Mrs.

Monica Pradyot
BASIC CONCEPTS Assistant Professor
SOL UPES
THE INCOME TAX ACT
1961:
 The Taxation Structure of the country can play a very important
role in the working of our economy.
 In our present day economy structure Income Tax plays a vital role
as a source of Revenue and a measure of removal of economic
disparity.
 Our Taxation structure provides for Two types of Taxes:
i. DIRECT- Income Tax and
ii. INDIRECT- Goods & Sales Tax, Custom Duties and Excise
Duties
HISTORY:
 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 and 1886 was a period of experiments in
the context of Income Tax.
 This period ended in 1886 when first Income Tax Act came into
existence.
 The pattern laid down in the Income Tax Act 1886 for levying of Tax
continues to operate even to-day though in some changed form.
 In 1918, another Act-Income Tax Act, 1918 was passed but it was
short lived and was replaced by Income Tax Act, 1922 and it remained
in existence and operation till 31st. March, 1962.
THE PRESENT ACT OF
1961:
 On the recommendation of Law Commission & Direct Taxes Enquiry
Committee and in consultation with Law Ministry a Bill was framed.
 This Bill was referred to a select committee and finally passed in
September 1961. This Act came into force from 1st April 1962 in
whole of the country.
 Income Tax Act, 1961 is a comprehensive Act and consists of 298
Sections. Sub-Sections running into thousands, Schedules, Rules,
Sub-Rules, etc. and is supported by other Acts and Rules.
 This Act has been amended by several amending Acts since 1961.
The Annual Finance Bills presented to Parliament along with Budget
make far-reaching amendments in this Act every year.
 PROGRESSIVE &
REGRESSIVE TAXES
 Progressive tax is the one where the tax rate increases with the increase
in taxpayer’s income.
Taxes can be progressive if the tax is levied on an action or purchase that
is more common amongst wealthier people (e.g. the luxury car tax, or an
inheritance tax).
Example- Income tax Act, 1961.
 Regressive tax is the opposite, where the average tax rate, or amount of
tax paid as a percentage of income, decreases as income increases.
Example- GST Act, 2017.
DEFINITIONS:
 ASSESSEE [Section 2(7)]:
‘Assessee’ means a Person by whom any Tax or any other
sum of money is payable under this Act. There are three
categories.
Ordinary Assessee
 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 ;
 Any person who has sustained loss and has filed return of Loss u/s 139(3).
 Any person by whom some amount of Interest , Tax or Penalty is payable under
this Act ; or
 Any person who entitled to refund of Tax under this Act.
 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 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 Assessee. Such person is Deemed to
be an Assessee.
 Assessee-in-default:
A person is deemed to be an assessee-in-default if he fails to fulfill 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 not deposit it
in the treasury, he is known as Assessee-in-default.
PERSON/ TYPES OF
ASSESSEE:
The term person as per Income Tax law is defined to include: -
1. An Individual. e.g. Mr. Sachin or Mr. Meyyappan.
2. A Hindu Undivided Family. e.g. Mr. Sharma (HUF) or Mr. Verma
(HUF).
3. A Company. e.g. Reliance Industries Ltd. Or Tata Sons Ltd.
4. A Partnership firm. e.g. M/s Africa traders or M/s Australia and Co.
5. An Association of persons or a body of Individuals, whether
incorporated or not. e.g. Aam Aadmi Sangh or Rashtriya Dal.
6. A Local Authority. e.g. Pune Municipal Corporation or PCMC
Municipal Corporation.
7. Every Artificial Juridical persons not falling within any of the above
categories. (Residual Category).
Individual:
Only natural persons are covered - The expression ‘individual’ is a unit
of assessment and referable only to a natural person, i.e., a human being
- a situation different from that in the Indian Income-tax Act, 1922
- Udham Singh v. CIT [1988] 171 ITR 471 (Ori.).
Hindu deity is ‘individual’ - A Hindu deity falls within the
meaning of the word ‘individual’ and can be treated as a unit of
assessment.
The Hindu idol is a juristic entity capable of holding property and of
being taxed through its shebaits who are entrusted with the possession
and management of its property - Jogendra Nath Naskar v. CIT [1969]
74 ITR 33 (SC)/Official Trustee of West Bengal v. CIT [1974] 93 ITR
348 (SC)/Sri Sri Sridhar Jiew v. ITO [1967] 63 ITR 192 (Cal.).
Guru Granth Sahib is a juristic person - Shiromani
Gurudwara Prabandhak Committee v. Som Nath Daro [2000] 160
CTR (SC) 61.
 Hindu undivided family
Hindu law should apply- The word ‘Hindu’ preceding the words
‘undivided family’ signifies that the undivided family should be of those
to whom Hindu law applies - CWT v. Smt. Champa Kumari
Singhi [1972] 83 ITR 720 (SC).
Understanding under personal law is relevant -
The expression ‘Hindu undivided family’ in the Wealth-tax Act is used in
the sense in which a Hindu joint family is understood in the personal law
of Hindus - N.V. Narendranath v. CWT [1969] 74 ITR 190 (SC).
All schools of Hindu law are covered - The words ‘Hindu undivided
family’ are used in taxation statutes with reference not to one school of
Hindu law only, but to all schools - CWT v. Smt. Champa Kumari
Singhi [1972] 83 ITR 720 (SC)/C. Krishna Prasad v. CIT [1974] 97
ITR 493 (SC).
Basic concept of jointness applies to all schools - The expression
‘Hindu undivided family’ must be construed in the sense in which it is
understood under the Hindu law.
 A joint Hindu family under the Dayabhaga is, like a Mitakshara
family, normally joint in food, worship and estate. In both systems,
the property of the joint family may consist of ancestral property,
joint acquisitions and of self-acquisitions thrown into the common
stock.
 In fact, whatever be the school of Hindu law by which a person is
governed, the basic concept of a HUF in the sense of who can be its
members is just the same - Surjit Lal Chhabda v. CIT [1975] 101
ITR 776 (SC)/CIT v. P.N. Talukdar [1982] 135 ITR 628 (Cal.)/T.
Ram Dulari v. CIT [1984] 150 ITR 569 (Delhi).
 Hindu law applies to Jains- In the absence of proof of custom
or usage to the contrary, the ordinary Hindu law applies to
Jains- Seth Nathusa Pasusa Ltd. v.CIT 7 ITC 129
(Nag.)/Nathu Sao v. CIT [1934] 2 ITR 463 (Nag.).
 Declaration under Special Marriages Act is not relevant - A
Hindu who declares, for the purposes of the Special Marriage
Act, 1872, that he does not profess the Hindu religion does not
cease to be a Hindu. Accordingly, the male issue of such a
Hindu acquires an interest by birth in the father’s ancestral
properties - CIT v. Partap Chand [1959] 36 ITR 262 (Punj.).
 Child brought up as a Hindu, is a Hindu - Any child,
legitimate or illegitimate, one of whose parents is a Hindu by
religion and who is brought up as a Hindu, is a Hindu
- CWT v. Late R. Sridharan [1976] 104 ITR 436 (SC).
 Hindu marrying Christian, and bringing up daughter as
Christian, cannot claim HUF status - A Hindu marrying
a Christian wife, whose daughter is brought up as a
Christian, cannot claim the status of HUF because for
claiming said status it is necessary that the child must be
brought up as member of the family to which the Hindu
parent belongs, namely, the family of the Hindu parents
and brothers, etc., and in that context only the
requirement as to the child being brought up as a Hindu
arises - Addl. CIT v. G. Venkataraman [1977] 109 ITR
247 (Mad.).
 Hindu law does not apply to Cutchi Memons - The
Hindu law is not at all applicable so far as Cutchi
Memons’ right to property, inheritance and succession are
concerned - Hajee Abdulla Sait v. CIT [1989] 177 ITR
71 (Kar.).
 Existence of property or multiple members is not a pre-
requisite- A family which does not own any property may still
have the character of Hindu joint family. This jointness is
understood in terms of faith and food.
This is because as a Hindu is born as a member of the joint family. In
the context of the situation it would follow as a consequence that it is
not necessary that at any point of time a joint Hindu family must
have connection with ancestral property.
 Existence of male member is not essential- It is not predicated of
a HUF that there must be a male member in existence. Even after
the death of the sole male member, so long as the property which
was originally of the joint Hindu family remains in the hands of
the widows of the members of the family and is not divided
among them, the joint family continues - CIT v. RM. AR. AR.
Veerappa Chettiar [1970] 76 ITR 467 (SC).
 Single person cannot constitute HUF-
The word ‘family’ always signifies a group. Plurality of
persons is an essential attribute of a family. A single
person, male or female, does not constitute a family. He
or she would remain, what is inherent in the very nature
of things, an individual, a lonely wayfarer till perchance
he or she finds a male/female. A family consisting of a
single individual is a contradiction in terms - C. Krishna
Prasad v. CIT [1974] 97 ITR 493 (SC)/ CIT v. Ved
Parkash [1982] 136 ITR 238 (Punj. & Har.).
 Two male members are not necessary - Single male
member with widows of deceased coparceners can be HUF
- A Hindu joint family consists of all persons lineally
descended from a common ancestor, and includes their
wives and unmarried daughters. A Hindu coparcenary is a
much narrower body than the joint family; it includes only
those persons who acquire by birth an interest in the joint
or coparcenary property, these being the sons, grandsons
and great-grandsons of the holder of the joint property for
the time being. Therefore, there may be a joint Hindu
family consisting of a single male member and widows of
deceased coparceners. The plea that there must be at least
two male members to form a HUF as a taxable entity has
no force - Gowli Buddanna v. CIT [1966] 60 ITR 293
(SC).
The plea that there must be at least two male members to form a HUF
as a taxable entity has no force. Under Hindu law a joint family may
consist of a single male member and widows of deceased male
members - C. Krishna Prasad v. CIT [1974] 97 ITR 493 (SC)/Surjit
Lal Chhabda v. CIT [1975] 101 ITR 776 (SC).
Female Members - Hindu personal law requires presence of a male for
purpose of constitution of an HUF and female heirs of a Hindu,
governed by Dayabhaga School of Hindu Law, dying intestate, cannot
form joint Hindu family by means of agreement by throwing therein
interest of any one of them in inherited property and, therefore, share
of properties inherited by such female heirs from her husband, dying
intestate, will be assessable in their hands in status of individuals -
CIT v. Smt. Sandhya Rani Dutta [2001] 115 Taxman 369/248 ITR
201 (SC).
 Single male member, after marriage can form HUF - In order to
constitute a joint family, it is not always necessary that there should
be two male coparceners. A single male member, after his marriage,
could duly form an HUF - CIT v. Arun Kumar Jhunjhunwalla &
Sons [1997] 223 ITR 45/93 Taxman 26 (Gauhati).
 Unmarried daughter continues to be a member - The joint Hindu
family, with all its incidents, is a creature of law and cannot be
created by act of parties, except to the extent to which a stranger
may be affiliated to the family by adoption. But the absence of an
antecedent history of jointness between the appellant and his
ancestors is no impediment to the appellant, his wife and unmarried
daughter forming a joint Hindu family. The daughter too, on her
birth, became a sapindi and until she leaves the family by marriage,
the tie of Sapindaship will bind her to the family of her birth - Surjit
Lal Chhabda v.CIT [1975] 101 ITR 776 (SC)/CIT v. B.K.
Sampangiram [1986] 160 ITR 188 (Kar.).
 Male member with wife and unmarried daughter can form
HUF - A man who separates from his father or brothers may
nevertheless, continue to be joint with the members of his own
branch. He becomes the head of a new joint family, if he has a
family, and if he obtains property on partition with his father and
brothers, that property becomes the ancestral property of his
breach qua him and his male issue.
 The absence of and antecedent history of joint between a male
Hindu and his ancestors is no impediment to his wife and
unmarried daughters forming a joint family. The wife and
unmarried daughters are members of his family. He is not by
agreement making then so. And as a Hindu male, he himself can
be the stock of a fresh descent so as to be able to constitute an
undivided family with his wife and daughter - Surjit Lal
Chhabda v. CIT [1975] 101 ITR 776 (SC).
 Association of persons:
AOP is not distinct and separate from BOI - In the definition of
person in section 2(31) sub-clause (v) speaks of an ‘association of
persons or a body of individuals’. This implies that an ‘association of
persons’ is not something distinct and separate from ‘body of
individuals’. It has been added to obviate any controversy as to
whether only combinations of human beings are to be treated as a
unit of assessment.
The intention clearly is to hit combinations of individuals and
individuals, combination of individuals and non-individuals and also
combinations of non-individuals with other non-individuals who are
engaged together in some joint enterprise when such joint enterprise
does not fall within any of the other categories enumerated in clause
(31) of section 2.
 Therefore, when several individuals are found to have joined together
for the purpose of making profit, the group of individuals may be
conveniently described as ‘a body of individuals.’ A profit-yielding joint
venture has to be taxed as a single unit. - Meera & Co. v. CIT [1997] 91
Taxman 219/224 ITR 635 (SC).
 Minor can be a member of AOP - It is well-settled by the Supreme
Court under the Indian Income-tax Act that ‘association of persons’
must be an association which is formed by volition of the parties for the
purpose of generation of income. This is the basic test. That a minor can
be a member of such a body or association is also well-settled. - Meera
& Co v. CIT [1997] 91 Taxman 219/224 ITR 635 (SC).
 Several individuals, including minors can form a AOP/BOI - When
several individuals (including minors) are found to have joined together
for the purpose of making profit, the group of individuals may be
conveniently described as a ‘body of individuals’. - Meera &
Co. v. CIT [1997] 91 Taxman 219/224 ITR 635 (SC).
 Even a minor can join an ‘AOP’. It is always open to its members
to withdraw from the same. No one can be compelled to continue as a
member of an association. For withdrawing from an association no
particular form need be observed - G. Murugesan &
Bros. v. CIT [1973] 88 ITR 432 (SC).
 Continuous business existence is not necessary to constitute AOP -
Even a single venture will do - To constitute common action and
common venture it is not necessary that there should be continuous
business or continuous existence. Even association of persons may
come into existence for a single venture. - Sardar Harvinder Singh
Sehgal v. Asstt. CIT [1997] 227 ITR 512 (Gauhati).
 Element of joint venture must exist - To constitute an association of
individuals two or more individuals should have joined in the
promotion of a joint enterprise with the object of producing income,
profits or gains. Thus, an element of joint venture for profit is
necessary to constitute an AOP - CIT v. Raja Ratan Gopal[1966] 59
ITR 728 (SC).
 Element of volition is essential - For forming an ‘AOP’, the
members of the association must join together for the purposes of
producing an income. An ‘AOP’ can be formed only when two or
more individuals voluntarily combine together for a certain
purpose. Hence, volition on the part of the members of the
association is an essential ingredient.
 Ultimate division of profits is not relevant factor - ‘Association of
persons’ means an association in which two or more persons join
in a common purpose or common action, and as the words occur
in a section, which imposes a tax on income, the association must
be one, the object of which is to produce income, profits or gains.
Liability to tax depends upon the earning of profits by a unit and
not upon the ultimate division of profits - N.V. Shanmugham &
Co. v. CIT [1971] 81 ITR 310 (SC).
 Trustees and beneficiaries merely receiving income cannot be treated
as AOP - Where the trustee and beneficiaries could not be considered
as having come together for earning income, but were merely in
receipt of income, and the beneficiaries had not set up the trust, the
mere fact that the beneficiaries or trustees being representative
assessees were more than one could not lead to the conclusion that
they constituted an association of persons, especially when the
trustees derived their authority under the terms of the trust deed and
they was absence of element of volition on the part of either the
trustees or the beneficiaries - CIT v. SAE Head Office Monthly Paid
Employees Welfare Trust [2004] 141 Taxman 364 (Delhi).
Body of individuals:
Object must be to earn income - The words ‘BOI’ occurring in the
Income-tax Act in the definition of the word ‘person’ in section 2(31)
means a conglomeration of individuals who carry on some activity with
the object of earning income - CIT v. Harivadan Tribhovandas [1977]
106 ITR 494 (Guj.).
Combination of individuals having unity of interest is also a BOI - The
expression ‘body of individuals’ should receive a wide interpretation,
perhaps not wide enough to include a combination of individuals who
merely receive income jointly without anything further as in the case of
co-heirs inheriting shares or securities, … but certainly wide enough to
include a combination of individuals who have a unity of interest but
who are not actuated by a common design, and one or more of whose
members produce or help to produce income for the benefit of all -
Deccan Wine & General Stores v. CIT [1977] 106 ITR 111
(AP), CIT v. A.P. Parukutty Mooppilamma [1984] 149 ITR 131 (Ker.).
 ‘Body of individuals’ may take in artificial persons as well as natural
persons - The expression ‘Body of individuals’ may take in artificial
persons as well as natural persons - Meera & Co. v. CIT [1997] 91
Taxman 219/224 ITR 635 (SC).
 A ‘body of individuals’ need not necessarily be the result of an
agreement, arrangement or design; it might arise out of a certain
situation. Though a BOI is not identical with an AOP, they have some
similarities. An AOP may consist of non-individuals but a BOI has to
consist only of individuals or human beings. A mere collection of
individuals without a common tie or common aim, cannot be taken to
be a ‘BOI’ - CIT v. Pabbati Shankaraiah [1984] 145 ITR 702 (AP).
 Common purpose or common cause must exist - In order to constitute a
BOI apart from the element of volition, it is required that the
association should be for some common purpose or for some common
cause and since the expression has been used in a taxing statute, it is
necessary that the object of the association has to be produce income
- CIT v. Smt. Vimla Lal [1983] 143 ITR 16 (All.).
 Body entrusted to receive income can be treated as BOI - If a body of
persons is entrusted with income with power to administer it or charged
with a duty to receive income with a power of disposal, then such body
may be regarded as a BOI and it cannot escape the taxation if its
income is otherwise taxable - CIT v.Bangalore Turf Club Benevolent
Fund [1984] 145 ITR 323 (Kar.).
 Accidental or legal combinations are not BOI -The mere collection of
individuals without a common tie or common aim cannot be taken to
be a BOI. The concept of ‘BOI’ and ‘AOP’ excludes from their
category those who found themselves thrown together by the accident
of their birth, by the accident of another’s death, by the accident of
testamentary disposition and so on - CIT v. V. Pattabhiraman [1987]
164 ITR 786 (Mad.).