Chapter 1: Basic Concepts

Chapter 1: Basic Concepts


Chapter 1: Basic Concepts - Potential 5-Mark Questions and Model Answers

1. Define "Person" under the Income Tax Act, 1961, and explain the types of persons.

Introduction: As per Section 2(31) of the Income Tax Act, 1961, the term "Person" includes a variety of entities who are liable to pay tax. The definition is broad and covers individuals, companies, and other legal entities.

Body: The term "Person" includes the following types:

  1. Individual:
    • A natural person or a human being who is liable to pay tax on their income.
    • Example: A salaried employee or a businessman.
  2. Hindu Undivided Family (HUF):
    • A family consisting of common ancestors and their descendants, including their wives and children.
    • Example: A family owning agricultural land or a joint family business.
  3. Company:
    • A company, whether a domestic or foreign company, is treated as a separate legal entity for tax purposes.
    • Example: A private limited company or a public limited company.
  4. Firm, Association of Persons (AOP), and Body of Individuals (BOI):
    • A partnership firm, or a group of persons or entities formed for a particular purpose, are considered "persons" under the Act.
    • Example: A partnership between two individuals to run a business.
  5. Legal Representatives:
    • A person representing the estate of a deceased person is considered a person.
    • Example: A legal representative or an executor handling the affairs of a deceased person.
  6. Other Persons:
    • Includes trusts, societies, and any other entity created under law.
    • Example: A trust managing a charitable activity.

Conclusion: Thus, "Person" is a broad term under the Income Tax Act, encompassing a variety of individuals and legal entities that are subject to tax.

2. Define "Income" under the Income Tax Act, 1961, and explain its various components.

Introduction: Under Section 2(24) of the Income Tax Act, 1961, "Income" includes any sum received by an assessee as profits, gains, or any form of benefit, whether in the form of money or in-kind.

Body: The components of "Income" include:

  1. Income from Salary:
    • Salaries, wages, bonuses, and other employment benefits provided to an individual in exchange for their services.
  2. Income from House Property:
    • Rent received from letting out property, which includes buildings, land, or commercial properties.
  3. Profits and Gains of Business or Profession:
    • Income from business activities, including income from professional services or any trade.
  4. Capital Gains:
    • Income arising from the sale of capital assets like property, shares, bonds, etc. It is calculated as the difference between the sale price and the cost price.
  5. Income from Other Sources:
    • Any income not falling under the above four categories, such as interest, dividends, winnings from lotteries, etc.

Conclusion: Income under the Income Tax Act encompasses a wide range of receipts, from salaries to business profits and capital gains, and is taxed accordingly.

3. Explain the term "Assessee" and the different types of assessees under the Income Tax Act.

Introduction: As per Section 2(7) of the Income Tax Act, 1961, an "Assessee" refers to a person who is liable to pay tax or any other sum under the provisions of the Act.

Body: The different types of assessees are:

  1. Individual Assessee:
    • A natural person who earns income and is liable to pay tax.
    • Example: A working professional or a self-employed person.
  2. Hindu Undivided Family (HUF):
    • A family consisting of common ancestors and their descendants, which is treated as a separate entity for tax purposes.
    • Example: A joint family business.
  3. Company:
    • A company, either domestic or foreign, is treated as an independent entity under the Income Tax Act.
    • Example: A public limited company or a multinational company.
  4. Firm, Association of Persons (AOP), or Body of Individuals (BOI):
    • A partnership firm, or any group of individuals/entities coming together for a business or professional purpose.
    • Example: A partnership business.
  5. Deemed Assessee:
    • Includes persons deemed to be assessees under specific provisions, such as legal representatives or trustees.
    • Example: A trustee managing a charitable trust.

Conclusion: "Assessee" includes various entities, from individuals to companies, and even trusts or representatives, all of whom are liable to pay taxes under the Income Tax Act.

4. What is the meaning of "Assessment Year" under the Income Tax Act, and how is it related to the "Previous Year"?

Introduction: Section 2(9) of the Income Tax Act, 1961, defines "Assessment Year" as the 12-month period starting from April 1st and ending on March 31st of the following year, during which an assessee’s income is assessed and taxed.

Body:

  1. Previous Year:
    • The "Previous Year" refers to the financial year immediately preceding the assessment year, in which the income is actually earned by the taxpayer.
    • Example: If the assessment year is 2023-24, the previous year would be 2022-23.
  2. Relationship Between Assessment Year and Previous Year:
    • The Previous Year is the year in which income is earned, and the Assessment Year is the year in which the income is assessed and taxed. For example, the income earned in the Previous Year (2022-23) is assessed in the Assessment Year (2023-24).
  3. Importance of the Assessment Year:
    • The assessment year is crucial because it sets the timeline for the filing of tax returns and the determination of tax liabilities.

Conclusion: The Assessment Year is a period for assessing and taxing the income earned in the Previous Year, which runs from April 1st to March 31st.

5. Define "Residential Status" under the Income Tax Act, and explain the different types of residential statuses.

Introduction: Under Section 6 of the Income Tax Act, 1961, a person’s residential status is determined to know how their income is taxed in India. It plays a key role in determining whether an individual is liable to pay tax on global income or only income sourced in India.

Body:

  1. Resident:
    • A person who stays in India for a certain number of days in a financial year. They are taxable on their global income.
    • Example: A person who stays in India for more than 182 days during the year.
  2. Non-Resident:
    • A person who does not meet the conditions for being a resident. They are only liable to pay tax on income earned in India.
    • Example: A person who works abroad and stays in India for less than 182 days during the year.
  3. Resident but Not Ordinarily Resident (RNOR):
    • A person who satisfies the conditions of being a resident but has not been a resident of India for 9 out of the 10 previous years, or has stayed in India for less than 729 days in the last 7 years.
    • Example: A person who resides in India but has spent a significant time abroad in recent years.

Conclusion: A person’s residential status determines the scope of taxation, i.e., whether they are taxed only on income earned in India or on their global income.

General Tips for Answering 5 Mark Questions:

  • Be Clear & Concise: Focus on defining terms clearly and elaborating in a simple manner.
  • Use Relevant Sections: Always cite the sections of the Income Tax Act to demonstrate the legal backing of your answer.
  • Give Examples: Use real-life examples to make the concepts relatable.
  • Conclude Effectively: Summarize key points or emphasize why the concept is important.

By following these guidelines and structuring your answers with the appropriate depth and clarity, you will be well-prepared for any 5-mark questions in the Income Tax Law exam for CA Intermediate.

 


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