Pooja Nahar

Introduction to Income Tax| Basic Terminology of Income Tax

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Introduction to income tax/ basic terminology of income tax

Introduction:- As per article 265 of the Constitution of India, No tax shall be levied or collected except by authority of law it means if the government wants to levy and collection of tax then there shall be a law and law framed by the government. Constitution of India gives the power to the Parliament and State Legislatures to levy, collect tax and to make laws on the matters in list I, II & III of Seventh Schedule to Article 246.

Lists of the Seventh Schedule to Article 246:-

ListPower to make laws
I (Union List)Parliament (Central Government)
II (State List)State Legislatures
III (Concurrent List)Both Parliament and State Legislatures

Note: Entry 82 of the Union List i.e., List I in the Seventh Schedule to Article 246 of the Constitution of India has given the power to the Parliament to make laws on taxes on income other than agricultural income.

Income tax is one of the major source of revenue for the Central Government.

Central Government collects income tax from company in form of corporation tax and from non-corporate assessees.

Income-tax is a tax levied on the total income of the previous year of every person. A person includes an individual, Hindu Undivided Family (HUF), Association of Persons (AOP), Body of Individuals (BOI), a firm, a company etc.

The income-tax law in India consists of the following components:-

  • Income Tax Act-The levy of income-tax in India is governed by the Income-tax Act, 1961. It extends to the whole of India & came into force on1st April, 1962. It contains sections 1 to 298 and schedules I to XIV.
  • Annual Finance Act– Amendments in Direct tax is brought by Finance Act.
  • Income Tax Rules- These rules are issued by CBDT for the proper administration of the Act.
  • Circulars and Notifications– Circulars issue to deal with specific problem and doubts relating to the scope and meaning of provisions of the Act, if any. Department is bound but not assessee by the circulars.
  • Notifications- issued by the Central Government to give effect to the provisions of the Act.
  • Case laws:- Case laws of Supreme court and High court are taking into consideration when dispute arises.

Important Definitions:-

  • Assessee: As per section 2(7), Assessee” means a person by whom income tax or any other sum of money is payable under this Act.
  • Assessment:- As per section 2(8), procedure of determine the income of assessee.
  • Assessment year- As per section 2(9), the financial year which starts on April1 and ending on March 31 of the next year.
  • Person- As per section 2(31), person includes An individual, HUF, company, firm, AOP, BOI, local authority and every artificial juridical person.
  • Previous year- As per section 3, means the financial year immediately preceding the assessment year. The income earned during the previous year is taxable in the assessment year.
  • Income- As per section 2(24), Income includes profits & gains, dividend, voluntary contribution, value of perquisites, allowance, capital gains, winnings etc. (for details refer sec. 2(24)).

Lease| Types of Lease| Operating Lease| Finance Lease

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Lease :- a lease is a contract between the owner (lessor) and the user (lessee) wherein lessor gives right to use the asset/capital goods/equipment on payment of periodic amount to lessee.

Parties involved in Lease agreement:-

  • Lessor – lessor is the real owner of asset.
  • Lessee – lessee gets the right to use the asset on payment of periodic amount.

Types of Lease :-

Operating lease :- under this lease, lessor is unable to recover the full value of asset/capital goods/equipment and other related charges due to short period of lease. In addition to this, lessor also bear insurance, repair & maintenance costs etc. Operating lease, generally, prefers in the following situations:-

  • When the asset is subject to rapid obsolescence.
  • When the long life of asset is uncertain.
  • When the asset is required for temporary use.

Finance lease :- under this lease, lessor is able to realize the value of asset/equipment due to long period of lease and title of ownership is transferred from lessor to lessee. In such lease, lessee doesn’t have option to terminate the lease agreement subsequently and bear insurance, maintenance costs. In finance lease, two types of options are available for lessee i.e. right to purchase the leased assets after the expiry of initial lease period at an agreed price & the right to share the sale proceeds of the asset after expiry of lease period.

Portfolio Management |Objectives |Phases of Portfolio Management |Portfolio Theories

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Portfolio Management :- Portfolio + Management, portfolio refers to a combination of financial assets or a collection of investment such as shares, bond, mutual funds etc. , management means taking right decision at the right time (i.e. selection of best securities).

Investors invest in securities such as s bonds, debentures and shares etc. & Investment in such type of securities requires analytical skills.

According to the famous punching line that never puts all eggs in the same basket, an investor never invest all funds in one security, he invests in a diversified portfolio that can reduce the risk and get good returns. So, selection of best securities is the important activities in portfolio management.

Objectives :-

  • Safety of Principal- to keep the capital or principal amount safe & it should not erode in terms of purchasing power.
  • Reduce Risk- to reduce the risk by investing in different types of securities.
  • Capital growth- to attain capital growth by reinvesting in growth securities.
  • Stability of income- To facilitate planned & systematic reinvestment of income to ensure stability in returns.
  • Liquidity/Marketability- investor is able to take advantage and buy and sell the securities.
  • Tax benefits- effective plan reduce the tax burden by which yield can be improved effectively.

Phases of Portfolio Management :-

Security Analysis:- various securities are available for an investor to invest such as equity shares, preference shares, debentures and bonds, Convertible Debentures, Deep Discount Bonds, Zero Coupon Bonds, Global Depository Receipts, Euro-currency Bonds, etc. out of these securities, investor has to choose best one, for this detailed analysis of securities is necessary. There are two approaches to analyse security i.e. fundamental and technical analysis. Fundamental analysis focus on fundamental factors of company such as EPS, DP Ratio, company’s market share and management etc. In fundamental analysis, intrinsic value of security compares with the current market price. If the current market price is greater than intrinsic value then the share said to be overprice and vice versa. With the help of fundamental analysis, investor would buy securities which are under- price and sell which are over-price.

The second approach to analyse securities is Technical Analysis. According to this, past movement in the prices of shares are studied to identify the trends and patterns in prices of securities and to predict the future price movements, immediate past patterns is considered.

Portfolio Analysis:- after selection of best securities for investment, the next step is to make portfolio by combining these securities. The return and risk can be studied on the basis of risk return profiles.

Portfolio Selection & Revision:- The rational investor is to identify the best portfolio out of various after that continuously monitor that.

Portfolio Evaluation:- The objective to make a portfolio is maintain optimal risk return.

Theories:- Theories play an important role in selecting and combining securities for expected rate of return for any given degree of risk from investor’s point of view.

  • Traditional Approach:- This approach to portfolio management concerns with the investor, portfolio objectives, investment strategy, other assets, need for income. In addition to this, investor considers age, responsibilities, portfolio needs, need for income, capital maintenance, liquidity, risk and taxation.
  • Modern Approach:- This approach developed by Dr. Harry M. Markowitz in 1950. Harry Markowitz is regarded as the father of Modern Portfolio Theory and his theory provides a mathematical framework in which investors can optimise their risk and return.

Perfect Competition | Features of Perfect Competition| Market in the Economy

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Perfect Competition | Market in the Economy | Features of Perfect Competition

Perfect Competition Market :- is a market where large number of sellers sell identical products to various buyers.

Features:-

  • Homogeneous product :- there is no product differentiation and no distinctive features of the products.
  • Large number of buyers and sellers :- every firm is a price taker and sell the products at the going price. Buyer is also a price taker
  • Transportation Cost :- there is no transportation cost. Price paid by a buyer is equal to the price received by the seller.
  • Knowledge of Market :- every buyer and seller has full knowledge of the prevailing price of the product.
  • Economic Rationality:- every buyer and seller is motivated by his own decision to buy or sell the products.
  • Free Entry & Exit :- new firm can enter the industry and existing firm can close down and leave the industry, there is no restriction.
  • Perfect Mobility of factors of production :- factors of production and workers can freely move from one firm to another.
  • No Government Regulation :- There is no government regulation or interference in terms of the tariff, subsidies, etc.

Difference among Perfect Competition, Monopoly and Monopolistic Competition

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Perfect CompetitionMonopolyMonopolistic Competition
There is large number of buyers and large number of sellers (i.e. firms in industry).Only singer seller is available, no difference between firm and industry.There is large number of buyers and sellers (i.e. firms in industry).
Firms can freely enter and exit the market.There are strong barriers to entry.Firms can freely enter and exit the market.
Firms are price takers.Monopoly is a price maker (full control over price).Some control over price.
Homogeneous (identical) products are available in perfect competition which are perfect substitutes. No close substitutes.Differentiated products which are close substitutes, but not perfect substitutes.
As the name suggest, perfect competition, Competition among firms is perfect.No competition.Imperfect competition.
In such type of market, price is equal to marginal cost.In monopoly, price is higher than marginal cost.In this market, price is higher than marginal cost.
There is Infinitely elastic demand curve is seen in perfect competition.There is downward sloping and highly inelastic demand curve in monopoly.There is downward sloping and more elastic demand curve in monopolistic competition.
Under perfect competition, MR and AR represented by the same curve.Under monopoly, MR starts at the same point as AR.Under monopolistic competition, MR starts at the same point as AR.
There is no supernormal profits in the long run.There is supernormal profits both in the short run and long run.There is no supernormal profits in the long run.
There is no consumer exploitation.consumers can be exploited. Consumers are influenced through competition i.e. price and non price.

The First Schedule to the Finance Act

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The First Schedule to the Finance Act contains four parts which specify the rates of tax

SchedulePartParticulars
First ScheduleIRates of tax for current Assessment Year
First ScheduleIIRates of TDS for the current Financial Year
First ScheduleIIIRates of Income Tax for Income Chargeable to tax under the head “Salaries” & advance tax
First ScheduleIVRules for determining/computing net agricultural income.

DEFINITION AND FEATURES OF PARTNERSHIP

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Partnership | Features of Partnership | Clauses In a Partnership Deed

a sole proprietor may not able to deal with with the financial and managerial demands of the present day business world. If there will be two or more person (individuals) may easily pool their financial and nonfinancial resources to carry on a business.

Section 4 of the Partnership Act, 1932 says, “Partnership is the relation between persons who have agreed to share the profit of a business carried on by all or any of them acting for all.”

Features of a partnership :-

  • Existence of an agreement– the relation of partnership arises from contract between parties and not from status as it happens in case of HUF (Hindu Undivided Family) and formal or written agreement is not necessary to create a partnership.
  • Sharing of profit – Indian Partnership Act, 1932 does not insist upon sharing of losses, the persons must agree to share the profits of the business. Because partner has the right to share the profits of the business.
  • Business – A partnership can exist only in business. Section 2 (b) of Indian Partnership Act, 1932 states that business includes every trade, occupation and profession.
  • Mutual agency – means business is to be carried on by all or any of them acting for all. If the person carrying on the business acts not only for himself but for others then relationship of principals and agents will exist.
  • Minor as a partner – A minor can be partner in partnership firm, but can be admitted to share profit only.

Note :- Minimum partners can be 2 and the maximum number of partners in partnership are 50. Rule 10 of Companies (incorporation) Rules 2014 specifies the maximum limit.

Clauses In a Partnership Deed

  • Name of the firm and the partners.
  • Amount of capital to be contributed by each partner.
  • Commencement and duration of business
  • Drawings limit and the timings of drawings.
  • Rate of interest on capital
  • Rate of interest on loan given to the firm by partners.
  • Rate of interest on drawings.
  • Profit or losses sharing ration.
  • Salary to partners.
  • Any variations in the mutual rights and duties of partners.
  • Method of valuation of goodwill.
  • Procedure of retiring partners and the method of payment of his dues.
  • Basis of the determination of the executors of a deceased partner and the method of payment;
  • Treatment of losses arising out of the insolvency of a partner;
  • Procedure for settlement of disputes among partners;
  • Preparation of accounts and their audit.

Difference Between Consignment and Sale

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ConsignmentSale
Ownership of the goods remains with the consignor till they are sold by the consignee.Ownership of the goods transfers with the transfer of goods from the seller to the buyer.
The consignee can return the unsold goods to the consignor.Goods sold are the property of the buyer and
can be returned only if the seller agrees.
Consignor bears the loss of goods.Buyer will bear the loss after the transfer of goods, if any.
Principal and agent relationship exists between the consignor and the consignee.Creditor and a debtor relationship exists between the seller and the buyer.
Expenses incurred by the consignee to receive the
goods are borne by the consignor unless there is any other agreement.		Expenses incurred by the buyer are borne
by the buyer itself after the transfer of goods.

Consignment Accounts

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Consignment Accounts:- Consign means to send. In accounting, consignment account deals with the situation where one person sends goods to another person on the basis that the goods will be sold on behalf of and at the risk of the former.

Important Points:-

  • The party which sends the goods is called consignor.
  • The party to whom goods are sent is called consignee.
  • The relationship between consignor and consignee is of principal and agent.
  • The ownership of the goods, i.e., the property in the goods, remains with the consignor or the principal the agent or the consignee does not become their owner even though goods are in his possession.
  • On sale, the buyer will become the owner.
  • The consignor does not send an invoice to the consignee but sends only a proforma invoice. Proforma invoice is only means to convey information to the consignee regarding particulars of the goods sent.
  • The consignee receives a commission for his work on the basis of gross sale.
  • For ordinary commission, the consignee is not responsible for any bad debt.
  • , In case of del-credere commission, the consignee is responsible for bad debts . Del-credere commission is calculated on total sales, not merely on credit sales until and unless agreed.
  • The consignee recovers all expenses incurred by him on the consignment from the consignor. However this can be changed by agreement between the two parties.
  • The consignee to give an advance to the consignor in the form of cash or a bill of
  • exchange. It is adjusted against the sale proceeds of the goods.
  • Periodically, the consignees a statement called Account Sales sends to the consignor. It contains sales made by the consignee, the expenses incurred on behalf of the consignor, the commission earned by the consignee and the balance due to the consignor.