Chapter 1 Introduction
Chapter 1
Introduction
Overview of Income Tax Law in India
The authority to levy and collect taxes, whether direct or indirect, is delegated to the Central
and State Governments by the Constitution of India. According to Article 246 of the
Constitution of India, the authority to legislate on the subjects specified in the Seventh
Schedule rests with the Parliament and State Legislatures. Three categories comprise the
Seventh Schedule to Article 246, which details the subjects in respect of which the State
Legislatures and Parliament have the authority to enact legislation concerning the imposition
of taxes.
The following are the lists:
i. Union List or List I: Parliament has the exclusive power to make laws on the matters
contained in the Union List.
ii. State List or List II: The Legislatures of any State have the exclusive power to make
laws on the matters contained in the State List.
iii. Concurrent List or List III: Both Parliament and State Legislatures have the power to
make laws on the matters contained in the Concurrent List.
Note: 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.
Components of Income Tax Laws
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Chapter 1 Introduction
Income Tax Act, 1961
The levy of income tax in India is governed by the Income-tax Act, of 1961. In this book, we
shall briefly refer to this as the Act.
It extends to the whole of India.
It came into force on 1st April, 1962.
It contains sections 1 to 298 and schedules I to XIV.
It undergoes a change every year by the Annual Finance Act passed by Parliament,
and other legislations like the Taxation Laws (Amendment) Act.
India (Section 2(25A))
The term 'India' means –
the territory of India as per Article 1 of the Constitution,
its territorial waters, seabed, and subsoil underlying such waters,
continental shelf,
exclusive economic zone or
any other specified maritime zone and the air space above its territory and territorial
waters.
Specified maritime zone means the maritime zone as referred to in the Territorial Waters,
Continental Shelf, Exclusive Economic Zone, and other Maritime Zones Act 1976.
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.
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Circulars and Notifications
Circulars
Circulars are issued by the CBDT from time to time to deal with and to clarify doubts
regarding the scope and meaning of certain
Circulars are issued for the guidance of the officers and/or assessees and override the
provisions of the Act.
The department is bound by the circulars. While such circulars assess, they can take
advantage of beneficial circulars.
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 that are binding on both departments and assessees.
Scheme of Taxation
Every person, whose total income of the previous year (P.Y) exceeds the maximum amount
that is not chargeable to tax, is an assessee and is chargeable to income tax in the assessment
year (A.Y) at the rate or rates prescribed in the Finance Act/ Income Tax Act for the relevant
AY. However, the total income of the person shall be determined based on his residential
status in India.
Person (Section 2(31))
As per the Income Tax Act, 1961 person includes the following entities:
Individual;
Hindu Undivided Family (HUF);
Company;
Firm.
Association of persons or a body of individuals, whether incorporated or not;
Local authority; and
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Every artificial judicial person does not fall within any of the preceding sub-clauses.
Association of Persons or Body of Individuals or a Local authority or Artificial
Juridical Persons shall be deemed to be a person whether or not, such persons are
formed or established or incorporated with the object of deriving profits or gains or
income.
Assessee (Section 2(7))
Assessee‖ means a person by whom any tax or any other sum of money is payable under
this
Act. In addition, it includes:
Every person in respect of whom any proceeding under this Act has been taken for
the assessment of
his income; or
the income of any other person in respect of which he is assessable; or
the loss sustained by him or by such other person; or
the amount of refund due to him or to such other person.
Every person who is deemed to be an assessee under any provision of this Act;
Every person who is deemed to be an assessee-in-default under any provision of this
Act.
Previous Year (Section 3)
Previous year is defined as the financial year which immediately precedes the
assessment year.
PY is the year, the income of which is assessed in the AY.
In case the source of income is new or the business set up is new, the previous year for
that entity will start from the date of setting up of that business or profession or from
the date when the source of income of this new existence starts and ends in the said
financial year.
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Exceptions to Previous Year:
Incomes are taxed as the income of the year immediately preceding the assessment year at
the rates applicable to such person.
1. Income of a person who is leaving India for a long period or permanently. (Sec 174)
2. Income of a person who is trying to alienate/ transfer his assets to avoid taxes. (Sec
175)
3. Income of a discontinued business. (Sec 176)
4. Income of non-resident shipping companies who don’t have any representatives in
India. (Sec 172).
5. Income of AoP or BoI. .(Sec 174A)
Assessment year (Section 2(9))
The term has been defined under section 2(9). This means a period of 12 months commencing
on 1st April every year. The year in which income is earned is the previous year and such
income is taxable in the immediately following year which is the assessment year. Income
earned in the previous year 2023-24 is taxable in the assessment year 2024-25.
The assessment year always starts from 1st April and it is always a period of 12 months.
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Assessment (Section 2(8))
This is the procedure by which the income of an assessee is determined by the Assessing
Officer. It may be by way of a normal assessment or by way of reassessment of an income
previously assessed.
Types of income-tax assessment:
1. Self-assessment under section 140A
2. Summary assessment under section 143(1)
3. Scrutiny assessment under section 143(3)
4. Best judgment assessment under section 144
5. Re-assessment or income escaping assessment under section 147.
Income (Section 2 (24))
The definition of Income is inclusive but not exhaustive of below-mentioned items:
Any illegal income arising from the assessee
Any income that is received at irregular intervals.
Any Taxable income that has been received from a source outside India
Any benefit that can be measured in money
Any subsidy relief or reimbursement
Gift the value of which exceeds INR 50,000 without any consideration by an individual
or HUF.
Any prize
Causal incomes like winning from lotteries or horse race gambling etc.
Agricultural Income Section 2 (1A)
Agricultural income, as defined in Section 2(1A), is quite broad. It includes earnings not just
from farming itself, but also from renting out agricultural land. This income can be received
as money or as goods. There are three main ways agricultural income can be earned:
1. Rent or revenue from land in India used for farming.
2. Income from:
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Farming activities,
Basic processing done by farmers or landlords to prepare produce for sale,
Selling agricultural produce grown or received, with minimal processing.
3. Income from farm buildings necessary for farming activities.
UNDISCLOSED SOURCES OF INCOME
Cash Credit (Section 68)
Cash Credits, as defined in Section 68, refer to any amount recorded in an individual's
books for a particular year. If the individual cannot explain where the money came
from or if the explanation given is deemed unsatisfactory by the Assessing Officer,
that amount may be treated as the individual's income for that year.
Unexplained Investments (Section 69):
If during the year just before the assessment year, a taxpayer has made investments
that are not recorded in their books, and they fail to explain the origin and nature of
these investments to the Assessing Officer's satisfaction, the value of these
investments may be treated as the taxpayer's income for that financial year.
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Unexplained money etc. (Section 69A):
If in any financial year, the taxpayer is found to possess money, gold, jewelry, or other
valuable items that are not recorded in their books, and they cannot provide a
satisfactory explanation about how they acquired these items to the Assessing Officer,
then the value of these items may be considered as the taxpayer's income for that
financial year.
Investments or Items not fully disclosed in books of account (Section 69B)
If during any financial year, a taxpayer has made investments or possesses valuable
items like bullion, jewelry, etc., and the Assessing Officer discovers that the amount
spent on these investments or acquisitions exceeds what is recorded in the taxpayer's
books, and if the taxpayer fails to provide a satisfactory explanation for this difference,
then the excess amount may be treated as the taxpayer's income for that financial year.
Unexplained expenditure (Section 69C):
If during any financial year, a taxpayer incurs expenses but fails to explain where the
money came from, or if the explanation provided is unsatisfactory to the Assessing
Officer, then such unexplained expenditure may be treated as the taxpayer's income
for that financial year. This income deemed from unexplained expenditure cannot be
claimed as a deduction under any income category.
Amount borrowed or repaid on hundi (Section 69D):
If someone borrows money on a hundi (a financial instrument) or repays such a loan
without using a bank cheque, the borrowed or repaid amount is considered as the
borrower's income for the year in which it occurred. However, if the amount borrowed
has already been treated as income, the borrower will not be taxed again when
repaying it. This rule also covers interest paid on the borrowed amount.
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Calculation of Taxable Income
(Source: ICAI BOS)
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