Jain University CMS B School Business Taxation Module Overview

CMS B School Jain University Business Taxation Dr BRR

Module 1: Concepts and Charge of Tax
Tax is a fee or a charge levied or charged by the Government (Central, State or Local) on a product, income or
activity. Taxes constitute a major source of revenue to the Government.

Types of taxes: Direct taxes and indirect taxes
Direct Taxes: If tax is levied directly on the income of a person and the burden of payment cannot be shifted to
others, then, it is a direct tax e.g. income-‐tax, Securities Transaction Tax (STT), Corporate tax.
Indirect Taxes: If tax is levied on the price of a good or service, and the person paying the tax passes on the
incidence to another person, then, it is an indirect tax Indirect taxes are also known as consumption tax. E.g. Goods
and Services Tax (GST) or Custom Duty.

Tax Systems: Progressive and regressive
Progressive: The tax system is progressive i.e. as the income increases, the applicable rate of tax increases. Income
tax is a case in point.
Regressive: A regressive tax is a tax that takes a larger percentage of income from low-‐income earners than from
high-‐income earners. It is generally a tax that is applied uniformly to all situations, regardless of the payer. Example:
indirect taxes
Rates of Income tax FY 2017-‐2018 for Individuals
Below 60 years 60 & Above but below 80 years 80 years & Above
Up to Rs. 2,50,000 0% Up to Rs. 3,00,000 0%
Up to Rs. 5,00,000 0%
Rs. 2,50,001 to Rs. 5,00,000 5% Rs. 3,00,001 to Rs. 5,00,000 5%
Rs. 5,00,001 to Rs. Rs. 5,00,001 to Rs.
20% 20% Rs. 5,00,001 to Rs. 10,00,000 20%
10,00,000 10,00,000
Above Rs. 10,00,000 30% Above Rs. 10,00,000 30% Above Rs. 10,00,000 30%
Rebate u/s 87A:
Applicable for an individual resident in India, whose total income does not exceed Rs. 3,50,000.
Amount of rebate = income-‐tax payable or an amount of Rs. 2,500, whichever is less.
Surcharge:
10% of income tax in case total income exceeds Rs. 50 lakhs but does not exceed Rs. 1 crore
15% of income tax in case total income exceeds Rs. 1 crore
Education cess = 3% of income tax plus surcharge if any

Taxation principles (Canons of taxation):
Adam Smith propounded the canons of taxation in his book, ‘Wealth of Nations’. He advocated mainly equity,
convenience, certainty and economy principles.
(1) Adequacy: taxes should be just-‐enough to generate revenue required for provision of essential public services.
(2) Broad Basing: taxes should be spread over as wide as possible section of the population, or sectors of economy,
to minimize the individual tax burden.
(3) Compatibility: taxes should be coordinated to ensure tax neutrality and overall objectives of good governance.
(4) Convenience: taxes should be enforced in a manner that facilitates voluntary compliance to the maximum
extent possible.
(5) Cost effective: The cost (administration cost and cost of collection of taxes) and benefit (tax revenue) principle
must be kept in mind.
(6) Socio-‐economic principle: Criteria like Rich and poor, privileged and less privileged, backward and advanced
must be factored in.
Legal framework of tax system in India:
Direct tax:
For direct tax like income tax, we have Income Tax act, 1961. It came into force on 1st April, 1962. It contains 298
sections and XIV schedules. A section may have sub-‐sections, clauses and sub-‐clauses.
Central Board of Direct Taxes (CBDT) is the apex body for direct taxes in India.

Income-‐tax Rules, 1962: CBDT frames rules from time to time. These rules are collectively called Income-‐tax Rules,
1962.

Annual Finance Act: Finance Minister of the Government of India introduces the Finance Bill in the Parliament’s
Budget Session. When the Finance Bill is passed by both the houses of the Parliament and gets the assent of the
President, it becomes the Finance Act. Amendments are made every year to the Income-‐tax Act, 1961 and other tax
laws by the Finance Act.

Finance Act (Schedule 1) contains four parts:
(1) Part I of the First Schedule to the Finance Act specifies the rates of tax applicable for the current Assessment
Year.
(2) Part II specifies the rates at which tax is deductible at source for the current Financial Year.
(3) Part III gives the rates for calculating income-‐tax for deducting tax from income chargeable under the head
“Salaries” and computation of advance tax.
(4) Part IV gives the rules for computing net agricultural income.

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 certain provisions of the Act. Circulars are issued for the
guidance of the officers and/or assessees. Notifications are issued by the Central Government to give effect to the
provisions of the Act. The CBDT is also empowered to make and amend rules for the purposes of the Act by issue of
notifications.
Legal decisions of courts: Verdicts of Supreme court and high courts must be referred to.

Indirect tax:
Central Board of Excise and Customs (CBEC) is a part of the Department of Revenue under the Ministry of Finance,
Government of India. It deals with the tasks of formulation of policy concerning levy and collection of Customs &
Central Excise duties and GST. The two important acts are:
(a) Goods and Services Tax Act, 2017 and (b) The Customs Act, 1962

Assessee: Section 2(7):
“Assessee” means a person by whom any tax or any other sum of money is payable under this Act.
Ordinary assesse: it includes
a) any person against whom some proceedings under this Act are going on. It is immaterial whether any tax or
other amount is payable by him or not;
b) any person who has sustained loss and filed return of loss u/s 139(3);
c) any person by whom some amount of interest, tax or penalty is payable under this Act; or
d) any person who is entitled to refund of tax under this Act.
Representative assessee or deemed assessee: A person may not be liable only for his own income or loss but also
on the income or loss of other persons e.g. agent of a non-‐resident, guardian of minor or lunatic etc. In such cases,
the person responsible for the assessment of income of such person is called representative assesses. Such person is
deemed to be an assessee.
In case of a deceased person who dies after writing his will the executors of the property of deceased are deemed
as assessees.
In case a person dies intestate (without writing his will) his eldest son or other legal heirs are deemed as assesses.
In case of a minor, lunatic or idiot having income taxable under Income-‐tax Act, their guardian is deemed as
assessee.
In case of a non-‐resident having income in India, any person acting on his behalf is deemed as assessee.
Assessee-‐in-‐default: A person is deemed to be an assessee-‐in-‐default if he fails to fulfill his statutory obligations. In
case of an employer paying salary or a person who is paying interest it is their duty to deduct tax at source and
deposit the amount of tax so collected in Government treasury. If he fails to deduct tax at
source or deducts tax but does not deposit it in the treasury, he is known as assessee-‐in-‐default.

Assessment: Section 2(8):
This is the procedure by which the income of an assessee is determined by the Assessing Officer. It may be by way
of a normal assessment or by way of reassessment of an income previously assessed.

Assessment Year: Section 2(9):
This means a period of 12 months commencing on 1st April every year. The year in which income is earned is the
previous year and such income is taxable in the immediately following year which is the assessment year. Income
earned in the previous year 2017-‐18 is taxable in the assessment year 2018-‐19.

Previous Year: Section 3:
It means the financial year immediately preceding the assessment year.
General rule: Income of a previous year is assessed in the assessment year following the previous year. Exception to
this rule: Cases where income of a previous year is assessed in the previous year itself.
(a) Shipping business of non-‐resident [Section 172] (b) Persons leaving India [Section 174] (c) AOP / BOI /
Artificial Juridical Person formed for a particular event or purpose [Section 174A] (d) Persons likely to
transfer property to avoid tax [Section 175] (e) Discontinued business [Section 176]

Person: Section 2(31): It includes,
a) An Individual;
b) A Hindu Undivided Family;
c) A Company;
d) A Firm;
e) An association of persons or a body of individuals, whether incorporated
f) A Local Authority, and
g) Every artificial juridical person not falling within any of the proceedings sub-‐clauses.

Average Rate of Tax: Section 2(10):
It means the rate arrived at by dividing the amount of income-‐tax calculated on the total income, by such total
income.

Maximum marginal rate: Section 2(29C):
It means the rate of income-‐tax (including surcharge on the income-‐tax, if any) applicable in relation to the highest
slab of income in the case of an individual, AOP or BOI, as the case may be, as specified in Finance Act of the
relevant year.

Income: Section 2(24): It includes,
(1) Profits and gains.
(2) Dividends.
(3) Voluntary contributions received by a trust/institution created wholly or partly for charitable or religious
purposes or by certain research association or universities and other educational institutions or hospitals and other
medical institutions or an electoral trust.
(4) The value of any perquisite or profit in lieu of salary taxable under section 17.
(5) Any special allowance or benefit other than the perquisite included above, specifically granted to the assessee to
meet expenses wholly, necessarily and exclusively for the performance of the duties of an office or employment of
profit.
(6) Any allowance granted to the assessee to meet his personal expenses at the place where the duties of his office
or employment of profit are ordinarily performed by him or at a place where he ordinarily resides or to compensate
him for the increased cost of living.
(7) The value of any benefit or perquisite whether convertible into money or not, obtained from a company either
by a director or by a person who has a substantial interest in the company or by a relative of the director or such
person and any sum paid by any such company in respect of any obligation which, but for such payment would have
been payable by the director or other person aforesaid.
(8) The value of any benefit or perquisite, whether convertible into money or not, which is obtained by any
representative assessee or by any beneficiary or any amount paid by the representative assessee for the benefit of
the beneficiary which the beneficiary would have ordinarily been required to pay.
(9) Deemed profits chargeable to tax under section 41 or section 59.
(10) Profits and gains of business or profession chargeable to tax under section 28.
(11) Any capital gains chargeable under section 45.
(12) The profits and gains of any insurance business carried on by Mutual Insurance Company or by a cooperative
society, computed in accordance with Section 44 or any surplus taken to be such profits and gains by virtue of the
provisions contained in the first Schedule to the Act.
(13) The profits and gains of any business of banking (including providing credit facilities) carried on by a co-‐
operative society with its members.
(14) Any winnings from lotteries, cross-‐word puzzles, races including horse races, card games and other games of
any sort or from gambling, or betting of any form or nature whatsoever.

Gross Total Income (GTI): It is equal to Salary Income + House Property Income + Business or Profession
Income + Capital Gains + Other Sources Income + Clubbing of Income -‐ Set-‐off of Losses

Total Income: Section 2(45) of Income Tax Act, 1961, unless the context otherwise requires, the term “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 under Chapter VIA (i.e., U/s 80C
to 80U) from Gross Total Income.

Steps to find Total income:
Step 1 – Determination of residential status
Step 2 – Classification of income under different heads
Step 3– Computation of income under each head
Step 4 – Clubbing of income of spouse, minor child etc.
Step 5 – Set-‐off or carry forward and set-‐off of losses
Step 6 – Computation of Gross Total Income
Step 7 – Deductions from Gross Total Income
Step 8 – Computation of Total income

Residential status [Section 6]:
Individuals:
(1) Resident and ordinarily resident: Satisfies any one of the basic conditions and both the additional
conditions
(2) Resident but not ordinarily resident: Satisfies any one of the basic conditions and both not the
additional conditions together
(3) Non-‐resident: Does not satisfy any of the basic conditions

Section 6(1): Basic Conditions:
(i) He has been in India during the previous year for a total period of 182 days or more, or
(ii) He has been in India during the 4 years immediately preceding the previous year for a total period of 365 days
or more and has been in India for at least 60 days in the previous year.
If the individual satisfies any one of the conditions mentioned above, he is a resident.
If both the above conditions are not satisfied, the individual is a non-‐resident.
Exception to second rule:
(1) Indian citizens, who leave India in any previous year as a member of the crew of an Indian ship or for purposes
of employment outside India, or
(2) Indian citizen or person of Indian origin engaged outside India in an employment or a business or profession or
in any other vocation, who comes on a visit to India in any previous year

Section 6(6): Additional Conditions:
(i) He is a resident at least in any 2 out of the last 10 years preceding the relevant previous year, and
(ii) His total stay in India in the last 7 years preceding the relevant previous year is 730 days or more.

Residential status of HUFs:
(i) Resident and ordinarily resident: The control and management of its affairs is situated wholly or partly in
India and the Karta should satisfy any one of the basic conditions and both the additional conditions as laid down
for individuals
(ii) Resident but not ordinarily resident: The control and management of its affairs is situated wholly or partly in
India and the Karta should satisfy any one of the basic conditions and not both the additional conditions together
as laid down for individuals
(iii) Non Resident: The control and management of its affairs is situated wholly outside India.

Residential status of Firms and AOPs:
(a) Resident: If the control & management of its affairs is situated wholly or partly in India.
(b) Non-‐Resident: If the control and management of the affairs is situated wholly outside India.
Residential status of Company:
(a) Resident: If it is an Indian Company or its place of effective management (POEM) in that year is in India.
(b) Non-‐Resident: If the company is not an Indian Company and its POEM is also not in India in that year.

Scope of Total Income [Section 5]
Particulars ROR RNOR NR
Income received or deemed to be received in India during the P.Y. Tax Tax Tax
Income accruing or arising or deeming to accrue or arise in India during the P.Y. Tax Tax Tax
Income accruing or arising outside India from:
Business/Profession: Business controlled from or profession set up in India Tax Tax -‐
Business/Profession: Business not controlled from or profession not set up in India Tax -‐ -‐
Other Sources Tax -‐ -‐

Exempted Incomes
Agricultural income [Section 10(1)]
Share income of a partner [Section 10(2A)]
Interest on notified securities and bonds issued to non-‐residents [Section 10(4)]
Leave travel concession [Section 10(5)]
Remuneration received by officials of Embassies etc. of Foreign States [Section 10(6)(ii)]
Gratuity [Section 10(10)]
Commuted pension [Section 10(10A)]
Leave salary or encashment of Earned leave [Section 10(10AA)]
Statutory Provident Fund (SPF) & Public Provident Fund (PPF) [Section 10(11)]
Tax holiday on newly established SEZs [[Section 10AA]
Payment from Sukanya Samriddhi Account [Section 10(11A)]
Recognised Provident Fund [Section 10(12)]
HRA (House rent allowance) [Section 10(13A)]
Educational scholarships [Section 10(16)]
Payments to MPs & MLAs [Section 10(17)]: Daily Allowance & Constituency Allowance
Awards for literary, scientific and artistic works and other awards by the Government [Section 10(17A)]
Pension received by recipient of gallantry awards (Param Vir / Maha Vir Chakra / Vir Chakra ) [Section 10(18)]
Dividends from Indian company [Section 10(34)]
Income from units from mutual fund [Section 10(35)]
LTCG [Long term capital gain] on transfer of Equity Shares or units in cases covered by STT [securities transaction
tax] [Sec 10(38)]

Partly agricultural incomes: [Rule 7, 7A, 7B and 8]
Rule 7 -‐ Income from growing and manufacturing of any product-‐Where income is partially agricultural income and
partially income chargeable to income-‐tax as business income, the market value of any agricultural produce which
has been raised by the assessee or received by him as rent in kind and which has been utilised as raw material in
such business or the sale receipts of which are included in the accounts of the business shall be deducted. No
further deduction shall be made in respect of any expenditure incurred by the assesse as a cultivator or receiver of
rent in kind. Example: Income from sale of sugarcane gives rise to agricultural income and from sale of sugar gives
rise to business income.
Table explaining Rules 7A, 7B, and 8:
Rule Apportionment of income in certain cases Agricultural Business
7A Income from growing and manufacturing of rubber 65% 35%
7B Income from growing and manufacturing of coffee
(i) Income derived from the sale of coffee grown and cured 75% 25%
(ii) Income derived from the sale of coffee grown, cured, roasted & grounded 60% 40%
8 Income from growing and manufacturing of tea 60% 40%

Problems:
1. Determine the previous year and assessment year in the following cases:
A. Mr. Anirudh, an officer in RBI working since February 1st, 2012.
B. Mr. Bimal got his got employment after completing his MBA on 1st August, 2017.
C. Dr. Charan started his medical practice on 1st February, 2017 after fulfilling necessary conditions
imposed by medical council.
D. Mr. Abhay, a Chartered accountant, sets up his profession on 1st July, 2017.
E. Ms. Amreen is running a business since 1st October 2017

2. Identify the type of person in the following cases:
A. Mr. Stephen, a practicing advocate
B. Sun Pharmaceuticals
C. Mr. A, Mr. B, Mr. C co-‐ventures in a joint venture.
D. Jain University
E. Rotary club
F. BHEL
G. Mr. A, Karta of HUF
H. Srinagar Housing Society
I. Mr. Ram, Professor of Physics
J. Sri. Balaji, Deity
K. Mr. A, Mr., & other is member of the joint Hindu family carrying on export business.

3. Mr. Brown, a foreign national come to India for first time on 1st August, 2017 and went back on 23rd
February,2018 to his home country. Determine the residential status of Mr. Brown for your assessment year.
4. Mr. Amogh an Indian citizen went to Australia on 1st January 2018. This was his first foreign visit in the last 22
years. Determine his residential status.
5 Mr. Chan a Japanese citizen left India after his stay of 10 years on 1st June 2015. During the financial year 2016-‐17
he comes to India for 46 days later he returns to India for 1 year on 10/10/2017. Determine his residential status for
your assessment year.
6. The business of a HUF is transacted from Australia and all the policy decisions are taken there. Mr. E, the karta of
the HUF, who was born in Kolkata, visits India during the P.Y. 2017-‐18 after 15 years. He comes to India on 1.4.2017
and leaves for Australia on 1.12.2017.
Required:
a. Determine the residential status of Mr. Eshwar for your previous year
b. Determine the residential status of HUF for your previous year
c. What is your answer, had Mr. Eshwar left India on 01/07/2017.
7. Mr. Zaheer had the following receipts during the previous year. Dividend from British company and received
there Rs. 10000.
a) Rent from property in Bangalore Rs 25000
b) Short term capital gain from sale of shares of an Indian company and received in Germany Rs.18000
c) Dividend from ONGC Rs.7000
d) Income from salary from Indian employer,40% of which received in Srilanka Rs.10000
e) Agricultural income lands in Gujarat Rs.20000
f) Income from business in Qatar received there Rs. 50000 business using controlled from India.
g) Income from profession in Thailand received there Rs.40000, the profession is set up in Thailand.
Required: Determine the scope of total income assuming Mr. Zaheer is ROR, RNOR, NR.

8. Mr. B grows sugarcane and uses the same for the purpose of manufacturing sugar in his factory. 30% of
sugarcane produce is sold for Rs. 10 lacs, and the cost of cultivation of such sugarcane is Rs. 5 lacs. The cost of
cultivation of the balance sugarcane (70%) is Rs. 14 lacs and the market value of the same is Rs. 22 lacs. After
incurring Rs. 1.5 lacs in the manufacturing process on the balance sugarcane, the sugar was sold for Rs. 25 lacs.
Compute B’s business income and agricultural income.
Solution:
Income from sale of sugarcane gives rise to agricultural income and from sale of sugar gives rise to business income.
Business income = Sales – Market value of 70% of sugarcane produce – Manufacturing expenses
= Rs. 25 lacs – Rs. 22 lacs – Rs. 1.5 lacs = Rs. 1.5 lacs.
Agricultural income = Market value of sugarcane produce – Cost of cultivation
= [ Rs. 10 lacs + Rs. 22 lacs] – [ Rs. 5 lacs + Rs. 14 lacs]
= Rs. 32 lacs – Rs. 19 lacs = Rs. 13 lacs.

9. Mr. C manufactures latex from the rubber plants grown by him in India. These are then sold in the market for Rs.
30 lacs. The cost of growing rubber plants is Rs. 10 lacs and that of manufacturing latex is Rs. 8 lacs. Compute his
total income.
Solution:
The total income of Mr. C comprises of agricultural income and business income.
Total profits from the sale of latex= Rs. 30 lacs – Rs. 10 lacs – Rs. 8 lacs = Rs. 12 lacs.
Agricultural income = 65% of Rs. 12 lacs. = Rs. 7.8 lacs
Business income = 35% of Rs. 12 lacs. = Rs. 4.2 lacs

Jain University CMS B School Business Taxation Module Overview

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