SOURCE BASED TAXATION Vs ASSESSEE BASED TAXATION

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The entire Income Tax Act can be divided into:  assessee based taxation & source based taxation.

The relevant analysis of the same is as follows, which every CA student should know :

A. Tax Rates : The tax rates are given in :

     1. Income Tax Act : Chapter XII (Sec 110 to 115 BBD) i.e Tax Rate on Source)

     2. Finance Act : Tax Rate on Person.

B. Depreciation u/s 32 :  Deduction u/s 32 is given to the Assessee & therefore unabsorbed Depreciation is allowed even if business gets discontinued subsequently.

C. Exemptions u/s 10 to 13B:

     1. Exemption to Assessee : Sec 13 (Trust) & Sec 13A (Political Party)

     2. Exemption to source  :  Generally Sec 10 viz. Dividend, LTCG, Agriculture income

D. Chapter VI-A Deductions :

     1. Sec 80C to Sec 80G – Deduction to assessee.

     2. Sec 80I to Sec 80RRB – Deduction to Source.

E. Set off & Carry Forward Provision :

     1. Set off :

          i) Intrahead Adj. (Sec 70) : Source Based (inner column in Total Income)

         ii) Interhead Adj. (Sec 71) :  Assessee Based (Outer Column in Total Income)

     2. Carry Forward & Set off (Sec 72 to 74A) :  Source Based ( Adj. in inner column of Total Income)

Note: This is the reason as to why we prepare two columns of amount in computation of Total income in practice.

F. Returns , Assessment etc : ROI is filed by Assessee and since Assessment (Sec 143(3),144,147) is on ROI, the assessment is on Person.

G. Special Provisions : (For Assessee)

     Like MAT (Companies), Transfer Pricing, AMT (Firms) etc.

Some Important notes :

1. There is a lot of controversy in classification of income under the heads of income. 

The following rules shall be applied in chronological order :

  a. Specific Charge : Certain receipts are targeted to be classified only in a particular head irrespective of nature of income like:

      i) Gift, lottery winnings under IOS

     ii) Dividend under IOS irrespective whether it is earned by dealer or investor in securities.

   b. Comparative Charge :

         i) Interest earned by dealer in securities is taxed under B&P and by investor under IOS.

        ii) Hire charges towards letting out of facilities eg. Plant & Machinery, Furniture & Fittings etc shall be classified under the head IOS if it cannot be classified under B&P.

        It shall be classified under B&P only when the facilities was temporarily let out due to strike in the factory i.e on account of commercial expediency.

      c. General Charge : First section of every head classifies the income on the basis of a general test laid down therein.

Note: If given an option, assessee shall classify his income under B&P head for two reasons :

1. The Assessee will claim ‘n’ no. of deductions under B&P head like Sec 30 to 37 etc. which will reduce the income to a nominal amount.

2. Losses under the head B&P can be Carry Forward but the same cannot be carried forward under the head IOS.

Written By: CA GROUPS

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