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INCOME TAX LAW- GCT-1

FACULTY OF LAW, ALIGARH MUSLIM UNIVERSITY

TAXATION IN INDIA (INCOME TAX ACT, 1961)

SUBMITTED BY - SHIVAM GARG

16 BALLB-31
GJ-6016
GROUP- II
B.A.LL.B [IX SEM]

SUBMITTED TO - PROF. ZAFAR AHMAD

KHAN
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ACKNOWLEDGEMENTS

I, SHIVAM GARG, would like to humbly present this project to

Prof. Zafar Ahmad Khan sir. Firstly, I would like to express my
most sincere gratitude to him for his encouragement and
guidance regarding this project. I am thankful for being given
the opportunity of doing a project on this topic.

I take this opportunity to thank the university, and Dean and

Chairman Sir for providing extensive database resources online
during this pandemic. I would like to thank God for keeping me
in good health and senses to complete this project. I would also
like extend my hand of gratitude towards the friends and family,
without whose support and encouragement this project would
not have been a reality.
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SYNOPSIS
1. INTRODUCTION

2. DIRECT AND INDIRECT TAXES

 Direct Tax
 Indirect tax

3. CONSTITUTIONAL VALIDITY OF TAXES

4. SOURCES OF INCOME TAX IN INDIA

 Income tax Act, 1961 (Amended up to date)

 Annual Amendments
 Income tax Rules, 1962 (Amended up to date)
 Circulars and Clarifications by CBDT
 Judicial decision

5. BASIC PRINCIPLES FOR CHARGING INCOME TAX [SEC. 4]

6. HEADS OF INCOME [SEC. 14]

 Significance of heads of income

 Distinguish between Heads of income and Sources of income
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TAXATION IN INDIA (INCOME TAX ACT, 1961)

INTRODUCTION

In a Welfare State, the Government takes primary responsibility for the welfare of its citizens, as
in matters of health care, education, employment, infrastructure, social security and other
development needs. To facilitate these, Government needs revenue. The taxation is the primary
source of revenue to the Government for incurring such public welfare expenditure. In other
words, Government is taking taxes from public through its one hand and through another hand; it
incurs welfare expenditure for publicat large. However, no one enjoys handing over his hard-
earned money to the government to pay taxes. Thus, taxes are compulsory or enforced
contribution to the Government revenue by public. Government may levy taxes on income,
business profits or wealth or add it to the cost of some goods, services, and transactions.

DIRECT AND INDIRECT TAXES

There are two types of taxes: Direct Tax and Indirect Tax Tax, of which incidence and impact
fall on the same person, is known as Direct Tax, such as Income Tax. On the other hand, tax, of
which incidence and impact fall on two different persons, is known as Indirect Tax, such as GST,
etc. It means, in the case of Direct Tax, tax is recovered directly from the assessee, who
ultimately bears such taxes, whereas in the case of Indirect Tax, tax is recovered from the
assessee, who passes such burden to another person & is ultimately borne by consumers of such
goods or services.

Direct Tax

 Incidence and impact fall on the same person

 Assessee, himself bears such taxes. Thus, it pinches the taxpayer.
 Levied on income
 E.g. Income Tax
 Progressive in nature i.e., higher tax are levied on person earning higher income and vice
versa.
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Indirect tax

 Incidence and impact fall on two different persons

 Tax is recovered from the assessee, who passes such burden to another person. Thus, it
does not pinch the taxpayer.
 Levied on goods and services. Thus, this type of tax leads to inflation and have wider
base.
 E.g. GST, Customs Duty, etc.
 Regressive in nature i.e., all persons will bear equal wrath of tax on goods or service
consumed by them irrespective of their ability.
 Useful tool to promote social welfare by checking the consumption of harmful goods or
sin goods through higher rate of tax..

CONSTITUTIONAL VALIDITY OF TAXES

The Constitution of India is the supreme law of India. It consists of a Preamble, 22 parts
containing 444 articles and 12 schedules. Any tax law, which is not in conformity with the
Constitution, is called ultra vires the Constitution and held as illegal and void. Some of the
provisions of the Constitution are given below:

Article 265 of the Constitution lays down that no tax shall be levied or collected except by the
authority of law. It means tax proposed to be levied must be within the legislative competence of
the legislature imposing the tax .

Article 246 read with Schedule VII divides subject matter of law made by legislature into three
categories

 Union list (only Central Government has power of legislation on subject matters covered
in the list)
 State list (only State Government has power of legislation on subject matters covered in
the list)
 Concurrent list (both Central &State Government can pass legislation on subject matters).
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If a state law relating to an entry in List III is repugnant to a Union law relating to that entry, the
Union law will prevail, and the state law shall, to the extent of such repugnancy, be void.
(Article 254).

Following major entries in the respective list enable the legislature to make law on the matter:

Union List (List I) Entry 82 - Taxes on income other than agricultural income i.e. Income-tax

State List (List II) Entry 46 - Taxes on agricultural income.

SOURCES OF INCOME TAX IN INDIA

1. Income tax Act, 1961 (Amended up to date)

The provisions of income tax extend to the whole of India and became effective from 1/4/1962
(Sec. 1). The Act contains provisions for –

(a) Determination of taxable income;

(b) Determination of tax liability;
(c) Procedure for assessment, appeals, penalties and prosecutions; and
(d) Powers and duties of Income tax authorities.

2. Annual Amendments

(a) Income tax Act has undergone several amendments from the time it was originally
enacted through the Union Budget. Every year, a Finance Bill is presented before the
Parliament by the Finance Minister. The Bill contains various amendments which are
sought to be made in the areas of direct and indirect taxes levied by the Central
Government.
(b) When the Finance Bill is approved by both the Houses of Parliament and receives the
assent of the President, it becomes the Finance Act. The provisions of such Finance Act
are thereafter incorporated in the Income Tax Act.
(c) If on the 1st day of April of the Assessment Year, the new Finance Act has not been
enacted, the provisions in force in the preceding Assessment Year or the provisions
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proposed in the Finance Bill before the Parliament, whichever is more beneficial to the
assessee, will apply until the new provisions become effective [Sec. 294]

Note: Besides these amendments, whenever it is found necessary, the Government introduces
amendments in the form of various Amendment Acts and Ordinances.

3. Income tax Rules, 1962 (Amended up to date)

(a) As per Sec. 295, the Board may, subject to the control of the Central Government, make
rules for the whole or any part of India for carrying out the purposes of the Act.
(b) Such rules are made applicable by notification in the Gazette of India.
(c) These rules were first made in 1962 and are known as Income tax Rules, 1962. Since
then, many new rules have been framed or existing rules have been amended from time to
time and the same has been incorporated in the aforesaid rules.

4. Circulars and Clarifications by CBDT

(a) U/s 119, the Board may issue certain circulars and clarifications from time to time, which
have to be followed and applied by the Income tax authorities.
(b) Effect of circulars: These circulars or clarifications are binding upon the Income tax
authorities, but the same are not binding on the assessee. However, assessee can claim
benefit under such circulars.

Note: These circulars are not binding on the Income Tax Appellate Tribunal or on the Courts.

5. Judicial decision

(a) Decision of the Supreme Court: Any decision given by the Supreme Court shall be
applicable as law till there is any change in law by the Parliament. Such decision shall be
binding on all the Courts, Tribunals, Income tax authorities, assessee, etc.
(b) Contradiction in the decisions of the Supreme Court: In case, there is apparently
contradiction in two decisions, the decision of larger bench, whether earlier or later, shall
always prevail. However, where decisions are given by benches having equal number of
judges, the decision of the recent case shall be applicable.
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(c) Decisions given by a High Court or ITAT: Decisions given by a High Court or ITAT are
binding on all assessees and Income tax authorities, which fall under their jurisdiction,
unless it is over ruled by a higher authority.

BASIC PRINCIPLES FOR CHARGING INCOME TAX [SEC. 4]

1. Income of the previous year of a person is charged to tax in the immediately following
assessment year.
2. Rate of tax is applicable as specified by the Annual Finance Act of that year. Further,
though the Finance Act prescribes the rates of tax, in respect of certain income, the
Income Tax Act itself has prescribed specific rates, e.g. Lottery income is to be taxed @
30% (Sec.115BB), Long term capital gain is to be taxed @ 20% (Sec.112), short term
capital gain on listed shares u/s 111A is to be taxed @ 15%, etc.
3. In respect of income chargeable to tax, tax shall be deducted at source, or paid in advance
(wherever applicable). Sec. 4 is a charging section and it is the backbone of the Income
Tax Act. The tax liability arises by virtue of this section and it arises at the close of a
previous year. However, the finalisation of amount of tax liability is postponed to the
assessment year. It follows the rule that the liability to tax is not dependent upon
assessment.

HEADS OF INCOME [SEC. 14]

According to Sec.14 of the Act, all income of a person shall be classified under the following
five heads:

1. Salaries;
2. Income from house property;
3. Profits and gains of business or profession;
4. Capital gains;
5. Income from other sources.

For computation of income, all taxable income should fall under any of the five heads of income
as mentioned above. If any type of income does not become part of any one of the above
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mentioned first four heads, it should be part of the fifth head, i.e. Income from other sources,
which may be termed as the residual head.

Significance of heads of income

 Income chargeable under a particular head cannot be charged under any other head.
 The Act has self-content provisions in respect of each head of income.
 If any income is charged under a wrong head of income, the assessee may lost the benefit of
deduction available to him under the correct head.

Distinguish between Heads of income and Sources of income

There are only five heads of income as per Sec. 14 of the Act, but the assessee may generate the
income from various sources.

In the same head of income, there may be various sources of income. E.g. under the head
‘Income from house property’, there may be two or more house properties and each house
property shall be termed as a source of income. The source of income decides under which head
(among the five heads) income shall be taxable.