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Direct Tax

HISTORY OF INCOME TAX IN INDIA.

The income -tax was introduced in India for the first time in 1860 by British rulers following the mutiny of 1857 . The period between 1860 to 1886 was a period of experiments in the context of income -tax. This period ended in 1886 when the first Income -tax came into existence. The pattern laid down in it for levying of tax continues to operate even to-day though in some changed form. In 1918 another Act-Income tax, 1918 was passed but it was a short lived and was replaced by Income - tax Act, 1922 and it remained in existence and operation till 31st March, 1961 .

.Documents containing Laws relating to Income Tax.

The law relating to Income tax is one of the most complicated law of India. A number of different documents cover the various aspects of Income tax provisions and one has to go through all these documents ( sources) to have a through knowledge of it. These documents are known as ' sources of Law relating to Income tax' and are as follows :

1. Income Tax Act, 1961 . On the recommendation of Law Commission and Direct Taxes Administration Enquiry Committee chaired by Sh. Mahavir Tyagi, a bill was framed. This bill was referred to a select committee and was finally passed in September, 1961 . This Act came into force from April 1, 1962 in whole of the country. Income Tax Act, 1961 is a comprehensive Act which consists of 298 sections and many subsections grouped under 23 Chapters along with 14 Schedules. The Act contains detailed provisions regarding applicability, basis of charge, residential status, heads of income, clubbing provisions, set-off of losses, deductions, exemptions and assessment procedures involving appeals, penalities and filing of return etc.

2.Income Tax Rules, 1962 . The provisions contained in Income Tax Act are duly supported by Income Tax Rules, 1962 that helps in carrying out the purposes of the Act. These rules are prepared by ' Central Board of Direct Taxes ' ( CBDT) by virtue of power granted to it (i.e.,Board) under section 295 of the Income Tax Act, 1961. These rules deal with procedural part of the various aspects of Income Tax.

Certain Examples of Income Tax Rules :

1. Rule 3 - Valuation of perquisites for calculating ' Salary income '

2. Rule 6-Prescribed authority for expenditure on scientific research.

3. Rule 7- Splitting up of partly agricultural income and partly non-agricultural income.

4. Rule 6DD- Cases and circumstances in which payment exceeding 20,000 may be made otherwise than by an account payee cheque or account payee bank draft.

These rules are made applicable by way of notification in the Official Gazette of India and are subject to the control of Central Government.

3. Annual Finance Act. Annual Finance Act is an important piece of legislation that updates /amends the Income Tax Act, 1961. It gives effect to the financial proposals of the government for the relevant financial year and is finalised at the beginning of every financial year. It contains :

1.Introduction of new sections to the Income Tax Act, 1961 .

2. Deletion of certain sections from the Income Tax Act, 1961 , and

3. Rates of Income Tax for an assessment year, rates of tax for deducted at source for the financial year and rates of advance tax for the relevant financial year.

4. Circulars and Clarifications issued by CBDT. The Indian Central Board of Direct Taxes ( CBDT) is the apex institution that regulates the overall administration of the direct taxes ( Income Tax and Wealth Tax) of the country. Section 119 of the Income Tax Act, 1961 empowers CBDT to issue certain orders, instructions and directions to the revenue department ( i.e.,Income Tax department) to assist in the interpretation of the law. These orders / instructions / directions are issued in the form of circulars / instructions and are required to be followed by the Income Tax authorities. These circulars clarify the ambiguities in statutory provisions and provide greater ease of administration.

.Important points :

1. CBDT circulars are binding on Income tax department officials.

2. Circulars are not binding on assessee.

3. Circulars are not binding on CTT ( Appeals) and other appellate authorities.

5. Judicial Decisions / Case Law. Judicial decisions are also one of the most important source of Income tax law.

.Important points :

1.Any decision given by any High Court shall be applicable in the particular case.

2. Any decision given by the honourable Supreme Court shall be treated as law applicable throughout the country.

3. The decision of Supreme Court can be reversed by the Parliament by enacting a law contrary to such decision.

.DEFINITIONS.

1. Agricultural Income [ Section 2(1A) ]

Agricultural income is fully exempted from tax u/s 10(1) and as such does not form part of total income :

a. any rent or revenue derived from land which is situated in India and is used for agricultural purposes :

b. any income derived from such land by -

1. agriculture : or

2. the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market : or

3. the sale by a cultivator or received of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in paragraph .2. of this sub-clause :

c. any income derived from any building owned and occupied by the cultivator or the receiver of rent-in-kind, of any land with respect to which, or the produce of which, any process mentioned in paragraphs .2. and .3. of sub - clause (b) is carried on.

Provided that -

1. the building is on or in the immediate vicinity of the land, and is a building which the receiver of the rent or revenue or the cultivator, or the receiver of rent-in-kind, by reason of his connection with the land, requires as a dwelling house, or as a store-house, or other out-building, and

2.the land is either assessed to land revenue in India or is subject to a local rate assessed and collected by officers of the Government as such or where the land is not, so assessed to land revenue or subject to a local rate, it is not situated :

a. in any area which is comprised within the jurisdiction of a municipality ( whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year : or

b. in any area within such distance, not being more than eight kilometers, from the local limits of any municipality or cantonment board referred to in item (A), as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification ' in the Official Gazette :

.Explanation -1. For the removal of doubts, it is hereby declared that revenue derived from land shall not include and shall be deemed never to have included any income arising from the transfer of any land referred to in item (a) or item (b) of sub-clause (3) of clause (14) of this section.

.Explanation -2. For the removal of doubts, It is hereby declared that income derived from any building or land referred, to in sub - clause (e) arising from the use of such building or land for any purpose ( including letting for residential purpose or for the purpose of any business or profession) other than agriculture failing under sub-clause (a) or sub clause (b) shall not be agricultural income.

.Explanation - 3 .For the purposes of this clause, any income derived from samplings or seedlings grown in a nursery shall be deemed to be agricultural income.

2. Assessee [ Section 2 (7) ]

' Assessee ' means a person by whom any tax or any other sum of money is payable under this Act includes :

a. every person in respect of whom any proceedings under this Act have been taken for the assessment of his income or of the income of any other person in respect of which he is assessable or loss sustained by him or by such other person or of the amount of refund due to him or to such 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.

The above definition divides various types of assessees into three categories :

a. Ordinary assessee. It includes

1. any person against whom some proceedings under this Act are going on. It is immaterial whether any tax or other amount is payable by him or not.

2. any person who has sustained loss and has filed return of loss u/s 139 (3) .

3. any person by whom some amount of interest, tax or penalty is payable under this Act: or

4. any person who is entitled to refund of tax under this Act.

b. Representative assessee or deemed assessee. A person may not be liable only for his own income or loss but also on the income or loss but also on the income or loss of other persons e. g. guardian of minor or lunatic, agent of a non-resident etc. In such case the persons responsible for the assessment of income of such persons are called representative assessees. Such person is deemed to be an assessee.

1. In case of a deceased person who dies after writing his will the executors of the property of deceased are deemed as assessees.

2. In case a person dies intestate ( without writing his will ) his eldest son or other legal heirs are deemed as assessee.

3. In case of a minor, lunatic or idiot having income taxable under Income-tax Act, their guardian is deemed as assessee.

4. In case of a non-resident having income in India, any person acting on his behalf is deemed as assessee.

c. Assessee-in-default. A person is deemed to be an assessee-in-default if he fails to fulfil his statutory obligations. In case of an employer paying salary or a person who is paying interest it is their duty to deduct tax at source and deposit the amount of tax so collected in Government treasury. If he fails to deduct tax at source or deducts tax but does note deposit it in the treasury, he is known as assessee-in-default.

3. Average Rate [ Section 2 (10) ].

"average rate of income-tax " means the rate arrived at by dividing the amount of income-tax calculated on the total income by such total income.

4. Maximum Marginal Rate [ MMR ] [ ( Section 2 (29C) ].

It means the rate of income-tax ( including surcharge on income tax, if any) applicable in relation to the highest slab of income in the case of an individual, AOP or BOI as specified in the Finance Act of the relevant year. At present, for assessment year 2015-2016, it is 30%.

5. Block of Assets [Section 2(11)]

It means a group of assets falling within a class of assets comprising :

a. tangible assets being buildings, plant or furniture.

b. intangible assets being know-how, patents, copyrights, trade marks licenses, franchises or any other business or commercial rights of similar nature in respect of which same percentage of depreciation is prescribed.

This simply means that all assets of the same nature and having same rate of depreciation would form one block of assets.

6.Charitable Purpose [ Section 2 (15) ]

" Charitable purpose" includes -

1.relief of the poor,

2.education ,

3.medical relief,

4.Yoga,

5. advancement of any other object of general public utility.

It is further provided that any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration irrespective of the nature of use or application or retention, of income from such activity .

The advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless -

1. such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility : and

2. the aggregate receipts from such activity or activities during the previous year, do not exceed 20% of the total receipts of the trust or institution undertaking such activity or activities, of that previous year.

7. Child [ Section 2(22) ]

" Child " in relation to an individual, includes a step-child and an adopted child of that individual. It includes both male and female children.

8. Fair Market Value [ Section 2(22) ]

The " fair market value " in relation to a capital asset means :

a. the price that the capital asset would ordinarily fetch on sale in the open market on the relevant date : and

b. where the price referred to in sub-clause (1) is not ascertainable, such price as may be determined in accordance with the rules made under this Act.

9. Person [ Section 2 (31) ]

Person includes :

1. an Individual

2. a Hindu Undivided Family

3. a Company

4. a Firm

5. an association of persons or a body of individuals, whether incorporated or not.

6. a local authority, and

7. 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.

The word person is a very wide term and embraces in itself the following :

1.Individual. It refers to a natural human being whether male or female, minor or major.

2. Hindu Undivided Family. It is a relationship created due to operation of Hindu Law. The manager of HUF is called " Karta " and it's members are called ' Coparceners'.

3. Company . It is an artificial person registered under Indian Companies Act 1956 or any other law.

4. Firm. It is an entity which comes into existence as a result of partnership agreement between persons to share profits of the business carried on by all or any one of them. Though, a partnership firm does not have a separate legal entity, yet it has been regarded as a separate entity under Income Tax Act, 1961 , a partnership firm can be of the following two types :

1. a firm which fulfill the conditions prescribed u/s 184 .

2. A firm which does not fulfill the conditions prescribed u/s 184.

It is important to note that for Income Tax purposes, a limited liability partnership (LLP) constituted under LLP Act, 2008 is also treated as a firm.

5.Association of Persons or Body of Individuals. Co-operative societies, MARKFED, NAFED etc . are the examples of such persons. When persons combine together to carry on a joint enterprise and they do not constitute partnership under the ambit of Law, they are assessable as an association of persons. There must be common purpose, and common action to achieve common purpose i.e, to earn income. An AOP can have firms, companies, associations and individuals as its members.

A body of individuals (BOI) cannot have non -individuals as its members. Only natural human beings can be members of a body of individuals.

Whether a particular group is AOP. or BOI. is a question of fact to be decided in each case separately.

6. Local Authority. Municipality, Panchayat, Cantonment Board, Port Trust etc . are called local authorities.

7. Artificial Juridical Person. 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.

10.Income .[ Section 2(24) ]

Income includes :

1. Profits and gains .

2. Dividend.

3. Voluntary Contribution received by a trust. Voluntary contributions received by a trust are included in the definition of income. As such contributions received by following types of trusts, funds, associations, bodies. etc. are included in the income of such bodies.

a. Contributions received by a trust created wholly or partly for charitable or religious purposes.

b. Contributions received by a scientific research association.

c. Contributions received by a fund or institution set up for charitable purposes and notified u/s 10 (23c) (4) (5).

d. Contributions received by any university or other educational institution, hospital referred in section 10 (23c) .