Income Tax All you need to know

“ Freedom and Property Rights are inseparable. You can’t have one without the other”

-George Washington

INTRODUCTION

Taxes are monetary charges imposed by the government on income, goods, services, circumstances, or transactions. Tax is derived from the Latin word ‘taxo’. Taxes, the government’s primary source of money, are used to benefit the citizens of the country through laws, rules, and practises.

The Indian tax structure has changed throughout the years to accommodate the government’s expanding financial needs. The system is also intended to assist the government in realising its socioeconomic goals. Tax reform is an ongoing effort that has to be done on a regular basis to evaluate the system for updating and maintenance. Currently, the Income Tax Act of 1961 governs India (IT Act). On April 1, 1962, the present Income Tax Act became operative after being approved in 1961. The government appertained the Income Tax Act to the Law Commission in 1956, and the report was presented in 1958. The Direct Tax Administration Enquiry Commission’s Chairman, Shri Mahavir Tyagi, was chosen in 1958. Based on the recommendations of both parties, the present Income Tax Act was developed. The 1961 Act has also undergone several revisions since then.

In order to prevent tax evasion, regulate black money, and stop it from moving around, the federal government added Section 269 ST to the Income Tax Act of 1961 through the Finance Act of 2017. Since cash transactions are difficult for the government to track, the majority of transactions in India are carried out in cash (particularly real estate sales). Therefore, there is a strong desire and necessity to provide identical foods in order to limit cash transactions. There used to be food in the statute to limit cash transactions. For instance, section 40A(3assessment )’s of spending limitations on cash. Additionally, taking and repaying loans­­­­­­ in cash is covered under sections like 269 SS and 269T.

However, before adopting section 269ST (i.e., before 1st April 2017), there was no provision in income tax involving cash bills, and this is what differentiates the existing rules from 269ST. It imposed limitations on the person receiving the money, or the payee.

Understanding the Section 269ST clause:

No person shall receive a sum of two lakh rupees or more from a person-a) in aggregate from a person in a day; or b) in respect of a single transaction; or c) in respect of transactions relating to a single event or occasion from a person, other than by account payee cheque, account payee bank draught, or use of electronic clearing system through a bank account.

However, the rules of this section do not apply to- any invoice by-

a) The government;

b) any financial institution, post office savings bank, or co-operative bank;

ii) transactions of the type referred to in section 269SS;

iii) such other people, classes of persons, or invoices as the Central Government may specify by notification in the Official Gazette.

A BRIEF OVERVIEW OF THE INCOME TAX ACT, 1961

Sir James Wilson implemented income tax in India for the first time in 1860 to compensate for the damage caused by the 1857 military revolt. In 1886, a separate Income Tax Act was enacted, and it remained in existence for a long time, subject to various amendments from time to time. A new Income Tax Statute was passed in 1918, but it was quickly abolished by a new act enacted in 1922. Because of various changes, the 1922 Act became incredibly complicated. This Act is still in existence for the 1961-1962 fiscal year. The Indian government appointed the Law Commission in 1956 to clarify the law and prevent tax evasion.

In September 1958, the Law Commission, in collaboration with the Ministry of Law, submitted its findings. This legislation is now governed by the Income Tax Act of 1961, which entered into effect on April 1, 1962. It covers the whole country of India, including Jammu and Kashmir. Any legislation is insufficient in and of itself until the loopholes are addressed. The Income Tax Act of 1961, as well as a multitude of income tax rules, notifications, circulars, and court judgements, including tribunal decisions, control India’s income tax legislation. 

The key provisions of Indian income tax legislation are as follows: 

• The Income Tax Act of 1961: The act consists most of the income tax laws of India.
• The Central Board of Direct Taxes (CBDT): It is the authority in charge of managing Direct Tax. To carry out the goals of this Act, the CBDT has the power to pass laws and regulations.
• Finance Act: The finance minister presents the budget to Parliament annually. The financial bill becomes an Act once it has been approved by the Indian parliament and signed by the president.
• Circulars and notifications: Clarification of an act’s provisions may be necessary at times, and the CBDT frequently issues circulars and notices that serve as this purpose. It includes dispelling any ambiguity regarding the application and interpretation of the provisions.

Applicability of the Income Tax Act, 1961

The Income Tax Act of 1961 applies to the entire country of India. The Income Tax Act addresses the following:

The foundation for revenue collection.

• Earnings not subject to income tax.
• The calculation of income across many categories.
• Grouping by income.
• Losses are triggered and carried over.
• Permissible deductions.
• Tax advantages and rebates.
• Taxation is decided in some extraordinary instances.
• Domestic firms must pay taxes on dividend payments.
• The authorities in charge of income tax.
• Monitoring, a search, and a seizure.
• Methods for evaluating.
• Tax recovery and collection, as well as tax withholding at source ( TDS).
• Tax payments in advance.
• Reimbursement.
• Amendments and appeals.
• Acquiring mobile property.
• Sanctions and legal action.

Purpose of the Income Tax Act 

The Income Tax Act’s pretensions can be described as follows:

• To lessen disparities in the distribution of income and wealth.
• To achieve the dual objectives of higher yields.
• To hasten the nation’s development and economic progress.
• To protect the relevant economy against short-term international price swings and long-term inflationary pressures.
• To provide money for economic growth.
• Reduce excessive wealth, income, and consumption inequality through increasing production over an extended period of time, committing offences, upholding the law, and promoting peace and stability.
• To promote the acquisition of new capital goods.
• To focus investment on the sectors of the economy that contribute most to growth.

Features of the Income Tax Act

Income tax is the amount due when the government levies taxes on the direct income of those who live within its jurisdiction. India’s income tax system is incredibly complicated and has many other obstacles, challenges, and features. Even though the entire process may seem onerous, the residents of the nation may be affected by the situation’s efficient management. The government uses income tax as a tool to ensure that civic duties and activities are completed properly and on time.

The basic features of the act are as follows:

1. Income tax is assessed at the rate determined by the Finance Act for the current assessment year on income from the prior year.

2. A person is subject to income tax depending on the income from the prior year.

3. The taxpayer’s obligation is determined by his place of residence in the previous year.

4. Income tax obligations only arise when total revenue for the fiscal year surpasses the threshold tax-free amount determined by the Finance Act for that particular year.

5. Income tax rates are progressive, which means that when income grows, the tax burden does too.

6. It is required to withhold taxes from payments at the point of origin and deposit them in the government’s treasury.

Punishments and remedies under the Income Tax Act, 1961

If taxes are paid on time and on schedule, and reports are filed, the government will always have money available for public welfare. The Act has a number of penalties to ensure that taxpayers do not fail to file their taxes or provide information. A penalty is a consequence levied against a taxpayer who has violated the law. Indian tax authorities have been allowed the authority to penalise taxpayers for violations ranging from non-filing of returns to non-disclosure of income or non-payment of tax as part of the taxation systems. While fines for procedural infractions are often represented directly in figures, penalties for failing to pay taxes or declare income or transactions are usually expressed as percentages of the taxes payable or sums involved (generally, 100 to 300 percent). Starting with the fiscal year 2020-2021, fines for under-reporting or misreporting income can be imposed; before, penalties were only imposed for giving false information or concealing income.

Penalty procedures are not included in the Income Tax Act’s assessment methodology. Section 274 of the Income Tax Act of 1961 specifies the method that the tax authorities must follow in order to penalise the assessee. The technique, in particular, takes into account the notions of natural justice (i.e., due notice and hearing to be given to the assessee prior to impost). Section 273AA also allows you to request a penalty reduction from senior tax officials. The assessee may petition the appeal authority to have a penalty judgement against them reversed. Tax inspectors issuing show-cause letters, on the other hand, have the authority to punish assesses throughout the same procedures in compliance with both goods and services tax and customs regulations.

The Income-tax Act specifies specific penalties for taxpayers who commit crimes such as willful tax evasion, failure to pay already collected indirect taxes, and other related offences. Such offences are punishable by both a fine and incarceration. The tax evader is subsequently tried in accordance with the principles of the Criminal Procedure Code. As a result, taxpayers may benefit from the Code’s legal alternatives.

Important case laws

• The issue at hand in the 1995 court case ¹Union of India v. Bhavecha Machinery and Others was the delay in filing the company’s income tax return. The Madhya Pradesh high court ruled that purposeful delay in making a return, rather than just failing to make a return on time, is necessary to meet Section 276CC’s requirements. There should be unequivocal evidence that the failure to file the return by the due date was “willful,” and it should be obvious, persuasive, and reliable. The failure must have been calculated, deliberate, planned, and cognizant of the legal repercussions. In this instance, it was ruled that the reasons for the completion of the income tax return were sufficient and that the delay was not intentional. Therefore, in this case, a prosecution under Section 276CC was not necessary.
• The Bangalore Club is free from paying wealth tax under the Wealth Tax Act of 1957, according to the Supreme Court’s ruling in the case of ²M/s Bangalore Club v. The Commissioner of Wealth Tax & Anr., 2020. The court noted that only three categories of people, namely individuals, Hindu undivided families, and businesses, can be taxed for wealth tax under Section 3. Therefore, the Bangalore Club was neither a person, a HUF, or a corporation under this clause based only on Section 3(1). Bangalore Club is a person-to-person association, not one that a person who is otherwise reachable established in order to conceal their tax obligations among a large number of other person-to-person associations. Because of all of these factors, it is clear that the facts of the current case do not fall within Section 21AA of the Wealth Tax Act, the court said.
• In the 2004 case of ³Sesa Goa Ltd. v. Joint Commissioner of Income-tax, the court had to decide whether the higher and secondary education cess and the education cess may be claimed as business expenses. The Higher and Secondary Education Cess and the Education Cess Paid on Business Revenue Are Deductible When Calculating Income Taxable Under the Heading “Profits and Gains of Business or Profession,” According to the High Court of Bombay. The phrase “any rate or tax levied” in Section 40(a)(ii) of the Income Tax Act of 1961 does not contain the word “cess.” Cess paid in conjunction with business revenue is therefore deducted when figuring up such corporate income.
• A trust established for educational purposes was the assessee in the 2016 tax court case ⁴Commissioner of Income Tax, Salem v. Angels Educational Trust. It submitted a Section 12AA registration application. For four fiscal years, the assessee’s income outpaced its expenses, according to the commissioner. As a result, he thought that building trust had a clear business motive. He thus rejected the assessee’s registration request. The High Court of Madras concluded that the assessee-financial trust’s surplus was insufficient evidence that it was established for financial gain rather than charitable purposes.
• In ⁵Liberty India v. Commissioner of Income-tax, 2009, the appellant, a partnership firm, had a small factory that produced textiles out of yarns as well as various textile items like cushion covers, pillow covers, and so forth out of market fabrics/yarn. The appellant claimed a deduction under Section 80-IB on the higher profits of Rs. 22,70,056.00 as a profit of the industrial firm attributable to DEPB and Duty Drawback reported to the Profit & Loss account during the pertinent prior year, which corresponded to Assessment Year 2001-02. Because the two benefits were export incentives rather than profits from industrial enterprises, the Assessing Officer refused to provide the deduction under Section 80-IB. If the revenues from the Duty Entitlement Passbook Scheme (DEPB) and the Duty Drawback Scheme constitute profit from the activities of the Industrial Undertaking and are thus deductible under Section 80-IB of the Income Tax Act of 1961, that was the question before the court. The Supreme Court ruled that drawback revenues cannot be regarded as profits from an industrial concern’s operations for the purposes of computing deductions under Section 80-IB.

CONCLUSION

Citizens should pay income tax in order to advance their country rather than thinking of it as a burden. The general public should make an effort to understand the importance of income taxes and how their money is regarded to contribute to the development of the nation. In order for our country to keep up with other industrialised nations and advance further, every responsible citizen must always pay their income taxes on time. Our country’s progress and social breakdown would suffer if individuals started to see paying income tax as a burden and chose not to. As a result, paying income tax on time is important to avoid this.

¹1995 SCC  Supl.  (4) 100

²M/S. Bangalore Club vs The Commissioner of Wealth Tax on 8 September, 2020

³2007 294 ITR 101 Bom

⁴Commissioner Of Income Tax vs M/S.Angels Educational Trust on 17 August, 2021

⁵M/S Liberty India vs Commr.Of Income Tax,Karnal on 31 August, 2009

Author: ‘Aabhas Soni’ And ‘Aishana’ are affiliated with Gujarat national law university and can be reached at [email protected] and at [email protected] respectively.