TAX LAW SEMESTER-VI ASSIGNMENT

“GENERAL SCHEME OF INCOME TAX ACT, 1961”

SUBMITTED BY:

NAME: ARFA IMTEYAZ

COURSE: 3RD YEAR B.A.LL. B (Hons)

SEMESTER: 6TH SEMESTER

R. No: 14, REGULAR BATCH

STUDENT ID: 202003793

EXAMINATION ROLL: 20BLW013

SUBMITTED TO: DR. EAKRAMUDDIN MALIK, FACULTY OF LAW, JMI.

15/05/2023 (Date of Submission)

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ACKNOWLEDGEMENTS

Law school is a journey, complete with hurdles, medals, pain, and appreciation. I am fortunate
to be a law student in Jamia Millia Islamia, where the faculty members are hardworking, highly
skilled, and most importantly, very helpful. I am glad to have Dr. Eakramuddin Malik sir,
taking Tax Laws as a subject in my third year of this journey, as he is not only hardworking
and talented but also highly dedicated to teaching us students the many concepts of the said
subject.

From definition of assessee and forms of tax, to income from agriculture and property, he has
taught us the many mechanisms of the Indian legal system, and nuances of Tax Law, the
concepts might be easy or difficult to understand, but either way, sir makes it highly interesting
and tries to engage the whole class in the discussions.

I would therefore firstly like to thank sir for his constant dedication and help. He does not think
twice before helping us and clearing our queries, and makes us intrigued towards the concepts
by using various case laws to explain.

I would also thank my family and friends for being constant supporters and for cheering me on
whenever I felt low, and for making readily available, the material required to study well and
do assignments properly.

Also, I would like to thank Faculty of Law, JMI for this wide, comprehensive syllabus, which
will benefit us in our legal career heavily.

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TABLE OF CONTENTS

S.NO. TOPIC PAGE NO.

1. Introduction 4

2. Chapterization 4-11

Chapter I: Development of Tax Law in India

Chapter II: General Scheme of Income Tax Act, 1961

Chapter III: Judicial Pronouncements

3. Conclusion 12

4. Bibliography 13

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INTRODUCTION

Tax law refers to the body of legal rules and regulations that govern the assessment, collection,
and payment of taxes. It encompasses a wide range of topics, including income tax, sales tax,
property tax, estate tax, and gift tax, among others. Tax laws are designed to ensure that
taxpayers pay their fair share of taxes and that the government collects enough revenue to fund
public services and programs. These laws outline the specific tax rates, exemptions, deductions,
credits, and other provisions that apply to different types of taxpayers and income sources

In many countries, tax law is enforced by government agencies such as the Internal Revenue
Service (IRS) in the United States and Her Majesty's Revenue and Customs (HMRC) in the
United Kingdom1. These agencies have the authority to investigate potential violations of tax
laws, impose penalties and fines, and even bring criminal charges in certain cases.2

In conclusion, tax law is a complex and constantly evolving field of law that plays a critical
role in the functioning of modern societies by ensuring that the government is able to collect
the revenue it needs to provide essential public services while also promoting fairness and
equity in the tax system.

I. DEVELOPMENT OF TAX LAW IN INDIA

The development of tax law in India has been shaped by a variety of historical, political, and
economic factors. During the British colonial period, India was subject to a complex system of
taxes, including land revenue, customs duties, and income tax3. The first income tax law in
India was enacted in 18604, but it was later repealed and replaced with a new law in 18865.
This law was subsequently revised and updated several times over the next few decades. After
India gained independence in 1947, the new government began to establish a modern tax
system that would help fund social and economic development programs6. The Income Tax Act
of 1961 consolidated and updated the various income tax laws that had been in place since
colonial times7. In the 1990s, India began a process of economic liberalization and opened its
economy to foreign investment8. This led to the introduction of new tax laws and policies

1
IRS.gov; GOV.UK, Her Majesty's Revenue and Customs.
2
26 U.S. Code pp 7201-7264; Taxes Management Act 1970 (U.K.).
3
Bimal Jain, India: Historical Overview of Taxation in India, 2020
4
Id
5
Id
6
Praveen B. Viswanath, Indian Tax System: An Overview, 2018
7
Income Tax Act, 1961
8
Ministry of Finance, Government of India, Economic Reforms in India since 1991: Has Gradualism Worked?
2015

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designed to promote investment and economic growth9. In 1991, the government introduced a
new tax system called the "Modi system," which was designed to simplify the tax code and
make it more efficient10. In 2017, Indian Government under BJP regime, introduced a new
national Goods and Services Tax (GST) system, which replaced a complex web of state-level
taxes and levies11. The GST represents a significant reform of India's tax system and is designed
to make it more transparent, efficient, and easy to comply with12.

In recent years, India has continued to update and modernize its tax laws. For example, the
government has introduced new measures to crack down on tax evasion and strengthen tax
enforcement, such as the introduction of the Black Money (Undisclosed Foreign Income and
Assets) and Imposition of Tax Act, 201513.

Overall, the development of tax law in India has been shaped by a wide range of social,
economic, and political factors, and it continues to evolve in response to changing
circumstances and new challenges14.

II. INCOME TAX ACT, 1961: GENERAL SCHEME

1. Preliminary

The Income Tax Act, 1961 (the "Act") begins with a preliminary section that sets out the short
title, extent, and commencement of the Act. This section also defines key terms used throughout
the Act, such as "assessment year," "previous year," "assessee," "person," and "income."15

2. Scope of Total Income

Section 2 of the Act defines what constitutes "income" and sets out the scope of an individual's
"total income" for the purposes of taxation. It includes income from various sources, such as
salaries, business or profession, capital gains, and other sources. The section also specifies the
deductions and exemptions that are allowed to reduce the total income and the amount of tax
payable on such income.16

3. Basis of Charge

9
Id
10
Narendra Modi, Reform to Transform, 1991
11
Central Board of Indirect Taxes and Customs, GST in India: A Brief Introduction, 2022
12
Id
13
Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (India).
14
Prashanth Mahaganasekar et al., India Taxation and Investment 2022, 2022.
15
Income Tax Act, 1961, s2(13), (23), (31), (43), (45)
16
Sections 2 (24), 80C, 80D, 80G, 80E

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Section 4 of the Act lays down the basis of charge of income tax, which is based on an
individual's total income for a given assessment year. It specifies that income tax shall be
charged at the rates specified in the Finance Act for the relevant assessment year.17

4. Residential Status

Section 6 of the Act defines the residential status of an individual for tax purposes. It sets out
the criteria for determining whether an individual is a resident or non-resident of India, and
distinguishes between "ordinary residents" and "not-ordinary residents." The residential status
of an individual determines the scope of his or her taxable income in India and the tax liability.18

5. Heads of Income

The Act provides for five "heads of income" under which an individual's income is classified
for tax purposes. These heads of income are:

a. Salaries: This head includes all income received by an individual as an employee,

including basic salary, allowances, bonuses, and other perks. It also specifies the
deductions that are allowed to reduce the taxable income under this head.19
b. Income from House Property: This head includes all income received from owning
or renting out a house property. The taxable income is computed after allowing
deductions for repairs, maintenance, and other expenses related to the property.20
c. Profits and Gains from Business or Profession: This head includes income earned
from a business or profession. The taxable income is computed after allowing
deductions for expenses related to the business or profession.21
d. Capital Gains: This head includes income earned from the sale of a capital asset, such
as a house property, shares, or mutual funds. The taxable income is computed after
allowing deductions for the cost of acquisition and improvement of the asset.22
e. Other Sources: This head includes income from sources not covered under the
previous heads, such as interest income, rental income from machinery, or winnings
from lotteries, races, or card games. The taxable income is computed after allowing
deductions for expenses related to earning the income.23

17
Sections 4, 2(31)
18
Sections 6, 6(1), 6(6), 6(5)
19
Sections 15, 16, 17, 80C
20
Sections 22, 23, 24, 25, 26
21
Sections 28, 29, 30, 31A, 35AD
22
Sections 45, 48, 49, 50C, 54
23
Sections 56, 57, 58, 80

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 6. Assessment and Reassessment

Sections 143-144 of the Act provide for the procedure for assessment of an individual's income
tax liability. Assessment is carried out by the Income Tax Department, which issues a notice to
the individual requiring him or her to file a return of income for the relevant assessment year.24
The department then examines the return of income and determines the individual's tax liability
based on the information provided in the return, and may also ask for additional information
or documents if required. If the department finds any errors or omissions in the return, it may
initiate reassessment proceedings to determine the correct tax liability.25

7. Computation of Total Income and Tax Liability

Section 14 of the Act lays down the procedure for computing an individual's total income and
tax liability. It specifies the order in which the different heads of income are to be set off and
the deductions allowed for arriving at the taxable income. It also specifies the rates at which
income tax is to be charged on the taxable income, based on the specific slab rates specified in
the Finance Act for the relevant assessment year.

8. Collection and Recovery of Tax

Sections 205-222 of the Act provide for the collection and recovery of income tax. Tax is
usually collected in the form of advance tax, self-assessment tax, and tax deducted at source
(TDS). The Act also provides for the recovery of tax due by the individual through various
means, such as attachment and sale of property, and recovery from a third party who owes
money to the individual.26

9. Appeals and Revisions

Sections 246-264 of the Act provide for the right of an individual to appeal against an
assessment order passed by the Income Tax Department. The individual can file an appeal with
the Commissioner of Income Tax (Appeals), and if not satisfied with the order passed by the
Commissioner, can file an appeal with the Income Tax Appellate Tribunal, and further with the
High Court and the Supreme Court. The Act also provides for the revision of an assessment
order by the Income Tax Department, in case of errors or omissions in the original assessment.27

24
Income Tax Act, 1961
25
Section 4
26
Sections 143-144
27
Sections 205-222

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 10. Penalties and Prosecution

Sections 270-276 of the Act provide for the imposition of penalties and prosecution for non-
compliance with the provisions of the Act. Penalties may be imposed for failure to file a return
of income, failure to pay tax, and other violations of the Act. Prosecution may be initiated in
cases of wilful tax evasion or other serious offenses.28

11. Anti-Avoidance Provisions

The Income Tax Act, 1961 contains various anti-avoidance provisions that seek to prevent tax
avoidance and evasion by taxpayers. These provisions include provisions relating to transfer
pricing, thin capitalization, General Anti-Avoidance Rules (GAAR), and Specific Anti-
Avoidance Rules (SAARs).29

12. International Taxation

The Income Tax Act, 1961 also contains provisions for the taxation of income earned by non-
residents in India, and income earned by Indian residents outside India. These provisions
include provisions relating to Double Taxation Avoidance Agreements (DTAAs), foreign tax
credits, and transfer pricing.30

13. Amendments and Updates

The Income Tax Act, 1961 is amended and updated from time to time through Finance Acts
passed by the Indian Parliament. The Finance Act specifies the rates of tax, exemptions,
deductions, and other provisions that apply to the assessment year covered by the Act.
Taxpayers must keep themselves updated with the latest amendments and updates to the Act in
order to comply with its provisions.

In conclusion, the Income Tax Act, 1961 is a comprehensive legislation that lays down the
framework for the taxation of income in India. It provides for the assessment, collection, and
recovery of income tax, and contains provisions for appeals, penalties, and prosecution for non-
compliance. Understanding the general scheme of the Act, along with the various provisions
and procedures contained therein, is essential for individuals and businesses to manage their
tax liability in a compliant and efficient manner.

28
Sections 246-264
29
Sections 270-276
30
Sections 4A, 5, 9, 90-91, and 92B-92F

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 III. JUDICIAL PRONOUNCEMENTS

1. McDowell and Co. Ltd. v. CTO31

Facts: In this case, McDowell and Co. Ltd. claimed a deduction for interest paid on borrowed
funds used for acquiring shares in a company. The tax authorities disallowed the deduction,
alleging that the transaction was a sham and that the sole purpose was to reduce the tax liability
of the company.

Judgment: The Supreme Court held that while tax planning is legal, the use of artificial or
colourable devices to reduce tax liability is not permissible. The Court emphasized that the true
nature of a transaction must be examined to determine its taxability, and that the form of the
transaction should not be given more weight than its substance.

Aftermath: This case has been cited in numerous subsequent cases dealing with tax planning
and anti-avoidance provisions. It established the principle that tax planning must have a
business purpose and must be supported by commercial substance, and that transactions
designed solely to reduce tax liability will not be permitted.

2. Vodafone International Holdings BV v. Union of India32

Facts: In this case, Vodafone International Holdings BV acquired a majority stake in Hutchison
Essar Ltd., an Indian company, through a series of transactions involving a Cayman Islands
company. The Indian tax authorities claimed that the transaction was taxable under the Income
Tax Act, as it involved the transfer of a capital asset located in India.

Judgment: The Supreme Court held that the transaction was not taxable in India, as it involved
the transfer of shares of a foreign company between two foreign entities, and did not involve
the transfer of any Indian assets or business. The Court also held that the Indian tax authorities
did not have the jurisdiction to tax the transaction under the provisions of the Act.

Aftermath: This case is significant as it clarified the scope of the Indian tax authorities'
jurisdiction over cross-border transactions. It also led to the enactment of the retrospective
amendment to the Income Tax Act in 2012, which sought to bring transactions such as the one
in this case under the purview of Indian taxation.

31
(1985) 3 SCC 230
32
(2012) 6 SCC 613

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3. Nokia India Pvt. Ltd. v. DCIT33

Facts: In this case, Nokia India Pvt. Ltd. sold mobile handsets to its parent company at a price
below the market rate. The tax authorities imposed a transfer pricing adjustment on Nokia
India, alleging that the transaction was not at arm's length and that the price charged was lower
than the market rate.

Judgment: The Delhi High Court held that the transfer pricing adjustment was not valid, as the
tax authorities had not provided sufficient evidence to support their claim that the price charged
was below market rate. The Court also held that the transfer pricing provisions should be
applied with caution and that the burden of proof lies with the tax authorities to establish that
the transaction was not at arm's length.

Aftermath: This case reinforced the principle that transfer pricing adjustments should be based
on sound evidence and that the burden of proof lies with the tax authorities. It also highlighted
the need for taxpayers to maintain detailed documentation to support their transfer pricing
arrangements.

4. Sahara India Real Estate Corporation Ltd. v. Commissioner of Income Tax34

Facts: In this case, Sahara India Real Estate Corporation Ltd. claimed a deduction for the
repayment of a loan obtained from a group company. The tax authorities disallowed the
deduction, alleging that the transaction was not genuine and that the loan was not actually
repaid.

Judgment: The Supreme Court held that the transaction was not genuine and that the loan was
not actually repaid. The Court also directed the company to deposit a substantial amount of
money with the Securities and Exchange Board of India to be returned to investors who had
invested in Sahara group's unlisted companies.

Aftermath: This case led to the unearthing of the Sahara group's financial irregularities, which
had gone undetected for several years. It also highlighted the importance of rigorous auditing
and the need for the tax authorities to closely scrutinize transactions that appear to be
suspicious.

33
ITA Nos. 1244 to 1253/Bang/2016 (2017) (ITAT Bangalore)
34
(2012) 10 SCC 603, AIR 2012 SC 3489

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5. Azadi Bachao Andolan v. Union of India35

Facts: In this case, the petitioner, Azadi Bachao Andolan, challenged the constitutional validity
of the Double Taxation Avoidance Agreement (DTAA) between India and Mauritius. The
petitioner alleged that the treaty was being misused by foreign investors to evade Indian taxes
on capital gains.

Judgment: The Supreme Court upheld the validity of the DTAA and held that it was within the
power of the Central Government to enter into such agreements. The Court also held that the
treaty did not prohibit the Indian government from taxing capital gains arising from
transactions between Indian and Mauritian companies, provided that the transactions were not
structured purely for the purpose of tax evasion.

Aftermath: This case clarified the scope of the DTAA between India and Mauritius and
affirmed the government's power to enter such treaties. It also led to greater scrutiny of foreign
investments and the use of tax havens to avoid Indian taxes.

6. Commissioner of Income Tax v. Essar Tele holdings Ltd.36

Facts: In this case, Essar Tele holdings Ltd. claimed a deduction for the loss incurred by its
subsidiary, which had been amalgamated with another company. The tax authorities disallowed
the deduction, alleging that the loss incurred by the subsidiary could not be carried forward and
set off against the profits of the merged entity.

Judgment: The Supreme Court held that the loss incurred by the subsidiary could be carried
forward and set off against the profits of the merged entity. The Court held that the provisions
of the Income Tax Act allowed for the carry forward of losses incurred by a subsidiary, even if
the subsidiary had been amalgamated with another company.

Aftermath: This case clarified the provisions of the Income Tax Act relating to the carry forward
of losses and affirmed the right of taxpayers to claim deductions for such losses. It also
highlighted the need for the tax authorities to apply the provisions of the Act in a manner that
is consistent with their purpose and intent.

35
AIR 2003 SC 2622
36
(2018) 401 ITR 445 (SC)

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CONCLUSION

These cases demonstrate the complex and evolving nature of tax law in India. They also
highlight the need for taxpayers and tax authorities to stay abreast of legal developments and
to carefully evaluate the substance of transactions to ensure compliance with the law.

The development of tax law in India has been shaped by various legislative and judicial
interventions over the years. The Income Tax Act, which is the primary legislation governing
the taxation of income in India, provides a comprehensive framework for the imposition,
collection, and administration of income tax. However, the interpretation and application of the
Act have given rise to several contentious issues, which have been resolved through landmark
judicial decisions.

The cases discussed earlier highlight the importance of careful evaluation of transactions to
ensure compliance with the law. The rulings in these cases have established important
principles of tax law that have a bearing on future disputes. For instance, the decision in the
Vodafone case has clarified the law on the taxation of indirect transfers of Indian assets, while
the Essar Tele holdings case has clarified the provisions of the Income Tax Act relating to the
carry forward of losses.

The development of tax law in India is an ongoing process, and it is essential for taxpayers and
tax authorities to stay abreast of legal developments and to carefully evaluate the substance of
transactions to ensure compliance with the law. The evolving nature of tax law in India also
underscores the importance of robust legal frameworks and effective dispute resolution
mechanisms to address any disputes that may arise.

In summary, tax law in India is a complex and evolving area of law, and its development has
been shaped by various legislative and judicial interventions. The landmark judicial decisions
discussed in this essay have established important principles of tax law and highlight the need
for careful evaluation of transactions to ensure compliance with the law. It is essential for all
stakeholders to stay informed about legal developments and to work towards building robust
legal frameworks and effective dispute resolution mechanisms.

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BIBLIOGRAPHY

Primary Sources

1) Income Tax Act, 1961

2) The Constitution of India, 1950
3) Union of India v. Azadi Bachao Andolan, (2003) 263 ITR 706 (SC)
4) McDowell & Co. Ltd. v. Commercial Tax Officer, (1985) 154 ITR 148 (SC)
5) Sahara India Real Estate Corporation Ltd. & Ors. v. Commissioner of Income Tax,
(2012) 8 SCC 1 (SC)
6) Vodafone International Holdings BV v. Union of India, (2012) 6 SCC 613 (SC)
7) Commissioner of Income Tax v. Essar Tele Holdings Ltd., (2018) 9 SCC 729 (SC)

Secondary Sources

1) "Tax Law" by Gaurav Jain, ManuPatra,

https://www.manupatrafast.com/articles/PopOpenArticle.aspx?ID=9c1d8626-8b92-
494a-8b54-7c2f1e92d7ba&txtsearch=Subject:%20Taxation
2) "Development of Income Tax Law in India" by Dr. Ravi Gupta, iPleaders,
https://blog.ipleaders.in/development-income-tax-law-india/
3) "Scheme of the Income Tax Act, 1961" by Taxmann,
https://www.taxmann.com/blogpost/225200000000303132/scheme-of-the-income-
tax-act-1961.aspx

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