Under the Income tax act 1961 of section 5 has defined that the incidence of tax on a tax payer depends on his residential status and also the time of accrual or receiving the Income. So the Income of a resident divided into two parts-
(i) Indian Income
(ii) Foreign Income
Indian Income has Include the following conditions:-
(a) Income received in India during the previous year and also accrued in India.
(b) Income received in India during the previous year but not accrued in India.
(c) Income not received in India during the previous year but accrued in India.
Foreign Income has included the following conditions:-
(a) Income not received in India
(b) Income not accrued or not arises in India.
Important Points to be consider before deciding the taxability of Income under Income Tax Act
- Indian Income always taxable in India irrespective of the residential status of the taxpayer.
- Foreign income in case of Individual and HUF from a business controlled or profession set up in India will be taxable in the hands of resident and ordinarily resident and non ordinarily resident but not in the hands of non-resident.
- Foreign income from a business controlled or profession setup outside India will be taxable only by the resident and ordinarily resident but not by the non-ordinarily resident and non-resident.
- Foreign income of any other taxpayer (company, firm, AOP, BOP etc.) will be taxable if the taxpayer is resident in India and will not be taxable in case the taxpayer is non-resident person.
- When the income accrues or arises or is deemed to accrue or arise to the assessee in India during the previous year, it is to be taxed in that year. Therefore, that receipt of a particular amount in the relevant year should be an “income” under the provision.
- If following mercantile method of accounting, then until the services are rendered by assessee, the income cannot be recognized and therefore, no income accrues.
Important Case Laws related to Incidence of Tax under Income Tax Act,1961
Exemptions — Section 5(1) (i) of the Wealth-tax Act, 1957 ADIT vs. N. SELVARAJOULU [2005
S. 5(1)(b), 145 of IT Act, 1961—Income—Under s. 5(1)(b) of the Act, when the income accrues or arises or is deemed to accrue or arise to the assessee in India during the previous year, it is to be taxed in that year. Therefore, that receipt of a particular amount in the relevant year should be an “income” under the provision. Sec. 145 of the Act, states that business income is to be computed in accordance with the cash or mercantile system of accounting. Under Accounting Standard 9, revenue is recognized only when the services are actually rendered. If the services are rendered partially, revenue is to be shown proportionate with the degree of completion of the services. A right to receive a particular sum under agreement would not be sufficient unless the right accrued by rendering of services and not by a promise for services. When the right to receive is anterior to the rendering of services, the income would accrue on the rendering of the services. The assessee is running a coaching institution where students are coached for entrance examination and it followed mercantile method of accounting however, assessee is charged fees in advance for entire course presumably because there should not by any default by the students during the period of course. Until the services are rendered by assessee, the income cannot be recognized and therefore, no income accrues—CIT vs. Dinesh Kumar Goel (2011) 331 ITR 10 (Delhi)
S. 5(1)(d) of IT Act, 1961—Expenditure-tax—Expenditure that is chargeable under the Act is what is incurred by guests in the hotel for services available in the hotel. The services covered by s. 5 are the services provided in the hotel whether those are provided by the Hotel or not. Boat charges and receipts for diving and water sports facilities do not fall under the residuary clause, RAVIPRAJother servicesRAVIPRAJ referred to in s. 5(1)(d) of the Act and some are not liable to expenditure-tax. Telephone charges recovered from the customers are liable to expenditure-tax since these telephone services are provided in the hotel. Laundry charges collected by the hotel from its customer fall under RAVIPRAJother servicesRAVIPRAJ and therefore, same are liable to expenditure tax—CIT vs. Hotel Allied Trades (P) Ltd. (2010) 233 CTR 485 (Ker)
S. 5(1), 6(1)(a), 6(a) of IT Act, 1961—Residence—If the assessee has not been resident in India in nine out of ten previous years, he will be “not ordinarily resident” and merely because in the notes on Clauses it has been mentioned that it is clarificatory in nature, it cannot be said that the substituted section is clarificatory in nature—Abhay Pratap Singh Sengar vs. ITO (2009) 311 ITR 59 (ITAT-Lucknow)
Income Tax Act, 1961, section 5(1)—Income—Life membership subscriptions—Two substantial questions of law were as under:—“(1) Whether the learned Tribunal has erred in law in affirming the order of the CIT (A) deleting the addition made by the Assessing Officer on account of life membership subscriptions received by the assessee treating the same as income and whether the finding of the learned Tribunal is perverse? (2) Assuming that the subscription received by the assessee was a capital receipt by way of deposit and the subscription of the subscriber was to be adjusted against the income arise out of the said deposit, whether the Tribunal was right in law in holding that interest which the assessee has shown accrued on the said deposits also does not form part of the income to the assessee merely on the ground that the assessee has not chosen to charge interest from the members of the partnership to whom the money had been advanced?”. While allowing the appeal partly, the High Court of Judicature for Rajasthan held that:—the amounts, received by the assessee, as subscription for life membership, cannot be said to be amounting to revenue receipts, liable to tax, rather, they are in the nature of capital receipts, liable to be returned to the subscriber/member constituent. On one hand, the assessee is enjoying the principal amount, and is not paying tax on the usufruct thereof, and on the other hand, is also claiming deduction, under the head of business expenditure, for the publication, sent to such life members. This cannot be permitted on any parameters. The matter is remanded back to the AO to decide the other part of the matter afresh, in accordance with the observation, made above. CIT, Jodhpur vs. Mantra Tantra Yantra Vigyan (Raj)