Income Tax Provisions and IMPORTANT DEFINITIONS

BASIC CONCEPTS

WHAT IS A TAX?

Tax is a fee charged by a government on a product, income or activity. There are two types of taxes – Direct taxes and Indirect taxes (See Chart below this paragraph). If tax is charged directly on the income or wealth of a person, then it is a direct tax e.g. income-tax. If tax is charged on the price of a good or service, then it is called an indirect tax e.g. excise duty. In the case of indirect taxes, the person paying the tax passes on the incidence to another person.

 

WHY ARE TAXES CHARGED

The reason for levy of taxes is that they constitute the basic source of revenue to the government. Revenue so raised is utilized for meeting the expenses of government like defence, provision of education, health-care, infrastructure like roads, dams etc.

LEVY OF INCOME-TAX

Income-tax is a tax charged on the total income of the previous year of every person. A person includes an Individual, Hindu Undivided Family (HUF), Association of Persons (AOP), Body of Individuals (BOI), a Firm, a Company etc.

IMPORTANT DEFINITION

1.       Assessee [Section 2(7)] – Assessee means a person by whom any tax or any other sum of money is payable under this Act. It includes every person in respect of whom any proceeding has been taken for the assessment of his income or assessment of fringe benefits. Sometimes, a person becomes assessable in respect of the income of some other persons. In such a case also, he may be considered as an assessee. This term also includes every person who is deemed to be an assessee or an assessee in default under any provision of this Act.

2.       Assessment [Section 2(9)] – This is the procedure by which the income of an assessee is determined by the Assessing Officer. It may be by way of a normal assessment or by way of reassessment of an income previously assessed.

3.       Association of Persons (AOP) ­– When persons combine together for promotion of joint enterprise they are assessable as an AOP when they do not in law constitute a partnership. In order to constitute an associate, persons must join in a common purpose; common action and their object must be to produce income.

4.       Local Authority – The term means a municipal committee, district board, body of port commissioners or other authority legally entitled to or entrusted by the Government with the control or management of a municipal or local fund.

5.       Artificial Persons ­– This category could cover every artificial juridical person (any organization having legal identity) falling under other heads.   It covers corporation, Bar council, Guru Granth Sahib, universities etc.

6.       Assessment year - The term has been defined under section 2(9). This means a period of 12 months commencing on 1^st April every year. The year in which tax is paid is called the assessment year. 

7.       Previous year [Section 3] – It means the financial year immediately preceding the assessment year. The income earned during the previous year is taxed in the assessment year.

For example, for the assessment year 2012-13, the relevant previous year is 2011-12 (1.4.2011 to 31.3.2012).The total income of an assessee earned in the previous year 2012-10 is assessed in the assessment year 2012-13

8.       Business or profession newly set up during the financial year – In such a case, the previous year shall be the period beginning on the date of setting up of the business or profession and ending with 31^st March of the said financial year. 

For Example

1.       A is running a business from 1992 onwards. Determine the previous year for the assessment year 2012-13.

Ans. - The previous year will be 1.4.2011 to 31.3.2012.

2.       A chartered accountant sets up his profession on 1^st July, 2011. Determine previous year for the assessment year 2012-13.

Ans. - The previous year will be from 1.7.2011 to 31.3.2012.

9.       Person [Sec. 2(31)] - The term “person” includes:

i.                     an individual (A natural Person) e.g. Mr. Ram, Ms. Anita,

ii.                   a Hindu undivided family / Joint Hindu Family  e.g.- Hari Om Brothers,

iii.                  a company e.g. KDK softwares (India) Private Limited,

iv.                 a firm e.g. Vikram Associates,

v.       an association of persons or a body of individuals, whether incorporated e.g. Rajasthan   Cricket Club,

vi.                 a local authority e.g. Jaipur Municipal Corporation, and

vii.    Every artificial juridical person not falling within any of the preceding categories e.g. University of Rajasthan.

These are seven categories of persons chargeable to tax under the Act. The aforesaid definition is inclusive and not exhaustive. Therefore, any person, not falling in the above-mentioned seven categories, may still fall in the four corners of the term “person” and accordingly may be liable to tax under section 4.

Author Bio: Anjali khurana is associated with India-based Tax Preparation Software company. The company offers Online TDS Software to help chartered accountant for e-filing their tax returns easily.