Basic Understanding of Income Tax- “Decoding Self-Contained Code”

Introduction

In India taxes have been levied since ancient times, reference can be made to Chanakya’s ‘Arthashastra’ and also ‘Manu-Smriti’ which is believed to be world’s first constitution.

“It was only for the good of his subjects that he collected taxes from them, just as the Sun draws moisture from the Earth to give it back a thousandfold”-Kalidas in Raghuvamsa eulogizing ‘King Dalip’ The Great Great Grand Father of Lord Ram.

 

The complexity of the income tax is an unending source of complaints by taxpayers & tax professionals. Income tax comes with a plethora of complexities, hindrances, issues & features. After going through numerous “aberrations” over a period of time & also due to its Multiple Over-riding & Over-lapping provisions, Fast amendments & interplay of various provisions, Income Tax Act has become “unwitty & complex”.

The great jurist, Late Shri N.A. Palkhivala in his article “The Maddening instability of Income tax law” contemplated income tax as a national disgrace.

While understanding the terms associated with Income Tax might seem like a humongous task, but one cannot deny that it is one of the strongest foundations holding up the basic concept of taxation in our country.

The purpose of the article is to decode the complexities of “The Self-Contained Code i.e. The Income Tax Act,1961. It Covers: –

1.The Major components of The Income Tax law in India

2. Types of Definition under the Income Tax Act, 1961.

3. Meaning of Section, Subsection, Clause, Proviso & Explanation and differentiating between them.

4. Legal Maxims vis-a-vis Income Tax Provisions.

5. Date of Applicability of Income Tax Provisions.

6. Literal vs Liberal Interpretation vis-à-vis Income Tax Provisions.

7. Phrases used generally at the beginning of some provisions to indicate a special meaning assigned to them.

8. Important aspects of Income Tax Act,1961.

 The Major components of The Income Tax law in India

1. Income Tax Act, 1961:It helps in determining taxable income, tax liability, appeals, penalties, & prosecution. It also lays down the power & duties of various authorities. The govt. has been making amendments to the act from time to time.

2. Income Tax Rules,1962:Central Board of Direct Taxes is responsible for administration of Direct Tax & to make rules for carrying out the purpose of this Act.

3. Finance Act: Every year India’s Finance Minister presents the Finance Bill which is popularly known as budget A.K.A ‘Bahi-Khata’. Once it is approved by the parliament & gets President’s assent, it becomes Finance Act.

The contents of Finance Act are tabulated as under:-

Chapter	Section	Part
I	1	Preliminary
II	2	Rates of TDS
III	3 to 88	Amendments in Income-tax Act, 1961
First Schedule		Rates of Income-tax
Others	Others	Indirect taxes & other economics laws

4. Circulars and Notifications:Sometimes the provisions of the act may need clarifications regarding its scope & meaning which are issued by the Central Board of Direct Taxes (CBDT) from time to time in form of circulars & notifications.

Circulars are internal memos that provide clarification on certain laws or issues. They are only binding on income tax authorities and not on tax-payers ; they cannot change provisions of law. In event of dispute courts are not bound by circulars.

Notifications refer to public notifications that let the general public know about laws and changes that are made by the government.

5. Income Tax Act,1961 Contains

> Sections : 1 to 298

> Chapters : I to XXIII

> Schedules : 1^st to 14^th

> Section 2 : Definitions

> Section 10 : Exemptions (which do not form part of Total Income)

> Section 80 : Deductions (to be made in computing total Income)

6. Judicial Pronouncements:– The Hon. Supreme Court’s decisions become the law of the land & are binding on all subordinate courts, income tax authorities, and the assessees. Similarly, High Court decisions are binding on the tribunals, income tax authorities, and all assessees in its territorial jurisdiction. If there are divergent decisions, the decision given by the larger bench & not the later bench prevails.

7. Heads of Income Chapter – IV

> Salaries (Section 14 to 17)

> Income from House property (Section 22 to 27)

> Profit and gains of business or profession (Section 28 to 44)

> Capital Gains (Section 45 to 55)

> Income from other sources (Section 56 to 59)

Meaning of Section, Subsection, Clause, Proviso & Explanation

1. SECTION:– It is a division which is used to break an act into smaller portions, in order to make it easier to read & understand. An Act is divided into different sections, which are further broken down into subsections.

2. SUB-SECTION:- When parts of a section are interrelated, or when one whole provision emerges out by putting all the parts of the section together, then those parts are referred to as sub-sections.

SUB- SECTION EXAMPLE

Short title, extent & commencement

Section 1.

(1) This Act may be called the Income Tax Act, 1961.

(2) It extends to the whole of India.

(3) Save as otherwise provided in this Act, it shall come in force on 1^st April 1962.

Examples of sub-sections may also be seen in sections 1, 44AD, 139 as these are interrelated & one whole provision of the respective section emerges out by putting together all the parts of these sections.

CLAUSE:- When parts of section or sub sections are independent of each other and are not interrelated then these are referred to as clauses. They usually give additional information about the law. A sub-section is a part of a section, whereas a clause may be a part of either a section or a sub-section.

Examples of Clause

> See section 2 (1) – defines “advance tax”;

> Section 2 (1A) – defines “agricultural income”;

> Section 2 (31) – “persons” & so on are all ‘clauses.

> Section 10 (1) – agricultural income;

> Section 10(2A) – share of total income of the firm;

> Section 10(5)-travel concession or assistance & so on are all ‘clauses.

These parts are independent of each other & also are not co-related to project a whole provision therefore these are clauses. Similar is the case with sections 6, 43, 47 & so on

Clue to Identify whether a part of section is Clause or Sub-section.

If a section doesn’t have any sub-sections within it but has clauses instead, it gets difficult to distinguish between a sub-section & a clause. Let’s understand how we can make this distinction without any confusion.

Clue 1: – The clue to differentiate between a ‘clause’ or a ‘Sub-section’ in a provision is:-

> A sub-section starts with a capital letter & ends with a full stop.

>  A clause starts with a small letter & ends with a semicolon (;).

> But the last clause ends with a full stop.

>  Because a sub-section is a complete sentence whereas clause is a part of a sentence.

 Clue 2: –

Where soon after the reference of section something is stated & thereafter a reference is made like (1) then that (1) is a ‘clause’ & where soon after the reference of section without stating anything a reference is made like (1) then that (1) is a subsection.

Refer section 2 where after 2 it is stated as “In this Act, unless the context otherwise requires,” then (1) is stated. Therefore (1) is a ‘clause’ of section 2. Similarly, all other such references like (1A), (7), (24) of section 2 are ‘clauses. Again, see section 10 in which after 10 it is stated “In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included” then (1) is stated. Therefore (1) is a ‘clause’ of section 10.

Now refer section 1, without stating anything a reference of (1) is made therefore this (1) is a sub-section of section 1. Similarly refer section 4, here also without stating anything a reference of (1) is made therefore this (1) is a sub-section of section 4.

3. PROVISO:- It is a condition or qualification attached to a ‘main provision’ which restricts the operation of ‘main provision’ by providing an exception.

The subject matter of ‘main provision’ & the proviso thereof should relate to each other. A proviso should not be read as if it provides such an addition which is foreign to the main provision itself.

Examples of proviso:-

Example 1

> If Main Provision relates to ‘fruit’ then the proviso should also relate to ‘fruit’.

>  For Ex. If main provision is ‘In breakfast one should eat sufficient fruits’

>  Then Proviso may be, ‘Provided that more than one apple should not be eaten’

>  But Proviso cannot be, ‘Provided that more than one Paratha should not be eaten’.

>  B’coz Apple (Proviso) is related with fruit (main Provision) whereas ‘Paratha’ is not.

Example 2 if the main provision states, ‘In breakfast one should eat sufficient food’ then both the provisos are possible as both ‘Apple’ & ‘Paratha’ relate to food.

Ascertaining the Number of a Proviso

>  First proviso begins with the phrase ‘Provided that’,

>  Second proviso with ‘Provided further that”,

>  Thereafter subsequent provisos with ‘Provided also that’.

>  If the proviso starts with ‘Provided also that’ it has to be manually counted to know whether it is third proviso, fourth proviso, & so on.

>  Reference may be made to section 10(23C) which has eighteen provisos.

4. EXPLANATION:– An explanation is introduced by the Legislature for clarifying some doubts or removing confusion from the existing provisions. it does not enlarge or limit the provision, unless the Explanation purports to be a definition or a deeming clause. Explanation is normally clarificatory and retrospective in operation.

 In Katira Construction Ltd. Vs. Union of India (2013) 352 ITR 513 (Guj). it was held “Normally, an Explanation would not expand the scope of the main provision & the purpose of the Explanation would be to fill a gap left in the statute, to suppress a mischief, to clear a doubt or as is often said to make explicit what was implicit”

EXPLANATION vs. SECTION Explanation intends to explain the provisions of the section; hence, there cannot be any contradiction. A section has to be understood and read hand in hand with the Explanation, which is only to support the main provision, like an example does not explain any situation, held in N. Govindaraju vs. I.T.O. (2015) 377-ITR-243 (Karnataka).

 EXPLANATION vs. PROVISO Explanation is different in nature from a proviso, as the latter excepts, excludes or restricts, while the former explains or clarifies and does not restrict the operation of the main provision.

EXPLANATION vs. RULES  Rules are for effective implementation of the Act whereas an Explanation only explains the provisions of the section.

5. How to locate the provisions for the Income Tax Rules. 

>  In section 2 (33) of the Income Tax Act, 1961, the word ‘prescribed’ is defined as follows: – “prescribed” means prescribed by rules made under this Act;

>  Whenever in any provisions of the IT Act, 1961, the word(s) ‘prescribed’ or ‘as may be prescribed’ or ‘prescribed form verified in the prescribed manner’ is found, it suggests that there shall be some provisions in a Rule or Form in the Income Tax Rules, 1962.

Examples:

>  Section 10(5) to find Rule 2B,

> Section 10(13A) to find Rule 2A, & so on.

6. Important aspects of Income tax 

>  Act is drafted in a very logical, systematic & sequential manner.

>  A unique law – Facts & Law both are equally important.

>  Other Statutes – like GST, Excise, Civil laws are generally not relevant.

>  Accounting treatment and Commercial principles are not conclusive.

>  Common sense, equity, logics, ethics, morality, illegality–totally irrelevant.

>  When terms not defined, Dictionary meaning can be used with utmost care.

>  In case of conflict between act and rules, the provisions of act will prevail.

>  Definition of income is inclusive and not exhaustive therefore any income specifically not exempt is taxable.

>  Exempt Incomes are exempt u/s 10 and will not be included while computing total income and whereas Incomes from which deductions are allowable under Chapter VI-A will first be included in the gross total income and subsequently the deductions will be allowed.

Types of Definition under the Income Tax Act, 1961

In the Income Tax Act, 1961 ‘definitions’ are not only provided in section 2, but also in various other sections like 3, 17, 27, 43, 55. It has to be carefully noted whether a particular definition applies to the whole Act, or a chapter, or a section, or group of sections or a sub-section. If a particular definition applies to a specific chapter, its meaning cannot be used in another chapter which is also true for sections, groups of sections, & so on. Let us try to understand each of these categories with reference to the Act.

1. Inclusive definitions can be identified by the word ‘includes’ in the definition. An inclusive definition allows including, within its ambit, anything which is similar to the term defined.

Examples of this category are

>  Section 2(8) “assessment” includes reassessment.

>  Section 2(24) “income” includes—(i) profits & gains; (ii) dividend..”

2. Exhaustive/Restrictive definitions can be identified by the word ‘means’ in the definition. It does not allow including anything from outside to the scope of the definition.

Examples of this category are

>  Section 2 (33) “prescribed” means prescribed by rules made under this Act,

>  Section 2 (42B) “short-term capital gain” means capital gain arising from the transfer of a short-term capital asset.

Let us understand the two categories mentioned above with the following example:

>  If the definition is “Colour includes Violet, Indigo, Blue, Green, Yellow, Orange, Red.” then even Magenta (a mixture of Red & Blue), Cyan (a mixture of Blue & Green) & even Black can also be interpreted as colour. Argument that Black is absence of all colors hence it cannot be interpreted as a colour is unacceptable as ordinarily Black is understood to be a colour. Ordinary & commonly understood meaning has to be assigned to the term.

>  If the definition is “Colour means Violet, Indigo, Blue, Green, Yellow, Orange, Red” then Magenta or Cyan or Black cannot be interpreted as a colour.

3. Adoptive definitions in this category instead of defining the term afresh, the definitions are adopted from other Acts.Examples of this category are :

>  Section 2(20) “director”, “manager” & “managing agent”, in relation to a company, have the meanings respectively assigned to them in the Companies Act, 2013.

>  Section 2(37) “public servant” has the same meaning as in section 21 of the IPC.

4. Exclusive definitions can be identified by the phrase ‘does not include’. In this category something is expressly excluded from the definition. Example of this category is

>  Section 2(14)”capital asset” means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include — (i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession…”

5. Combined definitions both the words i.e ‘means’ & ‘includes’ are present in the definition. In this category, on one hand it restricts inclusion, & on the other, it allows inclusion.

Example of this category is: –

>  Section 2(7) “assessee” means a person by whom any tax or any other sum of money is payable under this Act, & includes —

(a) every person in respect of whom any proceeding under this Act has been taken…

(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 provisions of this act;

Understanding Legal Maxims vis-a-vis Income Tax Provisions

The dictionary meaning of the term ‘maxim’ is a general truth, fundamental principle, or rule of conduct and hence a Legal Maxim can be referred as an established principle of law that judges are supposed to consider in deciding cases.

We will now discuss some important legal maxims widely used in income tax litigations.

Sno.	Particulars	Meaning
1.	Pari materia	Interpretation of “other law which is at par” can be used.
2.	Casus omissus	Court can only interpret law, it cannot supply the omissions.
3.	Generalia specialibus non derogant	Specific provision will prevail over general provisions.
4.	Ejusdem generia	Meaning of a general word is restricted to the same genus as the preceding particular words.
5.	Audi alterum partem	No man shall be condemned unheard.
6.	Carte blanche	Complete freedom to do anything as one’s wish.
7.	Res judicata Vs. Consistency	Res judicata is not applicable to Income-tax authorities. But the authorities are expected to maintain consistency unless a change is warranted.
8.	Onus of proof	Onus is on the party who claims something. Onus can shift from one side to other side.
9.	Noscitur a sociis	A man is known by the company he keeps. The meaning of an ambiguous term is known from the accompanying words.
10.	Approbate and reprobate	One cannot accept the same evidence for one purpose & reject for other purpose. Applies for both AO & Assessee.
11.	Expressio Unius Est Exclusio Alterius-	Express mention of one implies the exclusion of another.
12.	cum inverbis nulla ambiguitas est, non debet admitti voluntatis quaestio.	when the language in the statute is plain & unambiguous, the Court has to read & understand the plain language as such, & there is no scope for any interpretation.
13.	Actus Curiae Neminem Gravabit	No Party Should Suffer Due to the Act of The Court.
14.	Ignorantia Juris Non Excusat	Ignorance of Law is not an excuse.
15.	Actus Reus	A guilty deed or act.
16.	Interest republicae ut sit finis litium	it is in the interest of the State that there should be an end to a litigation.
17.	Modus Operandi	A particular way or method of doing something.
18.	Obiter dictum	Unnecessary remarks or comments made by a judge. These are entirely unnecessary for the decision of the case.
19.	Ratio decidendi	The rationale for the decision.
20	Res Integra	A matter not yet decided.
21.	Stare decisis	To stand by decided cases or to uphold precedents.
22.	Suppressio Veri or Suggestio Falsi	Concealment of truth or a statement of falsehood.
23.	Salus Populiest Supreme Lex-	The welfare of the people is the supreme law

DATE OF APPLICABLITY OF INCOME TAX PROVISIONS

Legal maxim ‘Law Prospicit Non Respicit’ presumes law to be prospective.

In Vatika Township SCC 1, 367 ITR 466 (SC) it was held that It is a settled principle of statutory construction that every statute is prima facie prospective unless it is expressly or by necessary implications made to have retrospective operations. Justice G.P Singh in Principles of statutory interpretation held a new law ought to regulate what is to follow, not the past’.

Retrospective application is contrary to the general principle that ‘legislation introduced for the first time need not change the character of past transactions carried out upon the faith of the then existing law. The obvious basis of the principle against retrospectivity is the principle of ‘fairness’, which must be the basis of every legal rule. However, where the legislation is enacted with a purpose of mitigating undue hardship the provision in such a case has to be given a reasonable & equitable construction & has to be considered to be retrospective in nature so as to make the provisions workable. The rule of beneficial construction should apply in such a case.

Hon. Apex Court has followed reasonable construction instead of strict interpretation in the following cases:-

1. R. B. Jodha Mal Kuthiala vs. CIT 82 ITR 570 (SC) [1971]

2. CIT vs. J.H. Gotla 156 I.T.R. 323(SC) [1985]

3. Good Year India Ltd. vs. State of Haryana 188 ITR 402 SC [1991]

In CIT v. Calcutta Export Company (SC) (2018) 93 taxmann.com 51 The issue before the Hon. Apex Court was whether the amendment to sec 40(a)(ia) by Finance Act 2010 can be considered to be retrospective in nature. The hon. Apex Court after considering the relevant schema of Section 40(a)(ia) & taking into consideration the purpose of the amendment was to mitigate undue hardship held the amendment to be retrospective in nature.

In determining whether a provision is applicable prospectively or retrospectively, attention should be paid to the language of the amending statute, the legislature’s intent, the memorandum to the relevant Finance Act, & the hardship the amendment would cause to the taxpayer Any amendment to a taxing statute is intended to remove any hardship caused to taxpayers, & not to the tax department.

We will now discuss Date of applicability of provisions with regards to income tax.

Sno.	Particulars	Applicability
1.	General Rule	From the date mentioned in law.
2.	Curative law	Retrospective Application.
3.	Provision introduced for removal of doubts	Prospective or Retrospective depends upon situation.
4.	Substantive law	Prospective unless specifically made retrospective
5.	Procedural law	Applies for all pending matters.

Literal vs Liberal Interpretation vis-à-vis Income Tax Provisions

Literal or Strict Construction:- Every word in Statute shall be interpreted by letter and no regard shall be made to the spirit beyond the statute. It takes the narrowest and the most literal meaning of the words without any regard for context or other permissible meanings. This rule applies when meaning is clear & has only one meaning.

Example. “I am really disturbed. Just go!” here you won’t argue & leave as it is an order.

Liberal or beneficial construction:- The words of the statute are  interpreted in a fair & reasonable manner adhering to the spirit of the law. It considers the real intent, reason behind that law.

In the earlier example. If the speaker is your friend, your answer would be “what happened, what’s the problem. I won’t going anywhere” Now you had not followed the real words but searched its real interpretation why it was happening.

Liberal rule won’t apply when meaning is clear & reasonable construction is absurd.

Example if your friend is tired & tells you to go. Now you won’t ask what’s the problem?

We will now discuss rules of construction w.r.t specific provisions of Income Tax.

Sno	Particulars	Interpretation	Reason
1.	General Rule	Strict Interpretation	By default, Tax laws are meant to be strict.
2.	Charging Provisions	Strict Interpretation	Article 265 – “No tax shall be levied or collected except by authority of law”.
3.	Procedural Provision	Liberal Interpretation	Procedural provisions are to carry out the mandate of the substantive Provisions.
4.	Concessional or Incentive Provisions	a) Conditions (Strict Interpretation)	Purpose is to give & not deprive.
		b)  Procedures (Liberal Interpretation)
5.	Penal provisions	Liberal Interpretation	Penalty cannot be source of revenue. To err is human nature
6.	Ambiguous Language	In Favor of assessee	Law is drafted by lawmakers, not by assessee.
7.	Deeming   Provisions	Strict Interpretation	Provisions are fictional.
8.	Clubbing Provisions	Strict Interpretation	Fasten liability on assessee.
9.	MAT/AMT Provisions	Strict Interpretation	Deeming provision.
10	Appeal Provisions	Liberal Interpretation	Purpose is to impart Justice.

 Phrases used with Provisions Indicating a Special Treatment.

1. “Notwithstanding anything contained in…” It is a ‘non obstante’ clause. The provision containing ‘notwithstanding’ shall have an overriding effect on any other provision, even if something contrary is stated in the other provision.

The contrary provision may be contained in – subsection/section/clause/any other provisions of this Act. [Refer sections 9(2), 12(3), 13(4), 10A (6), 10A (8), 40 respectively].

 2. “Subject to the provisions of…” This phrase attaches a condition that the provisions of the specified section are also to be complied with. Those provisions may be this Act/subsection/clause/section/other provisions of this section.

For ex. 10 (2) Subject to the provisions of sub section (2) of sec 64 any sum received…

3. “Save as otherwise provided in this Act…” This phrase implies that the provision of this section has to be applied without affecting any provisions in which something else has been stated.

For Example: Section 14: Heads of Income.

Section 14: “Save as otherwise provided by this Act, all income shall, for the purposes of charge of income – tax & computation of total income, be classified under the following heads of Income: –

A – Salaries.

C – Income from House property

D – Profit & gains business or profession.

E – Capital gains.

F – Income from other sources.

4. “Without prejudice to…” This phrase implies that the provision has to be applied without affecting other provision of the Act which may deal with same subject matter. Other provisions may be – the provisions of sub-section/the generality of the provisions of.

For Example : 12AA(4) Without prejudice to the provision of sub section (3) , where a trust or an …………….

 5. “Nothing contained in section XX or section YY shall operate so as to exclude from…” This phrase implies that referred sections are excluded from the applicability of the whole section.

For Ex. 13(1) Nothing contained in section 11 (or Section 12) shall operate so as to   exclude from the total income of the previous year of the person in receipt thereof .

Compiled By:- CA Milind Wadhwani  | DISA(ICAI), FAFD(ICAI), (Ph.D.) Scholar | Mail ID:- [email protected]