Chapter I : Introduction

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1.1 Basis of charge
1.2 Finance Bill and Finance Act
1.3 Definitions under IT Act
1.4 Structure of IT Authorities
1.5 Tax Payments (Advance Tax, TDS, TCS, etc.)
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Introduction :
The most important source of revenue of the Government is taxes. The act of levying taxes is
called taxation. A tax is compulsory charge or fees imposed by the Government on individuals or
corporations. The persons who are taxed have to pay the tax irrespective of any corresponding return from
the Goods and Services by the Government. The taxes may be imposed on income and wealth of persons or
corporations and the rate may vary.
What is Tax? :
Compulsory monetary contribution to the states revenue, assessed and imposed by a
Government on the activities, enjoyment, expenditure, income, occupation, privilege, property, etc of
individuals and organizations. Tax is imposition of financial charge or other levy upon a taxpayer by a
state or other the functional equivalent of the state.
1. Selingman : ‘Tax means a compulsorily collected donation from public which is used for the
benefit of all. Tax does not cater to individual needs’.
2. Taylor : ‘Tax means a compulsory donation by public without any direct benefit for such
donation’.
3. Dr. Dalton : ‘Tax is mandatory liability and it does not resemble any reciprocal or proportionate
benefit’.
Types of taxes :
There are two types of taxes in India – (a) Direct Taxes (b) Indirect Taxes
a) Direct Tax : A direct tax is really a tax which is paid by a person on whom it is legally imposed
and the burden of which cannot be shifted to any other person is called a direct tax. For
example - Income Tax, Wealth Tax, etc.
i) Dr. Dalton : ‘When tax is levied on one person and the same is paid by that person then it is said to
be direct tax’.
ii) Prof. Bullock : ‘Tax levied on production of goods is an indirect tax. Similarly tax levied on
income is direct tax’.
b) Indirect Tax : The taxes in which the burden is passed on to a third party are called Indirect
Taxes. For example - Service Tax, VAT, Excise duty, Custom duty, etc.
i) Dalton : The tax which is levied on one person but recovered, partly or fully from some other
person can be defined as indirect tax’.
ii) Prof. Bullock : ‘Tax levied on consumers and tax levied on expenditure could be defined as indirect
tax’.
iii) Prof. J.S.Gill : ‘When tax levied on one person could be transferred on some other person and
when the Government does not expect some specific person to pay such tax, then it is an indirect
tax’.

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 Difference between Direct Tax and Indirect Tax
Sr. Point of Direct Tax Indirect Tax
No. Distinction
1. Meaning Direct tax is a tax wherein the levy of In this the levy of tax is made on one
tax is made on a person and the person and the responsibility of paying
responsibility of paying such tax is the tax to the Government is fixed on
fixed on that person. some other person.
2. Levy Direct tax is levied on person. Indirect tax is levied on goods and
services.
3. Transfer The burden of direct tax cannot be The burden of indirect tax can be
of tax transferred to other person. transferred to the end users.
4. Nature Direct tax is considered progressive Indirect tax is considered as
tax. regressive tax.
5. Effect The purpose of direct tax is to Indirect tax increases the price of
redistribute the wealth of a nation. goods or services.
6. Examples Income Tax, Wealth Tax, Gift Tax. Excise Duty, Customs Duty, Sales Tax,
VAT, etc.
Income Tax :
Income tax is tax on income. Income tax is a central subject according to the Constitution of India.
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 the security
of the country from foreign powers and promote the welfare of the people. It is the foremost duty of the
government to bring out such welfare and development programmes which will bridge the gap between the
rich and the poor. For this purpose, mobilization of funds from various sources is required. These sources
may be direct or indirect. Income tax is one of the most important tools to achieve balanced socio-economic
growth.
Objectives of Income Tax :
The objectives of income tax may be –
1. To reduce inequalities in the distribution of income and wealth.
2. To bring out equity between classes of tax payers.
3. To accelerate the economic growth and development of country.
4. To make available of funds for economic development.
5. To encourage investment in new capital goods.
6. To channelize investment into those sectors which contribute the most economic growth.
Who is liable to pay income tax? :
Every person, whose taxable income for the previous financial year exceeds the minimum
taxable limit, is liable to pay income tax to the Central Government during the current financial
year on the income of the previous financial year at the rates in force during the current
financial year.
Features of Income Tax :
1. Income tax is charged on the income of previous year, at a rate which is prescribed by the
Finance Act for the relevant Assessment year.

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2. The Finance Act is passed every year by the parliament in the form of ‘Budget’.
3. Income tax is levied on a person in relation to his income of the previous year.
4. The tax payer’s liability is determined with reference to his residential status in the previous year
or accounting year.
5. Liability to income tax arises only where the total income in the accounting year exceeds the
maximum tax free amount prescribed by the Finance Act to that relevant year.
6. The rates of income tax are progressive and incidence of tax increases with the rise of income.
7. It is compulsory to deduct the tax at source and to pay it to the Government.
Brief History of Income Tax in India:
1. In India, Sir James Wilson, who became first British-India’s First Finance Minister,
introduced income tax for the first time in 1860 in order to meet the expenses and losses suffered by
the rulers on account of Military Mutiny (Freedom Movement) of 1857. It was introduced as a
temporary revenue measures only for five years.
2. The separate Income Tax Act was passed in the year 1886, which was remained in force up to 1917
with various amendments from time to time.
3. In 1918, a new Income Tax Act was passed.
4. The Income Tax Act 1918 was replaced by another new act which was passed in the year 1922. The
1922 Act was remained in force up to the Assessment year 1961-62 with numerous amendments.
5. The Income Tax Act 1922 had become very complicated on account of innumerable amendments.
The Government of India referred it to the Law Commission in 1956 with a view to simplify and for
the prevention of tax evasion. The law commission submitted its report in September 1958.
6. Meantime the Government of India had appointed the Direct Taxes Administration Enquiry
Committee to suggest measures to minimize inconveniencies to assesses and prevent evasion of Tax.
This Committee submitted its report in 1959.
7. Finally, the Income Tax Act has been brought into force with effect from 01st April, 1962. It applies
to the whole of India and Sikkim (including Jammu and Kashmir).
8. Income Tax Act 1961 contains 298 sections and XIV (14) schedules.
Short Title, Extent and Commencement (Sec 1) :
1.1 Short Title : This may be called the Income Tax Act, 1961,
1.2 Extent : It extends to whole of India. (It also means people of Jammu and Kashmir earning
income is required to pay income tax to Government of India).
1.3 Commencement : This act comes into force on 1st day of April, 1962.
Finance Bill :
‘Financial Bill’ means a bill ordinarily introduced every year to give effect to the financial proposals
of the Government of India for the next following financial year and includes a bill to give effect to
supplementary financial proposals for any period. A Financial Bill is a Money Bill as defined in Article
110 of the constitution.
The proposals of the government for levy of new taxes, modification of the existing tax structure or
continuance of the existing tax structure beyond the period approved by parliament are submitted to
Parliament through this bill. The finance bill can be introduced only in Lok Sabha. Rajya Sabha can
recommend amendments in the Bill. The bill has to be passed by the Parliament within 75 days of its
introduction.

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Procedure for passing of the Money Bills :
1. A money bill can be introduced or originated only in Lok Sabha.
2. A money bill can be introduced only on prior recommendations of the President.
3. Lok Sabha speaker will decide whether it is a money bill or not. His decision is final, no one is
challenging his decision.
4. A money bill can be a government bill only.
5. Once a money bill is passed in Lok Sabha, it is transmitted to Rajya Sabha for its consideration.
Rajya sabha can neither reject nor amend the money bill. It can make only recommendations and
has to return the bill with or without recommendation to Lok Sabha in 14 days.
6. The Lok Sabha may or may not accept the recommendations of Rajya Sabha. Thus returned
bill is considered passed in both houses. If Rajya Sabha does not even return the bill in 14 days, it is
considered passed in both houses.
7. The bill has to passed by the Parliament within 75 days of its introduction.
Important Definitions:
Under Sec. 2 and 3 of the Income Tax Act, 1961, definitions of important terms are given -
1) Gross Total Income (Sec. 14) :
Income of a person is computed 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.
The aggregate income under these heads is termed as ‘Gross Total Income’. In other words, gross
total income means total income derived from the above five sources before making any deduction
under section 80C to 80U.
2) Total Income:
Total income means the amount of income left after making the deductions under sections 80C to
80U from the gross total income. The amount so arrived is rounded off to the nearest multiple of ten
rupees.
Difference between Gross Total Income and Total Income
No. Gross Total Income Total Income
1. Aggregate of various heads of income After deduction U/s 80C to 80U, the balance is
is called Gross Total Income. called Total Income.
2. Gross Total Income is not rounded Total Income is rounded off to the nearest multiple
off. of ten rupees.
3. Tax is not levied on Gross Total Tax is levied on the Total Income at the prescribed
Income. rates.
4. Gross Total Income is not less than Total Income can be equal to Gross Total Income or
the Total Income. less than Gross Total Income.
5. Agricultural income is not included in If agricultural income excess Rs. 5,000/-, it is
Gross Total Income. included in the total income of an individual or HUF
to determine the tax payable by the assessee.

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3) Person Sec. 2(31) :
The term ‘person’ includes:
i) An individual : An individual means a natural person or a human being, who may be male, female,
minor child or a lunatic.
ii) A Hindu undivided family : A Hindu Undivided Family means a Hindu family which consists of
all persons lineally descended from a common ancestor including their wives and unmarried
daughters.
iii) A company : A company may be defined as an artificial person created by law with perpetual
succession, a common seal and shares carrying limited liability.
iv) A firm : A firm means a partnership firm which is defined under the Partnership Act. There are two
conditions for partnership firm (i) There must be registered partnership deed (ii) Profit sharing ratio
must be included in deed.
v) An association of persons (AOP) or a body of individuals (BOI), whether incorporated
or not : An association of persons means two or more persons joining for a common purpose for the
purpose of earning income. It may consist two or more individuals or any other person, i.e., an
individual and a company or two or more companies.
vi) A local authority : Local authority includes Municipality, Municipal Corporation, District Board,
etc.
vii) Every artificial juridical person not falling within any of the preceding categories : An
idol or deity is assessable as an artificial juridical person, but through persons managing them.
Similarly, all other artificial persons, with a juristic personality are artificial persons, like universities.
4) Assessee Sec. 2(7) :
An assessee means a person -
i) Who is liable to pay any tax; or
ii) Who is liable to pay any other sum of money under this Act (e.g., interest, penalty, etc.); or
iii) In respect of whom any proceeding under this Act has been taken for the assessment of his income; or
iv) In respect of whom any proceeding under this Act has been taken for the assessment of the income of
any other person in respect of which he is assessable; or
v) In respect of whom any proceeding under this Act has been taken for the assessment of the loss
sustained by him; or
vi) In respect of whom any proceeding under this Act has been taken for the amount of refund due to him;
or
vii) Who is deemed to be an assessee under any provision of this Act; or
viii) Who is deemed to be an assessee in default under any provision of this Act.
5) Deemed Assessee: A person, who is deemed to be an assessee for some other person, is called
‘Deemed Assessee’. For example,
a) After the death of a person, his legal representative will be treated as an assessee for that income of the
deceased on which tax has not been paid by the deceased before his death.
b) A person representing a foreigner or a minor or a lunatic is treated as an assessee for the income of
such foreigner or minor or lunatic.
6) Assessee in Default:

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 When a person is responsible for doing any work under the Act and he fails to do it, he is called an
‘Assessee in Default’. For example, if a person while making any payment to another person, is liable
to deduct income tax thereon at source, does not deduct income tax there from, or having deducted
it, does not deposit it in the Government Treasury, he will be treated as an Assessee in Default for
that income tax.
7) Assessment Year [Sec. 2(9)]
Assessment year means the period of twelve months commencing on the first day of April every year
and ending on 31st March of the next year. An assessee is liable to pay tax on the income of the
previous year during the next following assessment year. For example, during the assessment year
2017-18, tax shall be paid for the previous year 2016-17.
8) Previous Year (Sec. 3) :
Previous year means the financial year immediately preceding the assessment year. In other words,
the year in which income is earned is known as previous year and the next year in which this income
is taxable is known as assessment year. Income tax is charged on the total income of the previous
year at the rates prescribed by the relevant Finance Act for the assessment year.
9) Financial Year :
The year started from 1st April to 31st March of the next year. A financial year is both a previous year
as well as an assessment year. It is previous year for the income earned during that financial year
and assessment year for the income earned during the preceding financial year. For example,
Financial Year 2017-18 is assessment year for the income earned during the financial year 2016-17.
10) Rounding-off of income (Sec. 288A) :
The taxable income shall be rounded off to the nearest multiple of ten rupees and for this purpose
any part of a rupee consisting of paise shall be ignored and thereafter if such amount is not a
multiple of ten, then if the last figure in that amount is five or more, the amount shall be increased to
the nearest higher amount which is a multiple of ten and if the last figure is less than five, the
amount shall be reduced to the next lower amount which is a multiple of ten.
11) Rounding-off of tax (Sec 288B) :
Any sum payable by an assessee and the amount of refund due, under the provisions of the Act shall
be rounded off to the nearest ten rupees.
12) Casual Income :
Any receipt which is of a casual and non-recurring nature is casual income. In other words, casual
income is that income the receipt of which is accidental and without any stipulation. It is in nature of an
unexpected wind-fall.
Winning from lottery, crossword puzzles, card games and other games of any sort or from gambling
or betting of any form or nature, whatsoever are casual incomes. Receipts even from habitual betting are
non-recurring receipts and assessable as casual income.
The casual income does not include –
i) a) Capital gains; or
b) Receipts arising from business or the exercise of a profession or occupation; or
c) Receipts by way of addition to remuneration of an employee, such as bonus, gratuity,
perquisites, etc.

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ii) Voluntary payment received in exercise of an occupation is not treated as casual income. For
example, if an architect submitted a plan in a competition for construction of a building, the prize
won by him, is income from profession.
iii) A gift from a relative is not income at all. A gift from a relative does not become income
merely because it is repeated year after year. A regular allowance given year after year purely as a
voluntary gift, by husband to his wife, by a parent to a child, is merely a fresh gift every time, it is
paid and does not amount to income.
iv) Payment by husband to his wife under an agreement to live apart as maintenance allowance is
neither causal income nor a personal gift. Hence, it is taxable.
Other provisions relating to Casual Income :
i) Expenses are not deductible : If expenses are incurred to receive casual income, such expenses
are not deductible from any income. For example, an individual purchases lottery tickets, the cost of
lottery tickets is not deductible from any income.
ii) Set-off off losses not permitted : If instead of casual income there is casual loss, such loss
cannot be set-off from any income. For example, If a person wins a card game on the first day and
loses the next day, he cannot set-off the loss against any income.
iii) Tax deduction at source :
a) If the winnings from horse race exceed Rs. 10,000/-, tax will be deducted at source at the
prescribed rate.
b) If the winnings from any lottery, crossword puzzle, card game and other game of any sort
exceed Rs. 10,000/-, tax will be deducted at source at the prescribed rate.
iv) Rate of tax : On winning from lottery, crossword puzzle, races, gambling, betting, etc tax is
chargeable @ 30%.
Basis of Charge of Income Tax:
The following basic principles are the basis of charging income tax -
1. Income tax is an annual tax on income.
2. Income of previous year is taxable in the next following assessment year at the rate or rates applicable
to that assessment year. However, there are certain exceptions to this rule. For Example, Tax in the
same Financial Year –
a) Income of non-resident from shipping (Sec. 172)
b) Person leaving permanently / long time (Sec 174)
c) Bodies form for short duration (174A)
d) Person trying to alienate his assets to avoid tax (175)
e) Income of discontinued business (176)
3. Tax rates are fixed by the annual Financial Act.
4. Tax is charged on every person as defined in Section 2(31).
5. The tax is charged on the total income of every person computed in accordance with the provisions of
the Income Tax Act.
6. Income tax is to be deducted at the sources or paid in advance as provided under provisions of the Act.
Classification of Income :
The total income is computed on the basis of the residential status of the assessee. The income is
classified into the following five heads.

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1. Income from Salaries;
2. Income from House Property;
3. Profits of Business and Profession;
4. Capital gains and
5. Income from other sources.
Procedure for computing the total income :
For computing the total income of an assessee and the tax payable by him, following procedure is
followed –
1. Classify the income under each of the five heads and then deduct from the income under each head
the deductions permissible under the Act in respect of that head of income. The balance of amount
left under each head of income is its assessable income.
2. Total upto the assessable income of each head and the aggregate of all these assessable income is
called the Gross Total Income.
3. From the Gross Total Income deduct the deductions permissible under Sec. 80C to 80U of
the Act for computing the total income. The balance left after subtracting the allowable deductions is
called the ‘Total Income’.
4. The amount of income tax payable is then calculated on this total income according to the rates
prescribed by the Finance Act for the relevant assessment year and the rates prescribed under
different sections of the Act.
1) Residential Status of an Individual
On the basis of residence the assessees are divided into three categories. As per the
provisions of the Income Tax Act, an individual and a Hindu undivided family can either be –
1) Resident and Ordinarily Resident; or
2) Resident but not Ordinarily Resident; or
3) Non-Resident
1) Resident and Ordinarily Resident:-
An individual is said to be resident in India in any previous year if he satisfies any one of the basic
conditions and both the additional conditions.
Basic Conditions:-
a) He is in India in the relevant previous year for a period of 182 days or more, or
b) He is in India for at least 60 days or more during the relevant previous year and he has been in
India for at least 365 days or more during the four years immediately preceding the previous
year.
Exceptions to the above rules of 60 days stay in India:-
i) An individual who is a citizen of India and leaves India in any previous year for the purpose of
employment or as a member of the crew of an Indian ship must have stayed in India for at
least 182 days during the previous year instead of 60 days;
ii) If any citizen of India or a foreign national of Indian origin, who is living outside India, comes
on a visit to India in the previous year, he must have stayed in India for at least 182 days during the
previous year instead of 60 days.
Notes:

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1. A person is deemed to be of ‘Indian origin’ if he, or either of his parents or any of his
grandparents, was born in undivided India. It may be noted that grandparents include both
maternal and paternal grandparents.
2. It is not at all necessary that he should stay at a stretch for 182 days. His total stay for at least 182
days may be with gaps.
3. For calculating number of days stay in India, days of entry and exit should be included in the period
of stay in India.
Additional Conditions:
A person has to satisfy both the following additional conditions besides satisfying any one of the
above mentioned basic conditions in order to become ‘Resident and Ordinarily Resident’.
i) He has been resident in India in at least 2 out of 10 previous years immediately preceding the
relevant previous year.
ii) He has been in India for at least 730 days in all during the seven previous years preceding
the relevant previous year.
Note : The day on which he enters in India as well as the day on which he leaves India shall be taken
into account as the stay of the individual in India
2. Resident but not Ordinarily Resident:
If an individual satisfies any one of the above basic conditions but does not satisfy the two additional
conditions, he is said to be ‘Not Ordinarily Resident’.
3. Non-Resident:
If an individual satisfies none of the basic conditions, he is said to be ‘Non-Resident’.
2) Residential Status of Firm
A partnership firm is said to be resident in India if –
a) Resident : The control and management of their affairs are wholly or partly situated within India
during the relevant previous year.
b) Non-resident in India : If the control and management of their affairs are situated wholly outside
India.
A firm cannot be ordinarily or not ordinarily resident. The residential status of the partners is not
relevant in determining the status of the firm.
3) Residential Status of Company
a) Resident : A company is said to be a resident in India in any previous year, if -
i) It is an Indian company; or
ii) Its place of effective management, in that year, is in India.
An Indian company is always resident in India. A foreign company is resident in India only if during
the previous year, place of effective management is situated wholly in India.
b) Non resident : A foreign company is treated as non-resident if during the previous year, place of
effective management is either is wholly or partly situated out of India.
A company can never be ordinarily or not ordinarily resident in India. In case of a foreign company
even the slightest place of effective management is exercised from outside India, it would be treated as a
non-resident.
Structure of IT Authorities (Sec. 116):
There shall be the following classes of income tax authorities for purposes of the Income Tax Act.

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 The Central Board of Direct Taxes

Principal Directors General of Income Tax / Principal Chief Commissioners of Income Tax.

Directors – General of Income Tax / Chief Commissioner of Income Tax

Principal Director of Income Tax / Principal Commissioner of Income Tax

Directors of Income Tax / Commissioner of Income Tax

Additional Directors of Income Tax / Additional Commissioner of Income Tax

Joint Directors of Income Tax / Joint Commissioner of Income Tax

Deputy Directors of Income Tax / Deputy Commissioner of Income Tax

Assistant Directors of Income Tax / Assistant Commissioner of Income Tax

Income Tax offices

Tax Recovery Officers

Inspector of Income Tax

Advance payment of Tax :
Advance payment of tax is also known as the 'pay-as-you-earn' scheme. It means that assesse has to
pay tax simultaneously along with the earning of his income. This tax is paid on the current year’s income in
the same year. In fact, it is paid as advance and it is called ‘Advance payment of tax’.
Liability for payment of advance tax :
Advance tax shall be payable during any financial year in respect of the total income of the assessee
which should be chargeable to tax for the assessment year immediately following that financial year, and it
shall be called ‘Current Income’.
An individual resident shall not be liable, if –
i) He does not have any income chargeable under the head PGBP.
ii) He is of the age of 60 years or more at any time during the previous year.
Condition of liability to pay advance tax :
Advance tax shall be payable if your tax liability exceeds Rs. 10,000 in a financial year.
Installments of advance tax and due dates :
Installment Due Date Amount Payable
I One or before Not less than 15% of advance tax
15th June
II One or before Not less than 45% of advance Tax. It means 45% of advance tax, less the
15th September amount paid in earlier installment i.e. 30%
III One or before Not less than 75% of advance Tax. It means 75% of advance tax, less the
15th December amount paid in earlier installment i.e. 30%

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Tax liability
Rebate u/s 87A: Assessee is an individual who is resident of India during the
previous year and total income is less than Rs. 12,00,000.
Amount of rebate allowed is Rs. 60,000 OR tax liability WEL
The revised tax slabs under the new regime that are applicable from 1st April
2025 are as follows:

Income Tax Slabs Income Tax Rates

Up to Rs. 4 lakh NIL

Rs. 4 lakh - Rs.8 lakh 5%

Rs. 8 lakh - Rs.12 lakh 10%

Rs.12 lakh - Rs.16 lakh 15%

Rs.16 lakh - Rs. 20 lakh 20%

Rs. 20 lakh - Rs. 24 lakh 25%

Above Rs. 24 lakh 30%

The Rebate has been increased to Rs. 60,000 from Rs. 25,000 for the FY 2025-
26. With the revised tax structure, individuals earning up to Rs.12 lakhs will have
no tax liability due to the increased rebate of Rs.60,000. For salaried individuals,
the tax liability will be zero for incomes up to Rs.12.75 lakhs due to the Rs.75,000
standard deduction.