultural income to the State Legislature. However, while computing tax on non-
agricultural income agricultural income is also taken into consideration. As per Income Tax Act
income earned from any of the under given three sources meant Agricultural Income;

(i) Any rent received from land which is used for agricultural purpose.
(ii) Any income derived from such land by agricultural operations including processing of
agricultural produce, raised or received as rent in kind so as to render it fit for the market, or
sale of such produce.
(iii) Income attributable to a farm house subject to the condition that building is situated on or
in the immediate vicinity of the land and is used as a dwelling house, store house etc.
Now income earned from carrying nursery operations is also considered as agricultural income
and hence exempt from income tax.

In order to consider an income as agricultural income certain points have to be kept in mind:
(i) There must me a land.
(ii) The land is being used for agricultural operations.
(iii) Agricultural operation means that efforts have been induced for the crop to sprout out of
the land.
(iv) If any rent is being received from the land, then in order to assess that rental income as
agricultural income there must be agricultural activities on the land.
(v) In order to assess income of farm house as agricultural income the farm house building
must be situated on the land itself only and is used as a store house/dwelling house.

CERTAIN INCOME WHICH IS TREATED AS AGRICULTURE INCOME:

(a) Income from sale of replanted trees.

(b) Rent received for agricultural land.
(c) Income from growing flowers and creepers.
(d) Share of profit of a partner from a firm engaged in agricultural operations.
(e) Interest on capital received by a partner from a firm engaged in agricultural operations.
(f) Income derived from sale of seeds.

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CERTAIN INCOME WHICH IS NOT TREATED AS AGRICULTURAL INCOME:

(a) Income from poultry farming.

(b) Income from bee hiving.
(c) Income from sale of spontaneously grown trees.
(d) Income from dairy farming.
(e) Purchase of standing crop.
(f) Dividend paid by a company out of its agriculture income.
(g) Income of salt produced by flooding the land with sea water.
(h) Royalty income from mines.
(i) Income from butter and cheese making.
(j) Receipts from TV serial shooting in farm house is not agriculture income.

Partly agriculture income

Partly agricultural income consists of both the element of agriculture and business, so
nonagricultural part of the income is taxed. Some examples for partly agricultural income are
given below:

1. Profit of business other than Tea

This rule applicable to agricultural produce like cotton, tobacco, and sugarcane etc., here
the market value of the agricultural produce raised by the Assessee for utilizing it as raw
material for his business will be deducted out of the total profit of such Assessee while
calculating tax on his income.

2. Profit from Tea manufacturing

If a person using his own tealeaves grown by him for his tea manufacturing business, then
60% of his income will be treated as agricultural income and the remaining 40 % will be
treated as business income. So, he has to pay tax on that remaining 40% of income.
3. Income from the manufacturing of centrifuged latex or cenex
If a person manufacturing centrifuged latex by using his own made raw then, 65 % of the
income derived from the sale of the same is treated as agricultural income so he has to pay tax
remaining part of the income.
4. Income from the coffee manufacturing
a) 75% of the income derived from the sale of coffee grown and cured by the seller in India
is deemed to be agricultural income 25% is taken as business income.
b) 65% the income derived from the sale of coffee grown, cured, roasted and grounded by
the seller in India is deemed to be agricultural income 40% is taken as business income.

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Taxation of Agricultural Income

It is totally exempted from tax under Section 10(1). But, in case of agricultural income from land
situated outside India, it will be fully taxable under the head Other Sources.

Partial Integration

The concept of partial integration has been introduced to ensure that nonagricultural income is
taxed at higher slab rate

Conditions for Partial Integration

1. Agricultural income should exceed Rs5, 000.

2. Non-agricultural income should not exceed the taxable limit that is Rs 5,00,000 in case of super
senior citizen, Rs3, 00,000 in case of senior citizens and in case of individuals below 60 years the
limit is Rs 2,50,000.

3. Partial Integration is applicable for individual, HUF, AOP, Artificial Juridical Person. In other
words, this concept is not applicable for Companies, Cooperative Societies, Local Authorities and
Partnership Firm

Steps in Partial Integration

1. Add: Agricultural Income to Non-agricultural income and compute tax.

2. Add: Agricultural Income to maximum income exempted from income tax and compute the tax.

3. Gross Tax Liability= Step 1- Step 2.

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REVENUE AND CAPITAL RECEIPTS

Introduction:

For Income tax purpose, a clear understanding of the distinction between the two is essential
because income tax is charged on revenue incomes and not on capital incomes unless they are
expressly taxable. Again, the distinction between the two is vital because only revenue expenses
are allowed and capital expenses are disallowed.

Capital and Revenue are mainly classified into:

Capital and
Revenue

Receipts Expenditure Losses

1. Capital Receipts.
1. Capital Expenditure. 1. Capital Losses.
2. Revenue
2. Revenue Expenditure. 2. Revenue Losses.
Receipts.

Meaning:

According to English Dictionary, 'Revenue' means 'the return, yield, or profit of any lands, property
or any other important source of income; that which comes in to one as a return from property or
possessions; income from any source"; and 'capital' means "accumulated wealth employed re
productively".

Capital and Revenue Receipts:

Capital Receipts are non-recurring in nature and do not arise in the day-to-day activities of the
business. On the other hand, revenue receipt is recurring in nature and arise during the ordinary
course of business.

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Examples of Capital Receipts

(i) Compensation received for nationalization.

(ii) Insurance money received for the loss of a capital asset.
(iii) Profits due to fluctuations in the rate of exchange of foreign currency.
(iv) Premium on the issue of new shares.

(iv) Compensation received for termination of agency before the expiry of stipulated period,
the only source of income being agency.
(v) Compensation received from the employer for premature termination of services.
(vi) Annuity received under LIC scheme.

Examples of Revenue Receipts

(i) Annuities received periodically.

(ii) Compensation received for loss of profits.
(iii) Proceeds of sale of forest trees.
(iv) Damages received for breach of contract.
(v) Dividends and interest from investments.
(vi) Amount received by an assessee for digging and removing earth from his land for brick-
making.
(vii) GST collected from purchasers/customers.
(viii) Compensation received for the injury suffered in an accident.
(ix) Compensation received for the compulsory vacation of the place of business.
(x) Money received as the consideration for not resigning directorship.
(xi) Money received by a tyre manufacturing company for sale of technical know-how
regarding manufacturing of tyre.
Note: Unclaimed dividend cannot deemed to be profit of business. It is not a taxable receipt.

Capital and Revenue Expenditure –

Capital expenditure is the fund-Used by a company to acquire and upgrade physical assets such
as land and building, plant and machinery, furniture and fixture etc. on the other hand, any
maintenance cost to physical assets owned by the company is revenue expenditure.

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Examples of Capital Expenditure

1. Cost of acquisition and installation of fixed asset.

2. An expenditure incurred for the purpose of increasing the earning capacity.

3. Amount paid as commission to purchase machinery.

4. Cost of reconstructing of a business building.

5. Brokerage paid for raising capital.

Examples of Revenue Expenditure

1. Expenditure incurred in raising loan.

2. A reward given to the employee in consideration of his good service,

3. Brokerage paid for raising loan for the purpose of business.

4. Legal expenses in connection with resolving winding up petition by shareholders.

5. Amount received on the sale of securities by an investment company.

6. Interest on loan.

Capital and Revenue Loss

The distinction between the two is vital because only revenue losses are allowed and capital losses
are-disallowed.

Examples of Capital Loss

1. Loss on sale of office furniture.

2. Issue-of debentures at discount price.

Examples of Revenue Loss

1. Loss sustained on account of embezzlement done by an employee.

2. Bad Debts.

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EXEMPTED INCOME

EXEMPTED INCOME UNDER SECTION 10

Under Section 10, there are different sub-sections that define what kind of income is exempt
from tax. This can range from agricultural income to house rent allowance.

The term "Exempt Income" refers to Any income that a person gets or earns throughout the
course of a financial year and is judged to be non-taxable.

 Exempt income can take on a variety of shapes, including interest from agricultural
sources, PPF interest, long-term capital gains from shares and stocks, and much more.

According to the Income Tax Act, certain sources of income are exempt from taxation as long as
they adhere to the rules and regulations established in the Act.

Exempted income differs from income tax deduction in that tax deduction refers to an amount
deducted from the total income whereas exempted income refers to income that is not at all
taxed. The comprehensive list can be found below.

INCOME EXEMPT FROM TAX AS PER SECTION 10

Most income that is exempted from tax is listed under Section 10 of the Income Tax Act.

Section Exemptions

Section 10(1) Income earned through agricultural means

Section 10(2) Any amount received by an individual through a coparcener from an HUF

Section 10(2A) Income received by partners of a firm, as shared between them

Section 10(4)(i) Any interest that has been paid to a person who is not a resident Indian

Section 10(4)(ii) Any interest that has been paid to the account of a person who is not a resident
Indian

Section 10(4B) Any interest that has been paid to a person who is not a resident Indian, but of
Indian origin

Section 10(5) Concession on travel given to an employee who is also a citizen of India

Section 10(6) Any income earned or received by a non-Indian citizen

Section 10(6A), Government tax paid on the income of a foreign firm

(6B), (6BB), (6C)

Section 10(7) Allowances received by government employees stationed abroad

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Section 10(8) Income earned by foreign employees in India under the Cooperative Technical
Assistance Program

Section 10(8A) Income earned by a consultant

Section 10(8B) Income earned by a consultant's staff or employees

Section 10(9) Income earned by any family member of a foreign employee in India under the
Cooperative Technical Assistance Program

Section 10(10) Gratuity

Section 10(10A) The commuted value of the pension earned by an individual

Section 10(10AA) Any amount earned via encashment of leave at the time of retirement

Section 10(10B) Compensation paid to workers due to relocation

Section 10(10BB) Any remittance obtained as per the Bhopal Gas Leak Disaster Act 1985

Section 10(10BC) Any compensation obtained in the event of a disaster

Section 10(10C) Compensation in lieu of retirement from a PBC or any other firm

Section 10(10CC) Any income received through taxation on perquisites

Section 10(10D) Any amount acquired via a Life insurance policy

Section 10(11) Any payment received via the Statutory Provident Fund

Section 10(12) Any payment received via a recognised or authorised Fund

Section 10(13) Any payment received through a Superannuation Fund

Section 10(13A) House Rent Allowance

Section 10(14) Allowances utilised to meet business expenses

Section 10(15) Income received in the form of interest

Section 10(15A) Income received by an Indian firm through the lease of an aircraft from a foreign
firm or government

Section 10(16) Income in the form of a scholarship

Section 10(17) Allowances granted to MLCs, MLAs or MPs

Section 10(17A) Income received in the form of a government award

Section 10(18) Income received in the form of pension by winners of awards for heroism

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Section 10(19) Income received by family members of the armed forces in the form of pension

Section 10(19A) Income received from a single palace of an Ex ruler

Section 10(20) Income received by a localised body or authority

Section 10(21) Income received by an association involved with scientific research

Section 10(22B) Income earned by a news or broadcasting agency

Section 10(23A) Income earned by certain Professional Institutes

Section 10(23AA) Income acquired through Regimental Fund

Section 10(23AAA) Income acquired through an employee welfare fund

Section 10(23MB) Insurance pension fund income

Section 10(23B) Income earned by village industry development institutions

Section 10(23BB) Income earned by state level Khadi and Village Industries Board

Section 10(23BBA) Income earned by regulatory bodies of institutions affiliated with religion and
charity

Section 10(23BBB) Income received by the European Economic Community

Section Income received through SAARC funded regional projects

10(23BBC)

Section 10(23BBE) Income received by the IRDA

Section Income received through Prasar Bharti

10(23BBH)

Section 10(23C) Income received by any individual through certain specified funds

Section 10(23D) Income earned via Mutual Funds

Section 10(23DA)j Income earned via a Securitisation Trust

Section 10(23EA) Income earned through an IPF

Section 10(23EB) Income received by the Credit Guarantee Trust for Small Industries

Section 10(23ED) Income exemption of IPF

Section 10(23DFB) Income exemption of specified income received by Venture Capital Firms,
Funds or Businesses

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Section 10(24) Income earned by authorised trade unions

Section 10(25) Income earned via provident funds and superannuation funds

Section 10(25A) Income earned via Employee's State Insurance Fund

Section 10(26), Income earned by Schedule Tribe Members

10(26A)

Section Income earned by an individual of Sikkimese origin

10(26AAN)

Section 10(26AAB) Marketing regulation with regards to agricultural produce

Section 10(26B) Income earned by corporations established for the upliftment of backward
tribes and classes

Section 10(26BB) Income earned by corporations established for the protection of Minority
interests

Section 10(26BBB) Income earned by corporations established for former servicemen

Section 10(27) Income earned by cooperative societies established for protection of scheduled
castes and tribes interests

Section 10(29A) Income received by Community Boards

Section 10(30) Income earned in the form of subsidies via the Tea Board

Section 10(31) Income earned in the form of subsidies via the concerned Board

Section 10(32) Income earned by a child in accordance with Section 64 of the Income Tax Act

Section 10(33) Income earned through Unit Trust of India capital asset transfer

Section 10(34) Income earned in the form of dividends through an Indian firm

Section 10(34A) Income earned by a shareholder through the buyback of unlisted companies

Section 10(35) Income received through the sale or transfer of Unit Trust of India units as well
as other mutual funds

Section 10(35A) Income from a securitisation trust that is exempt

Section 10(36) Income received on the sale of shares under specific conditions

Section 10(37) Any capital gains made on the mandatory acquirement of land in relation to
urban agriculture

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Section 10(38) Any long term capital gains made from share and security transfers that fall
under the purview of Security Transaction Tax

Section 10(39) Any income received from any international event or function relating to sports

Section 10(40) Any income acquired in the form of a grant from a company deemed to be a
subsidiary of the parent company

Section 10(41) Any income received on any asset transfer of a company or project that
conducts power distribution, generation and transmission

Section 10(42) Any income earned by any authority that has been established by more than one
country

Section 10(43) Any income in relation to reversal of mortgage

Section 10(44) Income generated through the NPS Trust

Section 10(45) Any allowance or perks granted to the chairman or any member of the UPSC

Section 10(46) Any income that comes under the category of 'specified income' with regards to
specific authoritative bodies

Section 10(47) Any income that is exempt under the category of infrastructure debt fund

Section 10(48) Any income earned by a foreign firm or company due to crude oil sales within
India

Section 10(49) Any income earned by the NFHC (National Finance Holdings Company)

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PROBLEM-1

What will be the previous year in relation to assessment year 2024-25 in the following cases?

a. A sole trader keeping his accounts on financial year basis.

b. Mr. Praveen start up a new business on 03/03/2024.
c. Mrs. Anjali joins an Indian company on 23/01/2024.
d. Smt. Archana bought a house on 01/08/2023 and let out at Rs.6000 p.m.
e. Smt. Smriti is a registered doctor and keeps her income and expenditure accounts on calendar year.
SOLUTION: -

a. 01-04-2023 to 31-03-2024
b. 03-03-2024 to 31-03-2024
c. 23-01-2024 to 31-03-2024
d. 01-08-2023 to 31-03-2024
e. 01-04-2023 to 31-03-2024

PROBLEM-2

Determine the Income status of the following:

a. Dr. Arjun a lecturer in the Bangalore university.

b. Mysore University.
c. Sri. Ganesh is director in Bharat Electronics Limited.
d. Bharat Heavy Electrical Limited (BHEL).
e. Mr. Kiran a sole proprietor of a Business.
f. Bangalore Municipal Corporation (BMC).
g. Bangalore Development Authority (BDA).
h. Life Insurance Corporation of India.
i. Malleshwaram Ladies Association (MLA).
j. Co-operative Society.
k. Praveen and Sons (Partnership Firm).

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l. A joint Family of Sri. Baswegowda, his wife, children and parents.

m. Ram and laxman, who are the legal heirs of satyanarayan.
n. Union Bank of India Limited.
SOLUTION:-

a. An Individual.
b. Artificial Juridical Person.
c. An Individual.
d. A Company.
e. An Individual.
f. A Local Authority.
g. Artificial Juridical Person.
h. A Company.
i. An Association of Person.
j. An Association of Person.
k. A Firm.
l. Hindu Undivided Family.
m. Hindu Undivided Family.
n. A Company.

PROBLEMS ON AGRICULTURE INCOME: -

PROBLEM-03

State whether the following incomes are agriculture or Non-agriculture Incomes: -

a. Income from growing flowers and creepers.

b. Dividend received from a company engaged in agricultural operations.
c. Interest on loan given to a farmer.
d. Income from agricultural activities in Sri Lanka.
e. Income from conversion of sugarcane into jaggery by the farmer himself.

SOLUTION: -

a. Agricultural Income, as it is an Agricultural Activity.

b. Non-Agricultural Income, as it is not directly connected with Land.

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c. Non-Agricultural Income, as it is not directly connected with Land.

d. Non-Agricultural Income, as agricultural land is not situated in India.
e. Difference between market price and cost price of sugarcane is agricultural Income.
PROBLEM-04

State whether the following incomes are agriculture or Non-agriculture Incomes: -

a. Income from sale of forest trees of spontaneous growth.
b. Income from agricultural land situated in urban area.
c. Income derived from lease of land for grazing of cattle required for agricultural operations.
d. Income from sale of earth for brick making.
e. Income from dairy farming.
SOLUTION:-

a. Non-Agricultural Income, as basic agricultural operations are not performed.

b. Agricultural Income, as the land is situated in Urban Area and used in agricultural purposes.
c. Agricultural Income, as it is used for agricultural purpose.
d. Non-Agricultural Income, as basic agricultural operations are not performed.
e. Non-Agricultural Income, as basic agricultural operations are not performed.
PROBLEM-05

State whether the following incomes are agriculture or Non-agriculture Incomes: -

a. Income from Interest on arrears of rent payable in respect of land used for agricultural Purposes.
b. Income from agricultural land situated in Australia.
c. Income from sale of forest trees of spontaneous growth.
d. Income from lease of Land for grazing of cattle required for agricultural Pursuits.
e. Income from Interest on Simple Mortgage of land used for agriculture.
f. Rent received from house property situated in a village.
g. Remuneration received as manager of an agricultural farm house.
h. Income from Dairy farm, poultry farming etc.
SOLUTION: -

a. Non-Agricultural Income.
b. Non-Agricultural Income.
c. Non-Agricultural Income.
d. Non-Agricultural Income.
e. Non-Agricultural Income.

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f. Non-Agricultural Income.
g. Non-Agricultural Income.
h. Non-Agricultural Income.

PROBLEM-06

State whether the following incomes are agriculture or Non-agriculture Incomes: -

a. Dividend from a company engaged in agriculture.
b. Lease rent received from lands given to tenants for agricultural operations.
c. Salary received as a partner from a tea manufacturing firm.
d. Sale of plants from nursery.
e. Income from self-grown grass and trees.
SOLUTION: -

a. Non-Agricultural Income, as it is not directly connected with Land.

b. Agricultural Income, as basic agricultural operations are performed.
c. Non agricultural income, as it is not directly connected with Land.
d. Agricultural Income, as basic agricultural operations are performed.
e. Non-Agricultural Income, as basic agricultural operations are not performed.

PROBLEM-07

State whether the following incomes are agriculture or Non-agriculture Incomes: -

a. Sale of plants from nursery.
b. Interest on loan given to a farmer.
c. Income from agricultural activities in Sri Lanka.
d. Lease rent received from lands given to tenants for agricultural operations.
e. Remuneration received as Manager of an agricultural farm.

SOLUTION:-

a. Agricultural Income, as basic agricultural operations are performed.

b. Non agricultural income, as it is not directly connected with Land.
c. Non agricultural income, as agricultural land is not situated in India.
d. Agricultural Income, as basic agricultural operations are performed.
e. Non-Agricultural Income, as basic agricultural operations are not performed.

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PROBLEMS ON CAPITAL AND REVENUE: -

PROBLEM-08

State whether the following are capital or revenue in nature: -

a. Cost of acquisition and installation of fixed asset.
b. Expenditure incurred in raising loan.
c. An expenditure incurred for the purpose of increasing the earning capacity.
d. A Reward given to the employees in consideration of his good service.
e. Loss sustained on Account of embezzlement done by an employee.

SOLUTION: -

a. Capital Expenditure.
b. Revenue Expenditure.
c. Capital Expenditure.
d. Revenue Expenditure.
e. Revenue loss.

PROBLEM-09

State whether the following are capital or revenue in nature: -

a. Compensation received for Nationalization.
b. Dividends and interest from Investments.
c. Unclaimed Dividend.
d. Premium on the issue of new shares.
e. Amount received by an assessee for digging and removing earth from his land for brick-
making.
f. Rs.50,000 received as premium on hiring out 50 shops.
g. Sales tax collected from purchases/customers.
h. Compensation received for termination of agency before the expiry of stipulated period, the
only source of income being the agency.
i. Bonus shares received by a dealer of shares.
j. Annuity received.
k. Compensation received from the employer for premature termination of services.

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SOLUTION: -

a. Capital Receipt.
b. Revenue Receipt.
c. Neither capital nor revenue.
d. Capital Receipt.
e. Revenue Receipt.
f. Capital Receipt.
g. Revenue Receipt.
h. Capital Receipt.
i. Revenue Receipt.
j. Revenue Receipt.
k. Capital Receipt.

PROBLEM-10

Determine the nature of the following items:

a. Amount paid as commission to purchase machinery
b. Cost of Reconstructing of a business building.
c. Brokerage paid for raising loan for the purpose of business.
d. Legal expenses in connection with resolving winding up petition by shareholders.
e. Brokerage paid for raising capital.
f. Expenses incurred on the acquisition of copyrights by a publisher.
g. Amount received on the sale of securities by an investment company.
h. Interest on Loan.

SOLUTION: -

a. Capital Expenditure.
b. Capital Expenditure.
c. Revenue Expenditure.
d. Revenue Expenditure.
e. Capital Expenditure.
f. Capital Expenditure.
g. Revenue Expenditure.
h. Revenue Expenditure.

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