Chapter-1 Introduction & Basics of Income Tax

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Chapter-1 Introduction & Basics of Income

Tax
Overview of the chapter
● Constitution of India
● What is law ?
● Why do we need law ?
● Federalism
● 3 organs
● Article 245
● Article 246
● Schedule 7 of the Constitution of India
● How law is made ?
● What is Tax ?
● How government can collect tax ?- Article 265
● Relationship between law, tax and constitution.
● Amendments
● Why taxes and types of taxes
● Syllabus discussion
● Paper pattern discussion
● How to study ? Books discussion
● How much marks can be scored ?
● Entry no. 82
● Discussion over Income Tax Act
● Administration of Income Tax
● Source of Income Tax Law
● Previous year
● Person
● Assessee
● Assessment
● Overview of Income Tax (GTI, TI, Taxes)
● Rates of Taxes
● Return of Income
Constitution of India
It is the mother of every law in India and almost everything or activity which is happening in India. Indian constitution
is the longest written constitution in the world. Dr. B.R. Ambedkar was the architect of indian constitution.
It lays down the basic structure of government and how it will function.
It establishes the main organs of the country popularly known as legislative, executive and judiciary.

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Constitution defines the powers and responsibilities of each organs.
Constitution is divided in to 22 parts and each part has articles. Like in acts (laws) we have section in constitution we
have articles. In the end there are 12 schedules in our constitutions.
What is law ?
Law means rules and regulation to be followed by people of a particular country or a state or sometimes even a
particular state.
Why we need law ?

● To bring uniformity. ( To deal similar situation in similar manner)
● To manage activities such as trade and commerce.
● To ensure peace, harmony
Who makes the law ?

Power to make law is given to the legislative organ of union and state (Union represents the central level and state is for
states).
Federalism
Federalism is the mixed or compound mode of government, combining a general government (the central or ‘Federal’
government ) with regional governments (provincial, state,cantonal, territorial or other sub-unit governments) in a
single political system.
It can be defined as a form of government in which there is a division of powers between two levels of government of
equal status.
In India we two main levels Central level (Union ) & State
3 organs
● Legislative- Makes the law
● Executive -Implements the law
● Judiciary- Interprets the law
Level Legislative Organ Executive Organ Judicial Organ
Central Parliament President + Prime Minister Court

with Council of Ministers
(Popularly known as Central
Government)
State State legislative Assembly Governor + Chief Minister Courts


with council of ministers
Article 245
This article give power to parliament and state legislative assembly to make law. Parliament will make law and such
laws will be applicable on the entire nation. State legislative assembly will make law and such law will be applicable on
a particulars state only.
Article 246
This article divides the power to make law between parliament and state legislative assemblies. As per this article
Parliament can make law on matters which are enumerated in list 1 of schedule 7 of constitution of India.
State legislative assembly can make law on matters which are enumerated in list 2 schedule 7 of constitutions of India.
Schedule 7 has 3 lists
● Union list
● State list
● Concurrent list (will not be discussing it for CA Inter)
Each list has some entries or we can say some matter sand law can be made on these matter as par article 246.
What is tax ?
A Compulsory contribution to state revenue, levied by government on income, profits, value added to the cost of goods
and services and other transaction.
How government can collect taxes ?

Article 265- This article of Constitution of India gives power to parliament to levy and collect tax.
Article states that no tax shall be levied or collected except by the authority of law.
Relationship between law, tax and constitution

● For every tax we need a law-Article 246
● For every law we need an entry in one of the list in the 7th schedule of constitution of India.
● Hence we can say that for every tax there must be an entry in one of the list in the 7th schedule of constitution of
India. If there is no entry a law cannot be made and if a law cannot be made on tax can be levied or collected.
For income tax there is an entry in the list 1-union list and By using that entry parliament has made law or
income tax. Entry no 82 of List 1 gives power to parliament to make law on Income tax.
Income tax Act, 1961.
Entry no. 82 is read as follows

Taxes on income other than agricultural income. (Agricultural income part will be discussed later on).


Syllabus discussion
In videos or Classes only
Paper Pattern discussion ( In videos or Classes only )

Books which should be studied along with classes or videos
Only practice manual and you can also do from study material
Minimum marks that you should score in tax = 60

Discussion over income tax act, 1961
( In Videos or Classes Only)
Administration of income tax

● Ministry of Finance
● Department of Revenue
● CBDT
● Assessing Officers
● Commissioners (Will be discussed in Videos)
Sources of income tax law

1. Income tax Act, 1961
2. The Finance Act (Recent Finance Act)
3. Income Tax Rules
➢ Power to make rule - CBDT
➢ Section 295
✧ The Board may, subject to the control of the Central Government, by notification in the Gazette of
India, make rules for the whole or any part of India for carrying out the purposes of this Act
4. Circulars & Notifications (Not so important for CA Inter)

➢ Circulars
✧ Issued by CBDT
✧ Primarily issued for implementing the provision of law
✧ Binding upon income tax authority
✧ Not binding on assessee
✧ Assessee can take benefit
➢ Notifications
✧ For procedural aspects
✧ Issued by CG or CBDT
✧ Binding on everyone


5. Case Laws (Not so important for CA Inter) or Known as Judicial Decisions

➢ Supreme Court - Binding on all authorities
➢ High Court - Binding on authorities in the jurisdiction
Formation of Section / Clause / Subsection / Proviso / Explanation

➔ The Act is divided into chapters and schedules
➔ Income tax act contains 298 sections and XIV schedules
➔ A Chapter contains related sections
◆ A Section may have
● Sub-sections
● Clauses
● Sub-clauses
● Proviso
○ Exception to the main section or sub section or clause
○ Conditional application of main section or sub-section or clause
● Explanation
○ For clarification
Charging Section - Section 4

Section 4 of the Income-tax Act, 1961 is the charging section which provides that:
● Tax shall be charged at the rates prescribed for the year by the annual Finance Act.
● The charge is on every person specified under section 2(31);
● Tax is chargeable on the total income earned during the previous year (There are certain exceptions provided
by sections 172, 174, 174A, 175 and 176) - To be discussed later on
● CRUX - Income tax is a tax levied on total income of the previous year of a person.


Previous year -section 3

For the purposes of this Act, “previous year” means the financial year immediately preceding the assessment year.
Provided that, in the case of

● a business or profession newly set up , the previous year shall be the period
○ beginning with the date of setting up of the business or profession
○ and ending with the said financial year.
● or a source of income newly coming into existence the previous year shall be the period
○ beginning with the date on which the source of income newly comes into existence
○ and ending with the said financial year.
Example -
N Starts Business on 5th October 2018.
First Previous year
Second previous year
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. ( As defined in bare act)
● This year in which assessment is done is called the assessment year while the year in respect of the income of
which assessment is done is called the previous year.


Person section 2(31)

The term ‘person’ is important from another point of view also viz., the charge of income-tax is on every ‘person’.
The definition is inclusive i.e. a person includes,
1. An individual,
2. A Hindu Undivided Family (HUF)
3. A company,
4. A firm,
5. An AOP or BOI, whether incorporated or not,
6. A local authority, and
7. Every artificial juridical person e.g., an idol or deity.



Assessee section 2(7)

● Assessee means a person by whom any tax or any other sum of money is payable under this Act and Includes
a. every person in respect of whom any proceeding under this Act has been taken for the assessment
■ of his income or
● of the income of any other person in respect of which he is assessable,
■ or of the loss sustained by him or by such other person,


■ or of the amount of refund due to him or to such other person ;

b. every person who is deemed to be an assessee under any provision of this Act ;
c. every person who is deemed to be an assessee in default under any provision of this Act ;
Return of Income
Senior Citizen


Super Senior Citizen
Overview of income tax (gti,ti ,etc)

1. Residential Status
2. Classification of Income
3. Computation of Income under each head
4. Clubbing
5. Set-off or carry forward and set-off of losses
6. Computation of Gross Total Income
7. Deductions from Gross Total Income
8. Total Income
9. Computation of Income Tax
10. Surcharge / Rebate ETC.
11. Health and Education Cess (May 2019)
12. Advance tax/TDS etc
13. Tax Payable / Tax refundable
14. Return of Income
15. Assessment
Computation of Tax
Following concepts are relevant
1. Rate of Tax
2. Rebate
3. Surcharge
4. Marginal Relief
5. Health & Education cess
6. Advance tax paid
7. TDS
8. Self assessment tax
9. 288A - Rounding off of Total Income
10. 288B - Rounding off of tax etc.
Important websites
1. www.icai.org
2. https://www.incometaxindiaefiling.gov.in
3. https://www.incometaxindia.gov.in/
4. www.edu91.org


Discuss average rate of tax?

Amount of income tax calculated on the total income X 100
Average rate of tax = T otal Income
Where
1. Total Income = Income defined in 2(45), hence also including the income on which special rate of income tax are
applicable
2. Amount of Income Tax = Amount of Income tax computed taking into consideration various reliefs and rebates
3. Why Average rate of Tax (to be discussed later )
Maximum marginal rate of Tax

Section 2(29C) defines “Maximum marginal rate” to mean the rate of income-tax (including surcharge on the
income-tax, if any) applicable in relation to the highest slab of income in the case of an individual, AOP or BOI, as the
case may be, as specified in Finance Act of the relevant year.
Certain cases when income of a previous year will be assessed in

the previous year itself
Income earned in a year is taxable in the next year. This is known as previous year rule. However there are certain
exceptions in which income earned in a year is taxable in the same year.
1. Shipping business of non-resident [Section 172]
○ Where a ship, belonging to a non-resident, carries passengers, livestock, mail or goods shipped at a port
in India, the ship is allowed to leave the port only when the tax has been paid or satisfactory
arrangement has been made for payment thereof.
○ 7.5% of the freight paid or payable to the owner to any person on his behalf, whether in India or outside
India on account of such carriage is deemed to be his income which is charged to tax in the same year in
which it is earned.
2. Persons leaving India [Section 174]

○ Where it appears to the Assessing Officer that any individual may leave India during the current
assessment year or shortly after its expiry and
○ he has no present intention of returning to India,
○ Suppose Mr. X is leaving India for USA on 10.6.2018 and it appears to the Assessing Officer that he has
no intention to return. Before leaving India, Mr. X will be required to pay income tax on the income
earned during the P.Y. 2017-18 as well as the total income earned during the period 1.4.2018 to
10.06.2018
3. AOP / BOI / Artificial Juridical Person formed for a particular event or

purpose [Section 174A].
○ If an AOP/BOI etc. is formed or established for a particular event or purpose and


○ the Assessing Officer apprehends that the AOP/BOI is likely to be dissolved in the same year or in the
next year,
○ he can make assessment of the income up to the date of dissolution as income of the relevant assessment
year.
4. Persons likely to transfer property to avoid tax (Section 175)

○ During the current assessment year,
○ If it appears to the Assessing Officer that a person is likely to
➢ charge,
➢ sell,
➢ transfer,
➢ dispose of or
➢ otherwise part with any of his assets
○ to avoid payment of any liability under this Act,
○ the total income of such person shall be assessed in the year in which it is earned.
5. Discontinued business [Section 176]

○ Where any business or profession is discontinued in any assessment year, the income of the period from
the expiry of the previous year up to the date of such discontinuance may, at the discretion of the
Assessing Officer, be charged to tax in that assessment year.


Tax Rates For Individual For Assessment Year 2020-21
Individual (Age less than Senior Citizen (Age above Super senior citizen (Age
60 years) (HUF, AOP, BOI, 60 Years) (Must be an above 80 years) (Must be an
AJP) Individual who is a Individual who is a resident
resident of India) of India)
Up to Rs, 2,50,000 Nil Nil Nil
Rs. 2,50,000 to Rs. 3,00,000 5% Nil Nil
Rs. 3,00,000 to Rs. 5,00,000 5% 5% Nil
Rs. 5,00,000 to Rs. 20% 20% 20%

10,00,000
Above Rs. 10,00,000 30% 30% 30%
● Surcharge: 10% of income tax, where the total income exceeds Rs.50 lakh but does not exceed Rs.1 crore.
● Surcharge: 15% of income tax, where the total income exceeds Rs.1 crore but does not exceed 2 Crores
● Surcharge : 25% of the income tax, where the total income exceeds 2 crore but does not exceed 5 crores
● Surcharge : 37% of the income tax, where the total income exceeds 5 Crore.
● Marginal relief (To be discussed in videos and classes)
● Cess - Health & Education Cess 4% of Income Tax
● Rebate u/s 87A
○ Allowed only to resident individual
○ Total Income is less than equal to Rs. 5,00,000
○ Rebate amount = Rs. 12,500 or tax payable whichever is less
○ One more point is there, we will study it later on. (Related to LTCG u/s 112A)


Assessment
Types of Company


Rates of tax on other entities

1. Firm / LLP / - 30%
a. Surcharge = 12% if income exceeds Rs. 1 Crore.
b. Cess - 4%
2. Local Authority - 30% | Cess % | Surcharge same as Firm / LLP
3. Company
a. Domestic Company
i. AY 2020 - 21
1. Turnover of Financial Year 17-18 does not exceed Rs. 400 Crores - 25%
2. In other cases = 30%
3. In addition cess and surcharge is levied as follows:
a. Cess: 4% of corporate tax
b. Surcharge: Taxable income is more than 1Cr. but less than 10Cr.: 7% Taxable
income is more than 10Cr. :12%
b. Foreign Company
i. 40%
ii. Surcharge: (2/5) The amount of income-tax shall be increased by a surcharge at the rate of 2% of
such tax, where the total income exceeds one crore rupees but not exceeding ten crore rupees
and at the rate of 5% of such tax, where the total income exceeds ten crore rupees.
iii. Cess - 4%
4. Co-operative Society
a. Where the total income does not exceed Rs. 10,000 - 10% of Total Income
b. Where the total income exceeds Rs. 10,000 but does not exceed Rs. 20,000 - 1,000 plus 20% of the
amount by which the total income exceeds Rs. 10,000
c. Where the total income exceeds Rs. 20,000 - 30% of amount by which the total income exceeds Rs.
20,000.
i. CESS - 4%
ii. Surcharge same as partnership firm

Rounding off of income.
288A. The amount of total income computed in accordance with the foregoing provisions of this Act shall be rounded off
to the nearest multiple of ten rupees and for this purpose any part of a rupee consisting of paise shall be ignored and
thereafter if such amount is not a multiple of ten, then, if the last figure in that amount is five or more, the amount shall
be increased to the next higher amount which is a multiple of ten and if the last figure is less than five, the amount shall
be reduced to the next lower amount which is a multiple of ten; and the amount so rounded off shall be deemed to be
the total income of the assessee for the purposes of this Act.
Rounding off amount payable and refund due.

288B. Any amount payable, and the amount of refund due, under the provisions of this Act shall be rounded off to the
nearest multiple of ten rupees and for this purpose any part of a rupee consisting of paise shall be ignored and
thereafter if such amount is not a multiple of ten, then, if the last figure in that amount is five or more, the amount shall


be increased to the next higher amount which is a multiple of ten and if the last figure is less than five, the amount shall
be reduced to the next lower amount which is a multiple of ten.


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Chapter-1 Introduction & Basics of Income

Constitution defines the powers and responsibilities of each organs.

Why we need law ?

Who makes the law ?

In India we two main levels Central level (Union ) & State

Level Legislative Organ Executive Organ Judicial Organ

Central Parliament President + Prime Minister Court

State State legislative Assembly Governor + Chief Minister Courts

with council of ministers

How government can collect taxes ?

Relationship between law, tax and constitution

Income tax Act, 1961.

Entry no. 82 is read as follows

Paper Pattern discussion ​( In videos or Classes only )

Minimum marks that you should score in tax = 60

Administration of income tax

Sources of income tax law

4. Circulars & Notifications (Not so important for CA Inter)

5. Case Laws (Not so important for CA Inter) or Known as Judicial Decisions

Formation of Section / Clause / Subsection / Proviso / Explanation

Charging Section - Section 4

Previous year -section 3

Provided​ that, in the case of

Assessment year - Section 2(9)

Person section 2(31)

Assessee section 2(7)

■ or of the amount of refund due to him or to such other person ;

Super Senior Citizen

Overview of income tax (gti,ti ,etc)

Discuss average rate of tax?

Maximum marginal rate of Tax

Certain cases when income of a previous year will be assessed in

2. Persons leaving India [Section 174]

3. AOP / BOI / Artificial Juridical Person formed for a particular event or

4. Persons likely to transfer property to avoid tax (Section 175)

5. Discontinued business [Section 176]

Tax Rates For Individual For Assessment Year 2020-21

Up to Rs, 2,50,000 Nil Nil Nil

Rs. 2,50,000 to Rs. 3,00,000 5% Nil Nil

Rs. 3,00,000 to Rs. 5,00,000 5% 5% Nil

Rs. 5,00,000 to Rs. 20% 20% 20%

Above Rs. 10,00,000 30% 30% 30%

Rates of tax on other entities

Rounding off amount payable and refund due.

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Paper Pattern discussion ( In videos or Classes only )

Provided that, in the case of