Financial Planning & Tax

Management

Compiled by: CA Richa Singh

 Unit : 3
Introduction to Tax
Cannons of Taxation Person
• By canons of taxation we simply mean the characteristics or qualities which a good tax system
should possess.
• In fact, canons of taxation are related to the administrative part of a tax. Adam Smith first
devised the principles or canons of taxation in 1776.
Types of Canons of Taxation:

• In this sense, his canons of taxation are, indeed, ‘classic’. His four canons of taxation are:
(i) Canon of equality or equity

(ii) Canon of certainty

(iii) Canon of economy
(iv) Canon of convenience.

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Canon of Equality:

• Canon of equality states that the burden of taxation must be distributed equally or equitably among
the taxpayers.
• However, this sort of equality robs of justice because not all taxpayers have the same ability to pay
taxes.
• Rich people are capable of paying more taxes than poor people. Thus, justice demands that a person
having greater ability to pay must pay large taxes.
Canon of Certainty:
• The tax which an individual has to pay should be certain and not arbitrary.
• According to A. Smith, the time of payment, the manner of payment, the quantity to be paid, i.e., tax
liability, ought all to be clear and plain to the contributor and to everyone.
Canon of Economy:
• This canon implies that the cost of collecting a tax should be as minimum as possible.

• Any tax that involves high administrative cost and unusual delay in assessment and high collection of
taxes should be avoided altogether.

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Canon of Convenience:

• Taxes should be levied and collected in such a manner that it provides the greatest convenience not
only to the taxpayer but also to the government.

• Thus, it should be painless and trouble-free as far as practicable.

• “Every tax”, stresses A. Smith: “ought to be levied at time or the manner in which it is most
likely to be convenient for the contributor to pay it.”

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Characteristics of Canons of Taxation:
• A good (may be a near-ideal) tax system has to fulfil the following characteristics:

1. The distribution of tax burden should be equitable such that every person is made to pay his ‘fair
share’.
• This is known as the ‘fairness’ criterion which focuses on two principles:

• Horizontal equity— equals should pay equal taxes; and

• vertical equity—un-equals should pay unequal taxes. That is to say, rich people should pay more taxes

2. But equity must not hamper productive efficiency such that burdens should be provided to correct
inefficiencies. This ‘efficiency ’criterion says that it should raise revenue with the least costs to the
taxpayers so that tax system can allocate resources without distortion.

3. The two other criteria are: ‘flexibility’ and ‘transparency’.

• A good tax system demands changes in tax rates whenever circumstances change the system. .

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 Taxation serves the following purposes:

i. To raise revenue for the government

ii. To redistribute income and wealth from the rich to the poor people

iii. To protect domestic industries from foreign competition

iv. To promote social welfare.

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Assessee:

• Assessee is person who liable to pay Tax, Interest, or penalty under the Income Tax Act and
includes

1. Every person in respect of whom any proceeding under this Act has been taken for the
assessment of his income or assessment of fringe benefits 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
of the amount of refund due to him or to such other person;

2. Every person who is deemed to be an assessee under any provision of this Act;

3. Every person who is deemed to be an assessee in default under any provision of this Act.

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Assessee:
Ordinary Assessee or Normal Assessee

 Any person against whom some proceeding under this act are going on. It is immaterial
whether any tax or other amount is payable by him or not.

 Any person who has sustain loss and has filed return loss u/s 139(3)

 Any person by whom some amount of interest tax paid or penalty is payable under this act

 Any person who entitled to this act

Deemed Assessee or Representative Assessees

• A person may not be liable for his own income only for his own income but also on the income
of other person é.g. Guardians of minors or lunatics, agents of the non residence etc. In such
case the person is responsible for the Assessment of income of such person are called
Representative Assessees , such person is deemed to be assessee .

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Assessee:
An "assessee in default" refers to a taxpayer who fails to fulfill certain obligations under the tax
law. This typically includes:
1. Non-payment of Tax: If an assessee fails to pay the tax due within the stipulated time.
2. Non-deduction or Non-remittance of TDS: If a taxpayer is required to deduct tax at source (TDS)
from payments made to others and fails to do so or does not remit the deducted amount to the
government.
3. Failure to File Returns: If the taxpayer fails to file income tax returns on time.

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Definition of Person [Section 2(31)]

• According to the Income Tax Act 1961,

the definition of a person is broad that
comprised both a natural and an
artificial or a judicial person.
• A person can be an assessee only when
the incidence of tax relies on that
person.
• A person includes:

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 Important Definitions

• The term “individual” means only a natural person, i.e., a human being. It includes both males
and females. It also includes a minor or a person of unsound mind. Since a minor is not
competent to contract, his income shall be taxable through his legal guardian.
• A “Hindu Undivided Family (HUF)” is a unique legal and tax entity specific to Hindu families in
India. It is based on the concept of a joint family that includes all family members across
generations, with the eldest male member typically acting as the head or "Karta" of the family.
• A “Firm" shall have the meaning assigned to it in the Indian Partnership Act, 1932 (9 of 1932),
and shall include a limited liability partnership as defined in the Limited Liability Partnership
Act, 2008 (6 of 2009);
• (ii)"partner" shall have the meaning assigned to it in the Indian Partnership Act, 1932 (9 of
1932), and shall include,—
• (a)any person who, being a minor, has been admitted to the benefits of partnership;

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 What are the HUF Account Rules?
• One should be aware of the terms & conditions required to create a HUF. Below are a
few HUF account rules:
• HUF should only be formed by a family.
• HUF is automatically created for the newly added member of the family at the time of
their marriage.
• HUF, in general, consists of a common ancestor and all of his descendants, including
their daughters and wives.
• Buddhists, Hindus, Sikhs and Jains can form HUF
• HUF often has assets which come as a will, gift, or ancestral property
• Once the HUF is created, the bank account should be created in the name of HUF. After
that, A PAN number will be generated in the name of HUF
• Every member of the family can deposit their income in the common corpus
• Tax benefits are applicable on deposits under various sections
• Corpus can be divided only on the agreement of every coparcener of the family.

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 Important Definitions

• Under the Act, the expression „Company’ means:

a) Any Indian company (established under the companies act ) as defined in section
2(26); or
b) any body corporate incorporated by or under the laws of a country outside India,
i.e., any foreign company; or
c) any institution, association, or body which is assessable or was assessed as a
company for any assessment year under the Indian Income-tax Act, 1922 or for
any assessment year commencing on or before 1.4.1970 under the present Act;
or
d) Any institution, association, or body, whether incorporated or not and whether
Indian or non-Indian, which is declared by a general or special order of the CBDT
to be a company for such assessment years as may be specified in the CBDT‟s
order.

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 Important Definitions
• Association of Persons (AOP)
When persons combine together for promotion of joint enterprise they are assessable as an AOP,
when they do not in law constitute a partnership. In order to constitute an association, persons
must join for a common purpose or action and their object must be to produce income; it is not
enough that the persons receive the income jointly. Co-heirs, co-legatees or co-donees joining
together for a common purpose or action would be chargeable as an AOP.
• Body of Individuals (BOI)
It denotes the status of persons like executors or trustees who merely receive the income jointly
and who may be assessable in like manner and to the same extent as the beneficiaries individually.
Thus, co-executors or co-trustees are assessable as a BOI as their title and interest are indivisible.
Income-tax shall not be payable by an assessee in respect of the receipt of share of income by him
from BOI and on which the tax has already been paid by such BOI.
• Local Authority
The term means a municipal committee, district board, body of port commissioners or other
authority legally entitled to or entrusted by the Government with the control or management of a
municipal or local fund.

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 Important Definitions

• Artificial Persons
This category could cover every artificial juridical person not falling under other heads. An
idol, or deity would be assessable in the status of an artificial juridical person.

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 Determine the status of following persons :

• Reliance Industries Limited.[ company]

• Punjab National Bank.[ company]
• Madras University.[ Artificial Juridical person]
• Calcutta Municipal Corporation.[ Local Authority]
• A partnership firm with A, B and C partners.[ Firm]
• A Brahmin Parivar consisting of Mr. A, his brother B, Mrs. A and B.[ H.U.F.]
• Kalyani Publishers Ltd.[ Company]
• Reserve Bank of India.[ Artifitial Judicial Person]
• Life Insurance Corporation of India.[ Company]
• Narendra Modi, Prime Minister of India.[ Individual]
• A Village Panchyat.[ Local Authority]
• Markfed, Housefed.[ Association of Person – AOP ]

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 Agricultural Income & its assessment. Section 10(1)
According to Sec.10(1), agriculture income is exempted from the income tax.
The section 2(1A) comprehensively describe the term “agriculture income” in the following way:
1) Section 2(1A)(a), an amount of rent or revenue earned from a land which is located in India
and is used for the agricultural purposes.
2) Section 2(1A)(b), an amount of income earned from such land on which processing of
agricultural operations are conducted including the processing of agricultural produce, raised
or received as rent-in-kind so as to offer it into the market or sale of such produce.
3) Section 2(1A)(c), an amount of income which is related to a farm house because of particular
conditions.

Partial Agricultural Income is the income where the assessee is growing agricultural produce and
uses them as raw material for manufacturing of products. The income generated from the sale of
such products will be partial agriculture income & partial non agriculture income.

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 Income treated as Agriculture Income:

1. The income generated by selling the replanted trees.

2. The income earned as rent on the land utilized for agricultural purposes.
3. The income earned as share of profit by being a partner of a firm which involves in the
agricultural business.
4. The income earned by selling the grown flowers & creepers.
5. The income earned as interest on capital when a partner is receiving returns on his
investment from the firm involved in agriculture business.
6. The income earned by selling the seeds.

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 Examples of Non-Agricultural Income

Below are some examples of non-agricultural income:

• Income from poultry farming.
• Income from agricultural land held as stock-in-trade.
• Any dividend paid from an organization’s agriculture income.
• Income from dairy farming.
• Income from bee hiving.
• Income from fisheries.
• Income from cutting and selling timber trees.
• Income from butter and cheese making.
• Receipts from TV serial shooting in the farmhouse.

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 Taxation of Agricultural Income
• As discussed above, agricultural income is exempt from income tax.
However, the Income-tax Act has laid down a method to indirectly tax such income. This method
or concept may be called the partial integration of agricultural income with non-agricultural
income. It aims at taxing the non-agricultural income at higher rates of tax.
• Applicability:
This method is applicable to individuals, HUFs, AOPs, BOIs, and artificial juridical persons, when the
following conditions are met:
• Net agricultural income is greater than Rs. 5,000 during the year; and
• Non-agricultural income is above the basic exemption limit:
In simple terms, the non-agricultural income should be greater than the maximum amount not
chargeable to tax (as per the slab rates).

Thus companies, firms/LLP, co-operative societies, and local authorities are excluded from using
this method.

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Calculation of Agricultural Income

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 Key Changes in Income Tax Slabs: FY 2024-25 vs FY 2023-24

Tax Slab (FY 2024-25) in Rs. Tax Slab (FY 2023-24) in Rs. Tax Rate

Up to 3,00,000 Up to 3,00,000 NIL

3,00,001 - 7,00,000 3,00,001 to 6,00,000 5%

7,00,001 - 10,00,000 6,00,001 to 9,00,000 10%

10,00,001 - 12,00,000 9,00,001 to 12,00,000 15%

12,00,001 - 15,00,000 12,00,001 to 15,00,000 20%

Above 15,00,000 Above 15,00,001 30%

Note: You must note that under the new tax regime, the rebate for income tax has been increased to
Rs.7 lakh from the earlier limit of up to Rs.5 lakh.
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Old Tax Regime

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 Residential status & Tax Incidence
 According to Income Tax Act 1961, section 5 states the extent of total income.

 The extent of total income is explained through the residential status of a person.

 Simply put, the total income of an assessee is measured on the basis of his residence in India
during the previous year.

• The residential status of an individual for income-tax purposes depends on the physical stay of
the individual in India. Based on the period of stay in India in a given financial year, an
individual may be classified as:
• Resident
• Not ordinarily resident (NOR)
• •Non-resident (NR)

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Residential status & Tax Incidence

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Resident

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Additional Conditions

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Residential Status of Firms, AOP & BOIs

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Scope of total income

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