INCOME TAX ACT, 1961

MEANING:
Tax is a fee charged by government on a product, income or activity. There are 2 types-direct
& indirect tax. If tax is levied directly on income or wealth of a person it is direct tax e.g.
income tax. If tax is levied on price of a good or service then it is indirect tax e.g. excise duty.
Tax, of which incidence and impact fall on the same person, is known as Direct Tax, such as
Income Tax. On the other hand, tax, of which incidence and impact fall on two different
persons, is known as Indirect Tax, such as GST, etc.

SOURCES OF INCOME TAX LAW IN INDIA:

a. INCOME TAX ACT:
The provisions of income tax extends to the whole of India and became effective. The Act
contains provisions for - (a) determination of taxable income; (b) determination of tax liability;
(c) procedure for assessment, appeals, penalties and prosecutions; and (d) powers and duties
of Income tax authorities.
b. ANNUAL AMENDMENTS
(a) Income tax Act has undergone several amendments from the time it was originally enacted
through the Union Budget. Every year, a Finance Bill is presented before the Parliament by
the Finance Minister. The Bill contains various amendments which are sought to be made in
the areas of direct and indirect taxes levied by the Central Government.
(b) When the Finance Bill is approved by both the Houses of Parliament and receives the
assent of the President, it becomes the Finance Act. The provisions of such Finance Act are
thereafter incorporated in the Income Tax Act.
c. INCOME TAX RULES
(a) As per Sec. 295, the Board may, subject to the control of the Central Government, make
rules for the whole or any part of India for carrying out the purposes of the Act.
(b) These rules were first made in 1962 and are known as Income tax Rules, 1962. Since then,
many new rules have been framed or existing rules have been amended from time to time
and the same has been incorporated in the aforesaid rules.
d. CIRCULARS AND CLARIFICATIONS BY CBDT
(a) U/s 119, the Board may issue certain circulars and clarifications from time to time, which
have to be followed and applied by the Income tax authorities.
(b) Effect of circulars: These circulars or clarifications are binding upon the Income tax
authorities, but the same are not binding on the assessee. However, assessee can claim
benefit under such circulars.
e. JUDICIAL DECISION
(a) Decision of the Supreme Court: Any decision given by the Supreme Court shall be
applicable as law till there is any change in law by the Parliament. Such decision shall be
binding on all the Courts, Tribunals, Income tax authorities, assessee, etc.
(b) Decisions given by a High Court or ITAT: Decisions given by a High Court or ITAT are binding
on all assessees and Income tax authorities, which fall under their jurisdiction, unless it is over
ruled by a higher authority

INCOME TAX ACT:

Income may be received in cash or in kind. Income received in kind is to be valued as per the
rules prescribed and if there is no specific direction regarding valuation in the Act or Rules, it
may be valued at market price. Income also includes negative income. A capital receipt is not
liable to tax, unless specifically provided in the Act, whereas, a revenue receipt is not
exempted, unless specifically provided in the Act. Same income cannot be taxed twice.

DEFINITIONS:
1. INCOME: No precise definition is attempted under the Act. The definition as given in
the Act starts with word includes therefore list is inclusive not exclusive. Income of the
previous year of a person is charged to tax in the immediately following assessment
year. Rate of tax is applicable as specified by the Annual Finance Act of that year.
Section 4 which deals with the charging section is the backbone of income tax law.
2. ASSESSMENT YEAR: Assessment year means the period of 12 months commencing on
the 1st day of April every year. It is the year (just after the previous year) in which
income earned in the previous year is charged to tax. E.g., A.Y.2024-25 is a year, which
commences on April 1, 2023 and ends on March 31, 2024. Income of an assessee
earned in the previous year 2023-2024 is assessed in the A.Y. 2024-25.
3. PREVIOUS YEAR: Previous Year means the financial year immediately preceding the
Assessment Year. Income earned in a year is assessed in the next year. The year in
which income is earned is known as Previous Year and the next year in which income
is assessed is known as Assessment Year. It is mandatory for all assessee to follow
financial year (from 1st April to 31st March) as previous year for Income-Tax purpose.
4. ASSESSEE: A person by whom any tax or any other sum of money (i.e., penalty or
interest) is payable under this Act; every person in respect of whom any proceeding
under this Act has been taken for the assessment of his income or loss or the amount
of refund due to him; a person who is assessable in respect of income or loss of
another person; every person who is deemed to be an assessee under any provision
of this Act; and a person who is deemed to be an ‘assessee in default’ under any
provision of this Act.
5. PERSON: The term person includes the following: an Individual; a Hindu Undivided
Family (HUF); a Company; a Firm; an Association of Persons (AOP) or a Body of
Individuals (BOI), whether incorporated or not; a Local authority; & every artificial
juridical person not falling within any of the preceding categories
(a) Bombay Municipal Corporation-Local authority (b) Corporation Bank Ltd.-Company
(c) Ms. XYZ-Individual (d) XYZ Corporation Ltd.-Company (e) A joint family of X, Y and
their son L and K-HUF (f) Mumbai University-Artificial juridical person (g) X and Y who
are legal heirs of Z-BOI (h) Sole proprietorship business-Individual (i) Partnership
Business-Firm

HEADS OF INCOME:
According to Sec.14 of the Act, all income of a person shall be classified under the following
five heads:
1. Salaries;
2. Income from house property;
3. Profits and gains of business or profession;
4. Capital gains;
5. Income from other sources.
For computation of income, all taxable income should fall under any of the five heads of
income as mentioned above. If any type of income does not become part of any one of the
above mentioned first four heads, it should be part of the fifth head, i.e. Income from other
sources, which may be termed as the residual head.
Gross total income is the aggregate of income under all the five heads of income after
adjusting the set-off & carry forward of losses. Deductions under chapter VIA is provided from
GTI, to arrive at Total income or taxable income.
Residential status of an assessee determines the scope of chargeability of his income.
Whether a person will be charged to a particular income or not, depends on his residential
status.

RETURN OF INCOME:
Return of income is the format in which assesse furnishes information of his total income and
tax payable. The format for filing returns for different assessees is notified by CBDT. In short
return of income is the declaration of income of assessee in prescribed format.
1. COMPULSORY FILING OF RETURN OF INCOME [Section 139(1)]:
As per section 139(1) of the Act, it is compulsory for companies & firms to file return of
income/loss for every previous year on or before due date in prescribed format. In case of
person other than company/firm filing of return on or before due date is mandatory if his
total income(excluding deductions) during previous year exceeds exemption limit.
2. RETURN OF LOSS [Section 139(3)]:
This requires assessee to file return of loss in same manner as return of income. A return of
loss must be filed by an assesse who has incurred loss under head ‘Profits & gains from
business & profession’, ‘Capital gains’, ‘Income from activity of owning and maintaining race
horses taxable under head Income from other sources’.

3. BELATED RETURN [Section 139(4)]:

If an assessee fails to file return within the time limit allowed u/s 139(1) or within the time
allowed under a notice issued u/s 142(1), he can file a belated return. Assessee may file such
return before the end of the relevant assessment year; or before the completion of
assessment (u/s 144), - whichever is earlier.

4. INCOME TAX RETURN FOR CHARITABLE OR RELIGIOUS INSTITUTIONS [Section

139(4A)]
Public charitable or religious institutions seeking tax exemptions under Section 11 and Section
12 of the Income Tax Act are obligated to file their income tax returns, provided that the total
income accumulated before the provisions outlined in Section 11 and Section 12 surpasses
the basic limit allowed for exemption.

5. INCOME TAX RETURN FOR POLITICAL PARTIES [Section 139 (4B)]:

Political parties or parties with political affiliations are required to file their income tax
returns, provided that the total income generated by the party exceeds the basic limit allowed
for exemption, irrespective of any benefits outlined in Section 13A of the Income Tax Act,
1961.

6. REVISED RETURN [Section 139(5)]:

If an assessee discovers any omission or wrong statement (bonafide in nature) in the return
filed, he can revise his return u/s 139(5). Assessee may file the revised return before the end
of the relevant assessment year; or before completion of regular assessment, whichever is
earlier. Once a revised return is filed, it replaces the earlier return. A revised return can again
be revised i.e. a second revised return can be filed u/s 139(5) for correcting any omission or
wrong statement made in the first revised return within specified time. A loss return can be
revised. A belated return u/s 139(4) can be revised provided its from A.Y. 2017-18 onwards
not for previous years.

7. DEFECTIVE RETURN [Section 139(9)]:

Where the Assessing Officer considers that the return of income furnished by the taxpayer is
defective, he may intimate the defect to the taxpayer and give him an opportunity to rectify
the defect(s). The assessee must rectify the error within a period of 15 days from the date of
intimation (served on the assessee) or within such extended time as allowed by the Assessing
Officer. Where the taxpayer rectifies the defect after the expiry of the period of 15 days or
such extended period but before the assessment is completed, the Assessing Officer can
condone such delay. If defect is not rectified within the time limit, the Assessing Officer will
treat the return as an invalid return and provisions of the Act will apply as if the taxpayer had
failed to furnish the return at all.

ASSESSMENT PROCEDURE:
1. SELF ASSESSMENT [Section 140A]:
In self-assessment, assessee itself is responsible to determine its taxable income, tax liability
and to pay tax accordingly. Where any tax is payable (after deducting relief, rebate, advance
payment of tax or tax deducted or collected at source or MAT or AMT credit, if any) on the
basis of return furnished the assessee is required to pay such tax before filing the return. If
an assessee fails to pay whole or any part of such tax or interest or both in accordance with
the provisions of sec. 140A, he shall be deemed to be an assessee in default.

2. INTIMATION OR ASSESSMENT BY IT DEPARTMENT

After submission of return or on non-submission of return by the assessee, assessment is
made by the Income tax department. The Assessing Officer can assess the income of the
assessee in any of the following manner: Intimation u/s 143(1); Scrutiny Assessment u/s
143(3); Best Judgment Assessment u/s 144; Income Escaping Assessment u/s 147.
For making assessment, the Assessing Officer can make an inquiry.

3. INQUIRY BEFORE ASSESSMENT [Section 142]:

For the purpose of making assessment, the Assessing Officer may serve a notice on any person
- who has submitted a return u/s 139; or in whose case the time allowed u/s 139(1) for
furnishing the return has expired. Such notice may relate to any of the following matter - to
submit a return [Sec. 142(1)(i)] or to produce accounts, documents etc. [Sec. 142(1)(ii) & (iii)].
For the purpose of obtaining full information in respect of the income (or loss) of any person,
the Assessing Officer may make such inquiry, as he considers necessary. U/s 142(1) Assessing
Officer collects information from the assessee, however u/s 142(2) Assessing Officer has the
power to collect information from any source.
The Assessing Officer (after giving reasonable opportunity to the assessee) may direct the
assessee to get his accounts audited if he is of the opinion that it is necessary to do so. Such
direction can be issued even if the accounts of the assessee have already been audited u/s
44AB or any other law for the time being in force
The assessee must be given an opportunity of being heard in respect of any material gathered
on the basis of any inquiry u/s 142(2) or any audit u/s 142(2A) and is proposed to be utilised
for the purpose of the assessment.
The Assessing Officer may, for the purposes of assessment or reassessment, make a reference
to a Valuation Officer to estimate the value, including fair market value, of any asset, property
or investment and submit a copy of report to him.[Section 142A].
4. INTIMATION [Section 143(1)]:
Where a return has been made u/s 139 or in response to a notice u/s 142(1), such return shall
be processed in the following manner, namely the total income or loss shall be computed
after making the following adjustment:
i. any arithmetical error in the return;
ii. an incorrect claim, if such incorrect claim is apparent from any information in the return;
iii. disallowance of loss claimed, if return of the previous year for which set off of loss is
claimed was furnished after the due date;
iv. disallowance of expenditure indicated in the audit report but not taken into account in
computing the total income in the return;
v. disallowance of deduction claimed u/s 10AA, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID or 80-IE,
if the return is furnished after the due date;
The tax, interest and fee, if any, shall be computed on the total income computed above. The
sum payable by the assessee shall be determined after adjustment of the tax, interest and
fee, if any, by any TDS, TCS, advance tax paid, any relief, tax paid on self-assessment and any
amount paid otherwise by way of tax, interest or fee. An intimation shall be prepared or
generated and sent to the assessee specifying the sum determined to be payable by, or the
amount of refund due to, the assesse.

5. SCRUTINY/REGULAR ASSESSMENT [Section 143(3)]:

Where the Assessing Officer or the prescribed income-tax authority considers it necessary to
ensure that the assessee has not - understated his income; or declared excessive loss; or
under paid the tax, he can make a scrutiny in this regard and gather such information and
evidence as he deems fit. On the basis of such information and evidence so collected, he shall
pass an assessment order. Such order shall be treated as regular assessment order.
Conditions for this assessment are that a return has been furnished u/s 139 or in response to
a notice u/s 142(1); and Assessing Officer considers it necessary or expedient to ensure that
the assessee has not understated his income, declared excessive loss or under-paid the tax.
After collecting such information and hearing such evidence as the assessee produces in
response to the notice u/s 143(2) and after taking into account all relevant materials, which
the Assessing Officer has gathered; The Assessing Officer shall, by an order in writing, make
an assessment of the total income or loss of the assessee and determine the sum payable by
him or refund of any amount due to him on the basis of such assessment. Assessment u/s
143(3) should be completed within 12 months from the end of the relevant assessment year
from A.Y. 2019-20 onwards.
6. BEST JUDGEMENT ASSESSMENT [Section 144]:
Under this section, assessment shall be made by the Assessing Officer to the best of his
judgment after considering all relevant materials which he has gathered. A refund cannot be
granted u/s 144. Best judgment assessment is not the discretionary power of the Assessing
Officer but mandatory in nature.
Situation in which it is applicable: In the following situations assessment shall be made under
this section –
a. If the person fails to file the return u/s 139(1), 139(4) or 139(5); or
b. If the person fails to comply with the terms of notice u/s 142(1); or
c. If the person fails to comply with the directions u/s 142(2A) requiring him to get his
accounts audited; or
d. If the person fails to comply with the terms of notice u/s 143(2), requiring his presence or
production of evidence and documents
As per sec. 145(3), if the Assessing Officer is not satisfied with the correctness or the
completeness of the accounts of the assessee or if no regular method of accountancy or
accounting standards [as notified by the Central Government u/s 145(2)] is followed by the
assessee, the Assessing Officer may make an assessment in the manner provided u/s 144.
The assessment u/s 144 can only be made after giving the assessee a reasonable opportunity
of being heard. Such opportunity shall be given by serving a “Show cause notice” calling upon
the assessee to show cause(s), on a date and time specified in the notice, why the assessment
should not be completed to the best of judgment of the Assessing Officer. Time limit for
completion of assessment is 12 months from the end of relevant assessment year

7. INCOME ESCAPING ASSESSMENT [Section 147]:

If the Assessing Officer has reason to believe that any income chargeable to tax has escaped
assessment for any assessment year, he may, subject to the provisions of sections 148 to 153
assess or reassess such income and also any other income chargeable to tax which has
escaped assessment and which comes to his notice subsequently in the course of the
proceedings under this section, or recompute the loss or the depreciation allowance or any
other allowance, as the case may be, for the relevant assessment year.
From 2021, new law has been implemented for reopening to avoid unnecessary disputes and
litigation. As per the new law, notice u/s. 148 to reopen the case can be issued upto 3 years
from end of relevant assessment year or can be issued upto 10 years from end of relevant
assessment year provided the income sought to be escaped is Rs. 10 lakhs or more.
The first step is to conduct enquiry by issuing notice u/s. 148A of the Act providing all
information/material available with the officer. An opportunity of being heard is given to the
assessee. Based on reply of assessee, the officer has to decide whether it is a fit case for
reopening vide order u/s. 148A(d) of the Act. If the officer finds it to be a fit case, notice u/s
148 of the Act is issued reopening the assessee’s case and regular assessment proceedings
are conducted.
APPEALS & REVISIONS

The assessee is given a right of appeal by the Act where he feels aggrieved by the order of the
assessing authority. However, the assessee has no inherent right of appeal unless the statute
specifically provides that a particular order is appealable. There are four stages of appeal
under the Income-tax Act, 1961 after order is passed by Assessing officer as shown hereunder:

1st Stage: Commissioner of Income Tax (Appeals)

2nd Stage: Income Tax Appellate Tribunal

3rd Stage: High Court

4th Stage: Supreme Court