Introduction to Income Tax

Published On : 2020-12-27

INTRODUCTION

     ADMINISTRATION OF INCOME TAX IN INDIA
 
Finance Act: Every year a Budget is presented before the parliament by the Finance Minister. One of the important components of the Budget is the Finance Bill. The Bill contains various amendments such as the rates of income tax and other taxes. When the Finance Bill is approved by both the houses of parliament and receives the assent of President, it becomes the Finance Act.
 
Notifications: The CBDT issue 7notifications from time to time for proper administration of the Income Tax Act. Thses notifications become rules and collectively called Income Tax Rules, 1962.
 
Circulars: Circulars also issued by the CBDT to clarify the doubts regarding the scope and meaning of the provisions. These provisions are issued for the guidance of the Income Tax officers and assessees. These circulars are binding on the department, not on the assessee but assessee can take benefit of these circulars.
 
Judicial Decisions: Decisions pronounced by Supreme Court becomes law and they are binding on all the courts, Appellate Tribunal, Income Tax Authorities and on assessees while High Court decisions are binding on assessees and Income Tax Authorities which come under its jurisdiction unless it is overruled by a higher authority. The decision of a High Court can not bind other High Court.
 
CONCEPT OF INCOME:
 
Cash or kind: Income may be received in cash or kind. When the income is received in kind, its valuation will be made in accordance with the rules prescribed in the Income-tax Rules, 1962.
 
 Receipt basis/ Accrual basis Income arises either on receipt basis or on accrual basis. It may accrue to a taxpayer without its actual receipt. The income in some cases is deemed to accrue or arise to a person without its actual accrual or receipt. Income accrues where the right to receive arises.
 
 Legal or illegal source The income-tax law does not make any distinction between incomes accrued or arisen from a legal source and income tainted with illegality.
 
Temporary/Permanent: There is no difference between temporary and permanent income under the Act. Even temporary income is taxable same as permanent income.
 
Lump sum/installments Income whether received in lump sum or in installments is liable to tax. For example: arrears of salary or bonus received in lump sum is income and charged to tax as salary.
 
DEFINITIONS
PERSON: Income-tax is charged in respect of the total income of the previous year of every person. Hence, it is important to know the definition of the word person. As per section 2(31),
 
Person includes:
  • an individual
  • a Hindu undivided family:
  • a company
  • a firm
  • an association of persons or a body of individuals whether incorporated or not:
  • a local authority:
  • every artificial, juridical person, not falling within any of the above categories:
 
ASSESSEE: As per Section 2(7) of the Act according to which assessee means a person by whom any tax or any other sum of money (i.e. interest, penalty etc.) is payable under the Act and includes:
 
(a) 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 of the income of any other person in respect of which he is assessable or to determine the loss sustained by him or by such other person or to determine the amount of refund due to him or to such other person.
 
(b) every person who is deemed to be an assessee under any provision of this Act.
 
(c) every person who is deemed to be an assessee in default under any provision of this Act.
 
ASSESSMENT YEAR As per Section 2(9) “Assessment year” means the period of twelve months commencing on 1st April every year and ending on 31st March of the next year. Income of previous year of an assessee is taxed during the following assessment year at the rates prescribed by the relevant Finance Act.
 
PREVIOUS YEAR As per Section 3 Income earned in a year is taxable in the next year. The year in which income is earned is known as previous year.
 
From the assessment year 1989-90 onwards, all assessees are required to follow financial year (i.e. April 1 to March 31) as previous year. The uniform previous year has to be followed for all sources of income.
 
In case of newly set up business or profession or a source of income newly coming into existence, the first previous year will be the period commencing from the date of setting up of business/profession or as the case may be, the date on which the source of income newly comes into existence and ending on the immediately following March 31.
 
DISTINCTION BETWEEN AOP & BOI

 

AOP

BOI

1

Any person (like firms, Company, individuals,

HUF etc.) Can be member in an AOP.

 

Only individuals can be member in a BOI.

2

An AOP implies a voluntary getting together for a common design or combined will to engage in an income producing activities.

 

A BOI may or may not have such common  design or will.

 

 
 
 
 
CASES WHERE INCOME IF PREVIOUS YEAR IS ASSESSED IN THE SAME YEAR:
 
As a normal rule, the income earned during any previous year is assessed or charged to tax in the immediately succeeding assessment year. However, in the following circumstances the income is taxed in the same year in which it is earned. Therefore, the assessment year and the previous year in these exceptional circumstances will be the same. These exceptions have been provided to safeguard of taxes so that assessees, who may not be traceable later on, are not allowed to escape the payment of the taxes.
 
The exceptions are as follows:
 
1.      Shipping business of non-residents: As per Section 172 A non-resident who is carrying on a shipping business and earns income from carrying passengers/livestock/goods from a port in India, will be changed income-tax before the ship is allowed to leave the Indian port. Therefore, before the ship leaves the Indian port, the master of the ship is under an obligation to furnish a return of the full amount earned on account of fare and freight (including the amount paid or payable by way of demurrage charge or handling charge or any other amount of similar nature) and pay the tax accordingly. In this case 7.5% of the amount of fare/freight/charge, etc. shall be deemed to the income of such assessee on which the income-tax will be charged. Therefore, in this case the tax is chargeable on the income in the same year in which it is earned.
 
2.      Assessment of persons leaving India: As per Section 174 When it appears to the assessing officer that any individual may leave India during the current assessment year or shortly after its expiry, with no present intention of returning to India, the total income of such individual, from the expiry of previous year for that assessment year (i.e. from 1st April of the assessment year) up to the probable date of his departure from India shall be chargeable to tax in same assessment year.
 
3.      Assessment of association of persons or body of individuals or artificial juridical person formed for a particular event or purpose: As per Section 174A where it appears to the assessing officer that any association of persons or a body of individuals or an artificial juridical person formed or establish or incorporated for a particular event or purpose is likely to be dissolved in the assessment year in which such association of persons or body of individuals or artificial juridical person was found or established or incorporated or immediately after such assessment year, the total income of such persons or body or juridical person, for the period from expiry of the previous year for that assessment year up to the date of its dissolution, shall be chargeable to tax in that assessment year.
 
4.      Assessment of persons likely to transfer property to avoid tax: As per Section 175 If it appears to the assessing officer during any current assessment year, that any person is likely  to charge, sell,  transfer, dispose of or otherwise part with any of his assets with a view to avoiding any payment of his tax liability, then the total income of such person for the period from the expiry of the previous year for that assessment year (i.e. from 1st April of assessment year) till the date when the assessing officer commences proceeding, shall be chargeable to tax in same assessment year. However, in this case also the rate of tax applicable shall be the rate given in part III of schedule I which are applicable for advance tax also.
 
5.                   Discontinued business: As per Section 176 Where any business or profession is discontinued in any assessment year, the income of the period from expiry of the previous year for that assessment year, the income of the period from 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 assessment year. For example, if a business is discontinued on 16-07-2018 then the income for the period 1-4-2018 to 16-7-2018 may be assessed in assessment year 2018-19 itself.