Unit 5
The Income Tax Act 1961
The Income Tax Act 1961 extends to the whole of India and became effective from 1st April 1962. The act contains provisions for determination of taxable income, determination of liability, procedure for assessment, appeals penalties and prosecutions. It also lays down the powers and duties of various Income Tax authorities.
Since The Income Tax Act 1961 is a revenue law, there are bound to be amendments from time to time in this law. The Income Tax has undergone innumerable changes from the time it was originally enacted. These amendments are generally brought annually along with the Union Budget. Besides these amendments the Government introduces amendments in the form of various Amendment Acts and Ordinances, whenever found necessary.
Finance Act
Every year, usually in February end, a Budget is presented before the Parliament by the Finance Minister. One of the most important components of the Budget is the Finance Bill, which declares the financial proposals of the Central Government for the next financial year. The Finance Bill also mentions the rates of income tax and other taxes which are given in the first schedule attached to such Finance Bill. The Finance Bill when passed by the parliament and assented by the President becomes the Finance Act. The first schedule gives the rates of income tax in four parts:
Part – I : It gives the rate of income tax for various assesses for the current assessment year.
For example: The Finance Act 2008 has given the rates of income tax for the assessment year 2008-09 applicable to the income earned during 2007-08
Part – II : It gives the rates for deduction of tax at source from the income earned in the current year from sources other than salaries.
For example : The Finance Act 2008 has given the rates of tax to be deducted at source from the income earned during previous year 2008-09 chargeable to tax in the assessment year 2009-10.
Part – III : It gives the rates for calculating income tax for deducting tax from income chargeable under the head ‘salaries’ earned during previous year 2008-09 chargeable to tax in the assessment year 2009-10.
For example : The Finance Act 2008 has given the rates for computation of tax to be deducted at source from salaries. The same rates are applicable for computation of advance tax to be paid.
Scheme Of Taxation
Every person, whose total income of the previous year exceeds the maximum amount which is not chargeable to income tax, is an assessee and chargeable to income tax at the rate or rates prescribed in the Finance Act for the relevant assessment year. However , his total income shall be determined on the basis of his residential status in India.
Important Concepts
The following are some important concepts which should be understood for understanding the framework of the Income Tax Act :
1. Person [sec 2(31)] : Person includes i) An individual
ii) A Hindu Undivided Family iii) A company
iv) A firm
v) An association of persons (AOP) or Body of Individuals (BOI), whether incorporated or not
vi) A Local Authority
vii) Every artificial juridical person not falling within any of the preceding sub-clauses.
2. Assessee [sec 2(7)] : Assessee means a person by whom any tax or any other Sum of money is payable under this Act and includes the following :
i) Every person in respect of whom any proceeding under the Income Tax Act has been taken :
a) for the assessment of his income or assessment of fringe benefits or the income of any other person in respect of which he is assessable; or
b) to determine the loss sustained by him or by such other person.
c) To determine the amount of refund due to him or to such other person.
ii) A person who is deemed to be an assessee under any provisions of this Act i.e. a person who is treated as an assessee
3. Assessment year [sec 2(9)] : Assessment year means the period of 12 months commencing on the first day of April every year. It is therefore, the period from 1st of April to 31st of March.
For example : the assessment year 2007-08 will commence on 01.04.2007 and will end on 31.03.2008. the tax is levied in each assessment year, with respect to or on the total income earned by the assessee in the previous year.
4. Previous year [sec 3] : Previous year means the financial year immediately preceding the assessment year. Income tax is payable on the income earned during the previous year and it is assessed in the immediately succeeding financial year which is called an assessment year. Therefore the income earned during the previous year 01.04.2007 to 31.03.2008 will be assessed to charge to tax in he assessment year 2008-09.
The following provisions are important in this regard :
i) All assesses are required to follow the financial year (i.e., April 1st to March 31st) as the previous year. This uniform previous year has to be followed for all sources of income.
ii) An assessee may have his accounting year different from the financial year, eg, Diwali year and calendar year. However for income tax purposes his previous year will be the financial year and none else. The previous year must end before the commencement of the financial year. For example: if an assessee closes his books of accounts 31st December 2007, his accounting year is from 1st January 2007 to December 31st 2007, but for income tax purposes, his previous year will be the financial year i.e. 1st April 2007 to 31st March 2008 and assessment year will be 2008-09.
iii) The first previous year commences on the date of setting up of the business/profession (or, as the case may be, the date on which the source of income newly comes into existence) and ends on the immediately following March 31. Thus, in case of a newly set-up business/profession or new source of income, the first previous year will be either of a period of 12 months or less than 12 months. It can never exceed 12 months.
6. Gross Total Income [sec 80 B (5)] : All income shall, for purposes of income tax and computation of total income, be classified under the following heads of income :
i) salaries
ii) income from House Profession
iii) Profits and Gains of Business or Profession iv) Capital Gains
v) Income from other sources.
Aggregate of incomes computed under the above 5 heads, after applying clubbing provisions and makings adjustments of set off and carry forward of losses, is known as Gross Total Income (GTI)
7. Total Income [sec 2(45)] : The total income of an assesssee is computed by deducting from the gross total income, all deductions permissible under sections 80C to 80U. These include deductions in respect of the following :
Life Insurance premium, Deferred Annuity, Contribution to Provident Fund, Subscription for certain equity shares or debentures, National Savings Scheme, Equity Linked Savings Scheme, Pension Fund, Medical Insurance Premium, Loan taken for Higher education, Donations to certain funds or charitable institutions, donations for scientific research, contribution given to political parties, export turnover, certain income of offshore banking units etc.
Deduction Of Tax At Source [Sections 192 – 206 CA]
In order to minimize the cases of tax evasion the income tax act has made provision to collect tax at source on accrual of income. There are those cases where income can be computed at the time of accrual of income. In such cases, persons responsible for making payment of income are responsible to deduct tax at source and deposit the same to the Government’s treasury in the stipulated time. The recipient of income though gets only the net amount, is liable to tax on the gross amount and the amount deducted at source is adjusted against his final tax liability.
In case the assessee is liable to pay tax on his income, the person making the payment is required to deduct tax in respect of income of the assessee from each of the following sources :
i) salary
ii) interest on securities
iii) interest other than interest on securities
iv) winnings from lottery, crossword puzzle, card game etc. v) insurance commission
Advance Payment of Tax
[Section 207 - 209]
Advance payment of tax is another method of collection of tax by the Central Government in the form of prepaid taxes. Such advance tax is in addition to deduction of tax at source or collection of tax at source. The scheme of advance payment of tax is also known as pay as you earn. Under this scheme an assessee is required to pay tax in a particular financial year on the basis of his estimated income. This means that though the income earned during previous year 2007-08 is taxable in the assessment year 2008-09, tax on such income is payable during the financial year 2007-08 under the scheme of advance payment of tax.
The following are the specific features of this scheme:
i) Liability to pay advance tax : every person is liable to pay advance tax when the amount of such advance tax payable is Rs. 5000 and more. All items of income are liable for payment of advance tax.
ii) Installments of advance tax : The advance tax is payable in three installments in case of non-company assessee. However a company assessee has to pay advance tax in four installments. The relevant due dates of installments are given below :
Installment In the case of corporate
assessee In the case of non corporateassessee On or before June 15 of the
previous year Up to the 15 % of theadvance tax payable -On or before Sep 15 of the
previous year
Up to the 45 % of the advance tax payable
Up to the 30 % of the advance tax payable
Installment In the case of corporate assessee
In the case of non corporate assessee
On or before December 15 of the previous year
Up to the 75 % of the advance tax payable
Up to the 60 % of the advance tax payable
On or before March 15 of
Assessment Procedure
[Sections 139-154]
Every person is liable to tax has to file his income tax return. The income tax authorities make an assessment of the tax liability on the basis of his tax return and other information which they may have gathered from other sources. The following is the brief procedure for assessment of the income of the assessee :
i) submission of income : each of the following persons is required to file a return of income :
1. A company or a firm irrespective of any income or loss or
2. A local authority, of its total income during the previous year exceeds the maximum amount which is not chargeable to income tax or
3. A person other than a company or a firm, if (i) his total income or (ii) the total income of any other person in respect of which he is assessable under the Income Tax Act, during the previous year, exceeds the maximum amount which is not chargeable to income tax.
ii) Time for Financial Payment of Income : The due dates for filing returns of income are given below :
Different situations Due date of submission of return
1. Where the assessee is a company October31
2. Where the assessee is a person other than company
a) In case where accounts of the assessee are required October31 to be audited under any law.
b) Where the assessee is a ‘working partner’ in a firm whose October31 accounts are required to be audited under any law.
iii) Belated return : If the return is not furnished by the time allowed as above section 142(1), the person may (before the assessment is made), furnish the return of any previous year at any before the end of one year from the end of relevant assessment year. For instance an assessee is supposed to file return for the assessment year 2008-09 by October 31, 2008. If it does not file return upto October 31, 2008, then such return, is submitted after the said date, will be belated return. Such belated return may be submitted within 1 year from the end of assessment year (i.e. upto March 31, 2010). If however, the assessment is completed before March 31, 2010, then such return should be submitted before the completion of assessment.
iv) Defective return : where the assessing officer considers that the return of income furnished by the assessee is defective, he may intimate the defect to the assessee and give him an opportunity to rectify the defect within a period of 15 days from the date of such intimation. Such time may be extended by the Assessing Officer on an application made by the assessee.
v) Self assessment : Every person before submitting a return, is under an obligation to make a self assessment of his income and after taking in account the amount of tax, if any, already paid, pay the self assessment tax, if due. The assessee shall be liable to pay such tax together with interest payable for any delay in furnishing the return or any default or delay in payment of advance tax.
After submission of return of income by the assessee to Income Tax Department then the process of assessment commences. In some cases, the assessment may be taken up by the Assessing Officer, even though the return of income is not submitted, although the assessee was required to do so. The Assessing Officer can make the assessment in any of the following ways :
1) Summary assessment : This assessment is completed by the Assessing
Officer on the basis of return submitted by the assessee. The following can be different situations in such a case :
(i) when tax/interest is payable by the assessee : If any tax or interest is found due on the basis of return filed, after adjusting pre-paid taxes, an intimation shall be sent to the assessee specifying the sum so payable. Such intimation shall be deemed to be a notice of demand issued under the act.
(ii) When tax is refundable to the assessee : if any refund is due on the basis of return, an intimation shall be sent to the assessee specifying the sum refundable along with refund cherub/advice.
(iii) When no tax/interest is due or refundable : when either no sum
is payable or no refund is due, the acknowledgement of the return shall be deemed to be the intimation.
2) Scrutiny Assessment : The assessing Officer considers it necessary to
ensure that the assessee has not understated the income or has not computed excessive loss or has not underpaid the tax in any manner. In such a case, a notice shall be served on the assessee. The notice requires the assessee to produce any evidence which the assessee may rely in support of the return. Such notice should be served on or before the expiry of 12 months from the end of the month in which return is furnished. After hearing such evidence as the assessee may produce, the Assessing officer may require and after taking into account all relevant materials which the Assessing Officer has gathered, he shall pass an assessment order in writing determining (a) the total income or loss of the assessee and (b) the sum payable by or refundable to the assessee on the basis of such assessment order.
3) Best Judgment Assessment : This is done by the Assessing Officer in
each of the following cases :
i) where a person fails to make or file the return of his income
income of the assessee on the basis of the best of his Judgment.
The Central Excise Act 1944
Scope and Application
The Central Excise Act 1944 has been enacted to consolidate and amend the law relating to central duties of excise on goods manufacture or produced in certain parts of India. The Act extends to the whole of India.
It may be mentioned that excise duty is a tax on manufacture or production of goods. Excise duty is collected both by the state and central governments. Excise duty on alcohol, alcoholic preparations and narcotic substances is collected by the State Government and is called State Excise Duty. The excise duty on rest of goods is called Central Excise Duty and is collected in terms of Section 3 of the Central Excise Act, 1944. Excise duty is different from sales tax. The sales tax is on the act of sale while the excise duty is a tax on the act of manufacture or production of goods.
Levy of Excise Duty
According to section 3 of the Central Excise Act, excise duty is levied if the following conditions are satisfied :
1. Property must be goods : Goods include every movable and marketable
property. In other words, a property in order to be classified as goods should satisfy two conditions:
i) The property should be capable of shifting from one place to
another place : example, motor car, mobile phone, computers etc.
ii) Property must be marketable : It means the property should be capable of being sold. For example, iron ore is marketable and hence can be taken as goods but melted iron at 1300 degree to 1400 degree is not marketable and therefore not goods.
2. Goods must be excisable : Excisable goods are those which are mentioned in the
items of tariff in the Central Excise and Tariff Act (CETA), 1985.
3. Goods should be manufactured : According to section 2(f) of the Central Excise
Act manufacture includes any process : i) incidental or ancillary to the completion of a manufacture of product or ii) which is deemed to be a manufacturing process either under any of the provisions of the Central Excise Tariff Act (CETA) 1985 or Central Excise Act 1944.
The above meaning of the term manufacturer is thus inclusive and not exhaustive. As a matter of fact, according to the various court decisions, a process will be called manufacture only when a new and identifiable product known in the market emerges, having a different name, character or use. For example, when wood or pulp is converted into paper or sugarcane is converted into sugar, a new product emerges and therefore it can be very well said that a manufacturing process has taken place. But assembly of air conditioner in a car is not manufacture as no new identifiable product emerges.
4. Manufacture or production must be in India : excise duty is not levied on the
following items :
i) services such as doctors treating the patients, accountants preparing the accounts. In all these cases service tax may be levied.
ii) Immovable goods such as roads, bridges and buildings
iii) Non marketable goods i.e. goods for which no market exists, eg. Melted iron ore at 1600 degree Celsius
iv) Goods that are not mentioned in CETA
v) Goods manufactured or produced out of India and
vi) Production or manufacture in special economic zones.
5. Goods manufactured in SEZ : Goods manufactured or produced in special
economic zones are excisable goods but they have been specifically excluded under the provisions of Central Excise Act from levying of excise duty. Such goods, therefore, can be termed as ‘excluded excisable goods’ but not ‘exempted goods’.
Chargeability of Excise Duty
The following points are relevant in this regard :
2. Excise duty is levied even if the duty was paid on the raw material used in production.
3. Excise duty is also levied on government undertakings, eg., railways is liable to duty on the goods manufactured by it.
4. Excise duty is an expense while calculating the profits in accounts. 5. Excise duty is levied if goods are marketable.
6. Actual sale is not relevant. Hence goods which are given for free replacement during warranty period, are also liable for excise duty.
Excisable Goods
According to Section 2 (d) of the Central Excise Act 1944, excisable goods means goods specified in the Schedule to Central Excise Tariff Act 1985 (CETA) as being subject to a duty of excise and includes salt. Thus excisable goods are those which are mentioned in the items of tariff in the Central Excise Tariff Act (CETA). In case the item is not specified in the Schedule, no duty is leviable. However once an item is mentioned in Tariff, it will be “excisable goods” even if duty rate is “Nil”.
The following further points need careful attention :
i) Excisable goods do not become non – excisable merely because they are exempt from duty by an exemption notification.
ii) Goods not mentioned in CETA or with blank (i.e. ____) duty are non excisable goods.
iii) Mere mention in CETA will not attract duty unless the goods are marketable.
Computation of Excise Duty Payable
As discussed in the previously excise duty is the duty on excisable goods manufactured or produced in India. Hence, once it is determined that the goods are liable for levy of excise duty it will be necessary to take steps for computation of excise duty payable on such goods. This requires the following steps:
1. Classification of goods 2. Valuation of goods
Classification of Goods
1. Animal Products 2. Vegetable products 3. Animal or vegetable fats
4. Prepared food stuffs and beverages 5. Mineral products
6. chemical, fertilizers, soap etc
7. Plastics and rubber and their articles 8. leather and articles
9. Wood, cork, straw and their articles 10. Pulp, paper, paper – board and articles 11. Textile and Textile products
12. Footwear, headgear, umbrellas, Articles of human hair 13. Articles of stone, plaster, ceramic, glass
14. Pearls, precious metals
15. Base metals and articles of base metal
16. machinery and mechanical appliances, electrical equipments, clocks, musical instruments
17. Vehicles, aircrafts, vessels
18. optical, photographic, medical, surgical instruments, clocks, musical instruments 19. Arms and ammunition
20. Miscellaneous manufactured articles like furniture toys etc 21. Works of art, collectors pieces and antiques
Information for each item has been given in four columns :
i) Tariff item
ii) Description of goods iii) Unit
iv) Rate of duty
Code Number
Excise Tariffs
The Central Excise Tariff Act (CETA) gives the Central Excise Tariffs in 3 schedules :
i) Schedule I : it gives basic excise duty leviable on different products
ii) Schedule II : it gives the list of item on which special excise duty is payable. Items included in the Second Schedule are already covered and included in First Schedule. The second schedule has now lost its relevance since all goods in the schedule are exempt from Special Excise Duty.
iii) Schedule III : It contains the items covered under Maximum Retail Price (MRP) valuation provisions.
Valuation of Goods
Having established that the goods are excisable, it is necessary to compute the value on which the excise duty will be payable. In the Central Excise Tariff Act, some rates are fixed on per kg or per quintal basis while some rates are based on percentage basis. This percentage is the percentage of assessable value of goods fixed as per the provisions of Central Excise Act. Thus Excise Duty is levied based on the valuation of goods.
The following are different basis of valuation:
1. Specific duty: Specific duty means duty payable by the assessee on excisable
goods based on the unit, length, weight or volume etc.
i) excise duty payable on cigarette based on the length of the cigarette
ii) Excise duty payable on sugar based on the sugar per quintal
2. Tariff Value: The Central Government is empowered to fix different tariff value
for different classes of goods based on the whole sale price or average price of various manufacturers. For example : Tariff value has been fixed by government for Pan Masala, ready made garments etc. Duty is levied as a % of tariff value fixed by the Central Government.
Example : Price of a class of ready made garment is Rs. 500 per unit. The
government may fix the tariff value @ 60% of Rs 500 i.e. Rs 300. Hence, tariff Value is Rs 300 and the duty payable on the Tariff Value will be as per rate specified in the Central Excise Tariff Act 1985.
3. Compound Levy Scheme : The Central Government may by notification, specify
the goods in respect of which an assessee shall have the option to pay the excise duty on the basis of such factors as may be relevant to production of such goods and at such rates as may be specified in the said notification. This is done by the government in case of small manufacturers, allowing them to pay excise duty on the basis of specified factors like size of equipment employed at specified rates.
Example : i) the rate of compounded levy in case of cold rolled stainless steel
4. Maximum Retail Price : Government can specify the goods on which excise duty will be based on MRP. MRP is the maximum price at which excisable goods shall be sold to the final consumers. It includes taxes, freight and transport charges, commission to dealers etc. Excise duty on MRP is necessary under the Weights and Measurements Act, eg. Chocolates, Biscuits, Wafers, Ice Creams, Camera, Refrigerators, Fans, Footwear, Toothpaste etc.
5. Excise duty on assessable value : Assessable value means the value on which
excise duty is payable. It may or may not be transactional value. Transaction value refers to the value at which the transaction takes place. In other words, it is the price actually paid or payable for the goods on sales. Excise duty is paid on transaction value taking it as assessable value if the following conditions are satisfied :
a. Goods are sold at the time and place of removal b. Buyer and assessee are not related
c. Price is the only consideration for sale, i.e. money or some variable item is received on sale.
d. Each removal will be treated as separate transaction and value separately.
Registration of certain persons
According to section 6 of Central Excise Act, every manufacturer or producer who produce excisable goods must get two types of registration :
1. Registration of manufacturers
2. Registration of warehouse, where the goods are stored.
Rules for registration
The following are the summarized rules for registration :
1. Separate registration is required for each premises 2. Registration is not transferable
3. Registration certificate shall be given within 7 days of application for registration 4. If the manufacturer ceases to produce then he should apply for de-registration 5. Registration can be revoked or suspended by Assistant Commissioner or Deputy
Commissioner if any condition of the Act or rule is breached.
The VAT system has been introduced in our country in place of State sales Tax, with effect from April 2005. Of course, some non congress rules states, UP, Gujarat, Rajasthan, MP, Chattirgarh and Jharkhand are still refusing to implement VAT basically because the central sales tax has not been phased out. However, it is hoped that they will fall in line soon due to central governments continued persuation and its agreeing to phase out slowly the central sales tax.
VAT is multi point sales tax with set off for tax paid on purchases. It is basically a tax on the value addition on the product. The burden of tax is ultimately borne by the consumer of goods. In many aspects it is equivalent to last point sales tax. It can also be called as a multi point sales tax levied as a proportion of Value Added with the set off for the VAT paid on purchases.
VAT works on the principle that when raw material passes through manufacturing stages and the manufactured product passes through various distribution stages, tax should be levied on the value added at each stage and not on the gross sale price. This ensures that the commodity does not get taxed again and again and there is no cascading effect. In simple terms value added means differences between selling price and purchase price.
VAT is different from current sales tax system in the following
respects:-VAT, as stated earlier, is a multipoint taxation system as compared to a sales tax which is a single point taxation system.
VAT provides for “set-off” of previously paid tax which is not possible under the current sales tax system.
VAT makes tax evasion illogical for traders which are there in case of present sales tax system. This is because the benefit in case of VAT, if one understates the volume of sales will be lost since he will be losing the benefit of “set-off” for tax paid.
