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Chronology and structure of the Income tax Act, 1961

Let us understand the chronology and structure of the Income tax Act, 1961(the act). This understanding is very crucial in interpreting the Income tax Law. To start with let us remember that Income-tax is a charge on income of every person and it shall be charged for any assessment year (AY) at any rate(s) specified in the Finance Act, in respect of the total income of the previous year of every person[Refer section 4] All income received/ accrues/ arises in India/from outside India to a resident are included in total income, but a person who is ‘not ordinarily resident in India’ income received/accrues/arises from outside India are not included in total income. In case of a non-resident all income received/accrues/arises in India are only included in total income [Refer section 5]. Who is a resident/not ordinarily resident/non-resident is stated in section 6. Section 9 deals with the provisions relating to ‘Income deemed to accrue/arise in India.

To understand above stated provisions one has to know some ‘definitions’. These are ‘charge’ [Refer section 100 of the Transfer of Property Act, 1882], and following definitions of the act: ‘AY’ [Refer section 2(9)], ‘rate(s)’ [2(37A)], ‘total income’ [2(45)], ‘previous year’ [2(34) and 3], ‘person’ [2(31)], ‘income’ [2(24)], ‘India’ [2(25A)], ‘resident’ [2(42)], ‘non-resident’[2(30)].

There are certain incomes which do not form part of total income [Refer Chapter III/ section 10 to 13B] Chapter IV deals with the provisions as to how to compute ‘total income’. All income are classified under five heads of income these are Salaries, Income from house property(HP), Profits and gains of business/profession(BP), Capital gains(CG)and the residuary source is Income from other sources(OS) [14]. As stated earlier income tax is a charge, therefore each of these five heads of income has a charging provision. Charging section of Salaries is section 15, similarly for HP, BP, CG and OS these sections are 22, 28, 45 and 56 respectively. Look at the opening line of each of these sections you will find the word ‘chargeable’ in them. The principle and procedure of computation of income under each of these heads are unique and the principle and procedure of one head can never be extended to another head unless specified therein. To understand this one may refer to sections 57(ii), 58(3), 59(1) etc.

There are certain incomes of other persons which are included in assessee’s total income. Further there are certain incomes which are included in assessee’s total income on which no income-tax is payable. Again where any sum found credited in the books of account maintained by the assessee for which assessee offers no explanation about the nature and source, any investment, money, expenditure found unexplained and any sum borrowed/repaid on ‘hundi’ are aggregated to the total income. Assessee is entitled to set off and carry forward of losses incurred under all sources except from ‘Salaries’.

Assessee is entitled to some deductions in respect of certain payments, certain incomes, other incomes and other deductions. After giving all eligible deductions, the resulting figure is known as ‘total income’ on which income tax is payable. As income includes ‘loss’ total income may be a loss. Where total income exceeds specified limit (exemption limit) tax is computed. As you know rate(s) of income tax depends on the status of the assessee and they may vary from AY to AY as specified by the Finance Act every year. After computing tax, some assessees are entitled to rebate [87] and relief [89].

Thereafter from Chapter IX to Chapter XII-H, presently there are 16 chapters which deal with some special provisions relating to some special cases under some special circumstances.
Chapter XIII deals with the Income-tax authorities, their appointment, control, jurisdiction, powers including powers of search and seizure, survey [116 to 138].

Assessment procedure starts with filing of return of income (return) or issuance of notice by the Assessing Officer calling for the return. Tax payable as per return shall be paid before filing returns otherwise it shall be treated as ‘defective’. This type of payment is known as ‘Self Assessment Tax’. About 98% of returns filed are processed and remaining cases are selected for scrutiny. There are special procedures for assessment of search cases. Chapter XV deals with liability in special cases like in the case of legal representative, representative assessee, agent, oral trust, executor etc. and their assessment. Some of these provisions supersede section 4 and as such may be assessed in the previous year itself [139 to 180-A].

After assessment is done, the provisions of collection and recovery start. They are of different kinds namely, tax deducted at source, tax collected at source, advance tax. Please note that ‘Self Assessment Tax’ is not coming under this Chapter. These kinds of taxes including Self Assessment Tax are collectively known as pre paid taxes as these are paid before the assessment proceedings starts. After assessment any amount specified in the demand notice as payable is known as tax on regular assessment which is generally required to be paid within 30 days. If the amount specified in the notice is not paid within the specified time, assessee is liable to interest under section 220(2) and penalty under section 221when in default. There are some provisions for payment of interests and fee for defaults/failure by the assessee in certain cases. [190 to 234E]

After assessment any amount of tax exceeds the amount which the assessee is properly chargeable, the assessee shall be entitled to a refund of the excess together with interest in some cases [237 to 245].

At any stage of a case (generally search and seizure), an assessee may make an application for settlement of cases before the Settlement Commission. Order of settlement shall be conclusive. An applicant may make an application for obtaining an advance rulings on the question stated in the application. The advance rulings pronounced shall be binding on the applicant/PCIT/CIT/IT authority subordinate to PCIT/CIT and in respect of the transaction in relation to which the ruling has been sought [245A to 245V].

Wherever the assessee is aggrieved by some specified orders, made by authorities subordinate to the CIT (Appeals), the assessee may appeal to the CIT (Appeals). If the subordinate authority passes the said order with the approval of PCIT/CIT then the appeal shall not lie with the CIT (Appeals) but to Income tax Appellate Tribunal (ITAT). The CIT (Appeals) may confirm, reduce, enhance or annul the assessment and confirm, cancel the penalty order or vary the amount of penalty. Any assessee aggrieved by some specified orders made by the CIT (Appeals), Assessing Officer, PCIT/CIT/ PCCIT/CCIT/ PDGIT/ DGIT, the assessee may appeal to the ITAT. Similarly the PCIT/CIT if objects to any order passed by the CIT (Appeals) may direct the AO to appeal to ITAT against such order. The PCCIT/CCIT/PCIT/CIT/assessee aggrieved by the order of ITAT may appeal to High Court (HC), if HC is satisfied that the case involves a substantial question of law. Similarly an appeal shall lie to the Supreme Court (SC) from any judgment of the HC in any case which the HC certifies to be a fit one for appeal to the SC.

The PCIT/CIT may pass a revision order enhancing/modifying/cancelling an assessment or direct a fresh assessment where he considers any order passed by the AO is erroneous and prejudicial to the interests of revenue. The PCIT/CIT may also pass other revision order if it is not prejudicial to the assessee.

Provisions relating to penalties imposable under the act are many. Some of the failure which attract penalties are failure to furnish returns/reports/ information/ documents/ statements, comply with notices/provisions of some sections, concealment of income, failure to keep, maintain/retain books of account/documents, failure to get accounts audited, failure to deduct/collect tax at source, failure to answer questions, sign statements, allow inspection. These penalties may be imposed after following the procedures laid down in section 274.
For various contraventions/ failures there are provisions for offences and prosecutions.

The last Chapter relates to ‘Miscellaneous’, provisions of which may relate to any Chapter of the act.

Presently the act contains 11 Schedules. See reference of sections under the title of each such schedule. The provisions relating to the schedules are applicable/ relevant only for those sections.

1
ITKP on October 10 2015 16:27:06

Thank you sir for above article.

Your articles force us to understand I T Act rather read the Act. After reading so many articles written by you, I find myself in a better position in understanding act and implementing it in a more efficient and judicious way.

81
avinash kumar on October 10 2015 23:37:54

Sir,
I am speechless! I can not emagine whole of income tax can be explained in so short & chronological manner. Its just like reading interesting short story without any break. Very nice.

124
avnair on October 11 2015 07:39:45

Sir...

Just the best way to put the Income tax Act.
Chronicles of Income tax Act...Smile

123
kiritynandi on July 04 2016 11:09:35

It will be very useful for me. Kindly I would request you to post more & more articles for our benefits.

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