Unit – I
INCOME TAX LAW
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Syllabus Income Tax Law: An Introduction- concept
of tax, an overview of income tax law in India, levy of income tax, concept
of income. Important definition of income tax Act – Assessee, Assessment
year, Previous year, Person, Income, Charge of Income tax, Return of Tax,
Gross total income, Scope of total income, Residential status and tax
liability. |
1. Assessee [Section 2(7)]
“Assessee” means a person by whom any tax or any other sum of money
is payable under this Act. In addition, it includes –
i. 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
* the income of
any other person in respect of which he is assessable; or
* the loss
sustained by him or by such other person; or
* the amount of
refund due to him or by such other person.
ii. Every person who is deemed to be an assessee under any provision
of this Act;
iii. Every person who is deemed to be an assessee-in-default under
any provision of this Act.
2.
Assessment year [section 2(9)]: Assessment year means the period of 12 months
commencing on the first day of April every year. It is therefore, the period
from 1st of April to 31st of March, for example, the
assessment year 2020-2021 will commence on 1.4.2020 and will ends on 31.3.2021.
The tax is levied, in each assessment year, with respect to or on the total
income earned by the assessee in the previous year.
3.
Previous Year [section 3]:
According to section 3, previous year means the financial year immediately
preceding the assessment year. Financial year means a year which starts on 1st
April and ends on 31st March. Income tax is payable on the income
earned during the previous year and it is assessed in the immediately preceding
succeeding financial year which is called assessment year. Therefore, the
income earned during the previous year 1.4.2019 to 31.3.2020 will be assessed
or charged to tax in the assessment year 2020-2021.
Business or Profession
newly set up during the financial year:
In such a case, the
previous year shall be the period beginning on the date of setting up of the
business or profession and ending with 31st March of the said
financial year.
If a source of income
comes into existence in the said financial year, then the previous year will
commence from the date on which the source of income newly comes into existence
and will end with 31st March of the financial year.
4.
Definition of Income [section 2(24)]:
The definition of income
as per the Income-tax Act, 1961 begins with the words “Income includes”.
Therefore, it is an inclusive definition and not an exhaustive one. Section
2(24) of the Act gives a statutory definition of income. The term income
includes the following:
i. Profits and Gains;
ii. Dividends;
iii. Voluntary
contributions received by a trust/institution created wholly or partly for
charitable or religious purposes or by certain research association or
universities and other educational institutions or hospitals and other medical
institutions or an electoral trust.
iv. The value of any
perquisite or profit in lieu of salary taxable under section 17;
v. Any special
allowance or benefit other than the perquisite included above, specially
granted to the assessee to meet expenses wholly, necessarily and exclusively
for the performance of the duties of an office or employment of profit.
vi. The value of any
benefit or perquisite, whether convertible into money or not, obtained from a
company either by a director or by a person who has a substantial interest in
the company, or by a relative of the director;
vii. Deemed profits
chargeable to tax under section 41 or section 59;
viii. Profits and
gains of business or profession chargeable to tax under section 28.
ix. Any capital gains
chargeable under section 45;
x. The profit and
gains of any business of insurance carried on by a mutual insurance company or
by a co-operative society, computed in accordance with section 44 or any
surplus taken to be such profits and gains by virtue of the provisions
contained in the first schedule to the Act.
xi. The profits and
gains of any business of banking (including providing credit facilities)
carried on by a co-operative society with its members.
xii. Any winnings from
lotteries, crossword puzzles, races including horse races, card games and other
games of any sort or from gambling or betting of any form or nature whatsoever;
xiii. Any sum received
by the assessee from his employees as contributions to any provident fund or
superannuation fund or any fund set-up under the provisions of the employees
state insurance Act, 1948; or any other
fund for the welfare of such employees;
xiv. Any sum received
under a key man insurance policy including the sum allocated by way of bonus on
such policy.
5.
Gross total income:
In order to find out the gross total income of an assessee, it is necessary
that first of all income under different heads should be computed separately.
In order to calculate the taxable income under each head, certain deductions
have to be made from gross income of that head. There are separate sections in
the income tax Act for calculating the taxable income under different heads.
Moreover, certain exemptions are allowed under section 10 to compute the
taxable income under different heads of income:
i. Salaries;
ii. Income from House
Property;
iii. Profit and gains
of Business or Profession;
iv. Capital gains;
v. Income from other
source.
Aggregate of incomes computed under the above
five heads, after applying clubbing provisions and making adjustments of set
off and carry forward of losses but before any deduction under chapter VI-A is
known as gross total income.
6.
Total Income or Taxable Income: In order to find out the gross total income of an
assessee, it is necessary that first of all income under different heads should
be computed separately. In order to calculate the taxable income under each
head, certain deductions have to be made from gross income of that head. There
are separate sections in the income tax Act for calculating the taxable income
under different heads. Moreover, certain exemptions are allowed under section
10 to compute the taxable income under different heads of income:
i. Salaries;
ii. Income from House
Property;
iii. Profit and gains
of Business or Profession;
iv. Capital gains;
v. Income from other
source.
Aggregate of incomes computed under the above
five heads, after applying clubbing provisions and making adjustments of set
off and carry forward of losses but before any deduction under chapter VI-A is
known as gross total income from which the assessee has a right to deduct
certain deductions under chapter VI-A i.e. deductions under section 80C to 80U,
which are available to him depending upon the residential status and the
balance so found is the total income or taxable income.
7. Concept of Income: The word income covers receipts in the shape of money or money’s worth which arise with certain regularity or expected regularity from a definite source. However, all receipts do not form the basis of taxation under the Act. Broadly, an analogy is drawn of a tree and the fruits of that tree. The tree symbolizes the source from which one gets fruits which symbolizes income. The receipt arises from the sale of tree itself is, therefore, considered a capital receipt which is not an income; but the receipts flowing from this source viz., fruits is income.
8.
Charge of income tax [section 4]:
No tax can be levied or collected in India
except under the authority of law. Section 4 of the income tax Act gives such
authority for charging of income tax.
The following basic
principals immerge from the charging sections:-
a. Income tax is an
annual tax on income;
b. Income of previous
year is taxable in the next following assessment year at the rate or rates
applicable to that assessment year. However there are certain exceptions to
this rule;
c. The tax rates are
fixed by the Annual Finance Act;
d. Tax is charged on
every person as defined in section 2(31);
e. The tax is charged
on the total income of every person computed in accordance with the provisions
of this Act.
f. Income tax is to be
deducted at the sources or paid in advance as provided under the provision of
the Act.
g. The scope of tax
liability of an income will depend on the residential status of the assessee as
per the provisions of section 6.
9.
Person [section 2(31)]:
Person includes:
i. An Individual;
ii. A Hindu Undivided
Family;
iii. A Company;
iv. A Firm;
v. An Association of
Persons (AOP) or a Body of Individuals (BOI).
vi. A Local authority;
vii. Every artificial
juridical person not falling within any of the preceding sub-clauses.
i. An individual means
a natural person i.e. a human being. It includes a male, female, minor child.
However, the income of a minor is now generally included in the income of a
parent. Since minor is not competent to contract, his income shall be taxable
through his legal guardian.
ii. A Hindu Undivided
Family has not been defined under the tax laws. However, as per the Hindu law,
it means a family which consists of all persons lineally descended from a
common ancestor including their wives and daughters.
iii. A Company means a
joint stock company.
iv. A firm shall have
the meaning assigned to it in the Indian partnership Act, 1932 and shall
include a limited liability partnership.
v. Association of
persons: Association of persons means two or more persons who join for a common
purpose with a view to earn an income. It need not be on the basis of a
contract. Therefore, if two or more persons join hands to carry on a business
but do not constitute a partnership, they may be assessed as an Association of
Persons (AOP)
Body of Individuals:
Body of Individuals means a conglomeration of individuals who carry on some
activity with the objective of earning some income. It would consist of
individuals. Entities like companies or firms cannot be members of a Body of
Individuals.
vi. 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.
vii. 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.
10.
Residential Status of an Assessee:
Section 5 of the
income tax Act, states that the income of an assessee is determined with
reference to his residential status in India during the previous year. All
taxable entities are divided in the following categories for the purpose of
determining residential status.
A. An individual
B. A Hindu undivided
family
C. A firm or an
association of persons or a body of individuals
D. A joint stock
company
A. Residential status
of an individual
An individual may be:
a. Resident and
ordinarily resident in India; or
b. Resident but not
ordinarily resident in India; or
c. Non-resident in
India
a. Resident and
ordinarily resident in India
During an assessment
year an individual will be resident in India, if he satisfies any one of the
following two conditions known as basic conditions in the previous year under
section 6(1):
i. He is physically
present in India for 182 days or more in all during the previous year.
ii. He is physically present in India for at least 365 days during the immediately preceding four previous years and is in India for at least 60 days during the current previous year.
However, in case of an individual being a citizen of India:-
Who leaves India any previous year for the purpose of employment outside India or as a member of the crew of an Indian ship shall be resident if he is in India for at least 182 days in place of 60 days mentioned above.
Who being outside India or a person of Indian origin, comes on a visit to India in any previous year on leave, vacation, shall be resident if he is in India for at least 182 days in place of 60 days mentioned above.
An individual should
also satisfy both the following additional conditions as per section 6(6)
besides satisfying any one of the two basic conditions under section 6(1)
before he is considered as a resident and ordinarily resident in India.
i. He was resident in
India in at least two out of 10 previous years [according to basic condition as
per section 6(1)] immediately preceding the current previous year.
ii. He was physically
present in India for at least 730 days during the seven previous years
immediately preceding the current previous year.
b. Resident but not ordinarily resident in
India
An individual who
satisfies any one of the two basic conditions mentioned under section 6(1) but
does not satisfy both the additional condition under section 6(6) is said to be
not ordinarily resident in India.
c. Non-resident in
India
An individual is
considered as non-resident in India if he does not satisfy any one of the two
basic conditions mentioned under section 6(1).
B. Residential status
of a HUF
A HUF may be:
a. Resident and
ordinarily resident in India; or
b. Resident but not
ordinarily resident in India; or
c. Non-resident in
India
a. Resident and
ordinarily resident in India
A HUF is said to be
resident in India if control and management of its affairs is wholly or partly
situated in India during the relevant previous year.
A resident HUF is an
ordinarily resident in India, if Karta or manager of the family satisfies the
following two additional conditions as laid down by section 6(6):-
i. He was resident in
India in at least two out of 10 previous years [according to basic condition as
per section 6(1)] immediately preceding the current previous year.
ii. He was physically
present in India for at least 730 days during the seven previous years
immediately preceding the current previous year.
b. Resident but not
ordinarily resident in India
A resident HUF is said
to be resident and not ordinarily resident, if Karta or manager of HUF does not
satisfy the two additional conditions.
c. Non-resident in
India
A HUF is considered
non-resident in India, if control and management of its affairs is wholly
situated outside India.
C. Residential status
of a Firm, AOP or a BOI and other persons (Except company)
A Firm or an AOP or a BOI may be either:-
a. Resident b. Non-resident
a. Resident
A partnership firm and
an AOP are said to be resident in India if control and management of their
affairs are wholly or partly situated within India during the relevant previous
year.
b. Non-resident
If the control and
management of the affairs of these entities is wholly situated outside India
during the relevant previous year then they are said to be non- resident.
D. Residential status
of a Company
A company may be
either:-
a. Resident b. Non-resident
a. Resident
A company is said to
be a resident in India in any previous year If,
i. It is an Indian
company
ii. During the
relevant previous year, the control and management of its affairs is situated
wholly in India.
b. Non-resident
A company is said to
be a non resident in India in any previous year if,
i. It is not an Indian
company
ii. The control and
management of its affairs is wholly or partly situated outside India.
11. Scope of Total Income
Section 5 provides the scope of total income in terms of the
residential status of the assessee because the incidence of tax on any person
depends upon his residential status. The scope of total income of an assessee
depends upon the following three important considerations:
(i) the residential status of the assessee;
(ii) the place of accrual or receipt of income, whether actual or
deemed; and
(iii) the point of time at which the income had accrued to or was
received by or on behalf of the assessee.
The ambit of total income of the three classes of assessee would be
as follows:
(1) Resident and ordinarily resident
The total income of a resident assessee would, under section 5(1),
consist of:
(i) income received or deemed to be received in India during the
previous year;
(ii) income which accrues or arises or is deemed to accrue or arise
in India during the previous year; and
(iii) income which accrues or arises outside India even if it is not
received or brought into India during the previous year.
In simpler terms, a resident and ordinarily resident has to pay tax
on the total income accrued or deemed to accrue, received or deemed to be
received in or outside India.
(2) Resident but not ordinarily resident
Under section 5(1), the computation of total income of resident but
not ordinarily resident is the same as in the case of resident and ordinarily
resident stated above except for the fact that the income accruing or arising
to him outside India is not to be included in his total income.
However, where such income is derived from a business controlled
from or profession set up in India, then it must be included in his total
income even though it accrues or arises outside India.
(3) Non-resident
A non-resident’s total income under section 5(2) includes:
(i) income received or deemed to be received in India in the
previous year; and
(ii) income which accrues or arises or is deemed to accrue or arise
in India during the previous year.
12. Residential status and Scope of Total Income.
13. Define the term previous year and assessment year. What
are the exceptions to the rule that income of a previous year is assessed to
tax in the assessment year?
Ans:
Previous Year [section 3]:
According to section 3, previous year means the financial year immediately
preceding the assessment year. Financial year means a year which starts on 1st
April and ends on 31st March. Income tax is payable on the income
earned during the previous year and it is assessed in the immediately preceding
succeeding financial year which is called assessment year. Therefore, the
income earned during the previous year 1.4.2019 to 31.3.2020 will be assessed
or charged to tax in the assessment year 2020-2021.
Business or Profession
newly set up during the financial year:
In such a case, the
previous year shall be the period beginning on the date of setting up of the
business or profession and ending with 31st March of the said
financial year.
If a source of income
comes into existence in the said financial year, then the previous year will
commence from the date on which the source of income newly comes into existence
and will end with 31st March of the financial year.
Assessment
year [section 2(9)]: Assessment
year means the period of 12 months commencing on the first day of April every
year. It is therefore, the period from 1st of April to 31st
of March, for example, the assessment year 2020-2021 will commence on 1.4.2020
and will ends on 31.3.2021. The tax is levied, in each assessment year, with
respect to or on the total income earned by the assessee in the previous year.
The income of an assessee for a previous year is charged to
income-tax in the assessment year following the previous year. For instance,
income of previous year 2019-2020 is assessed during 2020-2021. Therefore,
2020-2021 is the assessment year for assessment of income of the previous year
2019-2020.
However, in a few cases, this rule does not apply and the income is
taxed in the previous year in which it is earned. These exceptions have been
made to protect the interests of revenue. The exceptions are as follows:
(i) Shipping business of non-resident [Section 172]
Where a ship, belonging to or chartered by a non-resident, carries
passengers, livestock, mail or goods shipped at a port in India, the ship is
allowed to leave the port only when the tax has been paid or satisfactory
arrangement has been made for payment thereof. 7.5% of the freight paid or
payable to the owner or the charterer or to any person on his behalf, whether
in India or outside India on account of such carriage is deemed to be his
income which is charged to tax in the same year in which it is earned.
(ii) Person leaving India [Section 174]
Where it appears to the Assessing Officer that any individual may
leave India during the current assessment year or shortly after his expiry and
he has no present intention of returning to India, the total income of such
individual for the period from the expiry of the respective previous year up to
the probable date of his departure from India is chargeable to tax in that
assessment year.
(iii) AOP / BOI / Artificial
Juridical Person formed for a particular event or purpose and the Assessing
Officer apprehends that the AOP/BOI is likely to be dissolved in the same year
or in the next year, he can make assessment of the income up to the date of
dissolution as income of the relevant assessment year.
(iv) Persons likely to transfer property to avoid tax [Section 175]
During the current assessment year, if it appears to the Assessing
Officer that a person is likely to charge, sell, transfer, dispose of or
otherwise part with any of his assets to avoid payment of any liability under
this Act, the total income of such person for the period from the expiry of the
previous year to the date, when the Assessing Officer commences proceedings
under this section is chargeable to tax in that assessment year.
(v) Discontinued business [Section 176]
Where any business or profession is discontinued in any assessment year,
the income of the period from the expiry of the previous year up to the date of
such discontinuance may, at the discretion of the Assessing Officer, be charged
to tax in that assessment year.
