INCOME TAX Part-1

INTRODUCTION 

In India Constitution is the parent law for all other laws. Other laws should be enacted without exceeding the framework of the Constitution of India.

The authority to levy tax is derived from the Constitution of India which allocates the power to various taxes between the Central & state Government.

An important restriction on this power
is Article 265 of the Constitution of India states that "no tax shall be levied or collected except by the authority of law", therefore each tax levied or collected has to be backed by an accompanying law passed either by the parliament or state legislation.

         
Income tax is an entry appearing in Union, thus the responsibility for collection of tax vest with the Central Government. Entry 82 of List 1^st  to the 7^th  schedule of the Constitution of India concerns power on parliament to levy taxes on income other than agricultural income.

Income tax Department is governed by Central Board of Direct Taxes and it is the part of department of revenue under the ministry of finance, Government of India.

Income tax Act, 1961, came into force on and from 1st April 1962.

It consists of 298 Sections, 23 chapters. Besides there are 14 Schedules and one annexure to it.

Moreover, there is Income tax rules, 1962 which contains over 125 RULES relating to income tax Act.

Chapter 4 (Section 14-59) of Income Tax Act is the most important Chapter as it deals with the computation of Income Tax.

This is one Act which is amended every year when the finance bill is passed in the Parliament.

Income tax can be classified into two parts, viz.

1. Personal Income Tax; and

2. Corporate Tax.

→ Income Tax levied on Individuals, HUF, Firms, AOP, BOI, Local authorities is termed as Personal Income Tax.

→Income Tax levied on the companies is called Corporate Tax.

Income Tax is a tax on income from various sources estimated according to sets of rules which vary according to source of income from it flows.

Most type of income can be broadly classified into three main categories:-

(1) Income derived by a person by rendering person services. i.e. Labour

(2) Income from property. i.e. Capital

(3) Income from the profit of trade, profession, or vocation. i.e. use of both; Labour and capital

Tax treatment of Income

For the purpose of treatment of Income for tax purposes it can be divided in to three categories:-

(1) Taxable Income - These incomes forms parts of total income and they are fully taxable, these are treated under Section 14-69 of this Act.

These incomes are:-

•Salaries;

•Rents;

•Business profits;

•Professional gain;

•Capital gains;

•Interest;

•Dividend;

•Winning from lotteries;

•Winning from races etc.

(2) Exempted Income - These income do not part of total income either fully or partly, and no tax is payable on such income. These incomes are given under Section 10(1) to 10(32) of the income tax Act.

(3) Rebateable  Income - These incomes form part of total income and these are fully taxable, tax is calculated on the total income out of which a rebate of tax at average rate is allowed.

BASIC CONCEPTS OF INCOME TAX

Calendar Year

It start from 1st January & ends on 31st December. Like all calendar which used to see date, festivals, holidays etc.

Financial Year

It starts from 1st April & ends on 31st March. Income tax payment based on Financial Year not Calendar year.

Previous year (Sec.3)

The year in which Assessee earned income is known as previous year.

Note1:- Uniform previous year applicable to all Assessee (starts 1 April & ends 31 March of Next Year). It's not necessary to maintain books of accounts on the basis of Financial Year.

Note 2:- Exceptions:-

Cases when previous year termed as assessment year. That is Income earned in previous year will be taxable in same previous year.
In case of:-

A. Income of shipping business earned by non-resident;

B. Income of that person who leaving India for a long period or permanently;

C. Income of that bodies which formed for short duration;

D. Income of a person who trying to sell out his assets to avoid payment of tax;

E. Income of discontinued business.

    

Previous Year in case of newly set up      business or profession:-

As per above notes previous year is of 12 months(1 April to 31 March) but it's not necessary. In case of newly set-up business or profession, it may be of 12 months or less than 12 months first previous year.

E.g. if A set up his business on 18 August 2016 his first previous year counted from August 18, 2016 to March 31, 2017.

Assessment Year [Sec. 2(9)]

The year in which tax paid on such income which earned in previous year, is Assessment Year.

Person [Section 2(31)]

As per this Act person includes:-

1. Individual;

2. Hindu Undivided Family;

3. Firm;

4. Company;

5. Association of Person or Body Of Individuals;

6. Local Authorities; and

7. Artificial Juridical person ont fall under above 6 groups.

Assessee [Section 2(7)]

In simple way, Every person who pays income tax, is an Assessee.

Income [section 2(24)]

Income is periodically monetary returns with sort of regularity. It may be recurring in nature. It may be broadly defined as the true increase in the amount of wealth, which comes to a person during a fixed period of time.

Income includes profit and gains, voluntary contribution received by a trust, perquisites in the hands of of an employee e.g. rent free accommodation etc.

Agriculture Income [Section 2(1A)]

Any rent or revenue derived from land which is situated in India and uses for agricultural purposes.

Conditions:-

◆Rent or revenue should be derived from land,

◆such land is one which situated in India;

◆Land is used for agriculture purposes only.

Section 10(1) of Income tax Act exempts agricultural income from taxation.

Article 270 of the Constitution of India, Central legislation is not competent to impose tax on agricultural Income.

Income Tax is of two types:-

1. Direct tax - Tax paid by such person who earned income, i.e. burden of tax rely upon same person earned income from any sources.

2. Indirect Tax - The person who pays the tax, shift burden on the person who costumes the goods or avails the services.

Some other important terms

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 in the Income-Tax Act and prescribes the rates of taxes.

Notifications:  The  Central Board of Direct Taxes (CBDT)  issues  notifications  from  time  to  time,  these  are  for  the  proper  administration of the Income  Tax  Act.  

Circulars : Circulars  are issued  by the CBDT  to clarify the doubts  regarding  the scope  and meaning of  the  provisions  of  the  law  and  provide  guidance  to  the  Income  Tax  officers  and  assesses.  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 become Judicial Precedent and are binding on all the courts, Appellate Tribunal, Income Tax  Authorities and on assesses. Further, High Court decisions are binding on assesses 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.