Direct taxes - 1 ( UNIT - 1 ) Concept of Taxation

                       Concept  of   Taxation

''Tax'' is a fee charged by the government on it's people income & on goods and services produced & utilised by them. It is compulsory contribution made by citizens for their country.
      
       Taxes are main source of income for tbe government. The income obtained from taxes to the government was re- utilised by the government for it's people welfare.

Who  is  liable to pay income tax :
              Every person, whose taxable income for the previous financial year exceeds the minimum taxable limit is liable to pay to the central government Income tax during the current financial year on the income of the previous financial year at the rates inforce during the current financial year.

Kinds  of Taxes :   Taxes are broadly classified into two types.
1. Direct Taxes
2. Indirect Taxes

1. Direct  Taxes :   Direct taxes are paid by the persons directly to the government. The person paying taxes cannot shift its burden on some other person. In case of direct taxes the impact(Immediate effect ) and incidence ( final burden ) are on same person.
Example : INCOME TAX.

2. Indirect  Taxes  :  Indirect taxes are those taxes which the tax payer pays indirectly. The person paying taxes can recover it from another person. Therefore, in case of indirect taxes, impact & incidence are on two different persons.
Example : GST, CUSTOMS etc.

Components /  sources  of  Income Tax  :
Income tax law comprises of the following :
1. Income tax law, 1961
2. Income tax rules, 1962
3. Government notification
4. Finance Act- Annual
5. Circular& clarification of CBDT
6. Judicial decision


SECTIONS : 

Section 1 : Short title, Extent & Commencement :  This is called as income tax Act, it is applicable to whole india including the state of jammu& kashmir. It came into force 1st April, 1962.

Section 2 : Definitions :
(i) Assessee ( section 2(7) ): Under Income Tax Act, an assessee means a person who is liable to pay any tax/ any other sum of money under this Act.(i.e.interest, penalty etc.) 
(ii) Assessment  year  ( section 2(9)): Assessment year means the period starting from april 1st & ending on 31st march of the next year.Ex : The A.yr 2018-19 commenced on April 1st, 2018 and will end on 31st march 2019.
    Income of a prevoius year of an assessee is taxed during the next following assessment year at the rates prescribed by the relevant finance Act.

Section  3 :  previous Year  :   Previous year means financial year immediately preceding the Assessment year.
  Income earned in a year is taxable in the next year. The year in which income is earned is known as previous year & the next year in which income is taxable is known as assessment year.
  In case, a business/ profession is newly setup , the previous year shall commence from the date of settingup of the business/ profession & end with the next following 31st march.

Section 4 : Chargeability of Income Tax Act : Every person whose total income during the previous year exceeds basic exemption limit becomes an assessee and is liable to pay income tax at the rate/ rates prescribed in the finance Act & income tax Act, applicable for the relevant Assessment year.
  However, his total income shall be determined on the basis of his residential status.

Section 5 :  Incidence of Tax : Section 5 of income tax Act, 1961 says that liability to pay tax depends on his residential status and also on place & time of accrual or receipt of income. 
  Income may be indian income & foreign income.Indian income is taxable for every person irrespective to residential status. Foreign income tax will depends on residential status of an individual. 
1. Incidence of  tax in case of resident  ( ordinary ) :   The total income of any previous year of a person who is resident includes all income from whatever source derived which : 
(a) is received or deemed to be received in india in such year by or on behalf of such person, whether accrued or arisen anywhere; or 
(b) accrues or arisen or deemed to accrue or arise to him in india during such year, whether received anywhere; or
(c) accrues or arisen to him outside india during such year.

2 . Incidence  of tax in case of  Not  Oridinarily  Resident  :   The total income of any previous year of a person who is ' Not Ordinarily Resident' includes all income from whatever source derived which : 
(a) Is received or deemed to be received in india in such year by or on behalf of such person, whether accrued or arisen anywhere; or 
(b) accrues or arises or is deemed to accrue or arise to him in india during such year, whether received anywhere; or
(c) accrues or arises to him outside india from a business controlled in or a profession set-up in india.

3. Incidence  of tax  in  case of  Non - Resident :  
The total income of any previous year of a person who is non- resident includes all income from whatever source derived which :
(a) is received or deemed to be received in india in such year by or on behalf of such person, whether accrued or arisen anywhere; or 
(b) accrues or arises or is deemed to accrue or arise to him in india during such year, whether received anywhere.

Section  6 : Residential  Status :  Income tax is to be charged on total income of the previous year of a person at the rate fixed for the A.yr by the annual finance Act. The total income of a person is determined in accordance with the provisions of the income tax Act; but the tax is charged according to the finance Act which is passed by the parliament every year.

        The total income of each person is based upon his residential status. The residential status of an assessee is determined with reference to his residence in the previous year.

Different types of residents : On the basis of residence the assessees are divided into 3 categories.
(1) Persons who are ordinarily resident in india.
(2) Persons who are not ordinarily resident in india.
(3) Persons who are non- resident.

There are separate rules for determinig the residence of different kinds of assessees. The different kinds of assessees are individuals, HUF, Firm, Aop, company, local authorities & artificial juridical person. It is not necessary that residence of a person should always be the same.  He can be resident in one year, not ordinarily resident in the other year& yet in the 3rd year he may be non- resident.

INDIVIDUALS :   The residence of an individual is determined on the basis of the rules stated hereunder:
1. Resident  (Ordinarily  Resident )  :  An individual is said to be resident in india in any previous year if he satisfies any one of the basic conditions & two additional conditions.
Basic Conditions: 
1. He is in india in the previous year for a period of 182 days/ more.
2. He has been in india for atleast 365 days during the 4 years preceding the previous year& is in india for atleast 60 days during the previous year.
Additional Conditions :
1. He has been resident in india atleast two out of the ten previous years preceeding the relevant previous year &
2. He has been in india for atleast 730 days in all during the 7 previous years preceeding the relevant previous year.

2. Not Ordinarily Resident :  If an individual satisfies any one of the above basic conditions but doesnot satisfy the additional conditions he is said to be ' Not ordinarily Resident'.

3. Non- Resident :  If he doesnot satisfy any one of the basic conditions, then he is said to be non- resident.

Hindu undivided family(H. U. F) , Firm OR Association of persons ( section 6(2) ) : 

1. Resident :  A HUF, firm or AOP are resident in india in any previous year if the control & management of its affairs is situated wholly or partly in india during the relevant previous year, i.e., if even a part of their control & management is situated in india during the previous year, they will be called resident in india.
  A resident  H.U.F will be ordinarily resident only when its karta satisfies both the additional conditions of ordinarily resident as an individual.
2. Not  Ordinarily Resident :  Firm & association of person(AOP) cannot be ' Not Ordinarily Resident' .
  A H.U.F  is ' not ordinarily resident' in india, if its karta or manager is not ordinarily resident in india.
3. Non- Resident :  All the three types of assessees(i.e., H.U.F, firm or A.O.P) are ' Non- resident' only when the control& management of their affairs is situated wholly outside india.

Companies :

1. Resident :  A company is said to be resident in india in any previous year, if :
(i) It is an indian company; or 
(ii) Its place of effective management, in that year is in india.
2. Not Ordinarily Resident :  A company is never 'not ordinarily resident'.
3. Non- resident :  If a company does not satisfy both the aforesaid conditions of residence, it is said to be a 'non- resident' company. It means neither the company is an indian compant nor the place of its effective management is in india.