INCOME TAX LAW AND ACCOUNTS

Ruchi Mehta
Assistant Professor
Department of Commerce
St. Mary’s College Thrissur
 WHAT IS TAX

• Tax is not only a form of revenue to the government

but also it shapes the economy by taxation laws
• Tax is a compulsory contribution to state revenue
levied by government on worker’s income and
business profit or added to some cost of goods
services and transactions.
• Direct tax is levied on persons who pay it eg : Income
tax
• Indirect tax is levied on goods and services rather
than on income or profits

Ruchi Mehta ,St.Mary’s College

 IT PILLARS/COMPONENTS

1. IT Act 1961

2. IT Rules 1962

3. Govt notifications from time to time

4. Finance Act (Annually)

5. Circulars and notifications

6. Judicial decisions

APEX BODY OF IT DEPARTMENT : CBDT

Ruchi Mehta ,St.Mary’s College
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.

 In 1918, a new income tax was passed and again it was replaced by another
new act which was passed in 1922.This Act remained in force up to the assessment
year 1961-62 with numerous amendments.

 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 1 April 1962. It
applies to the whole of India and Sikkim (including Jammu and Kashmir).
Since 1962 several amendments of far-reaching nature have been made in
the Income Tax Act by the Union Budget every year.
Ruchi Mehta ,St.Mary’s College
 Human relations concept

Ruchi Mehta ,St.Mary’s College

 IMPORTANT DEFINITIONS

Definition of 'Assessee' – Section 2(7) of Income Tax.

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
 Person in respect of whom any proceedings under this Act has been taken for
assessment of his income
 Deemed assessee under provisions of this Act
 Any person deemed to be an assesse in default under any provisions of this Act
Deemed Assessee:
A person who is deemed to be an assessee for some other person is called “Deemed
Assessee”.
Assessee In Default:
When a person is responsible for doing any work under the Income Tax Act and he fails to
do it, he is called an “Assessee in default”.

Ruchi Mehta ,St.Mary’s College

 ASSESSMENT YEAR (A.Y.) [SEC. 2(9)]
Assessment year means the period of 12 months commencing on the 1st day of
April every year. It is the year (just after the previous year) in which income
earned in the previous year is charged
to tax. E.g.,
A.Y.2021-22 is a year, which commences on April 1, 2021 and ends on March
31, 2022.
Income of an assessee earned in the previous year 2020-21 is assessed in the
A.Y. 2021-22
Previous Year (F.Y. 2020‐21)
The financial year immediately preceding the  assessment year. It is the income
generating year 

Ruchi Mehta ,St.Mary’s College

 Previous Year - section 3
(F.Y. 2020‐21)
The financial year immediately preceding the  assessment year.
It is the income generating year  However in the case of newly setup business or
profession py shall be the period beginning with date of setting up of the
business and ending on 31st march.
Exceptions to the General Rule
1. Income from non-residents from shipping business (172): if a non-resident
uses a ship owned or chartered by him for the carriage of passengers, livestock,
mail or goods shipped at the port in india, his income from the business wil be
taxed in the same year of earning and not in the assessment year.
2. Income of persons leaving India(174): If an indvidual leave India during the
current year withoud any intention of returning India, the income of such
person up to the probable date of departure from India should be taxed in the
same year
3. Income of persons likely to transfer assets to avoid tax (175):.
4. Income ofa discontinued business, profession or vocation (170)

Ruchi Mehta ,St.Mary’s College

INCOME- S 2(24)
the term ‘income’ has been defined in its widest sense by giving an inclusive definition. It includes
not only the income in its
natural and general sense but also incomes specified in section 2 (24).
Broadly the term “Income includes the following:
i. profits and gains ;
ii. dividend;
iii. voluntary contributions received by certain institutions
iv. Receipts by employees the value of any benefit or perquisite, whether convertible into money or
not.
vi. Incomes from business – s-28
vii. any capital gains chargeable under section 45;
viii. any sum earlier allowed as deduction and chargeable to income-tax under Section 59
ix. any winnings from lotteries, 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 ;
x. any contribution received from employees towards any provident fund or superannuation fund or
Employees State Insurance Act, 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.
xii. any sum of money or value of property received as gift –S 56(2) and Shares of closely held
companies transferred to another company or firm are covered in the definition of gift

Ruchi Mehta ,St.Mary’s College

 Person: Income-tax is charged in respect of the total income of the
previous year of every person. Hence, it is important to know the
definition of the word person. As per section 2(31),

Person includes:
• an Individual
• a Hindu Undivided Family (HUF)
• a Company
• a Firm
• an Association of Persons or a Body of Individuals (BOI) whether
incorporated or not
• a Local Authority
• every Artificial, Juridical person, not falling within any of the
above categories

Ruchi Mehta ,St.Mary’s College

 agricultural income :
The definition of ‘agricultural income’ under section 2(1A)
provides that the following shall constitute agricultural income:
(i) any rent or revenue derived from land which is situated in India
and is used for agricultural purposes [Section 2(1A)(a)]
(ii) any income derived from such land by agricultural operation
including processing and sale of the agricultural produce as rent-in-
kind so as to render it fit for the market [Section 2(1A)(b)],
(iii) income derived from building or land used for agricultural
operation, in certain cases. [Section 2(1A)(c)]

Ruchi Mehta ,St.Mary’s College

Gross Total Income [Section 80 B (5
Gross total income means the total income computed in accordance
with he provisions of this Act before making any deduction under
section 80c to 80U. in other words the aggregante taxable income
under the different heads of income such as income from salary,
income from house property. income from profits or gains of
business, capita gains and income from other sources
Sections 8OC to 80U deals with various deductions allowed for
certain payments made by the assessee and for certain income
received by him.
Total Income [Section 2(45)…
Total income means the amount left after making the deductions
under Sections 8OC to 80U from the gross total income. Income
tax will be calculated on this total income. So this income is also
called taxable income.

Ruchi Mehta ,St.Mary’s College

 Maximum Marginal Rate of tax [Section 2(29C)]
The Income Tax Act, 1961 defines Maximum Marginal Rate" to mean 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 indvidual, AOP or BOl, as the case
may be, as specified in the Finance Act of the relevant previous year.
Maximum marginal rate is the highest rate of tax at any income level in the case
of any indivdual, association of persons, or the body of indivduals. This means
for those with incomes betwen Rs 2 crore and Rs 5 crore, 39% will be the
highest appicable tax rate, and for those wilth incomes above Rs 5 crore, it will
be 42.74%

Average rate of income-tax [Section 2 (10)]

It means the rate arrived at by dividing the amount of income tax calculated on
the total income, by such total income.
average rate = total tax *100
total income
Casual Income
A non recurring income or income received casually is known as casual income.
It is unexpected income. Winning from lottery, crossword puzzzles, gambing or
betting is form of casual incomes
Ruchi Mehta ,St.Mary’s College