This article is written by Jaya Vats, a practicing advocate, Delhi. In this article, the author provides a detailed study of all the aspects related to the Income Tax Act, of 1961. The article provides an in-depth analysis of the purpose, need, and lacunae of the Income Tax Act along with its relevance and certain amendments.
Table of Contents
Taxes are financial charges imposed by the government on earnings, commodities, services, activities, or transactions. The term “tax” comes from the Latin term “taxo.” Taxes are the government’s primary source of income, and they are used to benefit the citizens of the nation through government policies, regulations, and practices.
The Indian tax system has evolved throughout the decades to meet the government’s rising demand for finances. The system is also designed to help the government accomplish its socio-economic goals. Tax reform is a continual activity that should be carried out regularly to assess the system for revamping and repairs.
India is now governed by the Income Tax Act of 1961 (IT Act). The current Income Tax Act was passed in 1961 and went into effect on April 1, 1962. The Income Tax Act was referred to the Law Commission by the government in 1956, and the report was submitted in 1958. Shri Mahavir Tyagi was appointed as Chairman of the Direct Tax Administration Enquiry Commission in 1958. The current Income Tax Act was created based on the suggestions of both of these groups. The 1961 Act has been revised several times since then.
Sir James Wilson implemented income tax in India for the first time in 1860 in order to compensate for the damage suffered by the military mutiny in 1857. A distinct Income Tax Act was created in 1886, and it remained in effect for a long period, subject to different revisions from time to time. A new Income Tax Statute was enacted in 1918, however, it was quickly repealed by a new act enacted in 1922. The Act of 1922 grew extremely difficult as a result of several modifications. This statute is still in effect for the fiscal year 1961-62. The Law Commission was referred to by the Indian government in 1956 to clarify the law and combat tax cheating.
In September 1958, the Law Commission delivered its findings in collaboration with the Ministry of Law. This legislation is now controlled by the Act of 1961, also known as the Income Tax Act of 1961, which came into effect on April 1, 1962. It is applicable across India, including the state of Jammu & Kashmir.
Any legislation, in and of itself, is insufficient until the loopholes are addressed. The Income Tax Act of 1961 governs income tax legislation in India, along with the help of certain income tax rules, notifications, circulars, and judicial pronouncements, including tribunal judgments.
The fundamental components of Indian income tax legislation are as follows:
The Act comprises the majority of Income Tax laws in India.
The Central Board of Direct Taxes (CBDT) is the authority in charge of Direct Tax administration. The CBDT has the authority to enact regulations to carry out the purposes of this Act.
Every year, the Finance Minister delivers the budget in Parliament. When the financial bill is passed by the parliament and signed by the President of India, it becomes an Act.
The terms of an act may require clarification at times, and such clarification is normally in the form of circulars and notifications issued by the CBDT from time to time. It entails clearing up any confusion about the scope and interpretation of the provisions.
Income taxes can be marginal, moderate, or proportionate. Income tax in India is divided into two types:
Direct taxes are those that are charged immediately on the income received. Individuals and corporations are subject to direct taxes. These taxes cannot be passed on to future generations. The income tax is the most important sort of Direct tax for individual taxpayers like you. This tax is levied once a year throughout the assessment year (1st April to 31st March). According to the Income Tax Act of 1961, you must pay income tax if your yearly income exceeds the minimal exemption level. Various parts of the Act provide for tax breaks. Before we discuss tax breaks, it is critical that you grasp the income tax bracket. In India, direct taxes make for over half of all government revenue. Income tax, however, is not the sole direct tax. In India, there are three sorts of direct taxes: income tax, capital gains tax, and corporate tax.
Income tax is levied on all income earned by individuals and HUFs, with the exception of capital gains and earnings from business and professions. The appropriate slab rates for the Assessment Year are used to calculate income tax. The slab rates are announced by the national government in the annual budget.
In contrast, indirect taxes are those that are received on your behalf and remitted to the Indian government. Businesses that are subject to indirect taxes include e-commerce firms, theatres, and any services for which you are required to pay tax. Indirect taxes are those that are placed on goods and services. They vary from direct taxes in that they are placed on products rather than individuals who pay them directly to the Indian government. Instead, they are imposed on items and collected by an intermediary, the individual selling the commodity. Sales taxes, taxes placed on imported products, Value Added Tax (VAT), and other minor indirect taxes are examples. These taxes are levied by adding them to the price of the product or service, which is likely to raise the price of the product.
The primary source of income for the government is taxes. The revenue generated by taxes is used to cover government expenses such as education, infrastructure amenities such as roads and dams, and so on. Taxes are collected for the fundamental aim of generating adequate income for the state. Taxes have come to be seen as a tool by which the economic and social ideals of a welfare state may be attained. As a result, the Income Tax Act of 1961 became necessary.
In India, the following individuals must pay income tax:
The Income Tax Act of 1961 applies to the entire country of India. The Income Tax Act addresses:
The Income Tax Act’s goals can be described as follows:
The amount payable when the government assesses taxes on the direct income of its residents under its authority is known as income tax. Income tax in India has a myriad of complexity, impediments, difficulties, and characteristics. Even if the entire procedure may appear to be challenging, effective treatment of the situation may have ramifications for the residents of the country. Income tax is a means by which the government guarantees that community activities and public tasks are carried out properly and in a timely way.
The basic features of the act are as follows:
The following are some key definitions from the Income Tax Act of 1961:
According to Section 2(7) of the Income Tax Act of 1961, an assessee is a person who is required to pay taxes under any provision of the Act. The term ‘assessee’ refers to somebody who has been evaluated for his income, another person’s income for which he is assessable, or the profit and loss he has experienced. A person or an individual under any provision of this Act is referred to as an assessee.
They may also be referred to as each and every person for whom:
Understanding the definition of a person is vital because an assessee is a person who pays a specific amount to the government.
According to the Income Tax Act, they are grouped into the following categories:
Assessment under Section 2(8) is a process of assessing the validity of the assessee’s claimed income and computing the amount of tax payable by him, followed by the practise of imposing that tax responsibility on that individual.
An “Assessment year” is defined in Section 2(9) as “twelve months beginning on the first day of April each year.” Every year, an assessment year commences on April 1st and finishes on March 31st of the following year. For instance, the Assessment year 2021-22 is a one-year period beginning on April 1, 2020, and concluding on March 31, 2021. In an assessment year, the assessee’s income from the previous year is taxed at the rates specified in the appropriate Finance Act. As a result, it is also known as the “Tax Year.”
Even though income tax is a tax on earnings, the act does not establish a comprehensive definition of “income.” Instead, the term “income” has been defined broadly by providing an inclusive meaning. It comprises not only income in its broadest meaning, but also income mentioned in Section 2(24).
In general, the term “income” refers to the following:
The individuals referred to in this section must have received a benefit in order for this section to apply; if no benefit has been obtained, the situation is not covered by that clause. All benefits obtained by the referred individuals are taxed, regardless of whether they are capital or revenue in origin. A director doesn’t have to be an employee in order to tax the benefit obtained from the firm. The director’s service has no link to any advantage gained by the director under Section 2(24) of the IT Act, 1961. The provision is not intended to limit the company’s ability to advance security deposits to its directors or relatives in exchange for beneficial compensation, such as getting housing property on rent18 or advancing interest-free loans. The phrase “whether converted into money or not” refers to a benefit other than financial payments. The burden is on the assessee to allege and establish that the benefit was provided to him in violation of any legal right.
Section 2(24) (iv) of the Income-Tax Act is a unique piece of legislation that includes both capital and revenue advantages. This clause is meant to take care of a company’s benefit distribution to its directors, who are in a fiduciary relationship and hold an office of trust. The primary goal of this legislation is to prohibit corporate directors from abusing or misusing their official positions for personal gain.
Residential status is defined under Section 6 of the act. It states that a person may be an Indian citizen, however, this does not imply that they must dwell in India for a specified year. Section 6 of the Income-tax Act of 1961 (the Act) covers provisions relating to determining a person’s residency.
The tax regulations divide taxable people into three groups.
There are several ordeals that may be used to ascertain a person’s residential status.
An individual is not an ordinary resident if and only if the following conditions are met:
A Non-Resident is someone who does not meet any of the fundamental requirements.
Under Section 7 of the act, any income received in India by any assessee during the previous year is taxable in India, regardless of the assessee’s residency status or the location where the income was earned.
The term “receipts” refers to the initial receipt: The first time the receiver receives money under his own authority is referred to as the receipt of income. Once an amount is received as income, any transfer or transmission of the amount to another location does not constitute receipt within the meaning of this paragraph at that location. This notion is important for identifying the year of receipt, as well as estimating the incidence of taxation where it is solely based on income receipt.
For example, non-residents’ overseas income is not taxable unless it is received in India. In their instance, unless the money is received as revenue from an outside source when it arrives in India, it is not an income receipt. If a non-resident obtained money outside India as income or exempt income in an earlier year or during the preceding year and transferred the funds into India during the accounting year, such money will not count as income in the eyes of the law.
The timely and regular payment of taxes and submission of returns guarantees that the government has funds available for public welfare at all times. Several penalties are stipulated under the Act to ensure that taxpayers do not fail on paying taxes or giving information. A penalty is a punishment levied on a non-compliant taxpayer. Indian tax authorities have been given the authority to impose fines on taxpayers for infractions ranging from non-filing of returns to non-disclosure of income or non-payment of tax as part of the taxation systems. Penalties for procedural infractions are often measured in direct sums, but penalties for non-payment of tax or failure to disclose income or transactions are typically quantified as percentages of the tax or amounts involved (generally, 100 to 300 percent). Penalties can be assessed for under-reporting or misreporting income beginning with the assessment year 2020–2021, whereas previously, the penalty was specified to be for supplying false particulars or concealing income.
Penalty procedures are not part of the assessment processes under the Income Tax Act. Section 274 of the Income Tax Act of 1961 specifies the method that the tax authorities must follow in order to impose fines on the assessee. The approach, in particular, takes into account natural justice principles (i.e., due notice and hearing to be given to the assessee prior to impost). Furthermore, Section 273AA allows you to seek senior tax authorities for a penalty reduction. If an order imposing penalties has been issued against an assessee, the assessee may petition the appellate authority to have the order reversed. Tax inspectors issuing show-cause notices, on the other hand, have the authority to impose fines on assesses during the same procedures under both goods and services tax and customs regulations.
The Income-tax act enumerates certain penalties for taxpayers concerning specific offences such as willful tax evasion, non-payment of already collected indirect taxes, and so on. Such offences are punishable by imprisonment as well as a fine. The tax evader is next tried in accordance with the rules of the Criminal Procedure Code. As a result, taxpayers may use the remedies authorized in the Code.
India has a number of obligatory taxes, including income tax, goods, and services tax, import-export tax, state border tax, and others. Despite the rules and regulations governing these taxes, some people try to avoid paying them.
Tax evasion is defined as any conduct that seeks to conceal, understate, or fraudulently disclose income in order to decrease your tax burden. Tax fraud, for example, is defined as failing to pay taxes or paying less than what is owed. It is essentially criminal conduct committed by a person or organization in order to avoid paying their tax responsibilities. It involves hiding or creating income, as well as misrepresenting deductions without proof. Another type of tax avoidance is omitting to disclose cash transactions, etc. Filing fake tax returns, smuggling, altering papers, and bribery are all techniques used by people to avoid paying taxes. Tax evasion is significant since it is prohibited in India and carries serious consequences.
People can use a variety of methods to avoid paying taxes. The following are some of the most regularly utilized strategies:
Ms. Nirmala Sitharaman, Finance Minister, delivered the Union Budget, 2022, in parliament on February 1, 2022. With the passage of the Finance Act, 2022, a number of adjustments to the provisions of the Income Tax Law have been made, as they are every year.
The following are a few key developments that taxpayers should be aware of:
The Finance Minister has proposed a new provision that allows the taxpayer to file a revised return, allowing him to declare additional income that he may have overlooked in the initial tax return. While all taxpayers have the option of amending their tax returns up until the 31st of December following the relevant fiscal year, the amended return must be filed within two years of the end of the relevant assessment year (i.e., within three years from the end of the relevant financial year). The inclusion of this option is a step toward encouraging taxpayers to report voluntarily.
Eligible start-ups formed before March 31, 2022, received a tax exemption for three consecutive years out of ten years from the year of formation under Section 80-IAC. This time for incorporation of qualifying start-ups has now been extended by one year, i.e., until March 31, 2023, in order to take advantage of such tax breaks.
Section 79A of the Act has been added to improve dissuasion among tax evaders by providing that no set-off of any loss shall be permitted against unreported income discovered during search and survey activities.
The Finance Ministry declared exemption of payments received for Covid medical care or on the death of an individual owing to disease connected to Covid 19 in a press statement dated June 25th, 2021. These exclusions have now been enacted with retroactive effect from April 1, 2020, by amending Sections 17 and 56 of the Act. The following are examples of exempt payments:
It should be noted that this exemption is unlimited for amounts received from the employer, but it is restricted to Rs. 10 lakhs for amounts received from any other person. It has been clarified that in order to qualify for the exemption, such payment must be received within 12 months of the date of death.
The Union Budget 2022’s goal for direct taxes was to simplify the tax system, encourage voluntary compliance by taxpayers, and eliminate litigation. Clarity on the taxation of virtual digital assets will assist investors in making sound judgments. The addition of the possibility for updated returns is a step toward positive and voluntary reporting by taxpayers, as well as relief from punitive measures.
Because taxes may take up a significant percentage of a person’s earnings, many people assume that taxes are nothing more than a burden. Let us examine the significance of income tax in India.
Under the Income Tax Act, if an individual wants to travel to nations such as Canada, the United States, or the United Kingdom, Indians must present their income tax returns (ITRs) for the previous three years to obtain an uncomplicated visa acceptance. Paying income tax to the government of your home country assures other nations that you are not departing the country for tax avoidance. As a result, the Income Tax Act, through its restrictions, aids in preserving a balance between the individual and the government.
When you apply for large-ticket loans such as house loans, company loans, or personal loans, you must pay your income tax regularly to the Government of India. Income tax plays an important role here since, before granting the loan, the lender typically demands that the loan applicant submit copies of his or her ITR to ensure that he is disencumbered of any falsehoods.
The Income Tax Act maintains a close check on income tax filing since it provides proof of income for any self-employed professionals, such as freelancers, company partners, or consultants. It is effective in situations where experts do not get a set pay from a certain employer. It is essential in all financial and economic dealings.
The major goal of taxing Indian residents is to generate income for the smooth operation of government functions and by regulating the same the act serves as a major source of revenue for the nation.
The income tax paid by the Indian people is used by the government to improve the quality of infrastructures such as public spaces, smart cities, and government institutes which are regulated under the Income Tax Act.
The expense of administering an entire country, particularly one as huge and populous as ours, is enormous. The government can carry out civic operations thanks to the taxes we pay. In other words, the government would be unable to administer the country if taxes were not collected. The Income Tax Act is one of the most important sources of revenue for the Indian government.
In India, there are now more than fifty union government initiatives. The government has developed many plans to assist all areas of society, ranging from job programs to house loan subsidies to cooking gas concessions to pension schemes.
These programs help millions of Indians and cost crores of rupees to implement. The same is controlled and handled under the Income Tax Act. By paying income tax, people contribute to the success of these initiatives while also allowing the government to work on further assistance schemes and programs.
The government’s taxation policy under the Income Tax Act is the most effective strategy to eliminate economic disparities in India. The wealthiest are expected to pay more taxes than the poor under a progressive taxation system. The income tax paid by the wealthy is used to fund social programs that help the most vulnerable members of society.
A considerable portion of the taxes collected under the Income Tax Act is used to improve the country’s healthcare system. There are healthcare facilities that provide free or low-cost medical treatments and are regulated under the act. The level of care offered by government hospitals has increased by leaps and bounds over the years, and it is only because taxpayers pay taxes that this has occurred.
Likewise, there are government schools with an extremely little tuition. Furthermore, every year, millions of crores are spent on defence and infrastructure improvements. All of this adds to the country’s growing power and wealth, and it cannot be governed without the Income Tax Act’s continual supervision.
While the Income Tax Act has several advantages, it also has some downsides, which are as follows:
Each assessee has the right to carry forward losses if they are unable to offset any of their losses against earned income subject to income tax laws and conditions. If the assessee attempts tax evasion, the losses cannot be carried forward.
If you fail to file your income tax return on time, you will be fined Rs 5000. The assessing officer has the ability to waive the penalty imposed. Before the penalty is levied, the taxpayer is given a reasonable opportunity to be heard. However, it is always prudent to follow the norms and regulations.
If you do not pay income tax in India, you are not eligible for a tax deduction for investments such as insurance premiums, medical premiums, and so on, according to Chapter VIA. Deductions granted by the Income Tax Act assist in lowering taxable income. Only if there are tax-saving investments or incurred qualified costs, one can claim the deductions. A variety of deductions are allowed under various sections to reduce your taxable income. Section 80C of Chapter VIA is the most well-known.
Imposing higher tax rates on people may increase their disinclination to work hard and save. They will begin to believe that the higher their incomes and savings, the higher their taxation.
When a commodity is taxed, the price of that commodity rises as well. It will indirectly raise the cost of manufacturing, requiring greater wages for employees, which will raise the price of the item even further.
The payment of income tax is critical in determining a taxpayer’s creditworthiness. If a person does not pay taxes on time, it might obstruct financial activity in a variety of ways.
In the case of Union of India v. Bhavecha Machinery and Others,1995 the issue before the court was of delay in filing the return of its income. The Madhya Pradesh high court held that to trigger the requirements of Section 276CC, there must be a deliberate delay in filing a return, not just a failure to file a return on time. There should be clear, convincing, and trustworthy proof showing the failure to submit the return on time was ‘willful,’ and there should be no room for question. The failure must be purposeful, deliberate, calculating, and aware, with a full understanding of the legal ramifications. In this case, it was determined that there were adequate causes for the delay in completing the income tax return and that the delay was not deliberate. As a result, prosecution under Section 276CC was not warranted in this situation.
The Supreme Court in the case of M/s Bangalore Club v. The Commissioner of Wealth Tax & Anr., 2020 held that the Bangalore Club is exempt from paying wealth tax under the Wealth Tax Act of 1957. The court observed that only three sorts of persons can be assessed for wealth tax under Section 3, namely individuals, Hindu undivided families, and corporations. As a result, based only on Section 3(1), the Bangalore Club was neither an individual, a HUF, nor a corporation underneath this provision. Bangalore Club is a person-to-person association, not the establishment of one of a huge number of person-to-person associations by an individual who is otherwise accessible in order to avoid tax liabilities. For all of these reasons, it is apparent that Section 21AA of the Wealth Tax Act is not applicable to the facts of the current case,” the court stated.
In the case of Sesa Goa Ltd. v. Joint Commissioner of Income-tax, 2004 the issue before the court was whether the education cess, as well as the higher and secondary education cess, may be claimed as business expenditure. The High Court of Bombay held that Higher and secondary education, as well as the education cess paid on business revenue, is deductible when calculating income taxable under the heading of ‘profits and gains of business or profession.’ The term “cess” is not included in the phrase “any rate or tax charged” in Section 40(a)(ii) of the Income Tax Act of 1961. As a result, cess paid in connection to business revenue is deductible when calculating such company income.
In the case of Commissioner of Income Tax, Salem v. Angels Educational Trust, 2016 the assessee was a trust created for educational reasons. It submitted a registration application under Section 12AA. The assessee’s revenue exceeded spending for four fiscal years, according to the commissioner. As a result, he believed that trust was formed with the explicit goal of profit. As a result, he denied the assessee’s registration application. The High Court of Madras ruled that the excess of revenue over expenditure is not a sufficient reason to conclude that the assessee-trust was not engaged in charity activities and was created for the purpose of profit. Excess revenue over expenditure is not the only reason for application rejection under Section 12AA, and assessee-trust is qualified for charity trust registration.
In the case of Liberty India v. Commissioner of Income-tax, 2009, the appellant, a partnership business, had a small-scale industry that manufactures textiles out of yarns as well as different textile goods such as cushion covers, pillow covers, and so on out of market fabrics/yarn. During the relevant preceding year, which corresponded to Assessment Year 2001-02, the appellant claimed a deduction under Section 80-IB on the higher earnings of Rs. 22,70,056.00 as a profit of the industrial enterprise due to DEPB and Duty Drawback recorded to the Profit & Loss account. The Assessing Officer disallowed the deduction under Section 80-IB on the grounds that the two advantages were export incentives rather than profits arising from industrial undertakings. The issue before the court was whether the earnings from the Duty Entitlement Passbook Scheme (DEPB) and the Duty Drawback Scheme are profit obtained from the operations of the Industrial Undertaking and so deductible under Section 80-IB of the Income Tax Act of 1961. The Supreme Court held that for the purposes of calculating deductions under Section 80-IB, drawback revenues cannot be considered earnings arising from the business of an industrial concern.
Rather than assuming that income tax is a burden, citizens should contribute to the progress of a nation by paying income tax. The general population should endeavor to comprehend the significance of income tax and the perceived role their money plays in the country’s growth. As a responsible citizen, one must always pay their income tax on time because it is only via tax payments that our country can stay up with other industrialized nations and progress further. If people begin to perceive income tax as a hardship and avoid having to pay it, our nation’s growth will suffer, as would social disintegration so in order to avoid the same paying of income tax on time is consequential.
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