TAXATION NOTES

MODULE - I
Introduction

A tax may be defined as a monetary burden rested upon individuals or people with
property to help add to the government’s revenue. Tax is, therefore, a mandatory
contribution and not a voluntary payment or donation which one decides on one’s
own. It is a payment exacted by the legislative authority.

 Hugh Dalton: Tax is a compulsory contribution imposed by a public authority

irrespective of the exact amount of service rendered to the taxpayer in return,
and not imposed as penalty for any legal offence.
 Adam Smith: Tax is a compulsory payment levied by the government on
individuals or companies to meet the expenditure which is required for public
welfare.

A tax is a mandatory fee or financial charge levied by any government on an

individual or an organization to collect revenue for public works providing the best
facilities and infrastructure. The collected funds are then used to fund different
public expenditure programs.

Taxes are levied by governments on their citizens to generate income for undertaking
projects to boost the economy of the country and to raise the standard of living of its
citizens. The payment of tax is beneficial on multiple levels including the
development of the nation, betterment of infrastructure, the upliftment of the
society, and even welfare activities for the nation.

The authority of the government to levy taxes in India is derived from the
Constitution of India, which allocates the power to levy taxes to the Central and State
governments. All taxes levied within India need to be backed by an accompanying
law passed by the Parliament or the State Legislature.

The government uses this tax to carry out functions such as:

• Social welfare projects like schools, hospitals, housing projects for the poor,
etc.

• Infrastructure such as roads, bridges, flyovers, railways, ports, etc.

• Security infrastructure of the country such as military equipment

• Enforcement of law and order

• Pensions for the elderly and benefits schemes for the unemployed or the ones
below the poverty line.
Purpose of Taxation

• To raise funds for public purposes.

• To distribute wealth effectively.

• To provide social services, defense and security.

• To achieve social and economic objectives

• To increase economic development.

• To increase employment

Constitutional Basis

Article 246 of the Indian Constitution distributes legislative powers including

taxation between the Parliament of India and the State Legislature. Schedule VII
enumerates these subject matters with the use of three lists –

List I – entailing the areas on which only the parliament is competent to make laws.
[Art. 246(1)]

List II – entailing the areas on which only the State Legislature can make laws. [Art.
246(3)]

List III – listing the areas on which both the Parliament and the State Legislature.
[Art. 246(2)]

Distribution of powers of taxation:

- List I in the VII schedule to the constitution has the powers of the Central
Government listed in entries 82-92B.
- List II in the schedule has the powers of the State Government listed in entries
45-63.
- As regards to list III, it doesn’t deal with taxation and hence both Centre and
State do not have any concurrent powers of taxation.
- Entry 97 of List I in the VII schedule contains residuary powers of taxation
belonging only to the centre.

Article 256:

- No tax can be levied and collected except by authority of law.

- No tax can be imposed by an executive order.
- The law providing for imposition of tax must be a valid law, that is, it should
not be prohibited by any provision of the constitution.
- A tax law will be void if it violates the fundamental rights to equality
guaranteed by Article 14.
A tax is a compulsory exaction of money by public authority for public purposes
enforceable by law and is not a payment for service rendered. A tax is a common
burden and the only return the taxpayer gets is the participation in the common
benefit of the state.

Article 265 - Double Taxation not prohibited under Article 265. There is nothing in
Art. 265 which prohibits the legislature to impose a tax twice on a thing.

Article 268 - According to Art 268 stamp duties and duties of excise on medicinal
and toilet preparations mentioned in the Union List shall be levied by the Central
Government. These duties are collected by the States within which such duties are
leviable. The proceeds of such duties are assigned to the states.

Article 268A - The new Art. 268A added by the Constitution 88th Amendment Act,
2003 empowers the Union of India. to levy service taxes

Article 269(1) - The new clause (1) of Art. 269 provides that taxes on sale or purchase
of goods and taxes on the assignment of goods shall be levied and collected by the
Government of India but shall be assigned and shall be deemed to have been
assigned to states on or after the 1st day of April 1996 in the manner as may be
prescribed by parliament by law.

Article 271 provides that if parliament at any time increase any of the duties or taxes
mentioned in Articles 209 and 270 by imposing a surcharge, the whole proceeds of
any such surcharge shall form part of the Consolidated Fund of India.

Articles 276 and 277 save the authority of the state to levy taxes, on the subjects now
forming part of the Union List, immediately before the commencement of the
constitution. Thus, taxes which are being levied by a state or a Municipality or other
local authority, notwithstanding that those taxes are mentioned in the Union List
continue to be levied by those authorities until parliament by law makes contrary
provision.

Taxation Law

Under the Constitution of India, the Central Government is empowered to levy tax on
the income. Accordingly, the Central Government enacted the Income Tax Act of
1961. The Act provides for the scope and machinery for the levy of Income Tax in
India. The Act is supported by Income Tax Rules, 1961 and several other subordinate
regulations.

Besides, circulars and notifications are issued by the Central Board of Direct Taxes
(CBDT) and sometimes by the Ministry of Finance, Government of India dealing with
various aspects of the levy of Income tax.

The Income Tax Act is a comprehensive Act containing 298 Sections, thousands of
sub-sections, schedules, rules, sub-rules, etc., and is supported by various other Acts
and Rules. Though this Act is still in force, several amending Acts have amended this
Act since 1961. The annual Finance Bills presented to Parliament by the Union
Finance Minister along with the budget make far-reaching amendments to this Act.

General Principals of Taxation

 Horizontal Equity: It is an economic theory that maintains that people with

identical incomes and assets should pay the same tax rate. Horizontal equity
should apply to people who are regarded as equal.

 The Ability-to-Pay Principle: individuals with a better ability to pay taxes (as
measured by income and wealth) should pay more. According to this, the
overall tax burden should be allocated among individuals based on their
ability to bear it, taking into consideration all relevant personal
characteristics. In this instance, personal levies are the most suitable taxes.

 The Principle of Benefit: Taxes, according to the benefit principle, serve a

similar purpose to prices in private transactions. Namely, they aid in
determining what activities the government will undertake and who will pay
for them. The benefit concept is most successfully applied in the funding of
roads and highways through vehicle fuel taxes and user fees (tolls), those who
use have to pay for that.

 Stability: Tax rules should be modified infrequently. When the tax rules are
modified, they should be part of comprehensive and systematic tax reform.
The reform includes enough provisions for a fair and orderly transition.
Frequent changes in tax legislation can lead to lower compliance or behavior
that tries to adjust for possible future changes in the tax system.

 Clarity: Tax rules and regulations must be understandable to the average

taxpayer. They must be as straight forward as feasible. Tax rules should be
plain and definite. Unclear tax will discriminate against the poor and the
uninformed, who are unable to take advantage of the myriad legal tax-saving
alternatives accessible to the educated and wealthy.

History and Development of Tax Laws in India

- In India - Income Tax was first time introduced in the year 1860 by Sir James
Wilson in order to meet the loss caused on account of ‘military mutiny’ in
1857.
- In 1886, a separate Income Tax Act was passed, this act was in force for a long
time, subject to the various amendments from time to time.
- In the year 1918, a new Income Tax Act was passed, but again, it was replaced
by another new act of 1992.
- The Act of 1922 became very complicated due to various amendments. This
act remains in force to the assessment year 1961-62.
 - In the year 1956, the Government of India referred to the Law Commission in
order to simplify the law and also to prevent the evasion of Tax.
- The Law Commission submitted its report in September 1958 in consultation
with the Ministry of Law.
- At present, this law is governed by the Act of 1961 which is commonly known
as Income Tax Act, 1961 which came into force on and from 1st April 1962. It
applies to the whole of India, including the state of Jammu & Kashmir.
- The law of Income Tax in India governed by the Income Tax Act of 1961 and
the gaps are being filled by the Income Tax Rules, Notifications, Circulars, and
judicial pronouncement including rulings by the Tribunal.

Importance of Taxation

The Taxation Structure of the country can play a very important role in the working
of our economy. Some time back the emphasis was on higher rates of Tax and more
incentives. But recently, the emphasis has shifted to ddecrease in rates of taxes and
withdrawal of incentives. While designing the Taxation structure it has to be seen
that it is in conformity with our economic and social objectives. It should not impair
the incentives to personal savings and investment flow and on the other hand it
should not result in a decrease in revenue for the State.

Canons of Taxation

Whenever the principles of taxation are referred to, the majority of the people think
instantly of the famous four canons of Adam Smith, the father of economic science. A
sound tax-system is one which adheres to these famous canons. These canons are
called fundamental principles of taxation.

 Canon of Equity or Ability: This canon of equity implies that the criterion of
payment of taxes should be the ability to pay and the sacrifice caused by
taxation should be equal for everybody. The principle is stated by Adam Smith
in the following words:
- “The subject of every state ought to contribute towards the support of the
government as nearly as possible in proportion to their respective abilities,
that is, in proportion to the revenue which they respectively enjoy under the
protection of the state.”
- Thus, according to this canon, tax system should be based on the principle of
social justice. Since it stresses on the payment of tax according to the capacity
of the taxpayer to pay tax, it is in favour of progressive tax-structure. For
satisfying the canon of equity, it is necessary to charge higher incomes at a
higher rate of taxation.

 Canon of Certainty: Taxpayer should be certain about the quantum of tax to be

paid. Tax rates should be certain, items of taxation be precisely defined; and
no discretionary power be left to the tax collecting officials because
uncertainty of any kind may result in fraud and corruption. The taxpayer
 might defraud the state by not paying his due tax in full, although he could
afford to pay; or the tax collectors might oppress the tax-payers by exacting
more out of them.
- Adam Smith states this principle in the following words - “The tax which each
individual is bound to pay ought to be certain and not arbitrary. The time of
payment, the quantity to be paid, ought to be very clear and plain to the
contributor and to every other person.”
- Importance was given to an accurate survey and record of the income since it
was necessary to secure certainty in taxation. Certainty in taxation also means
that a government should be able to estimate the probable yield of a tax with a
certain degree of accuracy, so that the expenses can be managed according to
the revenue or the purpose for which the tax is being levied is fulfilled.

 Canon of Economy: Economy principle implies that the cost of collection of

tax should be kept as low as possible. A major portion of the tax revenue
consumed in collecting the tax will reduce the net revenue yield of the
government from tax and the tax wouldn’t be economical. Economic taxes
promote economic efficiency.
- In the words of Adam Smith - “Every tax ought to be so contrived as both to
take out and keep out of the pockets of the people as little as possible over and
above what it brings into the public treasury of the state.”
- The Canon of economy is also capable of another interpretation. The payment
of a tax means inconvenience and disadvantage to the taxpayer i.e. real cost to
the taxpayer. It is in this sense that Smith has used ‘cost’ also. So, the cost
includes money cost as well as real cost. Therefore, economy may mean lowest
possible money cost of collections to the govt, and least possible
inconvenience and disadvantage to the taxpayer.

 Canon of Convenience: This canon implies that the time and mode of payment
of a tax should be such as to cause the minimum inconvenience to the
taxpayer.
- Adam Smith lays down - “Every tax ought to be levied at the time and in a
manner in which it is most likely to be convenient for the contributors to pay
it.”
- Adam Smith’s canons of Taxation are as sound today as they were in 1776.
There has only been extension and modifications of these canons by the
economists due to the change in objectives of taxation policy.

Distinction between Tax and Fee

 Tax: The Constitution of India does not define the word tax. However, Art.
366(28) of the Constitution of India says, "taxation includes the imposition of
any tax or impost, whether general or local or special and `tax' shall be
construed accordingly.
  Fee: Another source of revenue of the State and it differs from tax. Fee is
defined by Prof. Seligman as ‘a payment to defray the cost of each recurring
service undertaken by the Government, primarily in the public interest, but
conferring a measurable special advantage on the fee-payer'.

Tax Fee
Tax is the compulsory payment to the Fee is the voluntary payment for
government without getting any getting service.
direct benefits.

If the element of revenue for general While a fee is for payment of a

purpose of the State predominates, specific benefit or privilege although
the levy becomes a tax. the special to the primary purpose of
regulation in public interest.

In regard to tax, there is not and must In regard to fee, there is and must
not always be, a direct correlation always be, correlation between the fee
between the tax and the service collected and the service intended to
intended to be rendered. be rendered.

Tax is compulsory payment. If tax is Fee is the voluntary payment.

imposed on a person, he has to pay it.

Otherwise, he has to be panelized. On the other hand, fee is not paid if

the person does not want to get the
service.

In this case, taxpayers do not expect Fee payers can get direct benefit for
any direct benefit. paying fee.

Examples: income tax, gift tax, wealth Examples: Stamp fee, driving license
tax, VAT etc. fee, Govt. Registration Fee etc.

Distinction between Tax and Cess

 Tax: A tax is a fee that is levied on a product, income, or activity. Cess is

basically just another word for tax.

 Cess: is a form of tax charged/levied over and above the base tax liability of a
taxpayer. A cess is usually imposed additionally when the state or the central
government looks to raise funds for specific purposes. For example, the
government levies an education cess to generate additional revenue for
funding primary, secondary, and higher education. Cess is not a permanent
 source of revenue for the government, and it is discontinued when the
purpose levying it is fulfilled. It can be levied on both indirect and direct taxes.

- The government can impose cess for purposes such as disaster relief,
generating funds for cleaning rivers, etc. For example, after Kerala floods in
the year 2018, the state government imposed a 1% calamity cess on GST and
became the first state to do it.

- In other instances, the central government may levy an education cess, or a

health cess, or a sanitation cess. All these levies are usually imposed as a
percentage of the taxpayer’s basic tax liability.

- Under the GST (Goods and Services Tax) regime, certain sin goods and luxury
items also attract a cess. The procedure for introducing cess is comparatively
simpler than getting the provisions done for introducing taxes, which usually
means a change in the law. Cess is also easier to modify and abolish.

Types of Cess:

• Education Cess: Education cess was introduced to finance and provide

standard quality education to poor people.

• Health and education cess: Proposed in Budget 2018 by Finance Minister

Arun Jaitley to meet the education and health needs of rural and rural and
Below Poverty Line (BPL) families.

• Swachh Bharat Cess: Introduced in 2015, a 0.5% Swachh Bharat cess was
imposed to fund a national campaign for clearing the roads, streets, and
infrastructure of India.

• Krishi Kalyan Cess: This cess was aimed at developing the agricultural
economy and was collected at the rate of 0.5%.

• Infrastructure Cess: Announced in Union Budget 2016, this cess was charged
on the production of vehicles.

Who pays cess? What is meant by cess in GST?

• In the case of the cess levied on direct taxes, it is added to the basic tax liability
of the taxpayer and is paid as a part of the total tax paid by the taxpayers
themselves.

• In the case of the cess levied on indirect taxes, such as service tax or sales tax,
or GST in India’s case, it is paid by the producer of the goods and services.
This usually adds to the cost of making goods and services, and eventually, the
consumer might end up bearing the higher cost.
 Tax Cess
Type of Fee Tax
Definition A mandatory fee Technically, is just another
charged by the word for tax. The term might
government on a be used in regard to a specific
product, income, or type of tax.
activity.

Purpose To generate revenue To generate revenue for the

for the government. government.

Types Direct Tax – tax Usually used in regard to Local

levied directly on tax and/or Land and Property
personal or corporate tax.
income.

Indirect Tax – tax

levied on the price of
a good or service

Usage The word is used all The term is still frequently

over the world and in used in a few countries
all manners to refer including Britain, Ireland, to
to any type of tax. indicate a local tax, Scotland,
to indicate a land tax, and
India, applied as a suffix to a
indicate a category of tax such
as ‘property-cess’.

Objectives of Taxation

Initially, governments impose taxes for three basic purposes:

- to cover the cost of administration,

- maintaining law and order in the country, and
- for defense

But now government’s expenditure pattern changed and gives service to the public
more than these three basic purposes and it restore social justice in the society by
providing social services such as public health, employment, pension, housing,
sanitation, and other public services. Therefore, governments need a much larger
amount of revenue than before. To generate more revenue a government imposes
various types of taxes.

Tax Evasion
 • Tax Evasion is an illegitimate way to minimize tax liability through unlawful
techniques like inflating expenses or understating taxable income.

• Such fraudulent means are used with the motive of showing lesser profits to
minimize one’s tax burden.

• Certain noted illegal practices are concealing income or relevant documents,

making false statements, overstatement of the tax credit, not maintaining
complete records of the transactions or accounting personal expenses as
business expenses.

• Tax evasion is an offence for which the assessee could be punished under
Chapter XXII of the Income Tax Act, 1961.

• One common way people adopt to evade taxes is by transacting in cash

without accounting for the same in books. However, to track and tax such
transactions and the means utilized to evade tax, the government keeps a
vigilant watch and picks the cases for assessment. If caught, a heavy penalty
may be levied along with taxes.

Tax Avoidance

• Tax Avoidance involves using legal methods to minimize tax liability. In other
words, it consists of using means within four corners of the tax law to
minimize one’s tax burden.

• Although a legal method, it is not advisable as it ultimately aims to reduce the

amount of tax that is payable by one for their advantage, which is an unfair
exploitation of law.

• Tax avoidance is taking unfair advantage of the lacunae in the tax law by
finding ways to avoid the payment of taxes.

• Tax avoidance is usually done by adjusting the accounts so that there will be
no violation of tax laws or by finding loopholes in the law. Though lawful, it
could be categorized as an offense in some cases.

Tax Planning

• Tax planning is a comprehensive evaluation of one’s financial situation using

current known and estimated future variables and drawing out a feasible plan.

• Tax planning, like tax evasion/avoidance, is also done to reduce tax liability.
However, it involves legal planning regarding investments, expenses, etc., to
avail various exemptions and deductions provided under the tax laws.

• E.g., Section 80C allows a deduction of up to INR 1,50,000 if specified

investments are made. The most popular ways of saving tax through planning
 are investing in Life insurance policies, PPF accounts, National Saving
certificates, Sukanya Samriddhi Scheme, term deposits, Provident Funds, etc.

• Tax planning involves planning the financial affairs to entitle the taxpayer to
the benefits of deductions, exemptions, concessions, and rebates. Tax
planning is a genuine approach to applying all the provisions within the tax
law framework to the taxpayer’s benefit.

Criteria Tax Planning Tax Evasion Tax Avoidance

Legality Legal Illegal Legal
Objective Minimize tax Evade or avoid Minimize tax
liability within the payment of taxes liability within the
boundaries of the illegally. boundaries of the
law. law.
Methods used Utilizing Fraudulent Utilizing
legitimate tax activities, false legitimate tax
provisions and information. provisions and
strategies. strategies.
Compliance Complies with tax Violates tax laws Complies with tax
laws and reporting and reporting laws and reporting
requirements. requirements. requirement
Consequences No legal Penalties, fines, No legal
consequences legal actions, consequences
reputation damage
Examples Maximizing Under reporting Utilizing tax
deductions, tax income, incentives,
credits, retirement fabricating deductions,
planning expenses exemptions.
MODULE - II
Important Definitions under Income Tax Act, 1961

 Assessment Year [Section 2(9)]: Section 2(9) defines an “Assessment year” as

“the period of twelve months starting from the first day of April every year.” An
assessment year begins on 1st April every year and ends on 31st March of the next
year.

 Previous Year [Section 2(34) & Section 3]: Section 3 defines “Previous year” as
the financial year immediately preceding the assessment year”. Income earned in
one financial year is taxed in the next financial year. The year in which income is
earned is called the “previous year” and the year in which it is taxed is called the
“assessment year”. Common previous year for all sources of income.

 Person [Section 2(31)]: The word “Person” is a very wide term and embraces in
itself the following:
- Individual
- Hindu Undivided Family (HUF)
- Company
- Firm
- Association of Persons (AOP) or Body of Individuals (BOI)
- Local Authority
- Artificial Judicial Person

These are seven categories of persons chargeable to tax under the Act. The aforesaid
definition is inclusive and not exhaustive. Therefore, any person, not falling in the
seven categories as mentioned above, may still fall in the four corners of the term
“Person” and accordingly may be liable to tax under Section 4.

Income [Section 2(24)]: Section 2(24) of the Income Tax Act is a critical provision
that defines the term “income” for the purposes of taxation. It covers various sources
of income and helps determine the tax liability of individuals and entities. It is
essential for taxpayers to understand the scope of Section 2(24) and ensure that they
comply with the relevant provisions of the Income Tax Act.

Income earned in a year is taxable in the next year. The year in which income is
earned is known as previous year and the next year in which income is taxable is
known as assessment year. In other words, previous year is the financial year
immediately preceeding the assessment year. Illustration 1.1: For the assessment
year 2009-10, the immediately preceding financial year {i.e., 2008-09) is the
previous year. Income earned by an individual during the previous year 2008-09 is
taxable in the immediately following assessment year 2009-10 at the rates applicable
for the assessment year 2009-10. Similarly, income earned during the previous year
2009-10 by a company will be taxable in the assessment year 2010-11 at the rates
applicable for the assessment year 2010-11.

Section 2(24) of the Income Tax Act defines income as including the following:

1. Salaries: Any salary, wages, annuity, pension, gratuity, or other payment

received by an individual from his employer is considered as income for
taxation purposes.
2. Income from House Property: Any rental income earned from a house
property, or the deemed rental income from a self-occupied property, is
considered as income.
3. Profits and Gains of Business or Profession: Any profits or gains earned by an
individual from a business or profession are considered as income for taxation
purposes. (Section 28)
4. Capital Gains: Any profits or gains earned from the sale of a capital asset, such
as property or shares, are considered as income. (Section 45)
5. Income from Other Sources: Any income earned from sources other than
those mentioned above, such as interest on bank deposits, lottery winnings, or
gifts, is considered as income.
6. Winnings from Lotteries, Crosswords, and Other Games: Any winnings from
lotteries, crossword puzzles, races, card games, or any other games or
gambling activities are considered as income.
7. Contribution to Employees’ Provident Fund (EPF) Account: Any contribution
made by an employer to an employee’s EPF account is considered as income.
8. Voluntary Retirement Scheme (VRS) Compensation: Any compensation
received by an employee under a VRS is considered as income.
9. Foreign Income: Any income earned by an individual outside India is also
considered as income for taxation purposes.

Exclusions from the definition of Income: While the above-mentioned sources of

income are considered as income for taxation purposes, there are some exclusions
from the definition of income, such as:

1. Agricultural Income: Any income earned from agricultural land is exempted

from taxation under Section 10(1) of the Income Tax Act.
2. Income of a Charitable Trust or Institution: Any income earned by a
charitable trust or institution is exempted from taxation under Section 11 of
the Income Tax Act.
3. Income from a Hindu Undivided Family (HUF): Any income earned by an
HUF is taxed separately from the income of its individual members.

Additional Information about Section 2(24) of the Income Tax Act:

1. Exempt Income: Apart from the exclusions mentioned above, there are several
types of income that are exempt from tax under the Income Tax Act, such as
the interest earned on PPF, Sukanya Samriddhi Yojana, and so on.
 2. Deductions from Income: The Income Tax Act also allows for various
deductions from the total income of taxpayers, which can reduce their tax
liability. For example, deductions are allowed for contributions made to
charities, investments made in certain savings schemes, and so on.
3. Taxability of Gifts: Gifts received from specified relatives are exempt from tax
under the Income Tax Act. However, gifts received from non-relatives above a
certain limit are taxable as income.
4. Taxation of Clubbing of Income: The Income Tax Act also contains provisions
for clubbing the income of certain individuals, such as minor children, with
that of their parents. This is done to prevent tax evasion by transferring
income to family members in lower tax brackets.
5. Importance of Proper Record Keeping: Section 2(24) of the Income Tax Act
covers a wide range of income sources, and it is crucial for taxpayers to
maintain proper records of their income and expenses to ensure compliance
with the relevant tax laws.

Additional Considerations for Section 2(24) of the Income Tax Act:

1. Multiple Sources of Income: Many taxpayers earn income from multiple

sources, such as salary and rental income, or business profits and capital
gains. It is important to calculate the total income from all sources and
determine the applicable tax rate based on the tax slab applicable to the total
income.
2. Taxability of Bonus and Perquisites: Apart from salary, employees may also
receive bonuses and perquisites such as free accommodation, car, or other
benefits. These are also taxable as income under the Income Tax Act.
3. Taxability of Interest Income: Interest income earned from various sources,
such as bank deposits, bonds, or debentures, is taxable as income. Taxpayers
should ensure that they include all interest income earned during the financial
year while calculating their taxable income.
4. Taxability of Rental Income: Rental income earned from property is also
taxable under the Income Tax Act. However, taxpayers can claim deductions
for expenses such as repairs, maintenance, and property taxes paid during the
financial year.
5. Taxability of Capital Gains: Capital gains earned from the sale of assets such
as property, shares, or mutual funds are taxable under the Income Tax Act.
However, taxpayers can claim deductions for expenses such as brokerage fees,
transfer charges, and so on.

 Assessee [Section 2(7)]: An income tax assessee is a person who pays tax or any
sum of money under the provisions of the Income Tax Act, 1961.

Furthermore, Section 2(7) of the act defines an income tax assessee as anyone
who is required to pay taxes on any earned income or incurred loss in a single
assessment year. They can also be referred to as each and every person for whom:
 - any action being taken under the act to evaluate his income
- the income of another person for which he is taxed
- any loss incurred by him or any other person
- persons entitled to a tax refund

A minor child is treated as a separate assessee in respect of any income generated

out of activities performed by him like singing in radio jingles, acting in films,
tuition income, delivering newspapers, etc. However, income from investments,
capital gains on securities held by a minor child, etc. would be taxable in the
hands of the parent having the higher income (mostly the father), unless if such
assets have been acquired from the minor’s sources of income.

Normal Assessee: An individual who is liable to pay taxes for the income earned
during a financial year is known as a normal assessee. Every individual who has
earned any income or incurred losses during the previous financial years is liable to
pay taxes to the government in the current financial year.

All individuals who pay interest/penalty or who are supposed to get a refund from
the government are categorised as normal assessees. Say, Mr A is a salaried
individual who has been paying taxes on time over the past 5 years. Then, Mr A can
be considered as a normal assessee under the Income Tax Act, 1961.

Representative Assessee: There may be a case in which a person is liable to pay taxes
for the income or losses incurred by a third party. Such a person is known as a
representative assessee. Representatives come into the picture when the person
liable for taxes is a non-resident, minor, or lunatic. Such people will not be able to file
taxes by themselves. The people representing them can either be an agent or
guardian.

Consider the case of Mr. X. He has been residing abroad for the past 7 years.
However, he receives rent for two house properties he owns in India. He takes the
help of a relative, Mr. Y, to file taxes in India. In this case, Mr. Y acts as a
representative assessee. If the assessing officer plans to investigate the tax filing, Mr.
Y will be asked to provide the necessary documents as he is the guardian of the
property and represents Mr. X.

Deemed Assessee: An individual might be assigned the responsibility of paying taxes

by the legal authorities and such individuals are called deemed assessees.

Deemed assessees can be:

- The eldest son or a legal heir of a deceased person who has expired without
writing a will.
- The executor or a legal heir of the property of a deceased person who has
passed on his property to the executor in writing.
- The guardian of a lunatic, an idiot, or a minor.
 - The agent of a non-resident Indian receiving income from India.

For example, Mr P owns a commercial building from which he earns rent income. He
has prepared and signed a will stating the property should be handed over to his
niece after his death. Upon his death, his niece will be considered as the executor of
the property, i.e. deemed assessee. She will be responsible for paying tax on the
rental income thereon

Assessee-in-default: Assessee-in-default is a person who has failed to fulfil his

statutory obligations as per the income tax act such as not paying taxes to the
government or not filing his income tax return. For example, an employer is
supposed to deduct taxes from the salary of his employees before disbursing the
salary. He is, then, required to pay the deducted taxes to the government by the
specified due date. If the employer fails to deposit the tax deducted, he will be
considered as an assessee-in-default.

Roles/Responsibilities and Duties of an Assessee:

Assesses must file their returns on time and pay their taxes when they are due.
However, an assessee may frequently fail to file their return on time. In this
situation, they may receive a notice from the IT department or the relevant Assessing
Officer requesting information about why the return was not filed for that particular
fiscal year. In this scenario, the assessee must provide a response to the Assessing
Officer explaining why they did not file his returns on time, and he must also file the
returns as soon as he receives the notification.

Total Income [Section 2(45)]: Total Income means the total amount of income
referred to in section 5, computed in the manner laid down in this Act.

In the context of the Income Tax Act, "total income" refers to the aggregate income
earned or received by an assessee during the previous year, after making certain
deductions and adjustments as per the provisions of the Act. It includes income from
all sources such as salary, house property, business or profession, capital gains, and
income from other sources.

Once the total income is calculated, various deductions, exemptions, and allowances
provided under the Income Tax Act are applied to arrive at the "net taxable income."
This net taxable income is then subjected to the applicable tax rates to determine the
tax liability of the assessee for that particular previous year.

It's important to note that the determination of total income and the calculation of
tax liability involve various provisions, rules, and regulations outlined in the Income
Tax Act, and it can vary depending on the nature and source of income, as well as the
individual's eligibility for deductions and exemptions.

Income not included in the total Income:

Under the Income Tax Act, certain types of income are not included in the
computation of total income. These exclusions are typically granted to encourage
certain activities, provide relief to specific individuals or entities, or ensure fairness
in taxation. Some common examples of income not included in total income include:

1. Agricultural Income: Income derived from agricultural operations is generally

exempt from income tax under specific conditions outlined in the Income Tax
Act.
2. Dividend Income: Dividends received from domestic companies are exempt
from income tax in the hands of the shareholders, subject to certain
conditions and limits.
3. Interest on certain savings and investments: Interest income earned from
certain savings schemes, such as Public Provident Fund (PPF), Employee
Provident Fund (EPF), and tax-saving fixed deposits, may be exempt from
income tax up to a specified limit.
4. Long-term Capital Gains on Listed Equity Shares and Equity-Oriented Mutual
Funds: Long-term capital gains arising from the sale of listed equity shares or
equity-oriented mutual funds on which Securities Transaction Tax (STT) is
paid are exempt from income tax.
5. Gifts and Inheritances: Gifts received from specified relatives or inheritances
are generally not taxable in the hands of the recipient.
6. Certain allowances and perquisites: Certain allowances and perquisites
provided by employers for specific purposes such as medical treatment, travel,
or housing may be exempt from tax up to prescribed limits and conditions.
7. Income of certain bodies: Income of entities such as charitable trusts,
religious institutions, educational institutions, etc., may be exempt from tax if
they meet the criteria specified under the Income Tax Act

Residential Status

Under Income Tax, the residential status of a person is one of the most important
criteria in determining the tax implications. The residential status of a person can be
categorised into:

1. Resident and Ordinarily Resident (ROR)

2. Resident but Not Ordinarily Resident (RNOR) and
3. Non- Resident (NR)

Resident:

A resident taxpayer is an individual who satisfies any one of the following conditions:

- Resides in India for a minimum of 182 days in a year, OR

- Resided in India for at least 365 days in the immediately preceding four years
and for a minimum of 60 days in the current financial year.
For example, consider the case of Mr. D, who is the business head of the Asia Pacific
region for a private firm. Mr. D was born and brought up in India. He has to travel to
various locations of the continent for business purposes. He has spent 200 days
traveling in the current financial year. Also, he has been travelling abroad for the past
two years and has stayed out of India for about 400 days in this period.

Let us evaluate whether Mr. D was resident in India for the current financial year.

- Condition 1: (Resides in India for a minimum of 182 days in a year) – Not

satisfied.
To figure out the resident status of Mr D, you will understand that he has only
spent 165 days in India during the current financial year. Hence, he does not
satisfy the first condition.

- Condition 2: (Resides in India for a minimum of 365 days in the immediately

preceding four years and for a minimum of 60 days in the current financial
year) – Satisfied.
However, it is given that Mr. D has been traveling only for the past two years.
Also, it is said that he has travelled for 400 days in the past two years. That
means, in the past four years, Mr. D has stayed in India for more than 365
days (1061 days).
Hence, Mr. D has resided for at least 60 days in the current financial year and
more than 365 days in the immediately preceding four financial years.
Therefore, Mr. D satisfies the second condition.

Hence, if any one of the above two conditions is satisfied, he is a resident

taxpayer.

Resident and Ordinarily Resident (ROR) and Resident but Not Ordinarily Resident
(RNOR):

There is a further classification under the resident status – Resident and Ordinarily
Resident (ROR) and Resident but Not Ordinarily Resident (RNOR).

In addition to the basic conditions, if both the below conditions are met, he will be an
ROR

1. He has resided in India for at least 2 out of 10 immediate previous

years, and
2. He has resided in India for at least 730 days in 7 immediately previous
years.

In the above example, Mr. D will be considered a resident of India. Let us further
classify whether Mr. D is ROR or RNOR.
If both the additional conditions are satisfied, then Mr. D is ROR.

Considering the example, Mr. D has been traveling out of India for the past 2 years
only. Hence, the first condition is satisfied as he resided in India for at least 2 years
out of the last 10 years. Also, he has fulfilled the criteria of residing for at least 730
days in the last seven years. Therefore, he can be considered as Resident Ordinarily
Resident.

If any one of the additional conditions is not satisfied, then Mr. D is RNOR.

Non Resident:

An individual who does not satisfy the basic conditions of residence can be
considered as a non-resident.

For example, Ms. G went to London to join a reputed university for a graduation
course (three years). While studying there, her professor suggested that she join a
post-graduate course at the same university (two years). She had to get an internship
certificate to complete the course. Upon completion, the firm offered her a
permanent position. She has been an employee there for the past four years. That is,
Ms G has stayed out of India for nine years now. She receives rental income from the
property that she inherited from her parents. Both the basic conditions are not
satisfied. That makes Ms G a non-resident.

Note:

- The condition of a minimum 60-day stay in the current financial year will get
extended to 182 days in all the cases if:
1. A person is a citizen of India and he leaves India for employment
during the current financial year.
2. A person who stays outside India but is a citizen of India or a Person of
Indian Origin (PIO), and comes on a visit to India during the year.
3. However, if the income sourced from India exceeds Rs 15 lakhs in a
financial year, then 120 days is applicable instead of 182 days.

- Irrespective of the number of days of stay in India a Citizen of India having

income exceeding Rs 15 lakhs in India and is not liable to tax in any other
country due to his residence or domicile will be considered a Resident in
India, i.e. even if an Indian citizen fails the basic condition, His residential
status will be RNOR instead of Non-resident.

Tax Planning

Tax planning is the process of analysing a financial plan or a situation from a tax
perspective. The objective of tax planning is to make sure there is tax efficiency. With
the help of tax planning, one can ensure that all elements of a financial plan can
function together with maximum tax-efficiency. Tax planning is a significant
component of a financial plan. Reducing tax liability and increasing the ability to
make contributions towards retirement plans are critical for success.

Tax planning comprises various considerations. Considerations such as size, the

timing of income, timing of purchases, and planning are concerned with other kinds
of expenditures. Also, the chosen investments and the various retirement plans
should go hand-in-hand with the tax filing status as well as the deductions in order to
create the best possible outcome.

Tax planning plays an important role in the financial growth story of every individual
as tax payments are compulsory for all individuals who fall under the IT bracket.
With tax planning, one will be able to streamline his/her tax payments such that he
or she will receive considerable returns over a specific period of time involving
minimum risk. Also, effective tax planning will help in reducing a person's tax
liability.

Tax planning can be classified into the following:

1. Permissive tax planning: Tax planning which falls under the framework of the
law.
2. Purposive tax planning: Tax planning with a specific objective.
3. Long-range/short-range tax planning: Planning executed at the beginning and
towards the end of the fiscal year.

Highlights of tax planning:

1. Tax planning is the process of analysing finances from a tax angle, with an aim
to ensure maximum tax efficiency.
2. Considerations concerning tax planning will include timing of income, timing
of purchases, planning for expenditures, and size.
3. Tax planning is vital for small as well as large businesses since it will be
helpful for achieving business-related goals.

Rate of Income Tax

In India, the Income Tax applies to individuals based on a slab system, where
different tax rates are assigned to different income ranges. As the person's income
increases, the tax rates also increase. This type of taxation allows for a fair and
progressive tax system in the country. The income tax slabs are revised periodically,
typically during each budget. These slab rates vary for different groups of taxpayers.

India has a progressive income tax system as well. As of the 2021-2022 tax year,
individual taxpayers are subject to tax rates ranging from 5% to 30% depending on
their income level. Additionally, a surcharge may apply to higher-income earners.

Heads of Income
According to the Income Tax Act, a taxpayer’s earnings are divided into 5 heads of
income. At the end of each financial year, you must correctly classify your earnings
under these heads of income for accurate tax calculation.

The 5 heads of income tax are:

1. Income from salary

2. Income from house property
3. Income from profits and gains from business or profession
4. Income from capital gains
5. Income from other sources

Income from salary

Any income that you receive in terms of the service you provide on a contract of
employment is applicable for taxation under this head. This includes salary, advance
salary, perquisites, gratuity, commission, annual bonus and pension.

This tax head also includes some exemptions:

- House Rent Allowance (HRA): As a salaried individual, if you live in a rented

house, you can claim House Rent Allowance for partial or complete tax
exemptions.
- Conveyance Allowance: You can get a monthly tax exemption of up to Rs.800.

Income from House Property

An individual’s income from his or her property or land is taxable under the head of
income from house property. To put it simply, this head includes the policy for
calculating tax on rental income that you receive from your properties.

In case you own more than one self-occupied house, then only one house is
considered to be occupied and the rest are considered to be rented out. The taxation
occurs on income received from both commercial and residential property.

Income from Profits and Gains from Business or Profession

The profits that you earn from any kind of business or profession are taxable under
this head. You can subtract your expenses from the total income in order to
determine the amount on which tax is chargeable.

Here are the types of income that are chargeable under this head:

- Profits generated from the sale of a certain license.

- Gains earned by an individual during an assessment year.
- The profits that an organisation makes on its income.
- Cash received on the export of a government scheme.
- The benefits that a business receives.
 - Gains, bonuses or salary that an individual receives due to a partnership with
a firm.

Income from Capital Gains

When you earn profits by transferring or selling an asset that was held as an
investment, that income is taxable under the head of income from capital gains. A
large number of assets, like gold, bonds, mutual funds, real estate, stocks, etc., fall
under capital assets.

Now, you can subdivide capital gains into short-term capital gains and long-term
capital gains.

When you sell your capital assets after holding them for a period of 36 months or
more, they will fall under long-term capital gain and will have a tax rate of 20%.
Alternatively, if you sell your capital assets within a period of 36 months, the tax
deduction will be under short-term capital gain at the rate of 15%. In the case of
securities, this is applicable if you sell your holdings within 12 months from the
purchase date.

Income from Other Sources

Among the five heads of income tax, this one includes any other income that does not
have any mention in the above 4 heads. They fall under Section 56 sub-section (2) of
the Income Tax Act and include income from lottery, bank deposits, gambling, card
games, sports rewards, etc.

Deductions under Income Tax Act, 1961

Deductions under the Income Tax Act allow taxpayers to reduce their taxable
income, thereby lowering their overall tax liability. These deductions are offered for
various expenses, investments, and contributions made during the financial year.
Here are some common types of deductions available under most income tax
systems:

1. Standard Deduction: A fixed deduction allowed to salaried individuals and

pensioners, irrespective of their actual expenses. It is aimed at providing relief
from taxes on employment income. Currently, the standard deduction offered
under Section 16 of the Income Tax Act is a flat deduction of Rs. 50,000 on
the taxable income of salaried employees and pensioners irrespective of their
earnings.
2. Investments in Retirement Plans: Contributions made to retirement savings
schemes such as Employee Provident Fund (EPF), Public Provident Fund
(PPF), National Pension System (NPS), or contributions to pension plans
offered by insurance companies are often eligible for deductions.
3. Life Insurance Premiums: Premiums paid towards life insurance policies for
self, spouse, or children are eligible for deductions under specified limits.
 4. Health Insurance Premiums: Premiums paid for health insurance policies,
including those for self, spouse, dependent children, or parents, are eligible
for deductions under specified limits.
5. Education Loan Interest: Interest paid on loans taken for higher education for
self, spouse, children, or a student for whom the taxpayer is a legal guardian,
is eligible for deduction.
6. Home Loan Interest and Principal Repayment: Interest paid on housing loans
for the purchase or construction of a residential property and the principal
repayment amount is eligible for deductions under specified conditions.
7. Donations to Charitable Institutions: Donations made to eligible charitable
institutions or funds specified under the Income Tax Act are eligible for
deduction under specified limits.
8. Medical Expenses for Specified Ailments: Expenses incurred for medical
treatment of specified diseases for self, spouse, children, or dependent parents
are eligible for deductions under specified limits.
9. Deductions for Persons with Disabilities: Deductions are available for
expenses incurred for the maintenance of a dependent person with a
disability.
10. Interest on Savings Account: Interest earned on savings account deposits with
banks, cooperative societies, or post offices is eligible for deduction up to a
certain limit.

These deductions help taxpayers reduce their taxable income, thereby lowering their
tax liability. It's essential to understand the specific rules and limits associated with
each deduction to ensure compliance with tax laws and optimize tax-saving
opportunities. Additionally, tax laws may vary across jurisdictions, so it's advisable to
consult with a tax professional or refer to the relevant tax authorities for accurate
information.

Sections Eligible Investments Maximum Deduction

for Tax Deductions
Investment made in
Equity Linked Saving
80C Schemes, PPF/SPF/RPF,
payments made towards Rs 1,50,000
Life Insurance Premiums,
principal sum of a home
loan, SSY, NSC, SCSS, etc.
Payment made towards
80CCC Rs 1, 50, 000
pension funds.
Payments made towards Employed: 10% of basic
Atal Pension Yojana or salary + DA
80CCD(1) other Pension schemes
notified by government. Self-employed: 20% of
gross total income
Total Deduction under
80CCE Rs 1, 50, 000
Section 80C, 80CCC,
 80CCD(1)
Investments in NPS
80CCD( 1B) (outside Rs 1,50,000 limit Rs 50, 000
under Section 80CCE)
Central government
Employer’s contribution employer: 14% of basic
towards NPS (outside Rs salary +DA
80CCD( 2)
1,50,000 limit under
Section 80CCE) Others: 10% of basic salary
+DA

Income Tax Authorities: Powers and Functions

Income tax authorities, in most countries, have significant power and functions
related to the administration and enforcement of income tax laws. These powers and
functions typically include:

1. Assessment of Income: Income tax authorities have the power to assess the
income of individuals, businesses, and other entities to determine their tax
liability. This involves reviewing tax returns, financial statements, and other
relevant documents to ensure compliance with tax laws.
2. Tax Collection: They are responsible for collecting taxes owed by individuals
and entities based on their assessed income. This can involve issuing tax bills,
collecting payments, and enforcing penalties for non-payment or late
payment.

3. Tax Audits: Income tax authorities have the authority to conduct audits of
taxpayers to verify the accuracy and completeness of their tax returns. Audits
may be random or targeted based on specific criteria, such as high-risk
taxpayers or industries.

4. Enforcement of Tax Laws: Income tax authorities enforce tax laws by

investigating suspected tax evasion, fraud, or other violations. This can
involve conducting investigations, gathering evidence, and taking legal action
against non-compliant taxpayers.

5. Issuing Notices and Summonses: They have the power to issue notices and
summonses to taxpayers, requiring them to provide information, documents,
or testimony relevant to their tax liability.

6. Tax Refunds and Rebates: Income tax authorities are responsible for
processing and issuing tax refunds or rebates to taxpayers who have overpaid
taxes or are eligible for certain tax credits.
 7. Taxpayer Assistance and Education: Income tax authorities often provide
assistance and guidance to taxpayers regarding their tax obligations, rights,
and available deductions or credits. This can include offering resources,
workshops, and helplines to help taxpayers understand and comply with tax
laws.

8. Appeals and Dispute Resolution: They handle appeals and disputes related to
tax assessments, refunds, penalties, and other matters. Taxpayers who
disagree with an assessment or decision of the income tax authorities have the
right to appeal through established procedures.

9. Exchange of Information: Income tax authorities may collaborate with other

government agencies, as well as tax authorities in other countries, to exchange
information relevant to tax enforcement and compliance.

10. Policy Development and Legislation: In some cases, income tax authorities
may be involved in the development of tax policy and legislation, providing
input and expertise to lawmakers and government officials. Overall, income
tax authorities play a crucial role in ensuring the integrity of the tax system,
promoting compliance with tax laws, and collecting revenue to fund
government activities and services.

Filing of Returns and Procedure for Assessment

Under the Income Tax Act in India, filing of returns and the procedure for
assessment are integral parts of the taxation process.

- Filing of Returns: Individuals, Hindu Undivided Families (HUFs), companies,

firms, and other entities whose income exceeds the specified threshold are
required to file income tax returns.
- Types of Returns: Different types of forms are prescribed for filing returns
depending on the nature of income, residential status, and other criteria.
These include ITR-1, ITR-2, ITR-3, ITR-4, etc.
- Due Dates: The due date for filing income tax returns varies depending on the
type of taxpayer and whether the taxpayer is required to undergo tax audit.
Generally, the due date for individuals and other non-auditable entities is July
31st of the assessment year.
- Modes of Filing: Returns can be filed electronically through the Income Tax
Department's e-filing portal or physically by submitting a paper return.
- Documents Required: Taxpayers need to have various documents such as
PAN card, Aadhaar card, Form 16 (for salaried individuals), bank statements,
investment proofs, etc., while filing their returns.
- Claiming Deductions and Exemptions: Taxpayers can claim deductions under
various sections of the Income Tax Act such as Section 80C, 80D, 80G, etc.,
 and exemptions for income such as agricultural income, capital gains
exemptions, etc.
- Verification: After filing the return, it needs to be verified either electronically
using Aadhaar OTP, EVC (Electronic Verification Code), or physically by
sending a signed copy of ITR-V to the Centralized Processing Centre (CPC),
Bengaluru.

Procedure for Assessment –

- Selection for Assessment: Returns filed by taxpayers are subject to scrutiny or

assessment by the Income Tax Department. Returns may be selected for
scrutiny either randomly or based on specific criteria such as high-value
transactions, discrepancies in information, etc.
- Notice for Assessment: If a return is selected for scrutiny, the taxpayer
receives a notice from the Income Tax Department informing them about the
assessment proceedings and requesting additional information or documents.
- Submission of Documents: Taxpayers are required to submit the requested
documents and information to the Income Tax Department within the
specified time period.
- Assessment by Assessing Officer: The Assessing Officer examines the
taxpayer's return, along with the supporting documents, and may conduct
inquiries or seek clarifications from the taxpayer if necessary.
- Draft Assessment Order: Based on the examination of the return and other
relevant information, the Assessing Officer prepares a draft assessment order
determining the taxpayer's income and tax liability.
- Opportunity for Hearing: Before finalizing the assessment, the taxpayer is
given an opportunity to present their case before the Assessing Officer and
provide any additional explanations or evidence.
- Final Assessment Order: After considering the taxpayer's submissions, the
Assessing Officer issues the final assessment order determining the taxpayer's
income, tax liability, and any applicable interest or penalties.
- Appeal: If the taxpayer disagrees with the assessment order, they have the
right to file an appeal before the Commissioner of Income Tax (Appeals) or
the Income Tax Appellate Tribunal (ITAT), depending on the amount of tax
involved.

Understanding the process of filing returns and assessment under the Income
Tax Act is crucial for taxpayers to ensure compliance with tax laws and fulfill their
tax obligations.

Offences and Penal Sanctions

The Income Tax Act in India prescribes various offenses and penal sanctions to
ensure compliance with tax laws. These offenses range from non-compliance with
filing requirements to tax evasion and fraud. Here are some common offenses and
the corresponding penal sanctions:
Failure to Furnish Return of Income (Section 276CC):

- Offense: If a person required to furnish a return of income under Section

139(1) fails to do so within the prescribed time.
- Penalty: A penalty ranging from Rs. 5,000 to Rs. 10,000 may be levied.

Failure to Comply with Notice under Section 142(1) or 143(2):

- Offense: Failure to comply with a notice issued by the Assessing Officer under
Section 142(1) or Section 143(2) requiring the taxpayer to furnish information
or documents.
- Penalty: A penalty of Rs. 10,000 may be levied.

Concealment of Income (Section 271(1)(c)):

- Offense: Concealment of particulars of income or furnishing inaccurate

particulars of income to evade tax.
- Penalty: A penalty ranging from 100% to 300% of the tax sought to be evaded
may be imposed.

Failure to Maintain or Retain Books of Accounts (Section 271A):

- Offense: Failure to maintain or retain books of accounts and documents as

required under Section 44AA or Section 44AB.
- Penalty: A penalty of Rs. 25,000 may be levied.

Failure to Get Accounts Audited (Section 271B):

- Offense: Failure to get accounts audited as required under Section 44AB.

- Penalty: A penalty of 0.5% of the total sales, turnover, or gross receipts,
subject to a maximum of Rs. 1, 50,000 may be imposed.

Failure to Deduct or Pay Tax Deducted at Source (TDS) (Section 276B):

- Offense: Failure to deduct tax at source (TDS) or failure to pay the deducted
tax to the credit of the Central Government.
- Penalty: Imprisonment for a term which may extend to seven years, along
with a fine.

Failure to Collect or Pay Tax Collected at Source (TCS) (Section 276BB):

- Offense: Failure to collect tax at source (TCS) or failure to pay the collected tax
to the credit of the Central Government.
- Penalty: Imprisonment for a term which may extend to seven years, along
with a fine.

Abetment of False Return (Section 277):

- Offense: Abetting or inducing another person to deliver a false account or

statement or to make an untrue statement.
 - Penalty: Imprisonment for a term which may extend to three years, along with
a fine.

These are some of the common offenses and penal sanctions prescribed under the
Income Tax Act in India. It's essential for taxpayers to comply with the provisions of
the Act to avoid penalties, fines, and legal consequences.

Clubbing of Income

In India, we have a progressive system of taxation, which means as your income

increases, you have to pay more taxes as per the applicable income tax slab. In order
to avoid paying high taxes, many people transfer their assets or arrange sources of
income in the name of their wives, children, parents, and relatives to bring down
their income. In order to curb such tax avoidance practices, the income tax
introduced a “clubbing of income” provision under section 60 to section 64 of the
income tax act.

When the income of another person is included in your income and taxed in your
hands, then such a situation is called Clubbing of Income. The income clubbed in
your income is called deemed income. The provisions of clubbing of income are
applicable only to individuals and no other type of assessee like firm/HUF/Company,
etc.

For example, if you have a total income of Rs 3, 00,000. It comprises a salary income
worth Rs 2, 00,000 & rental income of Rs 1, 00,000. With an aim to fall below the
basic exemption limit, you transfer rental income without transferring the house
ownership in your wife’s name. Now, while calculating tax, your taxable income shall
be taken at Rs 3, 00,000, not Rs 2, 00,000. This is because of the income tax
provisions on Clubbing of Income.

Provisions of Clubbing of Income: There are different scenarios under which the
provision of Clubbing of Income applies.

 Transfer of Income without Transfer of Asset [Section 60]

When a person transfers the income without transferring the ownership of the
asset from which such income is earned, then, such income will be taxable in the
hands of the transferor. The most popular example that we see is the rental
income when the owner of the property asks his tenant to make the rental
payments in his/her parent’s/wife’s or children's name.

Example: Ashish owns a house in Jaipur and is earning a rental income of Rs

20,000 p.m. on this. But, in order to save tax, he asked his tenant to make rental
payments in his wife's bank account. In this case, though the income is received
in the wife's account, it will be taxed to Ashish as he transferred the income
source without transferring the legal ownership of the house.
 People often make this mistake while planning their taxes. So, remember to
transfer the legal ownership of the asset before transferring the income next time.
Our Tax Advisory Service can help you avoid such mistakes and do full proof tax
planning.

 Revocable Transfer of Asset [Section 61]

When a person transfers an asset to another person, keeping a clause in the

transaction empowers the transferor to take back the ownership anytime in the
future. Such a situation is called Revocable Transfer. As per provisions of
Clubbing of Income, when a “revocable transfer” of an asset is made, then any
income from that asset shall be taxable in the hands of the transferor.
[Transferor: a person who transfers the asset. Transferee: a person who receives
the asset.]

For instance, Karan transferred his house property to Arjun. There is a condition
in the agreement that the asset will transfer back to Karan after 2 years. Now, as
per clubbing of income, any income arising to Arjun from such house during 2
years will be included in Karan’s income only.

Till now, we have understood the basic provisions in Clubbing of Income. Let us
dive in further and discuss Clubbing of Income in the case of the spouse, son’s
wife, minor child, and HUF.

 Clubbing of Income of Spouse [Section 64(1) (ii), 64(1)(iv), 64(1)(vii)]

In common parlance, the easiest way to save tax is practiced by transferring
income in the name of your spouse. There are very special provisions to regulate
such transfers. All the different scenarios are discussed below –

- Your spouse works in a concern/entity in which you have a substantial

interest. There are two aspects of this situation, discussed below:

Provision of Clubbing of Income will

not apply. In other words, that
remuneration will be taxable in the
hands of your spouse only. For e.g.,
Your spouse is employed because of You are a partner in a firm and
his/her professional/ technical entitled to a 40% share in the profits
qualifications. of the firm. Your wife is employed in
the same firm as a general manager
and getting Rs 20,000 p.m. due to her
professional capacity, so such income
shall not be clubbed in your hand.
Any remuneration received by your
No such professional/ technical
spouse from such concern/ entity
qualification.
shall be clubbed and taxable in your
 hands only.

- When you and your spouse receive remuneration from a concern, and both
have substantial interest in that concern:

In such case, remuneration of both will be clubbed in the hands of that spouse
whose income excluding such remuneration is higher. However, as per the
common view, if both spouses are earning remuneration due to their
professional competence, then provisions of clubbing shall not apply. Note:
Substantial interest means when you are entitled to 20% or more share of
profits (in case of a firm) or not less than 20% voting power (in case of a
company) at any time during the year.

- If you have transferred any asset to your wife without adequate consideration:

It is a very common practice where a husband transfers an income-earning

asset in his wife’s name to save tax. These provisions have been introduced to
target such tax avoidance practices. In this case, income from such assets shall
be taxable in your hands. This provision of clubbing of income will not apply
in case where,
a) the asset is transferred for adequate consideration or,
b) as a condition of divorce or,
c) it was transferred before marriage.

- The nature of the transferred gift is changed by the transferee:

Sometimes, it is seen that a gift transferred that was not taxable previously is
further invested in a source such that it starts yielding income. In all such
instances where the transferee spouse changes the nature of the asset,
provisions of section 64(1) (iv) are attracted, and income clubbing occurs.

Example: Mr. Sharma gifted his wife Rs 5, 00,000. The wife invests this
amount in an FD and starts earning interest on the same. Will this interest
income be taxable in Mr Sharma's hands? Since a gift of Rs 5, 00,000 has
been made to a relative, it will not be taxable. But the interest earned on FD
will be taxable in the hands of Mr. Sharma as per the provisions of section
64(1)(iv). The clubbing provisions will be attracted as the form of the asset
transferred has been changed by the transferee, i.e., Mrs. Sharma.

- Any transfer of asset made to a third person or AOP(Association of Persons):

Such transfer must have been done without consideration or with inadequate
consideration to ultimately benefit your spouse now or at some later time.
 Such routing of assets to defer the benefit from assets to your spouse will also
be covered under the ambit of clubbing provisions

 Clubbing of Income in case of Son’s Wife [Section 64(1)(vi),64(1)(viii)]

Clubbing of income provisions also applies in case of any transfer of income made
to your daughter-in-law. The situation is discussed below.

The asset has been transferred to your daughter-in-law without any proper
consideration. In this case, any income generated from that asset will become
taxable in your hands. For e.g., you have 10,000 10% Debentures of Rs 100 each,
which you have transferred to your daughter-in-law without any consideration.
Now, interest income of Rs 1, 00,000 will be included and taxable in your hands.

The asset has been transferred to some other person or AOP to ultimately defer
its benefits to your daughter-in-law: In such a case, when these transactions are
carried out without any proper consideration just to route the income tax liability
to other hands, it is closely monitored by the Income Tax Department and is
added back to your income as per the clubbing of income provisions.

 Clubbing of Income of Minor Child [Less than 18 years] [Section 64(1A)]

Any income earned by a minor child is clubbed in the hands of either of his/her
parents, whose income (excluding minor child income) is greater. For example, in
a fixed deposit taken in the name of a minor child, the interest earned Will be
clubbed with the income of the highest-earning parent. However, as per Income
Tax provisions, there are certain situations in which the clubbing of income
provisions will not apply. These are –
1. When a minor child is suffering from any disability, as mentioned in Sec
80U, or
2. When income is earned by a minor child through manual work, or
3. Income earned by the minor child through his skill, talent, knowledge, etc.
For e.g., a minor child wins money on TV shows like Indian Idol Junior
winner, Voice India Kids, etc.

Moreover, an exemption of Rs 1500 is provided u/s 10 (32) on income earned

by each minor child to the parent under which the minor’s income is being
clubbed.

 Clubbing of Income of Major Child

There are many people who ask what about the income earned by his/her major
child? There is no need for a special provision in such a case. A major child is
governed by the principles applicable to an individual up to 60 years of age. So, if
your major child earns income above Rs 2, 50,000 (before any deduction), he is
liable to file his income tax return. No clubbing of income provisions shall apply.

A situation might arise where the child was a minor but attained the status of
major in the same financial year. In such a case, income would be clubbed until
such a child was minor and not for the remaining part of the year
MODULE - III - GST

Introduction:-
- The idea of a nationwide GST in India was first proposed by the Kelkar Task
Force on Indirect taxes in 2000. The objective was to replace the prevailing
complex and fragmented tax structure with a unified system that would
simplify compliance, reduce tax cascading, and promote economic integration.
The Empowered Committee of State Finance Ministers prepared a design and
roadmap, releasing the First Discussion Paper in 2009. The Constitution
Amendment Bill was introduced in 2011 but faced challenges regarding
compensation to States and other issues. After years of deliberation and
negotiations between the Central and State Governments, the Constitution
(122nd Amendment) Bill, 2014, was introduced in the Parliament. The Bill
aimed to amend the Constitution to enable the implementation of GST. The
Constitution Amendment Bill was passed by the Lok Sabha in May, 2015. The
Bill with certain amendments was finally passed in the Rajya Sabha and
thereafter by the Lok Sabha in August, 2016. Further, the Bill has been ratified
by the required number of States and has since received the assent of the
President on 8th September, 2016 and has been enacted as the 101st
Constitution Amendment Act, 2016. The GST Council was notified w.e.f. 12th
September, 2016. For assisting the GST Council, the office of the GST Council
Secretariat was also established. The GST Council, consisting of the Union
Finance Minister and representatives from all States and Union Territories,
was established to make decisions on various aspects of GST, including tax
rates, exemptions, and administrative procedures. It played a crucial role in
shaping the GST framework in India. On July 1, 2017, GST laws were
implemented, replacing a complex web of Central and State taxes. Under the
Indian GST, goods and services are categorized into different tax slabs,
including 5%, 12%, 18%, and 28%. Some essential commodities are exempted
from GST, Gold and job work for diamond attract low rate of taxation.
Compensation cess is being levied on demerit goods and ceratin luxury items .
To prepare for the implementation of GST, extensive efforts were made to
build the necessary technological infrastructure and train tax officials and
businesses. GST Network (GSTN), a not-for-profit company, was created to
provide the IT backbone for the GST system, including taxpayer registration,
return filing, and tax payments. Since its implementation, the Indian GST has
undergone various amendments and refinements based on feedback from
businesses and the evolving economic scenario. While the GST
implementation initially posed challenges for businesses in terms of
understanding the new compliance requirements and adapting to the changes,
it has gradually settled into the Indian tax landscape. It can be said that the
history of GST in India showcases a monumental shift in the country's tax
 structure, aiming to create a more unified, efficient, and transparent indirect
tax regime for the benefit of businesses and the economy as a whole.

Advantages and Disadvantages:- (Impacts of GST)

1) Advantages:
1. Simplified Tax Structure: GST has replaced multiple indirect taxes with a
single tax, simplifying the tax structure.

2. Higher Tax Compliance Levels: GST has introduced a single cumulative tax
return that the taxpayer needs to file, elevating tax compliance and reducing
tax evasion.

3. Greater Revenue Collection: More people are filing tax returns, complying
with the GST requirements, and avoiding evasion of taxes, resulting in
increased tax revenue for various central and state government agencies.

4. Increasingly Efficient Logistics: GST has moved goods and services across
states easier, reduced the overheads incurred by companies, and improved
overall logistics and operations.

5. Increased Transparency: GST is a transparent tax system that provides a clear

and comprehensive view of the taxes paid and collected, reducing corruption
within the tax administration and related agencies.

6. Easy Accessibility: GST returns can be filed anytime and from anywhere using
a web-enabled device like a smartphone, tablet, or PC, encouraging higher
compliance.

7. Convenience for Small Businesses: GST has simplified the tax structure for
small businesses, reducing the burden of adhering to multiple compliances
and simplifying the protocols for micro, small, and medium enterprises
(MSMEs).

8. Encouragement for Foreign Investments: The elimination of disparate taxes

and increased transparency has made India a highly-attractive investment
avenue for foreign investors, with the export of Indian commodities surging
while foreign companies are flocking to set up operations here.

9. Digitisation: GST has encouraged the digitisation of businesses, increasing

efficiency in operations and heightened transparency in reporting.
 10. Boost to the Economy: More taxes collected and a more efficient inter-state
supply chain have benefited the entire economy, especially the less-developed
states that can now benefit from the additional GST amount that can be
distributed across the country.

2) Disadvantages:
1. Increased Costs: To comply with the GST-suggested accounting practices,
businesses need to upgrade their software. The specialised GST-compliant
software comes with additional costs of purchasing, installation, training, and
maintenance. All of this has increased the overall operational expenses of
businesses.

2. Higher Tax Liability of SMEs: Before GST, small and medium enterprises
(SMEs) with a turnover in excess of ₹1.5 Cr were liable to pay excise duty.
However, under GST, any business with a turnover of more than ₹20 L has to
pay taxes. Although, for businesses with an annual turnover of less than ₹1 Cr,
a composition scheme exists that allows them to reduce their burden, its
caveats and conditions require an in-depth cost-benefit analysis.

3. Penalties and Fines: Most SMEs usually lack the resources and infrastructure
to comply with the new tax system. Then, there is the complication of grasping
the GST-related nuances. If not fully on board with the new process,
companies can face fines and penalties adding to their operational costs.

4. Impact on Unorganised Sector: While the unorganised sector such as

construction and textile has come under the ambit of GST, the businesses
operating within it are still struggling to become GST-compliant in their
infrastructure.

5. Other Teething Issues: GST was hurriedly implemented in 2017. Since the
financial year was already underway, many companies found it challenging to
comprehend the new requirements and adopt the system. However, this has
become more congenial in the last six years.

Salient Features:-
Goods and Services Tax (GST) is a comprehensive indirect tax levied on the supply of
goods and services in India. Here are some of the salient features of GST:

a. One Nation, One Tax: GST replaced multiple indirect taxes levied by the Central
and State governments, such as excise duty, service tax, value-added tax (VAT), and
others. It brought uniformity in the tax structure across India, eliminating the
cascading effect of taxes.
 b. Dual Structure: GST operates under a dual structure, comprising the Central GST
(CGST) levied by the Central Government and the State GST (SGST) levied by the
State Governments. In the case of Inter-state transactions, Integrated GST (IGST) is
applicable, which is collected by the Central Government and apportioned to the
respective State. Import of goods or services would be treated as inter-state supplies
and would be subject to IGST in addition to the applicable customs duties.

c. Destination-based Tax: GST is a destination-based tax, levied at each stage of the

supply chain, from the manufacturer to the consumer. It is applied to the value
addition at each stage, allowing for the seamless flow of credits and reducing the tax
burden on the end consumer.

d. Input Tax Credit (ITC): GST allows for the utilization of input tax credit, wherein
businesses can claim credit for the tax paid on inputs used in the production or
provision of goods and services. This helps avoid double taxation and reduces the
overall tax liability.

e. GST would apply on all goods and services except Alcohol for human
consumption. GST on five specified petroleum products (Crude, Petrol, Diesel, ATF
& Natural Gas) would by applicable from a date to be recommended by the GSTC.
Tobacco and tobacco products would be subject to GST. In addition, the Centre
would have the power to levy Central Excise duty on these products. Exports are
zero-rated supplies. Thus, goods or services that are exported would not suffer input
taxes or taxes on finished products.

f. Threshold Exemption: Small businesses with a turnover below a specified

threshold (currently, the threshold is 20 lakhs for supplier of services/both goods &
services and 40 lakhs for supplier of goods (Intra–Sate) in India) are exempt from
GST. For some special category states, the threshold varies between 10-20 lakhs for
suppliers of goods and/or services except for Jammu & Kashmir, Himachal Pradesh
and Assam where the threshold is 20 lakhs for supplier of services/both goods &
services and 40 lakhs for supplier of goods (Intra–Sate). This threshold helps in
reducing the compliance burden on small-scale businesses.

g. Composition Scheme: The composition scheme is available for small taxpayers

with a turnover below a prescribed limit (currently 1.5 crores and 75 lakhs for special
category state). Under this scheme, businesses are required to pay a fixed percentage
of their turnover as GST and have simplified compliance requirements.

h. Online Compliance: GST introduced an online portal, the Goods and Services Tax
Network (GSTN), for registration, filing of returns, payment of taxes, and other
compliance-related activities. It streamlined the process and made it easier for
taxpayers to fulfil their obligations.

i. Anti-Profiteering Measures: To ensure that the benefits of GST are passed on to

the consumers, the government established the National Anti-Profiteering Authority
(NAA). The NAA monitored and ensured that businesses do not engage in unfair
pricing practices and profiteering due to the implementation of GST. All GST anti-
profiteering complaints are now dealt by the Competition Commission of India (CCI)
from December 1, 2022.

j. Increased Compliance and Transparency: GST aims to enhance tax compliance by

bringing more businesses into the formal economy. The transparent nature of the tax
system, with the digitization of processes and electronic records, helps in curbing tax
evasion and increasing transparency.

k. Sector-specific Exemptions: Certain sectors, such as healthcare, education, and

basic necessities like food grains, are given either exempted from GST or have
reduced tax rates to ensure affordability and accessibility.

l. Accounts would be settled periodically between the Centre and the States to ensure
that the credit of SGST used for payment of IGST is transferred by the Exporting
State to the Centre. Similarly, IGST used for payment of SGST would be transferred
by the Centre to the Importing State. Further, the SGST portion of IGST collected on
B2C supplies would also be transferred by the Centre to the Destination State. The
transfer of funds would be carried out on the basis of information contained in the
returns filed by the taxpayers.

NOTE: - It's important to note that the GST framework is subject to changes and
amendments are passed based on the evolving needs of the economy and the
Government's policy decisions.

Components:-
There are three taxes applicable under this system: CGST, SGST & IGST.

1. CGST: It is the tax collected by the Central Government on an intra-state sale

(e.g., a transaction happening within Maharashtra)
2. SGST: It is the tax collected by the state government on an intra-state sale
(e.g., a transaction happening within Maharashtra)
3. IGST: It is a tax collected by the Central Government for an inter-state sale
(e.g., Maharashtra to Tamil Nadu)