1. Income Tax Law
An understanding of the Income-tax law requires a study of the following:
(I) The Income-tax Act, 1961 (amended up-to-date)
(II) The Income-tax Rules. 1962 (amended up-to-date)
(III) Notifications, Circulars and clarifications issued from time to time by the CBDT
(IV) Judicial decisions
(I) The Income-tax Act, 1961 (Amended upto date):
The provisions of income-tax are contained in the Income-tax Act, 1961 which extends to the whole of India and became effective from 1.4.1962 (Section 1).
Scope of Income-tax Act:
The income-tax Act contains provisions for determination of taxable income, determination of tax liability, procedure for assessment, appeals, penalties and prosecutions. it also lays down the powers and duties of various Income-tax authorities.
Since the Income-tax Act, 1961 is a revenue law, there are bound to be amendments from time to time in this law. Therefore, the Income-tax Act has undergone innumerable changes from the time it was originally enacted. These amendments arc generally brought in annually along with the Union Budget. Besides these amendments, whenever it is found necessary, the Government introduces amendments in the form of various Amendment Acts and Ordinances.
Every year a Budget is presented before the Parliament by the Finance Minister. One of the most important components of the Budget is the Finance Bill, which declares the financial proposals of the Central Government for the next financial year. The Bill contains various amendments which arc sought to be made in the areas of direct and indirect taxes levied by the Central Government.
The Finance Bill also mentions the rates of income-tax and other taxes which are given in the First Schedule attached to such Finance Bill. The First Schedule gives the rates of income-tax in 3 parts:
Part-I: It gives the normal rates of Income-tax for various assessees for the current assessment year e.g. the Finance Act, 2021 had given the rates of Income-tax for the assessment year 2021-22 and the Finance Bill, 2022 has given the rates of Income-tax for the assessment year 2022-23.
Part-II: It gives the rates for deduction of tax at source (TDS) from the income earned in the current financial year e.g. the Finance Act, 2021 has given the rates at which tax is to be deducted at source in the financial year 202 1-22. Similarly, the Finance Bill, 2022 has given the rates of TDS on the income earned during the financial year 2022-23.
Note. —Certain rates of TDS are given in the Income-tax Act itself.
Pan-III: It gives the normal rates for calculating Income-tax for deducting tax from income chargeable under the head ‘Salaries’. The same rates are applicable for computation of advance tax to he paid in the current financial year for incomes taxable at normal rates, e.g., Finance Act, 2021 had given the rates for the computation of advance tax for the financial year 2021-22 (i.e. assessment year 2022-23) and the Finance Bill. 2022 has given the rates of advance tax for financial year 2022-23 (i.e. assessment year 2023-24).
|1. When the Finance Bill is approved by both the Houses of Parliament and receives the assent of the President. it becomes the Finance Act. The provisions of such Finance Act are thereafter incorporated in the Income-tax Act.
2. Part-III of Schedule I of a particular Finance Act, which gives the rates for computation of Advance Tax and TDS on salary, etc., generally becomes Pan-i of the subsequent Finance Act, Similarly, rates given under Part Ill of Schedule I of the Finance Act, 2021 will become Part I of Schedule I of the Finance Act. 2022 and these will be the rates of Income-tax for assessment year 2022-23.
3. The total income of the assessee is taxable at the following two rates:
(1) Normal rates, which are given in section 2 of Chapter II read with First Schedule of the Finance Act, every year.
(2) Special rates, which are given in the Income-tax Act itself e.g. long-term capital gain is taxable 10% / 20%, short-term capital gain referred to in section IIIA is taxable @ 15% and income from lotteries, crossword puzzles, etc. is taxable @30% for assessment year 2023-24.
(II) Income-tax Rules, 1962 (amended upto date):
Every Act normally gives power to an authority, responsible for implementation of the Act, to make rules for carrying out purposes of the Act. Section 295 of the Income-tax Act has given power to the Central Board of Direct Taxes (CBDT) to make such rules, subject to the control of Central Government. These rules are made applicable by notification in the Gazette of India.
(1) The value of rent-free accommodation provided by the employer to an employee is included in the gross salary of employee. I-low to value such rent Free accommodation is given in rule 3 of the Income-tax Rules, 1962.
(2) Section 10(13A) provides that house rent allowance is exempt upto a certain limit. How to calculate such limit is given in rule 2A of the Income Tax Rules, 1962.
(III) Notifications, Circulars and Clarifications by CBDT:
Notifications are issued either by the Central Government or CBDT in the Official Gazette, whereas Circulars and clarifications are issued by CBDT.
Notification is a subordinate legislation and is issued under powers delegated by the Parliament. Notifications generally lay down the law taking care of some procedural aspects of the enactment.
Further, to carry out purposes of the Income Tax Act, in certain sections, the power has been given to CBDT to make rules, by way of notifications in the Official Gazette of India. See para (II) above.
Notifications issued by the Central Government as well as CBDT are binding on everyone,
A circular or clarification is a communication issued by the CBDT which is primarily meant to serve as guidelines to implement the provisions of law. Such circulars or clarifications are binding upon the Income-tax Authorities, but the same are not binding on the assessee. However, the assessee can claim benefit under such circulars.
The CBDT has been issuing certain circulars and clarifications from time to time, which have to be followed and applied by the Income-tax Authorities.
(IV) Judicial Decisions:
Decision given by judicial authorities on an appeal tiled before them is known as judicial decision. Any decision given by the Supreme Court becomes a law which will be binding on all the Courts. Appellate Tribunals, the Income-tax Authorities as well as on all the assessees.
Decisions given by a High Court. Income-tax Appellate Tribunal, etc. are binding on all the assessees as well as the Income-tax Authorities which fall under their jurisdiction, unless it is over-ruled by a higher authority. The decision of a High Court is binding on the Tribunal and the Income-tax Authorities situated in the area over which the High Court has jurisdiction.
2. Scheme of Taxation
Every person, whose total income of the previous year exceeds the maximum amount which is not chargeable to Income-tax, is an assessee and chargeable to income-tax in the assessment year at the rate or rates prescribed in the Finance Act/Income-tax Act. for that relevant assessment year. However, his total income shall be determined on the basis of his residential status in India.
3. Important Concepts of Taxation
(1A) Person [Section 2(31)]:
(i) An individual;
(ii) A Hindu Undivided Family (HUF).
(iii) A Company;
(iv) A Firm;
(v) An Association of Persons (AOP) or a Body of Individuals (BOI), whether incorporated or not;
(vi) A Local Authority;
(vii) Every Artificial Juridical Person not falling within any of the preceding sub-clauses.
(1B) 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 2022-23 will commence on 1.4.2022 and will end on 31.3.2023. The tax is levied, in each assessment year, with respect to or on the total income earned by the assessee in the previous year.
1(C) 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 succeeding financial year which is called an assessment year. Therefore, the income earned during the previous year 1.4.2022 to 31.3.2023 will be assessed or charged to tax in the assessment year 2023-24.
- All assessees are required to follow a uniform previous year e. the financial year (1st April to 31st March) as their previous year. Previous year, for Income-tax purposes. will be financial year which ends on 31st of March although the assessee can close his books of account on any other date e.g. an assessee may maintain books of account on calendar year basis hut his previous year, for Income-Lax purpose, will he financial year and not the calendar year.
|Each financial year is both, previous year as well as assessment year. It is the previous year for the income earned during that financial year and assessment year for the income earned during the preceding previous year e.g. financial year 2021-22 is the previous year for the income earned during that financial year 2021-22 and assessment year for the income earned during the previous year 2020-21.|
First previous year for a business/ Profession newly set-up during the financial year or for a flew source of income:
(i) a business or Profession is newly set up. or
(ii) a new source of income comes into existence during the financial year,
the period beginning from the date of setting up of the business or from the date the new source came into existence, and ending on the last day of that financial year i.e. 31St of March shall be the first previous year for that business or source of income.
For example, if a new business is set up on 21.10.2021 then the first previous year for that business will be the period starting from 21.10.2021 to 31.3.2022. Therefore, the first previous year of a newly set-up business/Profession or a new source of income will be either 12 months or less than 12 months. ft can never exceed a period of 12 months.
Case where income of 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 the collection of taxes so that assessees, who may not he traceable later on, arc not allowed to escape the payment of the taxes. The exceptions are as follows:
- Shipping business of non-residents [Section 172]:
- Assessment of persons leaving India [Section 174]:
- Assessment of association of persons or body of individuals or artificial juridical person formed for a particular event or purpose [Section 174A]:
- Assessment of persons likely to transfer property to avoid tax [Section 175]:
- Discontinued business [Section 1761:
1(D) Assessee [Section 2(7)]
Assessee means a person by whom any lax or any other sum of money is payable under this Act and includes the following:
|(i) Every person in respect of whom any proceeding under the Income-tax Act has been taken:
(a) for the assessment of his income or the income of any other person in respect of which he is assessable; or
(b) to determine the loss sustained by him or by such other person; or
(c) to determine the amount of refund due to him or to such other person.
|(ii) A person who is deemed to be an assessee under any provisions of this Act i.e. a person who is treated as an assessee. This would include the legal representative of a deceased person or the legal guardian of minor if minor is taxable separately.||(iii) Every person who is deemed to be an assessee in default under any provisions of this Act. A person is said to he an assessee in default if he fails to comply with the duties imposed upon him under the Income-tax Act. For example: a person, paying interest to another person, is responsible for deducting tax at source on this amount and to deposit the tax with the Government. If he Fails in either of these duties Le., if he does not deduct the lax, or deducts the tax but does not deposit it with the Government, he shall be deemed to be an assessee in default.|
|1. Every assessee is a ‘person, but every person need not he an ‘assessee’. For example, X, an individual has earned total income of Rs.2,40,000 in the previous year. He is a person hut not an assessee because his total income is less than the maximum exemption limit of Rs.2,50,000 and no tax or any other sum is due from him.
2. A person may not have his own assessable income but may still be an assessee. For example, an assessee, who has earned an income of Rs. 1,45,000 in a previous year, fails to deduct the tax at source on salary paid by him, which he was required to do under the Act, shall be deemed to be an assessee in default. Although, he is not assessable in respect of his own income, as it is below the maximum exemption limit, but shall still be an assessee for not deducting the tax at source, which he was obliged to do.
1(E) 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 base for levy of tax in any assessment year is normally the income of the previous year. However, in some cases, income-tax may be charged in respect of the income of a period other than the previous year.
Although income-tax is charged on the income of the previous year in the relevant assessment year, but Income-tax shall be deducted at the source, or paid in advance, in the same previous year wherever it is so deductible or payable under any provisions of the Act.
1(F) Total Income
(A) Definition of Income [Section 2(24)]:
(i) Profits and Gains;
(iia) Voluntary Contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such religious purposes or by an association or institution referred to in section 10(21), 10(23) or 10(23C) (iv), (v), (vi) and (via) or by an electoral trust:
(iii) the value of any perquisite or profit in lieu of salary taxable under section 17(2) or (3);
(iiia) any special allowance or benefit, other than perquisite included under sub-clause (iii), specifically granted to the assessee to meet expenses wholly, necessarily and exclusively for the performance of the duties of an office or employment of profit:
(iiib) any allowance granted to the assessee either to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at a place where he ordinarily resides or to compensate him for the increased cost of living;
(iv) 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 or such person, and any sum paid by any such company in respect of any obligation which, but for such payment, would have been payable by the director or other person aforesaid:
(iva) the value of any benefit or perquisite, whether convertible into money or not, obtained by any representative assessee mentioned in section 160(1)(iii) or (iv) or by any person on whose behalf or for whose benefit any income is receivable by the representative assessee (such person being hereafter in this sub-clause referred to as the “beneficiary”) and any sum paid by the representative assessee in respect of any obligation which, but for such payment, would have been payable by the beneficiary;
(v) any sum chargeable to income-tax under section 28(ii) & (iii) or section 41 or section 59;
(va) any sum chargeable to income-tax under section 28(iiia);
(vb) any sum chargeable to income-tax under section 28(iiib);
(vc) any sum chargeable to income-tax under section 28(iiic);
(vd) the value of any benefit or perquisite taxable under section 28(iv)
(ve) any sum chargeable to income-tax under section 28(v);
(vi) any capital gains chargeable under section 45;
(vii) the profits 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 provisions contained in the First Schedule;
(viia) the profits and gains of any business of banking (including providing credit facilities) carried on by a co-operative society with its members;
(ix) 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.
|For the purposes of this sub-clause,—
(i) “lottery” includes winnings from prizes awarded to any person by draw of lots or by chance or in any other manner whatsoever, under any scheme or arrangement by whatever name called:
(ii) “card game and other game of any sort” includes any game show, an entertainment programme on television or electronic mode, in which people compete to win prizes or any other similar game;
(x) 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;
(xi) any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy.
(xii) any sum referred to in section 28(va);
(xiia) the fair market value of inventory referred to in section 28(via);
(xiii) any sum referred to in section 56(2)(v);
(xiv) any sum referred to in section 56(2)(vi);
(xv) any sum of money or value of property referred to in section 56(2)(vii) or (viia);
(xvi) any consideration received for issue of shares as exceeds the fair market value of the shares referred to in section 56(2)(viib);
(xvii) any sum of money referred to in section 56(2)(ix);
(xviia) any sum of money or value of property referred to in section 56(2)(x)
(xviib) any compensation or other payment referred Io in section 56(2)(xi)
(xviii) assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee other than.—
(a) the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to section 43(1); or
(b) the subsidy or grant by the Central Government for the purpose of the corpus of a trust or institution established by the Central Government or a State Government, as the case may be;
(B) Gross Total Income:
As per section 14. all income shall, for the purposes of charge of Income-tax and computation of total income, be classified under the following heads of income:
(ii) Income from House Property.
(iii) Profits and Gains of Business or Profession.
(iv) Capital Gains.
(v) Income from Other Sources.
Aggregate of incomes computed under the above 5 heads, after applying clubbing provisions
and making adjustments of set off and carry forward of losses, is known as Gross Total
Income (GTI). [Section 80B(5)]
(C) Total Income:
The total income of an assessee is computed by deducting from the gross total income, all deductions permissible under Chapter VIA of the Income-tax Act i.e., deductions under sections 80C to 80U.
How to compute Total Income
The steps in which the Total Income, for any assessment year, is determined are as follows:
- Determine the residential status of the assessee to find out which income is to be included in the computation of his Total Income.
- Classify the income under each of the following five heads. Compute the income under each head after allowing the deductions prescribed for each head of income.
(a) Income from Salaries
Value of Taxable perquisites
Less: Deductions under section 16
Net taxable income from Salary
(b) Income from House Property
Net annual value of House Property
Less: Deductions under section 24 —
Income from I-louse Property —
(c) Profit and Gains of Business and Profession
Net profit as per P & L Account
Less/Add: Adjustments required to be made to the profit as per provisions of income-tax Act.
Net Profit and Gains of Business and Profession
(d) Capital Gains
Capital Gains as computed
Less: exemptions under section 54/54B/54D, etc.
income from Capital Gains
(e) Income from Other Sources
Net Income from Other Sources
Gross Total Income [(a) + (b) + (c) + (d) + (e)]
Less: Deduction available under Chapter VIA
(Sections 80C to 80U)
1(G) Rounding off of Total Income [Section 288A]
The total income, as computed above, shall be rounded off to the nearest multiple of ten rupees and 11w this purpose any part of a rupee consisting of paise shall be ignored. Thereafter if such amount is not a multiple of ten, then, if the last figure is 5 or more, the amount shall be increased to the next higher multiple of 10 and if the last figure of Total Income is less than 5, the amount shall he reduced to the next lower multiple of 10. For example, if the total income is Rs. 8,79,467, it shall be rounded off to Rs. 8,79,470 and if it is Rs. 8,79,464.90, it shall be rounded off to Rs. 8,79,460.
1(H) How to compute tax liability on Total Income
On the Total Income, tax is calculated according to the normal rates prescribed under the relevant Finance Act and special rates prescribed in the Income Tax Act.
The amount so computed, shall be increased by a surcharge, if applicable and health and education cess calculated @ 4% (tax + surcharge, if any). The amount so arrived at is the tax liability of the person for that year.
1(I) Rounding off of Tax, etc. [Section 288B]
The amount of tax (including tax deductible at source or payable in advance), interest, penalty. fine or any other sum payable, and the amount of refund due, under the provisions of the Income-tax Act, shall he rounded off to the nearest multiple of ten rupees and, for this purpose, where such amount contains a part of ten rupees then, if such part is live rupees or more, it shall be increased to ten rupees and if such part is less than five rupees it shall be ignored.
4. Incomes Received or Deemed to be Received in India [Section 7]
(1) Received in India
Any income which is received in India, during the previous year by any assessee, is liable to tax in India, irrespective of the residential status of the assessee and the place of accrual of such income.
Receipts means the first receipt:
The receipt of income refers to the first occasion when the recipient gets the money under his own control. Once an amount is received as income, any remittance or transmission of the amount to another place does not result in receipt within the meaning of this clause at the other place.
This principle is of importance, firstly, in determining the year of receipt, and secondly, for ascertaining the incidence of taxation where it depends purely upon receipt of income. For instance, in the case of non-residents, their foreign income is not assessable, unless it is actually received in India. In their case, unless, at the time the money is received in India, it is received as income from an outside source, such receipt will not be an income receipt. If a non-resident had already received moneys outside India (in an earlier year or during the previous year) as income or exempt income and he was transferring the funds into India in the accounting year. such moneys will not count as income in the eyes of law.
(2) Income deemed to be received in India [Section 7]
The following incomes shall he deemed to be received in India in the previous year even in the absence of actual receipt:
(i) Contribution made by the employer to the recognized provident hind in excess of 12% of the salary of the employee;
(ii) Interest credited to the RPF of the employee which is in excess of 9.5% p.a.
(iii) Transfer balance from the Unrecognized fund to a Recognized Provident Fund
(iv) The contribution made, by the Central Government or any other employer in the previous year, to the account of an employee under a notified contributory pension scheme referred to in section 80CCD.