INTRODUCTION TO INCOME TAX

Income Tax is a tax on the income of a person during a previous year. It is a very important direct tax. It is an important and most significant source of revenue of the government. The government needs money to maintain law and order in the country; safeguard the security of the country from foreign powers and promote the welfare of the people. Since our government is wedded to socialistic pattern of society it is the foremost duty of the government to bring out such welfare and development programs which will bridge the gap between the rich and the poor. All this requires mobilization of funds from various sources. These sources may be direct or indirect. Income tax, being the direct tax, is an important tool to achieve balanced socio-economic growth by providing concessions and incentives in income tax for various developmental purposes. BRIEF HISTORY OF INCOME TAX IN INDIA In India, this tax was introduced for the first time in 1860, by Sir James Wilson in order to meet the losses sustained by the Government on account of the Military Mutiny of 1857. Thereafter, several amendments were made in it from time to time. At last, in 1886, a separate Income Tax Act was passed. This Act was remained in force upto 1917, with various amendments from time to time. In 1918, a new Income Tax Act was passed and again it was replaced by another new Act, which was passed in 1922. This Act remained in force upto the assessment year 1961-62 with numerous amendments. The Income Tax Act of 1922 had become very complicated on account of innumerable amendments. The Government of India referred it to the Law Commission in 1956 with a view to simplify and prevent the evasion of tax. The Law Commission submitted its report in September 1958, but in the meantime the Government of India had

appointed the Direct Taxes Administration Enquiry Committee to suggest measures to minimize inconveniences to assess and to prevent evasion of tax. This Committee submitted its report in 1959. In consultation with the Ministry of Law finally the Income Tax Act, 1961 was passed. The Income Tax Act, 1961 has been brought into force with effect from 1 st April 1962. It applies to the whole of India and Sikkim (including Jammu and Kashmir). Since 1962 several amendments of far-reaching nature have made in the Income Tax Act by the Union Budget every year, which also contains Finance Bill. After it is passed by both the Houses of Parliament, and receives the assent of the President of India, it becomes the Finance Act. Besides this, amendments have also been made by various Amendment Act, for instance, Taxation Laws Amendment Act, 1984; Direct Taxes Amendment Act, 1987; Direct Taxes Law (Amendment) Acts of 1988 and 1989, Direct Tax Law (second Amendment) Act, 1989 and at last The Taxation Law (Amendment) Act, 1991. The Amendments in the Finance Acts, 1992 and 1993, are mostly based on the recommendations of Chelliah Committee Report. As a matter of fact, the Income Tax Act, 1961, which came into force on 1st April 1962, has been amended and re-amended drastically. It has, therefore, become very complicated for both the administering authorities and the taxpayers. Legal Framework of Income Tax in India Legal framework of Income tax in India is consists of the following. 1. I T act of 1961 with up-to-date amendments. 2. Finance act passed by parliament every year. 3. I T rules by CBDT 4. Circular, notification, orders, and executive instructions given by IT dept. 5. Judgment in court of law relating to matters of IT. Central Board of Direct Taxes: The apex body of the Income Tax Department is the Central Board of Direct Taxes (CBDT) - manned by the officers of the Indian Revenue Service - is the administrative head of the Income Tax Department and functions as a part of the Finance Ministry of the

Government of India. It performs various statutory functions. It has the power to assign jurisdiction to the authorities below and to issue orders, instructions and directions to them for the administration of the tax laws. It also enjoys certain powers of delegated legislation and is competent to make rules for carrying out the implementation of the direct tax laws. The CBDT consists of one Chairman and six members. Roles and Duties: India has a well-developed tax structure. The Constitution of India empowers the legislature to enact and enforce tax laws. The taxes so collected are required to be divided between the Central Government and the State Governments. The Central government levies direct taxes such as personal income tax and corporate tax, and also indirect taxes like customs duties, excise duties and central sales tax. The states in turn are empowered to levy state sales tax, entertainment tax etc. apart from various other local taxes like entry tax, etc. It has undergone significant changes over the past six years. The tax rates have been rationalized and now compare favorably with most other countries. Further, the tax laws have been simplified to ensure better compliance. At present, the Income Tax Department under the Department of Revenue in the Ministry of Finance administers the following Tax Laws. (The Gift Tax Act and the Estate Duty Act, which were also administered by the Income Tax Department in earlier years, have now been repealed). Basis of charge of Income tax: Income tax is an annual tax on income. Income of previous year is taxable in the next following assessment year at the rate or rates applicable to the assessment year. However there are certain exceptions to this rule. The annual Finance Act fixes tax rates. Tax is charged on every person as defined is Section 2(31).

The Tax is charged on the total income of every person computed accordance with the provisions of this Act. Income tax is to be deducted at the sources or paid in advance as provided under provisions of the Act.

Heads of Income under the Act: Under the Act, all income shall, for the purposes of charge of income tax and computation of total income, be classified under the following heads of income. Income from salaries, Income from House Property, Profits of Business or Profession, Capital Gains and Income from other sources.

ASSESSEE Under 2(7) of the Income-tax Act, ''Assessee'' means a person by whom any tax or any other sum of money is payable under this Act, and includesa. Every person in respect of whom any proceeding under this Act has been taken for the assessment of his income 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; b. Every person, who is deemed to be an assessee under the provision of this Act; Every person, who is deemed to be an assessee in default under any provision of this Act. If the assessment is on a person relating to Income belonging to others he is called as deemed assessee eg guardian of a minor legal representitive of a non-resident. If a person fails to fulfill any of his obligations under IT act he is termed as assessee in default.

Assessment Year: Under section 2 (9), Assessment Year means the period of twelve months commencing on the first day of April every year and ending on 31st March of the next year. It is the year in which the tax is levied on income earned in previous year. Previous Year: Under section 3, Previous year means the year in which income is earned. The financial year immediately preceding the assessment year is known as previous year. It is the income earned year. Uniform previous year: From the year 1989-90 onwards all the assesses are required to follow the same previous year irrespective of their book closing year. Exception to the general rule of previous year. General rule of previous year says that income of previous year is charged to tax in the assessment year. But there is certain exception to this rule viz Income of non-resident shipping company. Person leaving India either permanently or for a longer period of time. Bodies formed for short duration. Persons likely to transfer property to avoid tax. Discontinued business or profession.

Person: Under section 2(31), Person includes the following: An individual, A Hindu Undivided family, A company, A firm, An association of persons or a body of individuals whether incorporation or not, A local authority, Every artificial juridical person, not falling within any of the preceding sub-clauses.

Income: Under section2 (24), income includes Profits and gains, Dividend, Any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund for the welfare of the employees; Any sum received under a key man insurance policy including the sum received by way of bonus on such policy, The value of any benefits or perquisite arising from business or exercise of profession; Any interest, salary, bonus, commission or remuneration received by a partner from the firm, Any capital gains chargeable under section45; The profits and gains of any business of insurance carried on by a mutual insurance company or by co-operative society,

Any allowance granted to the assessee either to meet his personal expenses at the place where he performs his duties or compensate him for the increased cost of living.

Income given above is inclusive and not exhaustive. Any receipt is taxable under this act if it comes in general and natural meaning of income. It is a periodical return from ones work, business, land, investment etc. The income should have the following characteristics. It must be derived from a definite source. It must come from outside. It may be legal or illegal. It may be received voluntarily or under legal compulsion. It may be from a temporary or permanent source. It may be received in cash or in kind.

Gross total income Aggregate of income from all the head before allowing deduction under sec 80 is known as GTI. Net Income/ Taxable Income . Income on which the tax is payable or it is GTI minus deduction u/s 80.