THE BHOPAL SCHOOL OF SOCIAL SCIENCES

INTRODUCTION OF INCOME TAX

INTRODUCTION OF INCOME TAX ACT 1961

The name „Income Tax‟ is comprised of two words – Income and Tax. Income tax is a direct
tax which is imposed upon the income of an individual person. In India the Income-tax Act,
1961 came into force on 1st April, 1962. The Income Tax Act is an inclusive statute which
focuses on the different rules and regulations that govern taxation in the country. This act
provides provisions for - levying, administering, collecting and recovering income tax for the
Indian government. The act basically aims to consolidate and amend the rules related to
taxation in the country. It consists of 298 sections and 14 schedules. This act extends to the
whole of India.
The various heads for which an individual need to pay income tax include – Salary, Income
from house property, Capital gains, Profit and gains from business or profession, Income
from other sources. The income tax is computed on accrued or received net taxable income
by a person during the previous year according to the prescribed rates of income-tax in
current assessment year.
Under the Constitution of India Central Government is empowered to levy tax on the income.
Accordingly, the Central Government has enacted the Income Tax Act, 1961. The Act is
supported by Income Tax Rules, 1961 and several other subordinate and 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.
Income tax is a tax on the total income of a person called the assessee of the previous year
relevant to the assessment year at the rates prescribed in the relevant Finance Act. Thus, 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.

IMPORTANT POINTS RELATED TO INCOME TAX

 Income Tax is a tax on yearly taxable income of a person levied by the Central
Government at prescribed rates.
 Income tax is a very important direct tax.
 It is an important and most significant source of revenue of the government.
 The government needs money to maintain law and order in the country; safeguard of
the country from foreign powers and promote the welfare of the people.
 Every person, whose taxable income for the previous financial year exceeds the
minimum taxable limit is liable to pay income tax during the current financial year on
the income of the previous financial year at the rates in force during the current
financial year.

SALIENT FEATURES OF INCOME TAX

❖Central Tax
❖ Direct Tax
❖ Tax on taxable income
*Edited & Compiled for Students by:
DR. NEETU JAIN
Assistant Professor
Department of Commerce
The Bhopal School of Social Sciences
 THE BHOPAL SCHOOL OF SOCIAL SCIENCES
INTRODUCTION OF INCOME TAX

❖ Tax exemption limit

❖ Progressive rate of tax
❖ Surcharge
❖ Health and Education Cess
❖ Scope of taxation
❖ Burdon on rich class of persons
❖ Administration of Income Tax
❖ Distribution of Income Tax

IMPORTANT DEFINITIONS AND TERMS AS PER INCOME TAX ACT, 1961

ASSESSEE – SECTION 2(7)

Under Section 2(7) “Assessee” means a person by whom income tax or any other sum of
money is payable under the Act and it includes:
a. every person in respect of whom any proceeding under the Act has been taken for the
assessment of his income or loss or the amount of refund due to him
b. a person who is assessable in respect of income or loss of another person or who is deemed
to be an assessee, or
c. an assessee in default under any provision of the Act
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 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.

ASSESSMENT - SECTION 2(8)

An assessment is the procedure to determine the taxable income of an assessee and the tax
payable by him. Section 2(8) of the Income Tax Act, 1961 gives an inclusive definition of
assessment u/s 139 of the Act, every assessee is required to file a self declaration of his
income and tax payable by him called „Return of income‟.

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. For example, Assessment year 2020-21 means the period of one
year beginning on 1st April, 2020 and ending on 31st March, 2021. In an assessment year,
income of the assessee during the previous year is taxed at the rates prescribed by the relevant
Finance Act. It is therefore, also called as the “Tax Year”.
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INTRODUCTION OF INCOME TAX

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” .
A person may earn income from more than one sources but previous year will always be
common for all the sources of income. This will be so even if a person maintains records or
books of accounts separately for different sources of income.
Total income of a person from all the sources of income will be taken together and
considered in the previous year or the financial year immediately preceding the assessment
year.

PERSON –SECTION 2(31)

The term “person” includes:
a. an individual;
b. a Hindu undivided family (HUF);
c. a company;
d. a firm;
e. an Association of Persons(AoP) or a Body of Individuals,(BoI) whether incorporated or
not;
f. a local authority; and every artificial juridical person not falling within any of the preceding
categories.

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
abovementioned seven categories, may still fall within the four corners of the term “person”
and accordingly may be liable to tax.

INCOME- SECTION 2(24)

Although, income tax is a tax on income, the Act does not provide any exhaustive definition
of the term „Income‟. Instead, the term „income‟ has been defined in its widest sense by
giving an inclusive definition. It includes not only the income in its natural and general sense
but also incomes specified in section 2 (24).
Broadly the term „Income‟ includes the following:
i. profits and gains ;
ii. dividend;
iii. voluntary contributions received by certain institutions
iv. Receipts by employees the value of any benefit or perquisite, whether convertible into
money or not.
vi. Incomes from business
vii. any capital gains chargeable under section 45;
viii. any sum earlier allowed as deduction and chargeable to income-tax under Section
59.
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INTRODUCTION OF INCOME TAX

ix. any winnings from lotteries, crossword puzzles, races including horse races, card games
and other games of any sort or from gambling or betting of any form or nature whatsoever ;
x. any contribution received from employees towards any provident fund or superannuation
fund or Employees State Insurance Act, 1948 , or any other fund for the welfare of such
employees ;
xi. any sum received under a Keyman insurance policy including the sum allocated by way of
bonus on such policy.
xii. any sum of money or value of property received as gift –S 56(2) and Shares of closely
held companies transferred to another company or firm are covered in the definition of gift
except in the case of transfer of such shares for reorganization of business by amalgamation
or demerger etc.

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 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. • Income-tax is an annual tax on income
• Income of previous year is chargeable to tax in the next following assessment year at the tax
rates applicable for the assessment year.
• Tax rates are fixed by the annual Finance Act and not by the Income-tax Act. For

GROSS TOTAL INCOME (GTI) [SEC. 80B (5)]

The sum total of all above five heads of the income is known as GTI.

SCHEME OF CHARGING INCOME TAX

Income tax is a tax on the total income of an assessee for a particular assessment year. This
implies that;

•Income-tax is an annual tax on income

• Income of previous year is chargeable to tax in the next following assessment year at the tax
rates applicable for the assessment year.
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INTRODUCTION OF INCOME TAX

• Tax rates are fixed by the annual Finance Act and not by the Income-tax Act. For instance,
the Finance Act, 2020 fixes tax rates for the assessment year 2021-22

• Tax is charged on every person if the gross total income exceeds the minimum income
chargeable to tax.

BRIEF HISTORY OF INCOME TAX IN INDIA

The history of income tax in India is more than 150 years old. Land revenue and customs
were the only two main sources of income of the state in olden days. But later on, the British
Government and industrial revolution brought about changes in the structure of tax and state
revenue. The history of income tax in India can be better known from the following
description
1. Beginning of Income Tax- Income tax was first of all introduced by Sir James Wilson in
1860 in India. This tax was levied with a view to meeting financial crisis caused by the
Freedom Movement of 1857. The British Government had to suffer heavy losses due to the
1857 revolution. Income tax was imposed by way of punishment to meet the losses.
2. Income Tax Act, 1886- The Income Tax Act. 1860 was based on the British Income Tax
Act. A number of amendments were made in this Act in 1863. 1867. 1871. 1873 and 1878.
The Income Tax Act 1886 was passed to give it a permanent shape. Agricultural income was
exempted from taxation. Leaving income from agriculture all other types of income was
taxable. This Act remained valid up to 1917. This Act can be treated as foundation stone of
income tax in India.
3. Income Tax Act, 1918- A new Income Tax Act 1918 was passed as income tax was an
important source of revenue to meet financial crisis caused after the World War-I. Income tax
was given a final shape and the rates of taxation were
raised.
4. Income Tax Act, 1922- The Government of India Act, was passed in 1919 due to which
income tax was included in the schedule of income of the centre. The Government of India
appointed an All India Survey Committee in 1921 with a view to making changes in the tax
structure. The Income Tax Act, 1922 was passed which was based on the committee's
recommendations. According to this Act, tax was assessed for the current year on the income
of the previous year. A Central Board of Revenue was set up according to the provisions of
this Act.
5. Income Tax Amendment Act, 1939- Although the Income Tax Act, 1922 remained in
existence upto 1961-62, amendments were made from time to time. The most important
amendment was made in 1939 according to which the slab system was introduced in place of
classification:
6. Income Tax Act, 1961- The Income Tax Act, 1961 is in force at present. After
Independence. The Government of India appointed several commissions and committees
from time to time with a view to removing the complexities of the Act. A new Income Tax
Act was enacted based on the reports and recommendations of the two commissions. This
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INTRODUCTION OF INCOME TAX

Act is known as the Income Tax Act, 1961. Necessary amendments have been made in this
Act during the last 58 years.

REFERENCES:

❖ Shripal Saklecha and CA Anit Saklecha. (2023-24). Income Tax Law & Practice. Indore,
India: Satish Printers and Publishers.
❖ Dr. H.C.Mehrotra and Dr. S.P.Goyal. (2023-24). Income Tax Law & Practice. Agra, India:
Sahitya Bhawan Publications.
❖ V. P. Gaur and D. B. Narang. (2023-24). Income Tax Law & Practice. New Delhi, India:
Kalyani Publishers
❖Taxation Study Material. (2023-24). India: ICSI

NOTE:Kindly use APA style for referencing.

THE BHOPAL SCHOOL OF SOCIAL SCIENCES
INTRODUCTION OF INCOME TAX