HEC Group of Institutions , HARIDWAR

Online notes for the Subject – INCOME TAX

INTRODUCTION OF INCOME TAX

Income tax is a direct tax. It is levied and collected by the central government. The government
has set up the separate income tax department for this purpose. Income tax is a very important
source of income of the central government. Income Tax department functions under the direct
control and supervision of Central board of direct taxes( CBDT), which is under the finance ministry
of government of India.

Income tax is a tax on income levied on the previous years total taxable income at the rates
applicable during the current year. The rates of income tax are given in the ‘6Finance Act' passed
by the parliament every year.

CHARACTERISTICS OF INCOME TAX

1. Income tax is levied on income of a person :

Income means any received from an outside source. Income arising to a person from
various sources may be placed in any of the five heads of income: income from salaries,
income from house property, profits and gains of business and profession, capital gains
and income from other sources.
2. Income tax is a direct tax which cannot be shifted on any other person. Income taxes paid
and bone by the person on whom it is levied.
3. Income Tax is payable by every person means an individual or Hindu undivided family of a
company every local authority and every artificial person. All these persons are separately
assessable for income Tax under the income Tax Act 1961.
4. Income tax is levied on previous years income which is the period of 12 months
immediately preceding the current financial year.
5. income tax is levied on the total taxable income which has been received whether it is
earned or not calculated under various heads of income after deducting the deductions of
the respective heads and finally the deductions under section 80.
6. Income tax is levied as per the slab system:
Slap system means a system under which the total taxable income is divided into various
income slabs. There is a separate rate of income tax for each income slab. As the income
slab goes up the rate of income tax also goes up. This is the reason the income tax is
known as progressive tax.

OBJECTIVES / PURPOSE OF INCOME TAX

Income Tax occupies an important and leading place among the direct taxes. It is the main source
of revenue for Central government. It was imposed for the first time in 1860 in our country as a
source of income to the government as the government was facing financial difficulty.

Following are the main objectives of levying income tax:

 1. An important source of revenue : it is an important source of revenue for the central
government. It is levied and collected by the central government but allocated among the
state government and union territories on the basis of recommendations of finance
commission. about 75% of the income Tax is allocated among the state government and
25% among units and union territories on the basis of receptor and population of
respective States or union territories.
2. Reducing disparities and inequalities : the government wants to reduce economic
disparities and inequalities .income tax is an important tool in the hands of the
government in achieving this goal. In India income tax is levied on the basis of slab system
due to which the higher income groups have to pay more income Tax where as the
persons having low income have to pay comparatively less income tax.
3. Capital formation : The asseessee can save income tax audit use your tax liability by
investing their income in various tax saving schemes introduced by the government. These
savings helps in capital formation within the country.

ASSESSMENT YEAR - S. 2(9)

Section 2(9) defines an "Assessment year" as "the period of twelve months starting from the first
day of April every year." An assessment year begins on 1st April every year and ends on 31st
March of the next year. For example, Assessment year 2012-13 means the period of one year
beginning on 1 st April, 2011 and ending on 31st March, 2012. In an assessment year, income of
the assessee during the previous year is taxed at the rates prescribed by the relevant Finance Act.
It is therefore, also called as the "Tax Year"

PREVIOUS YEAR- S. 2(34)

Definition:

Section 3 defines “Previous year” as “the financial year immediately preceding the assessment
year”. Income earned in one financial year is taxed in the next financial year. The year in which
income is earned is called the previous year” and the year in which it is taxed is called the
“assessment year” Common previous year for all source of income:

A person may earn income from more than one sources but previous year will always be common
for all the sources of income. This will be so even if a person maintains records or books of
accounts separately for different sources of income.

Total income of a person from all the sources of income will be taken together and considered in
the previous year or the financial year immediately preceding the assessment year.

GENERAL RULE AND ITS EXCEPTIONS

There is a general rule that the income of previous year is assessable as income of immediately
following assessment year. The general rule has certain exceptions under the following conditions
assessment year and the previous year at the same. It means that the income of previous year is
taxable in the same previous year.
 1. Shipping business of non residents (section 172 ) : if a ship which carries passengers
livestock mail or goods from a port in India and belongs to or is chartered by non resident
Will be allowed to leave IV only after paying the tax on income earned at Indian port at
the rate of 7.5 % of total freight on at Indian port.

If the owner or charter of the ship has appointed any agent or representative in India the
above provision shall not apply . in that case the income of the shipping business shall be
assessed during the assessment year in the hands of the agent or representative.
2. Person leaving India (section 174): if a person for individual is leaving India during the
current assessment year and he has no present intention of returning to India is assessed
to income tax in that assessment year. Does the income earned by him during the
assessment year is taxed in the same assessment year.
3. Income of an association of persons or body of individuals or artificial judicial person
formed for a particular event or purpose section ( 174 a): if any AOP or BOI aur an artificial
judicial person, formed or established or incorporated for a particular event or purpose is
likely to be dissolved in the assessment year the total income of such association or body
of judicial person for the period shall be chargeable to tax in that assessment year only.
4. Persons transferring property to avoid tax (section 175): if it appears to the assessing
officer during any current assessment that any person is likely to sell transferred dispose
off any office acids with the intention of avoiding payment of income tax, the total income
of such person up to the date when the assessing officer commences proceedings against
him shall be chargeable to tax in that assessment year.
5. Discontinued business or profession( 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 for that assessment year up to the date of such discontinuance at the
discretion of assessing officer be assessed in that assessment year.

PERSON-Section 2(31)

The term “person” includes:

An individual;

A Hindu undivided family (HUF);

A company;

A firm;

An Association of Persons (AoP) or a Body of Individuals, (Bol) whether incorporated or not; f. A

local authority; and every artificial juridical person not falling within any of the preceding
categories.
These are seven categories of persons chargeable to tax under the Act. The aforesaid definition is
inclusive and not exhaustive. Therefore, any person, not falling in the abovementioned seven
categories, may still fall within the four corners of the term "person" and accordingly may be liable
to tax.

ASSESSEE-S. 2(7)

Definition :

U/s 2(7) "Assessee" means a person by whom income tax or any other sum of money is payable
under the Act and it includes:

a. every person in respect of whom any proceeding under the Act has been taken for the
assessment of his income or loss or the amount of refund due to him

b. a person who is assessable in respect of income or loss of another person or who is deemed to
be an assessee, or

c. an assessee in default under any provision of the Act

Deemed assessee: the following persons are deemed to be assessee is under special circumstances
as per provisions of this act:

 Legal heir : legal higher is deemed to be an assessee in respect of the assessment of the
person on whose death he inherited the property.
 Representative: a person representing a foreigner minor or an incompetent person is
liable to pay tax on their income.
 Assessee in default : if a person does not fulfill the legal obligations as per this 8 due to
which a loss of revenue is cost to the income Tax department such person is entitled to
compensate the the department for such loss. For this purpose he is deemed to be an
assessee in default.

A minor child is treated as a separate assessee in respect of any income generated out of activities
performed by him like singing in radio jingles, acting in films, tuition income, delivering
newspapers, etc. However, income from investments, capital gains on securities held by minor
child, etc. would be taxable in the hands of the parent having the higher income (mostly the
father), unless if such assets have been acquired from the minor's sources of income.

ASSESSMENT - S 2(8)

An assessment is the procedure to determine the taxable income of an assessee and the tax
payable by him. S. 2(8) of the Income Tax Act, 1961 gives an inclusive definition of assessment "an
assessment includes reassessment" U/s 139 of the Act, every assessee is required to file a self
declaration of his income and tax payable by him called "return of income".
INCOME-S 2(24)

Definition;

Although, income tax is a tax on income, the Act does not provide any exhaustive definition of the
term "Income". Instead, the term 'income' has been defined in its widest sense by giving an
inclusive definition. It includes not only the income in its natural and general sense but also
incomes specified in section 2 (24).

Broadly the term "Income includes the following:

i. profits and gains ;

ii. dividend;

iii. voluntary contributions received by certain institutions

iv. Receipts by employees the value of any benefit or perquisite, whether convertible into money
or not.

v. Incomes from business – s-28

vi. Incomes from business - s-28

vii. any capital gains chargeable under section 45;

viii. any sum earlier allowed as deduction and chargeable to income-tax under Section 59

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 :

x. any contribution received from employees towards any provident fund or superannuation fund
or 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 of money or value of property received as gift-S 56(2) and Shares of closely held
companies transferred to another company or firm are covered in the definition of gift except in
the case of transfer of such shares for reorganization of business by amalgamation or demerger
etc

SCHEME OF CHARGING INCOME TAX

Income tax is a tax on the total income of an assessee for a particular assessment Year. This
implies that;

• Income-tax is an annual tax on income

• Income of previous year is chargeable to tax in the next following assessment year at the tax
rates applicable for the assessment year.

• Tax rates are fixed by the annual Finance Act and not by the Income-tax Act. For instance, the
Finance Act, 2012 fixes tax rates for the assessment Year 2013-14

• Tax is charged on every person if the gross total income exceeds the minimum income
chargeable to tax