BASIS OF CHARGE - Income Tax - Ready Reckoner - Income Tax

BASIS OF CHARGE The provision of Section 4 of the Income Tax Act, 1961 is the brain of the law of Income Tax in India. This is because section 4 gives the authority for charging as well as collection of income tax in India. Section 4(1) of Income Tax Act, 1961 provides that income tax shall be charged on every person specified under section 2(31) for any assessment year in respect of the total income of the previous year at the rates prescribed by the relevant Finance Act. - [ Also see Rates of Tax ] Thus, the income tax is levied on the total income earned during the previous year. Exception to the Rule that Income of the Previous Year is Taxable: However, in specified circumstances / situations, income tax may be charged in respect of the income of a period other than the previous year. The sections with exceptions are as follows: SECTION PARTICULARS 172 Shipping business of Non-Residents; 174 Assessment of persons leaving India; 174A Assessment of AOP or BOI or AJP formed for a particular event or purpose; 175 Assessment of persons likely to transfer property to avoid tax; 176 Discontinued business Section 4(2) of Income Tax Act, 1961 provides that in respect of income chargeable under section 4(1), the income tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act. CHARGE TO INCOME TAX Whose income exceeds the maximum amount , which is not chargeable to the income tax, is an assessee, and shall be chargeable to the income tax at the rate or rates prescribed under the finance act for the relevant assessment year,shall be determined on basis of his residential status. Provisions as on April 1 of the assessment year applicable for computing income for the assessment year - The legal provision is summarised below:- Rule one - For computing income - Total income is calculated in accordance with the provisions of the Income Tax Act, as they stand on the first day of April of the assessment year (for illustration ~ For calculating taxable income for AY 2022-23, the provisions of Income Tax Act as on the April 1, 2022 are applicable, if an amendments is made with effect from April 2, 2022, it is irrelevant for calculating income for AY 2022-23, Likewise, the law existing during the previous year 2021-22 has no relevance for determining the total income for AY 2022-23.) Rule two - For other purposes - The above rule is applicable only for the purpose of computing taxable income. To put it differently, it can be said that the provisions applicable on April 1 of AY are relevant only for determining taxable income for that AY. If, however an amendment is made which is purely procedural (not for computing taxable income), then it is applicable from the date of amendment. Now let us understand some important terms used frequently in Income Tax Act Person [ Section 2(31) ]: As we know that income tax is levied on every person. However, in accordance with the provision of this section the definition of person is inclusive in nature and includes: an Individual, a Hindu Undivided Family (HUF), a Company, a Firm, an Association of Persons (AOP) or a Body of Individuals (BOI), whether incorporated or not, a Local Authority (LA), and every Artificial Juridical Person (AJP), not falling within any of the preceding sub-clauses Explanation : An AOP or a BOI or a LA or an AJP shall be deemed to be a person, whether or not such person or body or authority or juridical person was formed or established or incorporated with the object of deriving income, profits or gains. Assessment Year [Section 2(9)] : It means the period of 12 months commencing on the 1 st day of April every year. Previous Year [ Section 2(34) ] It means the financial year immediately preceding the assessment year. However, in the case of a business or profession newly set up, or a source of income newly coming into existence, in the said financial year, the previous year shall be the period beginning with the date of setting up of the business or profession or, as the case may be, the date on which the source of income newly comes into existence and ending with the said financial year. Income-earning year is called Previous Year. The year following the previous year is the Assessment Year. IN AN ASSESSMENT YEAR, YOU FILE YOUR INCOME TAX RETURNS OF THE PREVIOUS YEAR Let us see some examples. Previous year (PY) Financial Year (FY) Assessment Year (AY) 1 st April 2014 31 st March 2015 FY 2014-15 AY 2015-16 1 st April 2015 31 st March 2016 FY 2015-16 AY 2016-17 1 st September 2013 31 st March 2014 FY 2013-14 AY 2014-15 15 th May 2014 28 th February 2015 FY 2014-15 AY 2015-16 Assessee [ Section 2(7) ] : It means a person by whom any tax or any other sum of money is payable under this Act, and includes: Every person in respect of whom any proceeding under this Act has been taken For the assessment of his income or income of any other person in respect of which he is assessable, or For the assessment of the loss sustained by him or by such other person, or For the assessment of the amount of refund due to him or to such other person ( Note : A single enquiry letter issued by the Income Tax Department without reference to any specific provision of the Act does not constitute proceeding under the Act) Every person who is deemed to be an assessee under any provision of this Act. ( E.g. In case of deceased person, his legal heir may be deemed to be the assessee for the income of such person.) Every person who is deemed to be an assessee in default under any provision of this Act. (Assessee in default is a person who fails to fulfil obligations imposed upon him by income tax laws. E.g. If an employer who is required to deduct TDS, fails to deduct such TDS or deduct such TDS but fails to deposit such TDS, such employer is considered as assessee in default) EVERY ASSESSEE IS A PERSON, AND EVERY PERSON NEED NOT BE AN ASSESSEE