LIABILITY TO PAY INCOME TAX

[Mr. M. GOVINDARAJAN]

The liability to pay the tax is founded in Section 3 and Section 4 of the Income Tax Act, 1961.  These sections are the charging sections.  Section 4 of the Act provides that where any Central Act enacts that income tax shall be charged for any assessment year at any rate or rates, income tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income tax), of, this Act in respect of the total income of the previous year of every person.  Where by virtue of any provision of this Act income tax is to be charged in respect of the income of a period other than the previous year, income tax shall be charged accordingly.  In respect of income charge as detailed above shall be deducted at source or paid in advance, where it is so deductible under any provision of this Act. Thus it is clear that the charge of the income tax is on the income of a person which has been defined in Section 2(31) of the Act.

Lord Dunedin in ‘Whitney V. Commissioners of Inland Revenue’ (1926) AC 37; 10 TC 88 stated that there are three stages in the imposition of a tax.   There is the declaration of liability that is the part of the statute which determines what persons in respect of what property are liable.   The second stage is the assessment.  Liability does not depend on assessment that ex hyposthesi has already been fixed.   But assessment particularizes the exact amount which a person liable has to pay.  Lastly come the methods of recovery if the person taxed does not voluntarily pay.

In ‘W.H. Cockerline and Co. V. Commissioners of Inland Revenue’ – (1930) 16 TC 1 Lord Hanwaorth M.R. after accepting the passage from Lord Dunedin’s judgment quoted above observed as follows:   Lord Dunedin, speaking, of course, with accuracy as to these taxes, was not unmindful of the fact that it is the duty of the subject to whom a notice is given to render a return in order to enable the Crown to make an assessment upon him; but the charge is made in consequence of the Act, upon the subject; the assessment is only for purpose of quantifying it.  He further observed that non assessment does not prevent the incidence of the liability though the amount of the deduction is not ascertained until assessment.  The liability is imposed by the charging section, namely, Section 38 (of the English Act) the words of which are clear.   The subsequent provisions as to assessment and so on are machinery only.   They enable the liability to be quantified, and when quantified to be enforced against the subject, but liability is definitely and finally created by the charging section and all the materials for ascertaining it are available immediately.

The Supreme Court in ‘Universal Radiators V. Commissioner of Income Tax’ – 1993 (3) TMI 4 - SUPREME COURT held that liability to pay tax under the Act arises on the income accruing to an assessee in a year.  The word ‘income’, ordinarily in normal sense, connotes any earning or profit or gain periodically, regularly or upon even daily in whatever manner and from whatever source.   Thus, it is a word of very wide import. Clause 24 of Section 2 of the Act is legislative recognition of its elasticity.   Its scope has been widened from time to time by extending it to varied nature of income.  Evn before it was defined as including profits, gains, dividends and contributions received by a trust it was held be a word  ‘of broadest connotation’ which could not be ‘understood in restricted or technical sense’.

The Supreme Court in ‘Raghuvanshi Mills Limited V. Commissioner of Income Tax’ – 1952 (11) TMI 1 - SUPREME COURT emphasised that the expression, ‘from whatsoever source derived’ widened the net.  But eligibility to tax is not the same as liability to pay tax.  The former depends on charge created by the Act and the latter on computation in accordance with the provisions in the Act and the Rules.