1 of 65

OVERVIEW OF THE INCOME-TAX DEPARTMENT AND PROVISIONS OF INCOME TAX ACT, 1961

By Prof. G. Vijaya Kumar

2 of 65

History of Taxation Pre – 1922

"It was only for the good of his subjects that he collected taxes from them, just as the Sun draws moisture from the Earth to give it back a thousand fold" –--Kalidas in Raghuvaṃśa eulogizing KING DILIPA.

3 of 65

History of Taxation Pre – 1922

In India, the system of direct taxation as it is known today, has been in force in one form or another even from ancient times. There are references both in Manu Smriti and Arthasastra to a variety of tax measures. Manu, the ancient sage and law-giver stated that the king could levy taxes, according to Sastras.

4 of 65

History of Taxation Pre – 1922

The wise sage advised that taxes should be related to the income and expenditure of the subject.

He, however, cautioned the king against excessive taxation and stated that both extremes should be avoided namely either complete absence of taxes or exorbitant taxation.

5 of 65

History of Taxation Pre – 1922

According to him, the king should arrange the collection of taxes in such a manner that the subjects did not feel the pinch of paying taxes.

He laid down that traders and artisans should pay 1/5th of their profits in silver and gold, while the agriculturists were to pay 1/6th, 1/8th and 1/10th of their produce depending upon their circumstances.

6 of 65

History of Taxation Pre – 1922

The detailed analysis given by Manu on the subject clearly shows the existence of a well-planned taxation system, even in ancient times.

Not only this, taxes were also levied on various classes of people like actors, dancers, singers and even dancing girls.

Taxes were paid in the shape of gold-coins, cattle, grains, raw-materials and also by rendering personal service.

7 of 65

INCOME TAX ACT, 1961

The Constitution of India, in Article 265 lays down that “No tax shall be levied or collected except by authority of law.” Accordingly both the levy of tax as well as its collection shall be made under a law framed by the government.

8 of 65

INCOME TAX ACT, 1961

Constitution of India gives the power to levy and collect taxes, whether direct or indirect, to the Central and State Government.

The Parliament and State Legislatures are empowered to make laws on the matters enumerated in the Seventh Schedule by virtue of Article 246 of the Constitution of India.

9 of 65

INCOME TAX ACT, 1961

The Seventh Schedule to Article 246 contains three lists which enumerate the matters under which the Parliament and the State Legislatures have the authority to make laws for the purpose of levy of taxes.

10 of 65

INCOME TAX ACT, 1961

The following are the lists:

Union List or List I: Parliament has the exclusive power to make laws on the matters contained in Union List.
State List or List II: The Legislatures of any State has the exclusive power to make laws on the matters contained in the State List.
Concurrent List or List III: Both Parliament and State Legislatures have the power to make laws on the matters contained in the Concurrent List.

11 of 65

INCOME TAX ACT, 1961

Income-tax is the most significant direct tax. Entry 82 of the Union List i.e., List I in the Seventh Schedule to Article 246 of the Constitution of India has given the power to the Parliament to make laws on taxes on income other than agricultural income.

12 of 65

INCOME TAX ACT, 1961

Income-tax is a tax levied on the total income of the previous year of every person.

Key – terms: Examples

Total Income
Previous Year
Person

13 of 65

Classification of Taxes

A. Direct Taxes

Direct taxes are those, which are levied on one person and collected from the same person.
The levying of tax means impact of tax and collection of tax means incidence of tax.
If both impact and incidence of tax are on same person, such tax is called direct tax
Examples are Income tax and Wealth tax

14 of 65

Classification of Taxes

B. Indirect Tax

Indirect taxes are those , which are levied on one person and collected from another person.
If both impact and incidence of tax are on two different persons.
Examples are GST, Custom duty and Excise duty.

15 of 65

Difference between Impact of Tax and Incidence of tax

The term impact is used to express the immediate result of Or original imposition of the tax.
The impact of a tax is on the person on whom it is imposed first.
Thus, the person who is Liable to pay the tax to the government bears its impact. The impact of a tax, as such, denotes the act of impinging.

16 of 65

The term incidence refers to the location of the ultimate or the direct money burden of the tax as such.
It signifies the settlement of the tax burden on the ultimate tax payer.
Incidence emerges when the tax finally settles or comes to rest on the person who bears it.
It, in fact, is the ultimate result of shifting.
Hence, the incidence of a tax is upon that person who cannot shift the burden any further, so he has to himself bear the direct money burden of the tax.

17 of 65

It is, thus, easy to distinguish between the impact and incidence of taxation:
1. Impact refers to the initial burden of the tax, while incidence refers to the ultimate burden of the tax.
2. Impact is at the point of imposition, incidence occurs at the point of settlement.

18 of 65

3. The impact of a tax falls upon the person from whom the tax is collected and the incidence rests on the person who pays it eventually.
For example, suppose a tax — excise duty — is imposed on soap.
Its impact is on the producers, in the first instance, as they are liable to pay it to the government. But, the producers may succeed in collecting it from the consumers by raising the price of soap by the amount of tax. In that case, consumers eventually pay the tax and so the incidence falls upon them.

19 of 65

4. Impact may be shifted but incidence cannot. For, incidence is the end of the shifting process.
Sometimes, however, when no shifting is possible, as in the case of income tax or such other direct taxes, the impact coincides with incidence on the same person.

20 of 65

Definitions

Assessee: A person by whom any tax or any other sum of money is payable under this act .
Types of Assessees :
A) Ordinary Assessee
B) Representative assessee or Deemed Assessee
C) Assessee-in-default

21 of 65

Person: Includes the following

A) An individual
B) A HUF
C) A Company
D) A firm
E) An association of persons or body of individual, whether incorporated or not.
F) A local authority
G) Every artificial juridical person not falling within any of the preceding sub-clauses.

22 of 65

Example

Determine the status of the following:
1. Reliance Industries Limited
2. Punjab National Bank
3. Osmania University
4. Hyderabad Municipal Corporation
5.A partnership firm with A, B and C as partners.
6. A Brahmin parivar consisting of Mr. A , his brother B and Mrs. A and B
7.Kalyani Publishers ltd.
8 RBI.
9.LIC of India.
10. Mr. G. Vijaya Kumar
11. A Village Panchayat

23 of 65

Solution

1. A Company
2. A Company
3. Artificial juridical person.
4. A local Authority
5. A firm
6. A HUF
7. A Company
8. Artificial juridical person
9. A Company
10. An individual
11. A local authority

24 of 65

Artificial juridical person- Meaning

A public corporation established under special Act of legislature and a body having juristic personality of its own are known to be Artificial Juridical Persons. Universities are an important example of this category.

3-24

25 of 65

Previous Year: Previous Year is the financial year, in which the assessee earns income.( 1^st April 2021- 31^st March 2022)

Assessment Year is the financial year, in which the income of the assessee earned during the previous year is evaluated and taxed. (1^st April 2022 – 31^st March 2023 )

26 of 65

It is a common rule that the income of the previous year is assessed in the immediately following financial year.
However, there are certain instances when the income of the previous year is assessed in the same year.
These are:
Shipping business of non-resident.
Person leaving India, permanently having no intention of coming back.

27 of 65

Association of persons, Body of individuals or any artificial juridical person established for a definite objective.
Discontinued business
Person is likely to transfer, sell or dispose of assets to avoid the payment of taxes.

28 of 65

Assessment Year: The assessment year (AY) is the year that comes after the FY or PY
This is the time in which the income earned during FY/PY is assessed and taxed.
Both FY and AY start on 1 April and end on 31 March.
For instance, FY/PY 2022-23 and AY 2023-24 are one and the same.

29 of 65

Heads of income

Income tax act provides for the computation of total income of an assessee which is divided under 5 heads of income.
1. Income from Salaries.
2. income from House Property.
3. Profits and gains from Business or Profession.
4. Income from Capital gains
5. Income from Other Sources

30 of 65

Gross total income

Income from all the heads of income shall be computed separately according to the provisions.
Income computed under these heads shall be aggregated after adjusting past and present losses and the total arrived at is known as Gross Total Income..
Out of the GTI, IT act allows certain deduction under section 80,( for old scheme) after allowing these deductions the figure which we arrive at is called “ Total Income” or taxable income on this figure tax liability is computed at the prescribed rates.

31 of 65

Tax evasion is a crime for which the assesse could be punished under the law.
Examples: Falsifying Records: One way individuals have falsified records is by lying to their CA.
Underreporting Income: Everyone knows tax liability is based on income numbers.
Hiding Interest: Purposely Underpaying Taxes.
Illegally Assigning Income.

32 of 65

Tax Avoidance: Tax avoidance is an act of using legal methods to minimize tax liability.
Tax planning is the analysis of a financial situation or plan to ensure that all elements work together to allow you to pay the lowest taxes possible.
A plan that minimizes how much you pay in taxes is referred to as tax efficient or it is a process of analyzing one's financial situation in the most efficient manner
Tax planning should be an essential part of an individual investor's financial plan.

33 of 65

INCOME TAX ACT, 1961

The levy of Income-tax in India is governed by the Income-tax Act, 1961.
It extends to the whole of India.
It came into force on 1^st April, 1962.
It contains sections 1 to 298 and schedules I to XIV.
It undergoes change every year by the Annual Finance Act passed by Parliament, and other legislations like the Taxation Laws (Amendment) Act.

34 of 65

THE FINANCE ACT

Every year the Finance Minister of the Government of India introduces the Finance Bill in the Parliament’s Budget Session. When the Finance Bill is passed by both the houses of the Parliament and gets the assent of the President, it becomes the Finance Act. New provisions are inserted; existing provisions are substituted or amended every year in the Income-tax Act, 1961 and other tax laws by the Finance Act.

35 of 65

INCOME TAX RULES, 1962

The administration of direct taxes is looked after by the Central Board of Direct Taxes (CBDT).
The CBDT is empowered to make rules for carrying out the purposes of the Act.
For the proper administration of the Income-tax Act, 1961, the CBDT frames rules from time to time. These rules are collectively called Income-tax Rules, 1962.
It is important to keep in mind that along with the Income-tax Act, 1961, these rules should also be studied.

36 of 65

CIRCULARS

Circulars are issued by the CBDT from time to time to deal with certain specific problems and to clarify doubts regarding the scope and meaning of certain provisions of the Act.
Circulars are issued for the guidance of the officers and/or assessees. However, it cannot override the provisions of the Act.
The department is bound by the circulars. While such circulars are not binding on the assessees, they can take advantage of beneficial circulars.

37 of 65

NOTIFICATIONS

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

38 of 65

CASE LAWS

The study of case laws is an important and unavoidable part of the study of Income-tax law.

It is not possible for Parliament to conceive and provide for all possible issues that may arise in the implementation of any Act.

Hence the judiciary will hear the disputes between the assessees and the department and give decisions on various issues.

�The Supreme Court is the Apex Court of the Country and the law laid down by the Supreme Court is the law of the land.

The decisions given by various High Courts will apply in the respective states in which such High Courts have jurisdiction.

39 of 65

INTERPRETATION OF DIFFERENT PROVISIONS OF THE INCOME TAX ACT 1961

Charging Provisions:

Tax is levied by a charging section i.e., it imposes a charge or liability to pay tax. If a person has been brought to tax within the ambit of the charging section by clear words, he has to be taxed, subject to specific exemption/ deduction, if any, available under the provisions of the Act. Charging sections should be strictly construed.

40 of 65

INTERPRETATION OF DIFFERENT PROVISIONS OF THE INCOME TAX ACT 1961

Machinery Provisions:

Machinery provisions provide machinery for assessment and collection of charge created by the charging section.

Machinery and charging provisions constitute an integrated code. The machinery provisions should be construed in a way that makes the machinery workable.

41 of 65

INTERPRETATION OF DIFFERENT PROVISIONS OF THE INCOME TAX ACT 1961

Penal Provisions:

Penal provisions are required to be construed in a strict manner.

In case of ambiguity, the taxpayer should be entitled to the benefit of doubt.

42 of 65

INTERPRETATION OF DIFFERENT PROVISIONS OF THE INCOME TAX ACT 1961

Deeming Provisions:

Deeming provision is intended to enlarge the scope of chargeability of income under a particular head or scope of coverage of a certain provision.

It includes matters which otherwise may or may not fall within the provision.

Deeming provision should be strictly construed. It should be given its full effect and carried to its logical conclusion

43 of 65

INTERPRETATION OF DIFFERENT PROVISIONS OF THE INCOME TAX ACT 1961

Appeal and Refund Provisions:

The taxpayer has a right to appeal only if there is a statutory provision for the same. It cannot be implied. Appeal provision should be liberally construed in a reasonable and practical manner. Similarly, provisions granting refund must also be read liberally, in favor of the taxpayer.

44 of 65

INTERPRETATION OF DIFFERENT PROVISIONS OF THE INCOME TAX ACT 1961

Exemptions and Relief Provisions:

Provisions giving deduction, exemption or relief should be interpreted liberally and in favor of taxpayers. They should be construed to effectuate the object of legislature and not to defeat it.

45 of 65

INCOME TAX ACT 1961

The Income tax Act, 1961 has 298 sections which are grouped into 23 Chapters. The Act has fourteen schedules. The List of various chapters and the brief aspects covered in each of the Chapters are given below:

46 of 65