BASICS OF INCOME TAX

Question 1

WHAT IS TAX ?

Answer 1

TAX is a complusory contribution to state revenue, levied by the government on income, profits, value added to the good and services and other transaction. TAX are levied for common welfare.

Question 2

TYPES OF TAXES

Answer 2

DIRECT TAXES AND INDIRECT TAXES

Question 3

FEDERALISM

Answer 3

FEDERALISM is the mixed form of government, combining a general government with regional government in a single political system.

Question 4

3 ORGANS

Answer 4

LEGISLATIVE, EXECUTIVE AND JUDICIARY

Question 5

LAW

Answer 5

LAW means rules and regulation to be followed by people of a particular country or a state or sometimes even a particular state.

Question 6

WHY LAW?

Answer 6

●To bring uniformity
●To manage activities such as trade and commerce
●To ensure peace harmony

Question 7

WHO MAKES THE LAW?

Answer 7

Power to make law is given to the LEGISLATIVE ORGAN of union and state(Union represents the central level and state is for state)

Question 8

ARTICLE 245

Answer 8

This article gives POWER to parliament and state legislative assembly TO MAKE LAW. Parliament will make law and such law will be applicable on the entire nation. SLA will make law and such law will be applicable on a particular state only

Question 9

ARTICLE 246

Answer 9

This article divides the power to make law between parliament and state legislative assemblies. As per this article, Parliament can make law on matters which are enumerated in list 1 of schedule 7 of constitution of India.
State legislative assembly can make law on matters which are enumerated in list 2 schedule 7 of constitutions of India.
Schedule 7 has 3 lists.
● Union list
● State list
● Concurrent list
Each list has some entries, or we can say some matters and law can be made on these matters as per article 246.

Question 10

Components of INCOME TAX LAW:

Answer 10

• Income Tax Act
• Annual Finance Act
• Income-Tax Rules
• Circular and Notifications
• Legal Decisions of Courts

Question 11

Charging Section

Answer 11

• Section 4

Question 12

Section 3

Answer 12

Previous Year
For the purposes of this Act, “previous year” means the financial year immediately preceding the assessment year.
Provided that, in the case of
● a business or profession newly set up, the previous year shall be the period
○ beginning with the date of setting up of the business or profession
○ and ending with the said financial year.
● or a source of income newly coming into existence the previous year shall be the period
○ beginning with the date on which the source of income newly comes into existence
○ and ending with the said financial year.

Question 13

Assessment year

Answer 13

Section 2(9)

Question 14

Section 2(9)

Answer 14

Assessment year
● This means a period of 12 months commencing on 1st April every year. (As defined in bare act)
● This year in which assessment is done is called the assessment year while the year in respect of the income of which assessment is done is called the previous year.

Question 15

Person

Answer 15

section 2(31)

Question 16

section 2(31)

Answer 16

Person:
The term ‘person’ is important from another point of view also viz., the charge of income-tax is on every ‘person’. The definition is inclusive i.e. a person includes,
1. An individual,
2. A Hindu Undivided Family (HUF)
3. A company,
4. A firm,
5. An AOP or BOI, whether incorporated or not,
6. A local authority, and
7. Every artificial juridical person e.g., an idol or deity.

Question 17

SUB-SECTION

Answer 17

Sub-section refers to such parts of a section where each part is related with other, and all sub-sections taken together completes the concept propounded in that section.

Question 18

CLAUSE

Answer 18

When each part of the section is independent of each other and one is not related with other, such parts are called a clause.

Question 19

PROVISO:

Answer 19

The proviso(s) to a section/ sub-section/ clause spells out the exception(s) /condition(s) to the provision contained in the respective section /sub-section /clause, i.e., the proviso spells out the cases where the provision contained in the respective section/ sub-section /clause would not apply or where the provision would apply with certain modification.

Question 20

• EXPLANATION

Answer 20

The Explanation to a section/ sub-section/ clause gives a clarification relating to the provision contained in the respective section/ sub-section/ clause.

Question 21

discussion on HUF

Answer 21

• Treated as separate entity for Income Tax.
• Not defined in Income Tax Act.
• Head of the family - KARTA
• Co-Parceners - acquires the right, share in the property by birth
• Members
  - Daughter in law
  - Son-in-law
  - Daughter’s children
• Schools of Hindu law
  
  • Dayabhaga
  • West Bengal and Assam
  • Nobody acquires the right, share in the property by birth as long as the head of family is living. Thus, the children do not acquire any right, share in the family property, as long as his
    father is alive and only on death of the father, the children will acquire right/ share in the property. Hence, the father and his brothers would be the coparceners of the HUF.
• Mitakshara
• Rest of India
• One acquires the right to the family property by his birth and not by succession irrespective of the fact that his elders are living.
• Thus, every child born in the family acquires a right/share in the family property.

Question 22

CIRCULARS:

Answer 22

• Circulars are issued by the CBDT from time to time to deal with certain specific problems and to clarify doubts regarding the scope and meaning of certain provisions of the Act.
• Circulars are issued for the guidance of the officers and /or assesses.
• The department is bound by the circulars. While search circulars are not binding on the Assessees, they can take advantage of beneficial circulars.

Question 23

NOTIFICATIONS:

Answer 23

Notifications are issued by the central government to give effect to the provisions of the act. The CBDT is also empowered to make an amend rules for the purposes of the Act by issue of notification which are binding on both department and assesses.

Question 24

Assessee

Answer 24

section 2(7)

Question 25

section 2(7)

Answer 25

Assessee:
● Assessee means a person by whom any tax or any other sum of money is payable under this Act and Includes
a. every person in respect of whom any proceeding under this Act has been taken for the assessment.
■ of his income or
● of the income of any other person in respect of which he is assessable,
■ or of the loss sustained by him or by such other person,
■ or of the amount of refund due to him or to such other person.
b. every person who is deemed to be an assessee under any provision of this Act.
c. every person who is deemed to be an assessee in default under any provision of this Act.

Question 26

HEALTH AND EDUCATION CESS:

Answer 26

The amount of income tax as increased by the union surcharge, if applicable, should be further increased by an additional surcharge called the “health and education cess on income tax” calculated at the rate of 4% of such income tax and surcharge, if applicable. Health and education cess is leviable on all assesses i.e., individual, HUF, AOP/BOI, firms, local authorities, co-operative societies and companies.
It is leviable to fulfil the commitment of the government to provide and finance quality health services and universalised quality basic education and secondary and higher education.

Question 27

DOMESTIC COMPANY SECTION 2(22A)

Answer 27

It means an Indian company or any other company which, in respect of its income liable to income tax, has made the prescribed arrangements for the declaration and payment of dividends within India, payable out of such income.

Question 28

INDIAN COMPANY SECTION 2(26):

Answer 28

Two conditions should be satisfied so that a company can be regarded as an Indian company –
* The company should have been formed and registered under the Companies Act, 1956 and
* the registered office order principal office of the company should be in India.

Question 29

Certain cases when income of a previous year will be assessed in the previous year itself.

Answer 29

Shipping business of non-resident [Section 172]
● Where a ship, belonging to a non-resident, carries passengers, livestock, mail or goods shipped at a port in India, the ship is allowed to leave the port only when the tax has been paid or satisfactory arrangement has been made for payment thereof.
● 7.5% of the freight paid or payable to the owner to any person on his behalf, whether in India or outside India on account of such carriage is deemed to be his income which is charged to tax in the same year in which it is earned.

Persons leaving India [Section 174]
● Where it appears to the Assessing Officer that any individual may leave India during the current assessment year or shortly after its expiry and
● he has no present intention of returning to India.

AOP / BOI / Artificial Juridical Person formed for a particular event or purpose [Section 174A].
● If an AOP/BOI etc. is formed or established for a particular event or purpose and
● the Assessing Officer apprehends that the AOP/BOI is likely to be dissolved in the same year or in the next year, he can make an assessment of the income up to the date of dissolution as income of the relevant assessment year.

Persons likely to transfer property to avoid tax (Section 175)
● During the current assessment year,
● If it appears to the Assessing Officer that a person is likely to
➢ charge, sell, transfer, dispose of or
➢ otherwise part with any of his assets
● to avoid payment of any liability under this Act,
● the total income of such a person shall be assessed in the year in which it is earned.

Discontinued business [Section 176]
Where any business or profession is discontinued in any assessment year, the income of the period from the expiry of the previous year up to the date of such discontinuance may, at the discretion of the Assessing Officer, be charged to tax in that assessment year.

Question 30

Undisclosed Source of Income

Answer 30

Cash Credits - Section 68
Unexplained amounts credited in an assessee’s books may be taxed as income. For loans or similar amounts, the credit is deemed unsatisfactory unless both the lender and borrower provide satisfactory explanations for its nature and source. In closely held companies, credits related to shares (like share application money) are considered unsatisfactory unless the person in whose name the credit is recorded (and is a resident) gives a satisfactory explanation. Exceptions are made for credits linked to SEBI-registered Venture Capital Funds or Companies.

Unexplained investments - Section 69
Where in the financial year immediately preceding the assessment year the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year.

Unexplained money, etc. - Section 69A
If an assessee possesses unrecorded assets like money, bullion, jewellery, or other valuables in a given financial year and fails to satisfactorily explain their acquisition to the Assessing Officer, the value of these assets can be treated as the income of the assessee for that year.

Amount of investments etc., not fully disclosed in the books of account - Section 69B
If an assessee, in a specific financial year, makes investments or is discovered to own valuables like bullion or jewellery, and the Assessing Officer determines that the expenditure on these exceeds the amounts in the assessee’s books, and the assessee either doesn’t explain or provides an unsatisfactory explanation for the discrepancy, then this excess amount can be treated as the income of the assessee for that year.

Unexplained expenditure [Section 69C]
In a given financial year, if an assessee has expenses for which they either don’t provide an explanation or the explanation is deemed unsatisfactory by the Assessing Officer, such unexplained expenses can be considered as the income of the assessee for that year. Additionally, this amount, when deemed as income, is not allowed to be deducted under any income category.

Amount borrowed or repaid on hundi [Section 69D]
If any amount is borrowed or repaid via a hundi and not through an account-payee cheque from a bank, it will be considered as the income of the person who borrowed or repaid the amount in the year it was borrowed or repaid. However, if an amount borrowed on a hundi is already treated as income for a person, they won’t be taxed again upon repayment of that amount. The repaid amount also encompasses the interest paid on the borrowed sum.

Question 31

Foreign Company

Answer 31

foreign company means a company which is not a domestic company.