Income Tax Law and Practice Unit – 1

What is Tax? A Comprehensive Overview

Introduction to Tax

Tax is a financial charge imposed by the government on individuals and businesses as a way of financing public services and programs that benefit the community. It is considered as the “cost of living in a society.”

Types of Taxes

There are two main types of taxes: direct taxes and indirect taxes. Let’s take a closer look at each type.

Direct Taxes

Direct taxes are taxes that are directly levied on a person’s income or wealth. This means that the tax is imposed directly on the source of income or wealth. Examples of direct taxes include income tax and property tax. The person who pays the direct tax cannot recover it from someone else, meaning the burden of a direct tax cannot be shifted.

Indirect Taxes

Indirect taxes are taxes that are imposed on the price of goods or services. This means that the tax is not imposed directly on the person’s income or wealth, but rather on the goods or services they purchase. Examples of indirect taxes include the Goods and Services Tax (GST) and custom duty. In the case of indirect taxes, the person paying the tax passes on the incidence to another person.

Conclusion

In conclusion, tax is a necessary financial charge imposed by the government to fund public services and programs that benefit the community. Understanding the different types of taxes, direct and indirect, is important in knowing how taxes affect our daily lives and finances.

The Importance of Taxes

Introduction

Taxes are a crucial aspect of our daily lives and the functioning of any government. They are the primary source of revenue for the government and play a significant role in funding public services and programs that benefit the community. In this article, we will delve into the importance of taxes and why they are levied.

Why are Taxes Levied?

Taxes are levied by the government to raise revenue for various expenses incurred in running the government. The revenue raised from taxes is used to fund essential services such as defense, education, healthcare, and infrastructure facilities like roads, dams, etc. It is the responsibility of the government to provide its citizens with the necessary services and amenities, and taxes serve as the main source of financing for these services.

Funding Public Services

One of the most important reasons for the levy of taxes is to fund public services and programs. The government provides its citizens with essential services such as education, healthcare, and infrastructure facilities. These services require substantial funding, and taxes serve as the primary source of revenue for the government to finance these services. The revenue raised from taxes is used to build schools, hospitals, roads, bridges, and other essential infrastructure facilities that benefit the community.

Defense and Security

Another crucial reason for the levy of taxes is to finance the defense and security of the nation. The government must have a strong defense system in place to protect its citizens and secure the nation from external threats. The revenue raised from taxes is used to finance the military, develop advanced weapons and equipment, and provide training for military personnel.

Maintenance of Law and Order

The government is also responsible for maintaining law and order within its jurisdiction. The revenue raised from taxes is used to finance the police force and other law enforcement agencies, providing its citizens with a safe and secure environment.

Economic Development

In addition to financing essential services, taxes also play a crucial role in promoting economic development. The revenue raised from taxes can be used by the government to finance various programs and initiatives aimed at promoting economic growth and development. For example, the government can use the revenue raised from taxes to provide subsidies and incentives to industries, finance research and development programs, and provide financial assistance to entrepreneurs.

Conclusion

In conclusion, taxes play a crucial role in the functioning of any government. They are the primary source of revenue for the government and are used to finance essential services and programs that benefit the community. From funding public services to promoting economic development, taxes serve as a crucial tool for the government to provide its citizens with the necessary services and amenities. Understanding the importance of taxes and why they are levied is essential in appreciating the role they play in our daily lives and the functioning of the government.

The Constitution of India and the Power to Levy Taxes

The Constitution of India lays down the fundamental principles and laws that govern the country, including the power to levy taxes. According to Article 265, “No tax shall be levied or collected except by authority of law.” This means that for any tax to be levied, a law must be framed by the government.

The Constitution of India empowers both the Central and State Governments to levy and collect taxes, whether direct or indirect. The Parliament and State Legislatures have the authority to make laws on the matters enumerated in the Seventh Schedule of the Constitution of India. This authority is granted by Article 246 of the Constitution of India.

The Seventh Schedule to Article 246 contains three lists that enumerate the matters on which the Parliament and State Legislatures have the authority to make laws for the purpose of levying taxes. These lists are as follows:

(1)    Union List: The Parliament has exclusive power to make laws on the matters contained in the Union List.

(2)   State List: The Legislatures of any State have exclusive power to make laws on the matters contained in the State List.

(3)   Concurrent List: Both the Parliament and State Legislatures have the power to make laws on the matters contained in the Concurrent List.

This division of powers between the Parliament and State Legislatures ensures that taxes are levied and collected in a transparent and accountable manner. The Constitution of India provides a framework for the levy of taxes and outlines the responsibilities of both the Central and State Governments in this regard. By ensuring that taxes are levied in accordance with the law, the Constitution of India ensures that the revenue collected from taxes is utilized in a responsible and effective manner to meet the common welfare expenditure of the society.

An Overview of the Income-tax Act, 1961 in India

The Income-tax Act, 1961 is the primary legislation that governs the levy of income-tax in India. This act, which came into force on April 1, 1962, contains sections 1 to 298 and schedules I to XIV and extends to the whole of India. The act is crucial in determining the liability of individuals and companies to pay income-tax, and serves as the foundation for the Indian tax system.

The act is divided into sections, which may have sub-sections, clauses, provisos, and explanations. The clauses of a section define the meaning of terms used in the Income-tax Act, 1961. For example, clause (1A) of section 2 defines the term “agricultural income”, while clause (1B) defines the term “amalgamation”. The sub-sections of a section, on the other hand, provide a more complete understanding of the concept propounded in that section. For example, sub-section (1) of section 5 defines the scope of total income of a resident, while sub-section (2) defines the scope of total income of a non-resident.

The provisos of a section, sub-section, or clause specify the exceptions or conditions to the provisions contained in the respective section, sub-section, or clause. The explanations, on the other hand, provide clarifications related to the provisions contained in the respective section, sub-section, or clause. For example, the provisos to sections 80GGB and 80GGC of the Income-tax Act, 1961 specify that no deduction shall be allowed under these sections in respect of any sum contributed by cash to political parties or an electoral trust. The explanation below section 80GGC clarifies that for the purposes of sections 80GGB and 80GGC, a “political party” means a political party registered under section 29A of the Representation of the People Act, 1951.

It is important to note that the Income-tax Act, 1961 is a dynamic piece of legislation that undergoes changes every year through the Annual Finance Act passed by Parliament, or through other legislations like the Taxation Laws (Amendment) Act. As a result, it is essential for individuals and companies to stay updated on the provisions of the act to ensure compliance with the tax laws of India.

Features of Income tax act 1961:

The features of the Income-tax Act, 1961 are as follows:

(1)    Extent of the Act: The Income-tax Act, 1961 extends to the whole of India and is applicable to all individuals, Hindu Undivided Families (HUFs), firms, companies, and other entities earning income in India.

(2)   Commencement of the Act: The Income-tax Act, 1961 came into effect on 1st April, 1962.

(3)   Structure of the Act: The Income-tax Act, 1961 consists of sections 1 to 298 and schedules I to XIV. Each section is divided into sub-sections, clauses, and sub-clauses, which provide a clear and concise understanding of the provisions contained in the Act.

(4)   Clauses and Sub-sections: The clauses of a section define the meaning of terms used in the Income-tax Act, 1961, whereas the sub-sections of a section provide a more in-depth understanding of the provisions contained in that section.

(5)   Provisions and Exemptions: The Income-tax Act, 1961 contains provisions for levying income-tax on different types of income and also provides for various exemptions from tax.

(6)   Provisions and Explanations: The Income-tax Act, 1961 also contains provisos and explanations, which spell out exceptions or conditions to the provisions contained in the Act and provide clarification and understanding of the provisions.

(7)   Amendment of the Act: The Income-tax Act, 1961 undergoes change every year with additions and substitutions brought in by the Annual Finance Act passed by Parliament. The Act can also be amended through other legislations like Taxation Laws (Amendment) Act.

(8)   Application to all entities: The Income-tax Act, 1961 is applicable to all entities including individuals, Hindu Undivided Families (HUFs), firms, companies, and other entities earning income in India.

The Finance Act

The annual budget session of the Indian Parliament holds a significant importance as it is the time when the Finance Minister of the country presents the Finance Bill. This bill is introduced with the aim of making amendments to various tax laws in India, including the Income-tax Act, 1961. The Finance Bill, when passed by both the houses of the Parliament and receives the President’s assent, becomes the Finance Act.

The First Schedule to the Finance Act: Key Features

The First Schedule to the Finance Act is an important part of the Finance Act as it specifies the rates of tax for the current Assessment Year (AY) and Financial Year (FY). The schedule is divided into four parts, each specifying different tax rates:

(1)    Part I of the First Schedule: Tax Rates for the Current Assessment Year The first part of the First Schedule to the Finance Act specifies the tax rates that are applicable for the current Assessment Year. For example, Part I of the First Schedule to the Finance Act, 2022 specifies the tax rates for the Assessment Year 2022-23.

(2)   Part II of the First Schedule: Tax Deductible at Source for the Current Financial Year The second part of the First Schedule specifies the rates at which tax is deductible at source for the current Financial Year. Similarly, Part II of the First Schedule to the Finance Act, 2022 specifies the rates for tax deduction at source for the Financial Year 2022-23.

(3)   Part III of the First Schedule: Calculation of Income Tax from Salaries The third part of the First Schedule gives the rates for calculating the income tax for deducting tax from the income chargeable under the head “Salaries” and computation of advance tax for the Financial Year 2022-23.

(4)   Part IV of the First Schedule: Rules for Computing Net Agricultural Income Finally, the fourth part of the First Schedule gives the rules for computing net agricultural income.

In conclusion, the Finance Act is a crucial component of the Indian taxation system, and the First Schedule to the Finance Act provides a comprehensive overview of the tax rates and rules for the current Assessment and Financial Years.

Income-tax Rules, 1962

The administration of direct taxes in India is the responsibility of the Central Board of Direct Taxes (CBDT). The CBDT is authorized by the government to create and enforce rules for the implementation of the Income-tax Act, 1961.

These rules, collectively known as the Income-tax Rules, 1962, play a crucial role in the administration of the Income-tax Act, 1961. The Income-tax Rules, 1962 provide a comprehensive framework for the assessment and collection of income tax in India. They specify the procedures and methods for computation of taxable income, tax liability, and the manner in which tax is to be collected and enforced. The rules also provide the basis for tax administration and the provisions for assessment, appeal, revision, and settlement of tax disputes.

In order to gain a complete understanding of the provisions of the Income-tax Act, 1961, it is important to study the Income-tax Rules, 1962 in conjunction with the Act. The rules provide detailed explanations and clarifications of various provisions of the Act and offer a practical guide to its implementation. They also include sub-rules, provisos, and explanations, which serve to further elaborate on the provisions of the Act.

It is important to note that the CBDT has the power to modify and update the Income-tax Rules, 1962 from time to time, to keep pace with the changing economic and regulatory environment. Therefore, it is essential for taxpayers and tax practitioners to regularly monitor and stay updated on any changes made to the rules.

In conclusion, the Income-tax Rules, 1962 play a critical role in the administration of the Income-tax Act, 1961 and should not be overlooked. A thorough understanding of these rules is crucial for individuals and businesses to ensure that their tax obligations are fulfilled correctly and efficiently.

(1)    The administration of direct taxes in India is handled by the Central Board of Direct Taxes (CBDT).

(2)   The CBDT has the power to create and enforce rules for the implementation of the Income-tax Act, 1961, which are collectively known as the Income-tax Rules, 1962.

(3)   The Income-tax Rules, 1962 provide a comprehensive framework for the assessment and collection of income tax in India.

(4)   The rules specify the procedures and methods for computation of taxable income, tax liability, and the manner in which tax is to be collected and enforced.

(5)   The rules also provide provisions for assessment, appeal, revision, and settlement of tax disputes.

(6)   A complete understanding of the provisions of the Income-tax Act, 1961 requires the study of the Income-tax Rules, 1962 in conjunction with the Act.

(7)   The rules provide detailed explanations and clarifications of various provisions of the Act and offer a practical guide to its implementation.

(8)   The CBDT has the power to modify and update the Income-tax Rules, 1962 from time to time to keep pace with changes in the economic and regulatory environment.

(9)   Taxpayers and tax practitioners must regularly monitor and stay updated on any changes made to the rules.

(10)         The Income-tax Rules, 1962 play a critical role in the administration of the Income-tax Act, 1961 and a thorough understanding of these rules is crucial for individuals and businesses to fulfill their tax obligations correctly and efficiently.

Circulars and Notifications

The Central Board of Direct Taxes (CBDT) plays a vital role in the administration of the Income-tax Act, 1961. As part of its responsibilities, the CBDT issues circulars and notifications from time to time to provide guidance and clarification on various provisions of the Act.

Circulars are issued by the CBDT to address specific problems and to clear up any confusion regarding the scope and meaning of certain provisions of the Act. They are intended to serve as a guide for both tax officers and taxpayers and are considered binding for the department. Although circulars are not legally binding for taxpayers, they can still take advantage of any beneficial provisions outlined in the circulars.

Notifications, on the other hand, are issued by the Central Government to give effect to the provisions of the Act. The CBDT is also authorized to make and amend rules for the purposes of the Act by issuing notifications, which are binding on both the department and taxpayers.

It is important for taxpayers and tax practitioners to stay updated on any circulars and notifications issued by the CBDT, as they can have a significant impact on the administration of the Income-tax Act, 1961. Regular monitoring and understanding of these circulars and notifications is crucial for individuals and businesses to ensure that they fulfill their tax obligations correctly and efficiently.

In conclusion, the role of circulars and notifications in the administration of the Income-tax Act, 1961 cannot be overstated. They provide guidance and clarification on various provisions of the Act and play a crucial role in ensuring its effective implementation.

Total Income and Tax Liability

The Income Tax Act, 1961 imposes a tax on an individual’s total income. To determine the tax payable, it’s important to understand the steps involved in computing the total income. Here is a step-by-step explanation of the process:

Step 1 – Residential Status Determination

The first step in computing the total income for tax purposes is determining the residential status of the individual. The residential status, as defined in the Income Tax Act, 1961, can be classified into three categories:

§       Resident and Ordinarily Resident

§       Resident but not Ordinarily Resident

§       Non-Resident

The number of days an individual spends in India determines his or her residential status. For example, the income earned and received outside India is not taxable for a non-resident, but it is taxable for a resident and ordinarily resident.

Chapter 2 of the Income Tax Act, 1961 also deals with the concept of deemed residency. A deemed resident is considered a resident but not ordinarily resident in India.

Step 2 – Classifying Income into Different

Categories In the process of computing an individual’s total income for the purpose of income tax, all the sources of income are classified into five heads as per the provisions of the Income-tax Act, 1961.

Each head of income has a designated section in the act that outlines the scope of the income that is chargeable under that head. The five heads of income are:

(1)    Salaries: This head includes all taxable income from salary and pensions.

(2)   Income from House Property: This head includes all taxable rental income.

(3)   Profits and Gains from Business or Profession: This head covers all taxable income derived from carrying out a business or profession.

(4)   Capital Gains: This head encompasses all taxable profits from the sale of a capital asset, such as land.

(5)   Income from Other Sources: This is the residual head that covers all taxable income that is not included under the first four heads.

It is the responsibility of the tax payer to correctly classify the income earned under the relevant head of income.

Step 3 – Calculation of Income Under Each Head

To determine the taxable income under each head, it is important to understand the provisions of the Income-tax Act, 1961 that apply to each head of income.

Exclusions: Some forms of income are exempt from taxation, such as agricultural income, and must be excluded from the calculation of total income. Additionally, other forms of income, such as House Rent Allowance and Education Allowance, may be partially exempt to the extent of limits prescribed by the Act. Any remaining income beyond these limits must be classified under the appropriate head of income.

Allowances: Tax deductions and allowances are specified for each head of income. For instance, while computing income from house property, deductions for municipal taxes and interest on loans may be allowed. Similarly, deductions and allowances are available for the other heads of income, and these must be taken into account to arrive at the net taxable income under each head.

Step 4 – Clubbing of income of spouse, minor child etc.

When it comes to individuals, their total income is taxed according to a progressive slab system, which means the tax rate increases as their income increases. Some taxpayers, especially those in higher income brackets, have a tendency to divert a portion of their income to their spouse, minor child, or other related individuals to reduce their tax liability. To prevent this type of tax avoidance, the Income-tax Act has incorporated clubbing provisions, which require that the income earned by certain individuals, such as a spouse or minor child, be included in the income of the person who has diverted their income when computing their tax liability.

Step 5 – Set-off or carry forward and set-off of losses

Set-off or carry forward and set-off of losses refers to the process of offsetting losses incurred from one source of income against the profits generated from another source. For example, if an individual has made profits from his textile business but incurred losses from his printing business, the loss from the printing business can be offset against the profits from the textile business to arrive at the net income that is taxable under the head “Profits and Gains of Business or Profession.”

The Income-tax Act, 1961 provides provisions for inter-head adjustments in certain cases, meaning that losses from one head of income (such as Income from House Property) can be set off against profits from another head of income (such as Profits and Gains of Business or Profession). However, there are certain restrictions to this rule, and business losses cannot be set off against salary income, for example.

In the case where the losses incurred in a particular year cannot be set off due to insufficient eligible profits, these losses can be carried forward to the following years and set off against the profits from that year. It is important to note that the carried forward losses under a particular head of income cannot be set off against income under a different head. For instance, carried forward business losses cannot be set off against income from house property in the current year.

Step 6 – Computation of Gross Total Income

It involves calculating the gross total income by adding up all the figures from the various sources of income, after making any necessary deductions, allowances, clubbing of income provisions, and set-off and carry forward of losses. This process provides the final figure of income, which is the starting point for determining the tax liability.

Step 7 – Deductions from Gross Total Income

This step of the income tax calculation process involves deducting specific amounts from the Gross Total Income. There are four types of deductions that can be made, each addressing different types of income and payments.

The first type is deductions in respect of certain payments, such as life insurance premiums, contributions to a provident or pension fund, medical insurance premiums, interest on loans for higher education or a residential house, rent payments, donations to approved funds and institutions, and contributions to political parties.

The second type is deductions in respect of certain incomes, including employment of new employees, royalty income for authors of books, and royalty on patents.

The third type is deductions in respect of other income, such as interest on savings account deposits and interest on deposits for senior citizens.

The final type is other deductions, for example, a deduction for a person with a disability. These deductions are calculated based on the specific provisions outlined in the Income-tax Act, 1961.

Step 9 – Application of the rates of tax on the total income

(AY 2022-23)

This step involves calculating the tax liability by applying the prescribed tax rates to the total income. The tax rates for different classes of taxpayers are determined annually by the Annual Finance Act. For individuals, Hindu Undivided Family (HUF) and other similar taxpayers, there is a slab system that includes basic exemption limits. Currently, the basic exemption limit for individuals is INR 2,50,000, meaning that individuals with a total income of up to INR 2,50,000 are not required to pay any tax.

Individuals with a total income greater than INR 2,50,000 but less than INR 5,00,000 are taxed on the amount over INR 2,50,000 at a rate of 5%. Resident individuals in this slab also enjoy a rebate of either INR 12,500 or the tax payable under section 87A, whichever is lower. For individuals with a total income between INR 5,00,000 and INR 10,00,000, the tax rate is 20%. The highest tax rate of 30% is applied to individuals with a total income in excess of INR 10,00,000.

It should be noted that there is a provision in section 115BAC for individuals and HUF to opt for concessional slab rates, subject to certain conditions, which will be discussed further in this chapter. After applying the appropriate tax rates to the total income, the resulting figure represents the tax liability that must be paid.

For certain special forms of income, such as long-term capital gains, lottery winnings, and specified short-term capital gains, the slab system does not apply. Instead, these types of income are taxed at special rates specified in the Income-tax Act. The slab rates are specified in the Annual Finance Act, while the special rates are specified directly in the Income-tax Act.

Income range Income tax rate Up to Rs. 3, 00,000 – Nil

Rs. 300,000 to Rs. 6,00,000 – 5% on income which exceeds Rs 3,00,000

Rs. 6,00,000 to Rs. 900,000 – Rs 15,000 + 10% on income more than Rs 6,00,000

Rs. 9,00,000 to Rs. 12,00,000 – Rs 45,000 + 15% on income more than Rs 9,00,000

Rs. 12,00,000 to Rs. 1500,000 – Rs 90,000 + 20% on income more than Rs 12,00,000

Above Rs. 15,00,000 – Rs 150,000 + 30% on income more than Rs 15,00,000

Step 10 – Tax Surcharge and Section 87A Rebate

Tax Surcharge: A tax surcharge is an additional amount of tax that must be paid on top of the regular income tax. It is calculated as a percentage of the income tax if your total income exceeds Rs.50 lakhs. The specific surcharge rates for different income levels are further discussed in the later part of this chapter.

Section 87A Rebate: To provide tax benefits to individual taxpayers in the 5% tax bracket, Section 87A offers a rebate on the tax owed. This applies to individual residents of India with total income not exceeding Rs. 5,00,000. The rebate is equal to either the amount of income tax owed on the total income for the given tax year or Rs. 12,500, whichever is lower.

Step 11 – Health and education cess on income-tax

“Health and Education Cess” to the calculated income tax, which includes any applicable surcharge and rebates. The Health and Education Cess is levied at a rate of 4% on the combined amount of income tax and surcharge (if any). This additional tax is used to fund the government’s healthcare and education initiatives.

Step 12 – Advance Tax Payments and Tax Withheld at Source

In order to avoid a large tax bill at the end of the year, the tax liability of an individual must be paid in advance, either through four installments or a single payment depending on the estimated income. The installment due dates are 15th June, 15th September, 15th December, and 15th March. However, residents who have opted for a presumptive taxation scheme are allowed to make a single advance tax payment on or before 15th March. Additionally, there may be situations where tax is required to be withheld from the income by the payer, at the rates specified in the Income-tax Act or the Annual Finance Act. This tax must be deducted either when the income is earned or when it is paid, depending on what is required by the law.

Step 13: Calculation of Tax Payable or Refundable

Once the advance tax and tax deducted at source have been taken into account, the taxpayer will have an idea of the net tax they owe or the amount they are owed in the form of a refund. This figure should then be rounded off to the nearest ten rupee increment as per the provisions outlined in section 288B. The taxpayer must pay the amount of tax they owe, known as self-assessment tax, before the deadline for filing their tax return. In the event of a tax refund, the taxpayer will receive the funds after submitting their income tax return.

Filing of Income Tax Return

As per the provisions of the Income-tax Act, 1961, filing of an Income Tax Return (ITR) is mandatory. An ITR is a form in which an assessee declares their total income, and the tax payable on that income. The Central Board of Direct Taxes (CBDT) lays out the format for ITR filing for different types of taxpayers. The details of the income earned under different heads, gross total income, deductions from gross total income, total income, and tax payable must be furnished in the ITR. In summary, an ITR is an individual’s declaration of their income in the prescribed format. Different due dates are specified for ITR filing for various types of taxpayers, with companies and firms having a mandatory obligation to file their ITR before the due date. Other taxpayers are required to file an ITR subject to certain conditions.

Definition of Assessee

The term “Assessee” as defined in Section 2(7) of the Income Tax Act, 1961 refers to any individual, entity or organization that is required to pay tax or any other sum of money under the provisions of this Act. This definition of assessee is quite comprehensive and includes various types of individuals and organizations who may be liable to pay tax in various circumstances.

In particular, the definition of assessee includes:

(1)    Every person in respect of whom any assessment proceedings have been initiated under the Income Tax Act. This includes individuals or organizations who are being assessed for their own income, or for the income of another person for which they are assessable.

(2)   Every person who is deemed to be an assessee under any provision of the Income Tax Act. This includes individuals or organizations who may be deemed as assessable by virtue of the provisions of the Act.

(3)   Every person who is deemed to be an “assessee-in-default” under any provision of the Income Tax Act. This includes individuals or organizations who are deemed to be in default of their tax obligations, and who may be subject to penalties and other consequences as a result.

In conclusion, the definition of assessee as defined in the Income Tax Act, 1961 is quite comprehensive and covers a wide range of individuals, entities, and organizations who may be liable to pay tax in various circumstances.

Definition of Assessment

Definition of Assessment under the Income Tax Act, 1961

Assessment refers to the process of determining the income of an assessee. This process involves evaluating the total income earned by an individual or a business during a financial year and determining the tax payable on that income. The assessment can be done through a normal assessment or by reassessing the income that was previously assessed.

In accordance with the provisions of the Income Tax Act, 1961, the assessment process involves the following steps:

§       Calculation of total income earned by the assessee during the financial year.

§       Determination of tax payable on the total income by taking into account various deductions, exemptions, and rebates.

§       Comparison of the tax payable with the advance tax paid and tax deducted at source (TDS).

§       Calculation of the net tax payable or refundable.

§       Filing of the return of income by the assessee.

The assessment process plays a crucial role in the functioning of the income tax system as it helps to determine the tax liability of an individual or a business and ensures that the right amount of tax is collected by the government.

Definition of a Person

According to the Income Tax Act of 1961, the definition of “person” is provided in Section 2(31) and states:

“Person includes—

(i)    an individual;

(ii)   a Hindu undivided family;

(iii) a company;

(iv) a firm;

(v)   an association of persons or a body of individuals, whether incorporated or not;

(vi) a local authority; and

(vii)         every artificial juridical person, not falling within any of the preceding sub-clauses.”

The Income Tax Act, 1961 is the primary legislation that governs the taxation of incomes in India. According to the Act, a “person” refers to a wide range of entities including individuals, Hindu Undivided Families (HUFs), firms, companies, association of persons (AOPs), body of individuals (BOI), artificial juridical persons, and any other person recognized as a taxable entity by the Income Tax Department.

Individuals refer to a natural person who is a resident or a non-resident of India and is taxed on their income earned in India or outside India. Resident individuals are taxed on their global income, whereas non-resident individuals are taxed only on the income earned in India. The definition of a resident individual is based on the number of days of stay in India in a financial year. If an individual stays in India for more than 182 days in a financial year, they are considered as a resident of India.

Hindu Undivided Families (HUFs) refer to a distinct entity in Indian law that consists of a group of individuals who are lineally related and share a common ancestral property. The income of the HUF is taxed as a separate entity, and the head of the HUF is considered as the Karta, who represents the HUF for tax purposes.

Firms refer to a partnership firm where two or more individuals carry on a business together with a view to earn profits. The income of the firm is taxed as a separate entity, and the partners are taxed on their share of income from the firm.

Companies refer to a separate legal entity registered under the Companies Act, 1956 and include both private and public limited companies. The income of the company is taxed as a separate entity, and the shareholders are taxed on their share of dividend income.

Association of persons (AOPs) refers to a group of individuals who carry on a business or an activity with a common intention and share profits. The income of the AOP is taxed as a separate entity, and the members are taxed on their share of income from the AOP.

Body of Individuals (BOI) refers to a group of individuals who carry on a business or an activity and share profits. The income of the BOI is taxed as a separate entity, and the members are taxed on their share of income from the BOI.

Artificial Juridical Persons refer to entities created by law and include societies, trusts, universities, and other similar entities. The income of such entities is taxed as a separate entity.

In addition to the above entities, the Income Tax Act also recognizes any other person as a taxable entity if the Income Tax Department considers them as such. This includes individuals who earn income from sources such as rent, capital gains, or professional or business income.

In conclusion, the definition of a person according to the Income Tax Act, 1961 is a wide-ranging definition that includes individuals, Hindu Undivided Families (HUFs), firms, companies, association of persons (AOPs), body of individuals (BOI), artificial juridical persons, and any other person recognized as a taxable entity by the Income Tax Department. The Act provides a comprehensive framework for taxation of incomes in India and ensures that all taxable entities are taxed fairly and efficiently.

Definition of “Income”

According to the Income Tax Act, 1961, the definition of “Income” is provided under Section 2(24) of the Act. The definition of income as per the Act is as follows:

“(24) “Income” includes—

(i) profits and gains;

(ii) dividends;

(iii)

any sum which is chargeable to income-tax under any head of income;

(iv) any receipt referred to in section 56;

(v) any capital gains chargeable under section 45;

(vi) any income falling within the definition of “deemed income” under Part C of Chapter VI-A; and

(vii) any other income chargeable under this Act.”

In simple terms, the definition of income according to the Income Tax Act, 1961 encompasses any income received or earned by an individual or a business entity that is taxable under the Act. It includes any profits, gains, dividends, interest income, rental income, capital gains, and other forms of taxable income.

Under the head “profits and gains”, the Act includes any income earned from business or profession, salary, pension, annuity, or any other form of income that is taxable under the head “profits and gains.”

The term “dividends” refers to the income received by an individual or a business entity as a result of their ownership in a company. This income is in the form of a share of the profits earned by the company and is taxed under the head “dividends.”

Under the head “chargeable under any head of income”, the Act includes any form of income that is taxable under the different heads of income specified in the Act. Some of the heads of income specified in the Act include “income from house property,” “income from capital gains,” “income from other sources,” and “income from business or profession.”

“Receipt referred to in section 56” refers to any income received by an individual or a business entity in the form of gifts or other taxable receipts. Section 56 of the Income Tax Act, 1961 provides the conditions under which any gift received by an individual or a business entity is taxable.

“Capital gains chargeable under section 45” refers to any gains made from the sale of a capital asset. Capital gains are taxed under the head “capital gains” and the taxability of capital gains is specified under Section 45 of the Income Tax Act, 1961.

The term “deemed income” refers to any income that is treated as taxable income even though it is not received in the form of money. Part C of Chapter VI-A of the Income Tax Act, 1961 provides the provisions for deemed income. Some of the examples of deemed income include deemed profits, deemed dividend, and deemed rent.

Finally, the definition of income also includes “any other income chargeable under this Act.” This means that any other form of taxable income not specified under the different heads of income is also considered as taxable income under the Income Tax Act, 1961.

In conclusion, the definition of “Income” according to the Income Tax Act, 1961 is comprehensive and includes all forms of taxable income that an individual or a business entity may receive or earn. It is essential to understand this definition as it helps taxpayers to determine their taxable income and comply with their tax obligations as specified under the Act.

Criteria for determining whether a receipt is capital or revenue in nature

There are several criteria for determining whether a receipt is capital or revenue in nature. These include:

(1)    Nature of the receipt: If the receipt is in the form of a return of capital, it is considered to be a capital receipt. If it is in the form of an income or profit, it is considered to be a revenue receipt.

(2)   Purpose of the receipt: If the receipt is received as a result of the sale of a capital asset, such as land, building, or machinery, it is considered to be a capital receipt. If it is received as a result of the sale of goods or services, it is considered to be a revenue receipt.

(3)   Duration of the receipt: If the receipt is expected to be received repeatedly over a period of time, it is considered to be a revenue receipt. If it is a one-time receipt, it is considered to be a capital receipt.

(4)   Source of the receipt: If the receipt is from a business or profession, it is considered to be a revenue receipt. If it is from the sale of a capital asset, it is considered to be a capital receipt.

(5)   Capital or income in nature: If the receipt is in the form of capital appreciation, such as the increase in value of a property, it is considered to be a capital receipt. If it is in the form of rent, interest, or dividends, it is considered to be a revenue receipt.

(6)   Tax treatment: The tax treatment of the receipt can also be a determining factor in classifying it as capital or revenue. Capital receipts are usually taxed differently from revenue receipts.

Revenue Receipts vs Capital Receipts

Revenue Receipts:

(1)    Income generated from normal business operations or the sale of goods and services.

(2)   The main purpose of revenue receipts is to provide regular income to the business for day-to-day operations.

(3)   Examples of revenue receipts include sales revenue, rental income, and service fees.

(4)   These receipts are considered as a part of the current year’s income and are taxable.

(5)   Revenue receipts are considered as a major source of income for the government in the form of taxes.

Capital Receipts:

(1)    Income generated from the sale of long-term assets such as land, buildings, and investments.

(2)   The main purpose of capital receipts is to provide a lump-sum amount that can be invested in other assets or used to finance major expenditures.

(3)   Examples of capital receipts include the sale of shares, bonds, and property.

(4)   These receipts are considered as non-recurring in nature and are not taxable as income.

(5)   Capital receipts are considered as a source of non-taxable income for the business.

In conclusion, revenue receipts and capital receipts are two different types of income that are generated by a business. Revenue receipts are a regular source of income and are taxable, while capital receipts are non-recurring and are not taxable. Understanding the difference between these two types of receipts is important for businesses and individuals for proper financial planning and tax planning purposes.

“Previous Year” and “Assessment Year”

The Income Tax Act, 1961 defines two crucial terms – “Previous Year” and “Assessment Year”. These terms play a vital role in determining the taxable income of an individual or a firm.

Assessment Year is a period of 12 months starting from 1st April of each year. It is the year in which the income earned in the previous year is taxed. For example, if the previous year is 2022-23, then the assessment year would be 2023-24, and the income earned in the previous year will be taxed in the assessment year.

On the other hand, the Previous Year is the financial year immediately preceding the assessment year. It refers to the year in which the income is earned. For instance, if the assessment year is 2023-24, then the previous year would be 2022-23. It is important to note that the income earned during the previous year is taxed in the assessment year.

In case of a newly set-up business or profession, the previous year shall be the period starting from the date of its inception and ending on 31st March of the financial year.

In conclusion, the Previous Year and Assessment Year are two important terms in the Income Tax Act, 1961, which play a crucial role in determining the taxable income of an individual or a firm. Understanding these concepts is essential for individuals and firms to calculate and pay their taxes correctly.

Residential status of an individual

Residential status of an individual is an important aspect for determining his/her tax liability under the Income Tax Act, 1961. Residential status is determined based on the number of days an individual has spent in India during a financial year. The act recognizes three types of residential status:

(1)    Resident and Ordinarily Resident (ROR)

(2)   Resident but Not Ordinarily Resident (RNOR)

(3)   Non-Resident (NR)

Resident and Ordinarily Resident (ROR): An individual is considered as ROR if he/she has been in India for a period of 182 days or more during the financial year and has been in India for a period of 365 days or more during the preceding four financial years. In case of ROR, the individual’s global income is taxed in India.

Resident but Not Ordinarily Resident (RNOR): An individual is considered as RNOR if he/she has been in India for a period of 182 days or more during the financial year but has not been in India for a period of 365 days or more during the preceding four financial years. In case of RNOR, only the income earned or received in India is taxed in India, while the global income is not taxed.

Non-Resident (NR): An individual is considered as NR if he/she has been in India for a period of less than 182 days during the financial year. In case of NR, only the income earned or received in India is taxed in India.

In conclusion, residential status is an important aspect for determining the tax liability of an individual under the Income Tax Act, 1961. It is based on the number of days an individual has spent in India during a financial year and is categorized into three types: ROR, RNOR, and NR.

To illustrate, let’s take an example of Mr. A who is an Indian citizen and resides in India for the financial year 2022-23. Mr. A spent 182 days in India and 183 days abroad during the financial year 2022-23. Based on the above information, we can determine Mr. A’s residential status as follows:

§       If Mr. A has been in India for a period of 182 days or more but less than 183 days during the financial year 2022-23, then he will be considered as a Resident but Not Ordinarily Resident (RNOR).

§       If Mr. A has been in India for a period of 183 days or more during the financial year 2022-23, then he will be considered as a Resident.

§       If Mr. A has been in India for a period of less than 182 days during the financial year 2022-23, then he will be considered as a Non-Resident.

Residential Status of HUF

Residency of HUF A Hindu Undivided Family (HUF) is considered resident in India if the control and management of its affairs are situated wholly or partially in India.

Meaning of Control and Management The term “control and management” referred to in section 6 of the Income Tax Act refers to the central control and management and not to the day-to-day business operations carried out by employees or agents. It refers to the place where the head and brain of the business is situated, which may not necessarily be the place where the business is conducted or the registered office of the assessee.

Resident vs Non-Resident If the control and management of the HUF’s affairs is situated entirely outside India, then it will be considered a non-resident. On the other hand, if the control and management is located partially or entirely within India, then it will be considered a resident.

Resident and Ordinarily Resident vs Resident but not Ordinarily Resident To determine if a resident HUF is considered resident and ordinarily resident or resident but not ordinarily resident, it is necessary to consider two additional conditions as applicable in the case of an individual:

The Karta of the resident HUF must have been a resident in at least two previous years out of the ten previous years immediately preceding the relevant previous year.

The stay of the Karta during the seven previous years immediately preceding the relevant previous year must be 730 days or more.

If these two conditions are met, the resident HUF will be considered resident and ordinarily resident, otherwise it will be considered resident but not ordinarily resident.

Residential Status of Firms, AOPs, and BOIs

I. Resident:

A firm, Association of Persons (AOP), or Body of Individuals (BOI) would be considered resident in India if the control and management of its affairs is situated wholly or partly in India.

II. Non-Resident:

If the control and management of the affairs of a firm, AOP, or BOI is situated wholly outside India, then it would be considered a non-resident.

It is important to note that the determination of the residential status of firms, AOPs, and BOIs is based on the location of the control and management of its affairs. If the central control and management of the business is situated wholly or partly in India, it would be considered resident in India, whereas if the control and management is situated wholly outside India, then it would be considered a non-resident.

Residential Status of Companies

Resident in India: A company is considered resident in India in a previous year if it meets either of the following criteria:

(1)    Indian Company: The company is incorporated in India and is thus considered an Indian company.

(2)   Place of Effective Management: The company’s place of effective management, which is defined as the place where key management and commercial decisions that are crucial to the conduct of the business are made, is in India in that year.

Non-Resident: If a company does not meet the above criteria, it would be considered a non-resident.

Residential Status of Local Authorities and Artificial Juridical Persons

I. Resident

A local authority or an artificial juridical person would be considered as a resident in India if the control and management of its affairs is situated either wholly or partly within the country.

II. Non-resident

On the other hand, if the control and management of its affairs is located wholly outside of India, then such local authority or artificial juridical person would be deemed as a non-resident.

SCOPE OF TOTAL INCOME UNDER INCOME TAX ACT 1961

Introduction:

Section 5 of the Income Tax Act 1961 provides the scope of total income which is determined by the residential status of the assessee. The total income of an assessee is influenced by three significant factors, namely the residential status, place of accrual or receipt of income and the point of time at which the income had accrued or was received.

Resident and Ordinarily Resident:

A resident and ordinarily resident assessee’s total income, as per section 5(1), includes: ⦁ Income received or deemed to be received in India during the previous year ⦁ Income which accrues or arises or is deemed to accrue or arise in India during the previous year ⦁ Income which accrues or arises outside India even if it is not received or brought into India during the previous year

Resident but Not Ordinarily Resident:

The total income of a resident but not ordinarily resident assessee, according to section 5(1), consists of: ⦁ Income received or deemed to be received in India during the previous year ⦁ Income which accrues or arises or is deemed to accrue or arise in India during the previous year ⦁ Income derived from a business controlled in or profession set up in India, even though it accrues or arises outside India. Note: Income accruing or arising outside India and not received or deemed to be received or deemed to accrue or arise in India is not included in the total income.

Non-Resident:

As per section 5(2), a non-resident’s total income includes: ⦁ Income received or deemed to be received in India in the previous year ⦁ Income which accrues or arises or is deemed to accrue or arise in India during the previous year.

Conclusion:

The residential status of the assessee plays a crucial role in determining the scope of total income under the Income Tax Act 1961. It is important to understand the different aspects of the residential status and their impact on the total income of an assessee.

Scope of total Income	Resident and Ordinarily Resident	Resident but not Ordinarily Resident	Non- Resident
Income received or deemed to be received in India during the previous year	Yes	Yes	Yes
Income accruing or arising or deeming to accrue or arise in India during the previous year	Yes	Yes	Yes
Income accruing or arising outside India during the previous year	Yes, even if such income is not received or brought into India during the previous year	Yes, but only if such income is derived from a business controlled in or profession set up in India; Otherwise, No.	No

Income received or deemed to be received

Assessment of Income: Regardless of the residential status and the place of accrual of the income, all assessees are held liable to pay taxes in respect of the income received or deemed to be received by them in India during the relevant previous year.

Definition of Receipt: Income is considered to be part of an assessee’s total income immediately upon its actual or deemed receipt. Receipt of income refers to the first time the recipient has control over the money. The remittance or transmission of an amount from one person or place to another does not constitute receipt of income in the hands of the subsequent recipient or at the place of subsequent receipt.

Arising and Accruing Income

What is Accruing Income?

Accruing refers to the right to receive income. It represents the gradual accumulation of an individual’s entitlement to a particular income. It is a term used to describe the incremental increase in a person’s right to receive income as time passes.

For example, consider an employee who has worked for a company from January to December. His salary for the entire year will accrue day by day throughout the year. The employee will gradually accumulate the right to receive his salary for work done during that year.

What is Arising Income?

Arising refers to the realization of the right to receive income. It represents the actual receipt of the income for which a person has an entitlement.

Continuing with the above example, the salary that the employee is entitled to receive will arise only when the salary bill is passed on 31st December or 1st January. On that date, the employee will receive the salary, and the right to receive salary will be realized.

In conclusion, the terms “accruing” and “arising” are used to describe the gradual buildup and realization of a person’s right to receive income. The Income Tax Act 1961 considers both the accruing and arising of income as taxable events, and taxes are levied on the income accordingly.

Income deemed to accrue or arise in India

Income deemed to accrue or arise in India: Section 9 of the Income Tax Act, 1961 provides for the circumstances in which the income shall be deemed to accrue or arise in India, regardless of where it is actually earned. The following are the circumstances under which income is deemed to accrue or arise in India:

(1)    Business Connection in India: Any income arising from business connection in India, whether or not through an agent in India, shall be deemed to accrue or arise in India.

(2)   Immovable Property in India: Any income arising from immovable property situated in India shall be deemed to accrue or arise in India.

(3)   Capital Assets in India: Any income arising from the transfer of a capital asset situated in India shall be deemed to accrue or arise in India.

(4)   Income from Profession, Trade or Calling in India: Any income arising from a profession, trade or calling carried on in India shall be deemed to accrue or arise in India.

(5)   Interest on securities in India: Any income arising from interest on securities issued by the Government of India or any State Government shall be deemed to accrue or arise in India.

(6)   Dividends from Indian Companies: Any income arising from dividends declared by an Indian company shall be deemed to accrue or arise in India.

(7)   Salary for Services rendered in India: Any salary received for services rendered in India shall be deemed to accrue or arise in India.

(8)   Royalty or Fees for Technical Services: Any royalty or fees for technical services received from the Government of India or an Indian concern shall be deemed to accrue or arise in India.

Circumstance	Explanation
Business Connection in India	Any income arising from business connection in India, whether or not through an agent in India, shall be deemed to accrue or arise in India.
Immovable Property in India	Any income arising from immovable property situated in India shall be deemed to accrue or arise in India.
Capital Assets in India	Any income arising from the transfer of a capital asset situated in India shall be deemed to accrue or arise in India.
Income from Profession, Trade or Calling in India	Any income arising from a profession, trade or calling carried on in India shall be deemed to accrue or arise in India.
Interest on securities in India	Any income arising from interest on securities issued by the Government of India or any State Government shall be deemed to accrue or arise in India.
Dividends from Indian Companies	Any income arising from dividends declared by an Indian company shall be deemed to accrue or arise in India.
Salary for Services rendered in India	Any salary received for services rendered in India shall be deemed to accrue or arise in India.
Royalty or Fees for Technical Services	Any royalty or fees for technical services received from the Government of India or an Indian concern shall be deemed to accrue or arise in India.

Heads of Income Under the Income Tax Act, 1961

The Income Tax Act, 1961 outlines several heads of income under which the various sources of an individual’s or a firm’s income can be classified. These heads of income are as follows:

(1)    Salaries: Salaries refer to the amount of money received as remuneration for employment, whether in the form of a salary, wages, leave salary, commission, etc.

(2)   Income from House Property: This head of income encompasses rental income received from letting out a property, whether a house, land, building, or any other structure.

(3)   Profits and Gains of Business or Profession: This head of income includes profits and gains derived from any business, trade, commerce, or any other activity that constitutes a profession.

(4)   Capital Gains: Capital gains refer to the profits realized from the sale of a capital asset, such as shares, securities, real estate, etc.

(5)   Income from Other Sources: This head of income covers all sources of income that do not fall under any of the other heads, such as interest on fixed deposits, winnings from lottery or horse races, income from hobbies, etc.

Exempted income as per income tax act 1961

Introduction:

The Income Tax Act, 1961 provides for certain exemptions from taxation for the individuals and Hindu Undivided Families (HUFs) in order to give relief to the taxpayers from the tax liability. The exemptions are given for different types of income such as income from agriculture, income from house property, income from capital gains, income from other sources, etc.

Types of Exempted Income:

(1)    Income from Agriculture: Agriculture income is exempt from tax as per section 10(1) of the Income Tax Act, 1961. Agriculture income means income derived from agriculture in India, which includes rent or revenue derived from land used for agricultural purposes, income derived from such land by agriculture or by the use of such land for any other purpose.

(2)   Income from House Property: The income from one self-occupied house property is exempt from tax as per section 10(1)(i) of the Income Tax Act, 1961. However, this exemption is subject to certain conditions like the taxpayer should not own any other house property, the house should be occupied by the taxpayer for the purpose of his own residence.

(3)   Income from Capital Gains: Capital gains arising from the transfer of certain specified assets such as long-term capital assets, agricultural land, residential house, bonds and shares of companies, etc. are exempt from tax as per section 10(38) of the Income Tax Act, 1961.

(4)   Income from Family Pension: The amount received as family pension from a deceased family member is exempt from tax as per section 10(17) of the Income Tax Act, 1961.

(5)   Income from Life Insurance Policy: The amount received from a life insurance policy, including bonus, is exempt from tax as per section 10(10D) of the Income Tax Act, 1961.

(6)   Income from National Pension Scheme: The amount received from the National Pension Scheme (NPS) is exempt from tax as per section 10(12) of the Income Tax Act, 1961.

(7)   Income from PPF (Public Provident Fund): The amount received from a Public Provident Fund (PPF) account is exempt from tax as per section 10(11) of the Income Tax Act, 1961.

(8)   Income from Bank Deposits: The interest received on bank deposits is exempt from tax as per section 10(15)(i) of the Income Tax Act, 1961.

(9)   Income from Dividends: Dividend received from domestic companies is exempt from tax as per section 10(34) of the Income Tax Act, 1961.

(10)         Income from Employee Provident Fund (EPF): The amount received from the Employee Provident Fund (EPF) is exempt from tax as per section 10(11) of the Income Tax Act, 1961.

Conclusion: The exemptions provided under the Income Tax Act, 1961 are a relief to the taxpayers in reducing their tax liability. The exemptions are given for various types of income such as income from agriculture, income from house property, income from capital gains, etc. However, it is important to note that these exemptions are subject to certain conditions and it is advisable to consult a tax expert to understand the details.