Income tax is a tax on the TOTAL INCOME of a PERSON. It is charged on the income of the PREVIOUS YEAR and is assessed and paid in the next succeeding year (assessment year) at the rates prescribed by the Annual Finance Act. (Sec.4) How to Reset Login Password.
Sources of Income – Tax Law:
- The Income – tax Act, 1961 – The Income – tax Act, 1961 constitutes the substantive legislation containing the law of income tax. It extends to the whole of India and come into force on 1st April, 1962. The Act comprises of 298 sections along with their respective sub – sections arranged in 23 chapters and 12 schedules. This Act is amended from time to time to implement the fiscal policies of the Government.
- The Income – tax Rules, 1962 – Parliament cannot provide for all circumstances and issues that may arise in the course of implementation of Income – tax Act. Hence, the legislature has left many issues to be decided by the department. Central Board of Direct Taxes (CBDT) looks after the administration of all the direct taxes. This Board has framed various rules for the administration of the Act. These rules are known as the Income – tax Rules, 1962. These are also amended from time to time as warranted by the amendments made in the Income – tax Act and also the changing fiscal requirements.
- Circulars, Notifications issued by the CBDT – In addition to the above, the Board issues from time to time certain circulars and notifications for the direction of the departmental officials. These circulars are binding on the assessing authorities. However, all circulars have to be in conformity with the provisions of Income – tax Act.
- The Finance Act – To give effect to the various fiscal proposals of the Govt., a Finance Act is enacted annually. The Finance Act contains amendments in Direct and Indirect Tax Laws. It also contains the rates of Income tax applicable to various types of assesses.
- Case Law – Apart from the above, innumerable disputes arise between assesses and the department while implementing the provisions of Income – tax Act. The Supreme Court and the various High Courts give judgments interpreting the provisions of the Income – tax Act. Such judgment also forms part of the law of income tax.
What is Gross Total Income and Total Income? [Sec.5]
Gross Total Income (GTI)
Means total income computed in accordance with the provisions of the Act before making any deduction under sec.80C to 80U. [See Chart]
Total Income
Total income of an assessee is GTI reduced by the amount permissible as deduction u/s 80CCC to 80U. Total income is calculated in accordance with the provisions of the Income Tax Act as they stand on first day of April in any assessment year.
Important Concepts
a. Person [Section 2(31)]: Person includes:
- An Individual;
- A Hindu Undivided Family (HUF);
- A Company;
- A Firm;
- An Association of Persons (AOP) or a Body of Individuals (BOI), whether incorporated or not;
- A local authority;
- Every artificial juridical person not falling within any of the preceding sub – clauses.
b. Diversion V/s. Application of Income:
| Diversion of Income | Application of Income |
| 1. In this case income is diverted at source before it reaches to the assesse by virtue of an obligation. 2. Diversion of Income takes place by overriding title. There is an obligation to fulfill. 3. The income is not included in the total income of the assessed. 4. It is not taxable | 1. In this case the application of income takes place after the Income reaches the assessed. 2. The application of income is gratuitous or self – imposed after the income reaches the assessed. 3. Since the income has reached the assesse first, it is included in the income of the assessed. 4. It is taxable |
C. – AOP V/s. BOI
- An AOP may consist of non- individuals but a BOI has to consist of individuals only. If two or more persons (like firm, company, HUF, individual etc.) join together, it is called an AOP. But if only individuals join together then it is called a BOI. For example, where Mr. X, XYZ Ltd. and PQ & Co. (A firm) join together for a particular venture then they may be referred to as an AOP. If X,Y and Z join together for a particular venture, but do not constitute a firm then they may be referred to as a body of individuals.
- An AOP implies a voluntary getting together for a common design or combined will to engage in an income producing activities, whereas a BOI may or may not have such common design or will.
In case of AOP as well as BOI, the provisions relating to computation of total income and taxability of such income are same.
General Rule: Income of previous year is taxable in the immediately following assessment year.
Exceptions:
- Income of non – resident shipping companies, if they do not have any representative in India; (sec 172)
- Income of persons leaving India either permanently or for a long period of time;(sec 174)
- Income of a person trying to alienate his assets with a view to avoiding tax; and (sec 175)
- Income of a discontinued business. (sec 176)
In these cases, income of a previous year is taxed in the same year.
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