UNIT – 1

INCOME TAX ACT

I. INCOME TAX ACT, 1961

ANS. According to section 1
i. This Act may be called the Income-tax Act, 1961.
ii. It extends to the whole of India.
iii. It came into force on the 1st day of April, 1962 i.e. from AY 1962-63 onwards

OVERVIEW OF SYSTEM
i. The income tax rules, 1962
a. IT rules are subordinate of ITA.
b. The administration of direct taxes is looked after CBDT.
c. According to sec.295, Central Board of Direct Taxes(CBDT) may subject to
the control of CG by notification in the official Gazette of India, make rules
for the whole or any part of India for implementation of the provisions
contained in act.
d. These rules were first made in 1962 and are known as ITR, 1962.
ii. Notifications
a. These are issued by CG and CBDT from time to time
b. These are subordinate legislation and is issued under powers delegated by
Parliament.
c. Any notification issued by CG and CBDT are binding on everyone.
iii. Circulars
a. Circular is communication from CBDT, which basically serves as guidelines
for better implementation of the law.
b. Circular are binding upon Tax authorities and not on the assessee‘s or courts
c. The CBDT in exercise of powers conferred on it u/s 119 has been issuing
certain circulars which have to be followed by ITA authorities.
iv. Judicial pronouncements
a. Decisions pronounced by Tribunals and the courts in respect of an appeal filed
before them are known as judicial pronouncements.
b. It may be noted that any decision given by SC becomes law which shall be
binding on everyone, namely courts, assesses and income tax authorities.
c. Decisions pronounced by HC, Tribunal are binding on all assesses as well for
IT authorities who fall under same area over which HC has jurisdiction.

CHARGING SECTION - SECTION 4

i. Section 4 of Income tax act is the most effective and operative of the various
provisions in the Act since, it is because of this section alone all other sections
become enforceable.
ii. The charging section is the backbone of the act, it lays down the provisions as to what
are taxable and at what rates; income of which period is taxable and in whose hands.
iii. Accordingly, the section provides that :
a. Income tax shall be charged at the rate or rates prescribed in the finance act for
the relevant previous year,
b. the charge of tax is on various persons specified u/s 2(31);

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 c. the income sought to be taxed is that of the previous year and not of the of
assessment year
d. the levy of tax on the assessee is on his total or taxable income computed in
accordance with and subject to the appropriate provisions of the income tax
Act, including provisions for the levy of additional income-tax.
e. Income Tax shall be deducted at source or paid in advance, where it is so
deductible or payable under any provision of the Act.

RATE OF TAX
i. The Finance Act contains necessary amendments in the direct taxes (e.g. income tax
and wealth tax) and indirect taxes (e.g. excise duties, custom duties and service tax)
signifying the policy decisions of the Union Government.
ii. Finance Bill is presented usually in the last week of February every year and this bill
contains amendments in direct as well as indirect taxes.
iii. It is usually presented in the Parliament by the Finance Minister.
iv. The finance bill is passed by both the houses of Parliament after it is being tabled and
necessary recommendation / amendments have been made in it.
v. Once this bill has been passed by the Parliament, it goes to the President for his
assent. After President‘s assent, the finance bill becomes the Finance Act.
vi. The effective date of applicability of provisions of the Finance Act is usually
mentioned in the notification in the official gazette or in the Act itself.
vii. Generally, the amendments by the Finance Act are made applicable from the first day
of the next financial year e.g. generally, amendments by Finance Act, 2016 are
effective from 1st April, 2017.
viii. First schedule to the annual Finance Act is divided into four parts:
a. Part I provides rates for current Assessment Year. For example, Part I of the
Finance Act, 2016 provides income-tax rates for Assessment Year 2016-17;
b. Part II provides rates of TDS for the current financial year. For example, Part
II of the Finance Act, 2016 provides rates of TDS for financial year 2016-17
(i.e. Assessment Year 2017-18);
c. Part III provides the rate of TDS under the head Income from ‗Salaries‘ and
the rates of advance tax for the current financial year. For example, Part III of
the Finance Act, 2016 provides rates of advance tax for financial year 2016-17
(i.e. Assessment Year 2017-18).
d. Part IV provides for rules for computation of net agricultural income.

INCOME TAX SLAB RATES

The Income Tax slab rates are different for different categories of taxpayers. We can divide
Income Tax slab rates for the following categories:
i. Individual or HUF or Association of Person or Body of Individual or Artificial
Juridical Person
ii. resident senior citizen
iii. resident super senior citizen
iv. partnership firm
v. local authority
vi. domestic company
vii. foreign company
viii. For a co-operative society

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 II. DEFINITIONS
ANS. Following definitions as under ITA:
1. Person – section 2(31) – It includes
i. Individual - Individual refers to a natural human being whether male or
female or transgender, minor or major. It includes only natural persons and not
deities and statutory corporations. Partner of a firm, Managing director or
director of a company, Co-owners of the house property, Sole proprietor of a
business, Individual includes minor or a person with unsound mind.
ii. a Hindu undivided family - It is a relationship created due to operation of
Hindu Law. The manager of HUF is called ―Karta‖ and its members are called
‗Coparceners‘. Many state governments have abolished the status of HUF and
they are prevalent in some states of the country only. The Karta is having two
assessments i.e. One his individual assessment and the second in the capacity
of Karta of HUF. A joint family of X, Mrs. X, their sons and unmarried
daughters
iii. a company - "company" means—
i. any Indian company, or
ii. any body corporate incorporated by or under the laws of a country
outside India, or
iii. any institution, association or body which is or was assessable or was
assessed as a company for any assessment year under the Indian
Income-tax Act, 1922 (11 of 1922), or which is or was assessable or
was assessed under this Act as a company for any assessment year
commencing on or before the 1st day of April, 1970, or
iv. any institution, association or body, whether incorporated or not and
whether Indian or non-Indian, which is declared by general or special
order of the Board to be a company :
Provided that such institution, association or body shall be deemed to be a
company only for such assessment year or assessment years (whether
commencing before the 1st day of April, 1971, or on or after that date) as may
be specified in the declaration ;]
iv. a 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.
Under Income Tax Act, 1961, a partnership firm can be of the following two
types
(i) a firm which fulfil the conditions prescribed u/s 184.
(ii) A firm which does not fulfil the conditions prescribed u/s 184.
It is important to note that for Income Tax purposes, a limited liability
partnership (LLP) constituted under the LLP Act, 2008 is also treated as a
firm.
v. an association of persons whether incorporated or not - (AOP) are persons
who combine together to form a joint enterprise but does not constitute a
partnership. There must a common purpose and a common action to achieve
the common purpose for which the AOP is constituted. AOP can have
individuals, firms, companies or Associations as its members. In case of
income of AOP, the AOP alone shall be taxed and the members of the AOP
cannot be taxed individually in respect of the income of the AOP

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 vi. a body of individuals, whether incorporated or not - Body of Individuals as
can have only individuals as members and non-individuals cannot be
members. Only natural human beings can be members of a body of
individuals. Example – political party members.
vii. a local authority - A local authority is a municipal committee or a district
body that controls a municipal or local fund. It includes
i. Municipal corporation of Delhi or
ii. Any other State Municipal Corporation
viii. every artificial juridical person, not falling within any of the preceding
sub- clauses - An Artificial Juridical person is a body having juridical
personality of its own and a public corporation established under Special Act
of Legislature. Artificial juridical person is an entity other than a natural
person created/recognized/accredited by law and also recognized as a legal
entity having distinct identity, legal personality and duties and rights. Eg:
Universities, Lord Tirupathi Balaji, and Sabarimala Ayyappa etc. Any other
body which does not fall under other 6 categories of person satisfying the
above requirements can also be classified as an artificial juridical person.

2. Income - it includes
i. profits and gains36 ;
ii. dividend ;
(iia) voluntary contributions received by a trust created wholly or partly for
charitable or religious purposes or by an institution established wholly or
partly for such purposes 38[or by an association or institution referred to in
clause (21) or clause (23)39, or by a fund or trust or institution referred to in
sub-clause (iv) or sub-clause (v) 40[or by any university or other educational
institution referred to in sub-clause (iiiad) or sub-clause (vi) or by any hospital
or other institution referred to in sub-clause (iiiae) or sub-clause (via)] of
clause (23C) of section 1041[or by an electoral trust
Explanation.—For the purposes of this sub-clause, "trust" includes any other
legal obligation
iii. the value of any perquisite or profit in lieu of salary taxable under clauses (2)
and (3) of section 17 ;
(iiia) any special allowance or benefit, other than perquisite included under
sub-clause (iii), specifically granted to the assessee to meet expenses wholly,
necessarily and exclusively for the performance of the duties of an office or
employment of profit ;
(iiib) any allowance granted to the assessee either to meet his personal
expenses at the place where the duties of his office or employment of profit
are ordinarily performed by him or at a place where he ordinarily resides or to
compensate him for the increased cost of living
iv. the value of any benefit or perquisite, whether convertible into money or not,
obtained from a company either by a director or by a person who has a
substantial interest in the company, or by a relative of the director or such
person, and any sum paid by any such company in respect of any obligation
which, but for such payment, would have been payable by the director or other
person aforesaid ;
(iva) the value of any benefit or perquisite45, whether convertible into money
or not, obtained by any representative assessee mentioned in clause (iii) or
clause (iv) of sub-section (1) of section 160 or by any person on whose behalf

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 or for whose benefit any income is receivable by the representative assessee
(such person being hereafter in this sub-clause referred to as the "beneficiary")
and any sum paid by the representative assessee in respect of any obligation
which, but for such payment, would have been payable by the beneficiary ;]
v. any sum chargeable to income-tax under clauses (ii) and (iii) of section 28 or
section 41 or section 59 ;
(va) any sum chargeable to income-tax under clause (iiia) of section 28 ;]
(vb) any sum chargeable to income-tax under clause (iiib) of section 28 ;]
(vc) any sum chargeable to income-tax under clause (iiic) of section 28 ;]
(vd) the value of any benefit or perquisite taxable under clause (iv) of section
28 ;
(ve) any sum chargeable to income-tax under clause (v) of section 28 ;]
vi. any capital gains chargeable under section 45 ;
vii. the profits and gains of any business of insurance carried on by a mutual
insurance company or by a co-operative society, computed in accordance with
section 44 or any surplus taken to be such profits and gains by virtue of
provisions contained in the First Schedule ;
(viia) the profits and gains of any business of banking (including providing
credit facilities) carried on by a co-operative society with its members;]
viii. Omitted by the Finance Act, 1988, w.e.f. 1-4-1988. Original sub-clause (viii)
was inserted by the Finance Act, 1964, w.e.f. 1-4-1964;]
ix. any winnings from lotteries53, 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.]
[Explanation.—For the purposes of this sub-clause,—
(i) "lottery" includes winnings from prizes awarded to any person by draw of
lots or by chance or in any other manner whatsoever, under any scheme or
arrangement by whatever name called;
(ii) "card game and other game of any sort" includes any game show, an
entertainment programme on television or electronic mode, in which people
compete to win prizes or any other similar game ;]
x. any sum received by the assessee from his employees as contributions to any
provident fund or superannuation fund or any fund set up under the provisions
of the Employees' State Insurance Act, 1948 (34 of 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.
Explanation.—For the purposes of this clause*, the expression "Keyman
insurance policy" shall have the meaning assigned to it in the Explanation to
clause (10D) of section 10 ;]
xii. any sum referred to in 58[clause (va)] of section 28;]
xiii. any sum referred to in clause (v) of sub-section (2) of section 56;]
xiv. any sum referred to in clause (vi) of sub-section (2) of section 56;]
xv. any sum of money or value of property referred to in clause (vii) 62[or clause
(viia)] of sub-section (2) of section 56;]
xvi. any consideration received for issue of shares as exceeds the fair market value
of the shares referred to in clause (viib) of sub-section (2) of section 56;]
xvii. any sum of money referred to in clause (ix) of sub-section (2) of section 56;]
(xviia) any sum of money or value of property referred to in clause (x) of sub-
section (2) of section 56;]

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 xviii. assistance in the form of a subsidy or grant or cash incentive or duty drawback
or waiver or concession or reimbursement (by whatever name called) by the
Central Government or a State Government or any authority or body or agency
in cash or kind to the assessee 66[other than,—
(a) the subsidy or grant or reimbursement which is taken into account for
determination of the actual cost of the asset in accordance with the provisions
of Explanation 10 to clause (1) of section 43; or
(b) the subsidy or grant by the Central Government for the purpose of the
corpus of a trust or institution established by the Central Government or a
State Government, as the case may be];]

INCOME HEADS- sec 14

I. Income from Salary - The first head of Income Tax heads is income from salary.
This clause essentially assimilates any remuneration, which is received by an
individual in terms of services provided by him based on a contract of
employment. This amount qualifies to be considered for income tax only if there
is an employer-employee relationship between the payer and the payee
respectively. Salary also should include the basic wages or salary, advance salary,
pension, commission, gratuity, perquisites as well as the annual bonus.
a. Allowances: An allowance is a fixed monetary amount paid by the
employer to the employee for expenses related to office work. Allowances
are generally included in the salary and taxed unless there are exemptions
available.
b. Specific tax exemptions are allowances allowed by employers as part of
the salary. Some of them are.
c. Conveyance Allowance: Up to Rs 800/- a month is exempt from tax.
d. House Rent Allowance (HRA): Salaried individuals can claim House
Rent Allowance or HRA to lower taxes who live in a rented house. This
can be partially or completely exempt from taxes. The deduction available
is the minimum of the following amounts:
i. Actual HRA received
ii. 50% of [Basic salary + DA] for those living in metro cities (40%
for non-metros)
iii. Actual rent paid less 10% of salary
e. Leave Travel Allowance (LTA): LTA accounts for expenses for travel
when you and your family go on leave. While this is paid to you, it is tax-
free twice in a block of 4 years.
f. Medical Allowance: Medical expenses to the extent of Rs 15,000/– per
annum is tax-free. The bills can be incurred by you or your family.
g. Perquisites: Section 17 of Income Tax Act deals with perquisites which
are basically benefits in addition to normal salary to which an employee
has a right by way of his employment. Examples of these are rent free
accommodation or car loan. There are some perquisites that are taxable in
the hands of all categories of employees, some which are taxable when the
employee belongs to a specific group and some that are tax-free
II. Income from House Property - The second head of Income Tax heads is Income
from house property, According to the Income Tax Act 1961, Sections 22 to 27 is
dedicated to the provisions for the computation of the total standard income of a
person from the house property or land that he or she owns. An interesting aspect
is that the charge is derived out of the property or land and not on the amount of

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 rent received. However, if the property is utilized for letting out the normal course
of business, then the income from the rent will be considered.
III. Income from Profits of Business - The third head of Income Tax heads is Income
from Profits of Business in which the computation of the total income will be
attributed from the income earned from the profits of business or profession. The
difference between the expenses and revenue earned will be chargeable. Here is a
list of the income chargeable under the head:
a. Profits earned by the assessee during the assessment year
b. Profits on income by an organization
c. Profits on sale of a certain license
d. Cash received by an individual on export under a government scheme
e. Profit, salary or bonus received as a result of a partnership in a firm
f. Benefits received in a business
IV. Income from Capital Gains - Capital Gains are the profits or gains earned by an
assessee by selling or transferring a capital asset, which was held as an
investment. Any property, which is held by an assessee for business or profession,
is termed as capital gains.
V. Income from other sources - Any other form of income, which is not categorized
in the above-mentioned clauses, can be sorted in this category. Interest income
from bank deposits, lottery awards, card games, gambling or other sports awards
are included in this category. These incomes are attributed in Section 56(2) of the
Income Tax Act and are chargeable for income tax. Some of the types of income
which are assessable under this head are mentioned below:
a. Dividends or income from units of mutual fund.
b. Interest including ‗interest on securities‘ if it is not taxable under the head
‗Profits and gains of business or profession‘.
c. Income such as:
i. Ground rent or rent received or sub-letting a property.
ii. Winning from lotteries, cross-word puzzles, races including horse
races, card games or from gambling or betting etc.
iii. Income from hiring of machinery, plant or furniture unless such a
hiring is the business of the taxpayer.
iv. Family pension.
d. In computing the taxable income under this head, deduction is allowable
for expenditure (other than capital expenditure) which is incurred by the
tax payer wholly and exclusively for the purpose of earning such income.
Besides, in assessing dividend income, any remuneration or commission
paid for realizing such income is allowed as deduction. In assessing
income from letting the machinery, plant or furniture on hire, the
depreciation on the value of such assets calculated in the same manner as
in respect of assets used in a business or profession is allowable as a
deduction. No deduction is, however, allowed in respect of-
i. Any personal expenditure of the tax payer;
ii. Any salaries or interest payable outside India from which tax is
deductible at source under the Act but has not been deducted.

3. Assessee – sec 2(7)

As per S. 2(7) of the Income Tax Act, 1961, unless the context otherwise
requires, the term ―assessee‖ means a person by whom any tax or any other
sum of money is payable under this Act, and includes-

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 i. every person in respect of whom any proceeding under this Act has been taken
for the assessment of his income or assessment of fringe benefits 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;
ii. every person who is deemed to be an assessee under any provision of this Act;
iii. every person who is deemed to be an assessee in default under any provision
of this Act.

Normal Assessee
i. any person against whom proceedings under Income Tax Act are going on,
irrespective of the fact whether any tax or other amount is payable by him or not;
ii. any person who has sustained loss and filed return of loss u/s 139(3);
iii. any person by whom some amount of interest, tax or penalty is payable under this
Act;
iv. any person who is entitled to refund of tax under this Act.

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

Deemed Assessee
i. In case of a deceased person who dies after writing his will the executors of the
property of deceased are deemed as assessee.
ii. In case a person dies intestate (without writing his will) his eldest son or other legal
heirs are deemed as assessee.
iii. In case of a minor, lunatic or idiot having income taxable under Income-tax Act, their
guardian is deemed as assessee.
iv. In case of a non-resident having income in India, any person acting on his behalf is
deemed as assessee.

Assessee-in-default
i. A person is deemed to be an assessee-in-default if he fails to fulfill his statutory
obligations.
ii. 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.
iii. If he fails to deduct tax at source or deducts tax but does not deposit it in the treasury,
he is known as assessee-in-default.

4. Assessment year – section 2(9)

i. Assessment year may be defined as a year in which the income tax of the
previous year is to be assessed.
ii. It is a period of twelve months starting from April 1st of every year and ending
on March 31st of the next year.
iii. In an assessment year, you file your income tax returns of the previous year.

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 iv. For instance, the assessment year 2017‑2018 commenced on 1st April, 2016
and will end on March 31,2017.
v. It is the year in which you have earned the income.
vi. AY is the year in which you file returns.

5. Previous year - S.2(34) & S.3 Income Tax

i. (1) For the purposes of this Act, "previous year" means—
(a) the financial year immediately preceding the assessment year; or
(b) if the accounts of the assessee have been made up to a date within the said
financial year, then, at the option of the assessee, the twelve months ending on
such date; or
(c) in the case of any person or business or class of persons or business not
falling within clause (a) or clause (b), such period as may be determined by
the Board or by any authority authorised by the Board in this behalf; or
(d) in the case of a business or profession newly set up in the said financial
year, the period beginning with the date of the setting up of the business or
profession and—
(i) ending with the said financial year, or
(ii) if the accounts of the assessee have been made up to a date within
the said financial year, then, at the option of the assessee, ending on
that date, or
(iii) ending with the period, if any, determined under clause (c), as the
case may be; or
(e) in the case of a business or profession newly set up in the twelve months
immediately preceding the said financial year—
(i) if the accounts of the assessee have been made up to a date within
the said financial year and the period from the date of the setting up of
the business or profession to such date does not exceed twelve months,
then, at the option of the assessee, such period, or
(ii) if any period has been determined under clause (c), then the period
beginning with the date of the setting up of the business or profession
and ending with that period, as the case may be; or
(f) where the assessee is a partner in a firm and the firm has been assessed as
such, then, in respect of the assessee's share in the income of the firm, the
period determined as the previous year for the assessment of the income of the
firm; or
(g) in respect of profits and gains from life insurance business, the year
immediately preceding the assessment year for which annual accounts are
required to be prepared under the Insurance Act, 1938 (4 of 1938), or under
that Act read with section 43 of the Life Insurance Corporation Act, 1956 (3 of
1956).
ii. (2) Where an assessee has newly set up a business or profession in the said
financial year and his accounts are made up to a date in the assessment year in
respect of a period not exceeding twelve months from the date of such setting
up, then, notwithstanding anything contained in sub-clause (iii) of clause (d)
of sub-section (1), the assessee shall, in respect of that business or profession,
at his option, be deemed to have no previous year for the said assessment year
under that clause and such option shall, in relation to the immediately
succeeding assessment year, have effect as an option exercised under sub-
clause (i) of clause (e) of sub-section (1).

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 iii. (3) Subject to the other provisions of this section, an assessee may have
different previous years in respect of separate sources of his income.
iv. (4) Where in respect of a particular source of income or in respect of a
business or profession newly set up, an assessee has once exercised the option
under clause (b) or sub-clause (ii) of clause (d) or sub-clause (i) of clause (e)
of sub-section (1) or has once been assessed, then, he shall not, in respect of
that source, or, as the case may be, business or profession, be entitled to vary
the meaning of the expression "previous year" as then applicable to him,
except with the consent of the Income-tax Officer and upon such conditions as
the Income-tax Officer may think fit to impose.

6. WHEN IS PREVIOUS YEAR SAME AS ASSESSMENT YEAR?

Ans. Following circumstances –

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