Indian Taxation: The constitutional scheme
The governing Act is the Income-tax Act, 1961. It was supposed to simplify the law as it had developed under the Income-tax Act, 1922. Numerous amendments have, however, followed since its enactment, and simplicity seems an unattainable goal.
The charging section: The Act lays down in section 4 that income tax shall be charged in every assessment year from every person on the total income of the previous year at the rate or rates levied by the relevant finance Act. Section 4 provides:
(1) where any Central Act enacts that income tax shall be charged for any assessment year at any rate or rates, income tax rate or those rates shall be charged for that year in accordance with and subject to provisions (including the provision for the levy of additional income tax) of this Act in respect of total income of the previous year of every person.
(2) In respect of the income chargeable under sub-section (1) income tax shall be deducted at source or paid in advance where it is so deductible or payable under any provisions of this Act.
Thus the Act itself does not levy the tax; it leaves it to be levied by the Finance Act. The central legislature, therefore, passes every year, a Finance Act in which the rates of tax on different kinds of assesses and incomes are laid down. The Finance Act is also used to make substantive amendments in the various taxing structure. The income tax, according to Section 4,is leviable on every person. ‘Person’ is defined in Section 2 (31) to include an individual, a Hindu undivided family, a company, a firm, an association of persons or a body or individuals, whether incorporated or not, a local authority and every artificial juridical person not falling within any of the above categories. This definition is inclusive not exhaustive. Therefore, any person not falling in the above categories may still fall in four corners of the term ‘person’ and accordingly may be liable to pay tax under section 4.
Next it will be noticed that under section 4, tax is to be levied in the assessment year (i.e., the financial year in which the tax is leviable) on the income of the previous year. Previous year means the financial year immediately preceding the assessment year, e.g., for the assessment year 2005-06 the previous year is the financial year 2004-05.
However, from the assessment year 1989-90 onwards all assesses are requested to follow financial year (i.e., April to March, 31) as the previous years. This uniform previous year has to be followed for all sources of income.
What is income :
Under the Act, income is taken in the widest sense. The definition of ‘income’ in section 2 (24) is inclusive and not exhaustive. Under Section 2 (24) income includes: (i) Profit and gains; (ii) Dividend; (iii) Voluntary contribution received by a trust and various other items. It includes those things which are included in section 2 (24) but also includes such things, which the term signifies according to its general and natural meaning.
Entry 82 of list 1 of Seventh Schedule to Constitution empowers Parliament to levy taxes on income other then agricultural income. Entries in the lists in Seventh schedule to the Constitution should not be read in a narrower or restricted sense as held in Bbagwandas Jain v. Union of India.10 It, therefore, follows that in addition to receipts mentioned in Sec. 2 (24) which does not define the term income but merely describes the various receipts as income any other receipts is taxable under the Act; if it comes within the general and natural meaning of the term ‘income’. Though there are different concepts of ‘income’ for the purpose of taxation, income is broadly defined as the true increase in the amount of wealth, which comes to a person during a stated period of time.
Total Income |Residence Income|Income Tax
As per section 2 (45), ‘total income’ means the total amount of income referred to in section 5, computed in the manner laid down in the Act. The definition of total income in section 2 (45) has two ingredients: (i) the income must comprise the total amount of income mentioned in section 5 and, (ii) it must be computed in the manner laid down in the Act. In ‘total income’, certain incomings which fall within the ordinary meaning of income may be excluded by some provisions of the Act; equally some incomings which are outside the ordinary concept of income may be included. It is after giving effect to the various exclusions and exemptions and applying the rules as to computation of income that ‘total income’ is arrived at. The whole of ‘total income’ may again not be taxable as a result of certain deductions.
Income Tax|Total Income
Residence and total income
Section 5 of the Act provides for what constitutes total income with reference to the residential status of the assessee concerned. Total income under the section is different for those who are “resident but not ordinarily resident”, and those who are “non resident”. What is to be seen is the residential status in the previous year. It becomes necessary at this stage to examine the concept of residence as envisaged under the Act.
An individual under section 6(1) is said to be resident in India in any previous year if he (a) is in India in that previous year for a period or periods amounting in all to one hundred and eighty-two days or more; or (b) having within the four years preceding that previous year has been in India for periods amounting in all to three hundred and sixty-five days or more, is in India for a period or periods amounting in all to sixty days or more in that previous year.
A firm or other association of persons is said to be resident in India in any previous year in every case except where during that year the control and management of its affairs is situated wholly outside India.
A company is said to be resident in India in any previous year if (i) it is an Indian company as defined in the Act, or (ii) during that year the control and management of its affairs is situated wholly in India.
A person who is a resident in India will be treated as not ordinarily resident in the previous year if such person is an individual who (a) has not been resident in India in eight out of the ten previous year preceding that year, or (b) has not during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and thirty days or more. A Hindu undivided family is not ordinarily resident in India in the previous year if its manager or karta is not ordinarily resident in India according to the above definition.
The total income of persons who are resident and ordinarily resident and not ordinarily resident in the previous year consists under section 6 (5) of: (a) income received or deemed to be received in India, (b) income which accrues or arises or is deemed to accrue or arise in India, (c) income which accrues or arises outside India during the accounting year even if it is not received or brought into India. Persons who are not ordinarily resident differ from those ordinarily resident in that their foreign income is taxed only if it is derived from a business controlled or a profession or vocation set up in India or it is deemed under the provisions of the Act to accrue in India or is received or deemed to be received in India. Non-residents are taxable only in respect of income, which accrues or arises in India or deemed