Taxation Law – Notes

taxation-law

Meaning of Taxation Law:

It is a charge levied by the state on the individual and corporation. The element of compulsion is per cent in it. According to Prof, “A tax is a compulsory contribution from the prison to the state to expenditure incurred on the activities for the common interest without any reference to special benefit at all.” According to Justice Oliver Wendell Holmes, “Tax is what we pay for civilised society.”



Kinds of Taxes:

  1. Direct Taxes: According to Prof. Shivas, “Direct tax are those which are imposed immediately on property and person. The incidence of tax and impact of it lie on one person on whom tax is imposed. Example- Income Tax.
  2. Indirect Tax: Those tax on which incidence of tax and impact of tax lies on different persons. Example- Excise Duty, VAT.

“Direct tax is for rich and indirect tax are for the poor.”

Prof. Adam Smith:- He gives the following principles of Taxation Law:

  1. Cannon of Equity is also known as the principle of ability to pay.
  2. Cannon of Certainty means who so even pay tax must know the amount he has to pay as tax so that he can evaluate the amount as an investment, so to secure his life.
  3. Cannon of Convenience means tax should be less burdened and convenient to pay.
  4. Cannon of Economy, administrative expenses should be less.




Importance of Taxation Law:

  • Service of Revenue.
  • Help in bringing economic equality.

Historical background of Income Tax Act-1961:

In India, for the first time, Income Tax introduced in 1860 by Income Wilson.

  1. 1858: English Government has an economic loss due to 1857 revolt.
  2. 1860: In 1860 limit of tax was Rs.200.
  3. 1862: In 1862 this limit was extended to Rs.60.
  4. 1886: In 1886 a new act was introduced which existed till 1917.
  5. 1916: In 1916 there was Amendment happened in the act of 1886 and the progressive rate of tax introduces.
  6. 1918-1922: In 1918-1922 new act was introduced. There was a drawback in this act. Not able to find the current income in the current year.
  7. 1924: In 1924 a new act came and many amendments were done in that.
  8. 1956: In 1956 this matter was submitted to the Law Commission then Direct Tax Administration. After that, this matter was given to Enquiry Committee so that to eradicate the complexities of tax problem and in 1957 they submitted their report so the recommendation is obtained and in 1961, September as New Income Tax was introduced.
  9. Prof. Mahaveer Tyagi has submitted the matter





Scheme of Taxation Law:

Every person whose income in the previous year exceeds the maximum amount not chargeable to tax is an assessee is chargeable in Income Tax Act the rates given in the Income Taxation Law Act 1961, and Finance Act in the assessment year.

However, Income is determined on the basis of the residential status in India.

Income – Section 2(24):

It includes profit and gain, dividend, voluntary contributions received by a trust or association established wholly or partly for religious purposes, scientific research association, sports or game association, hospital or medical institution, universities and educational institution, perquisites and profit in lieu of salary.

Assessee – Section 2(7):

The term assessee may be classified into 4 categories:

  1. A person who pays the tax or any other sum under the Income Taxation Law Act. Here person includes individuals, Hindu Undivided Family, Company, Firm, Association of person, the body of the individual, local authorities whether corporate or incorporated or another artificial judicial person.

Also Read: Case Study – Kedar Nath v/s Bihar

Any other sum includes Penalty and Interest pay in arises of tax:

  1. A person against whom any proceedings have to be taken for the assessment of:
  2. Income or loss sustained by him.
  3. Income or sum sustained by another person on behalf of me.
  4. Amount of refund due to him or person.
  5. Deemed Assessee: like a representative.
  6. The assessee in default.

Classification of Assessee:

  • Resident and Ordinary Resident in India.
  • Resident and Not-Ordinary Resident in India.
  • Non-Resident in India.

Previous Year – Section 3:

Previous year means financial year immediately preceding the assessment year.

Assessment Year – Section 2 (G):

Assessment year means the period of 12 months commencing on 1st day of April every year and ends on the 31st March of next year.

Determination of Residential Status of Individual:-

Two basic conditions:

  • He is in India for 182 days in the previous year.
  • He is in India for 60 days in previous and 365 days in 4 years before the previous year.

Two additional conditions:

  • He must live in India for 2 years out of 10 years just preceding from the previous year.
  • He is in India for 73 days in 7 years preceding the previous year.

Two exceptions:

  • He is an employed person.
  • Member of the crew.

A person who fulfils all the basic and additional condition is a Resident and Ordinary Resident of India.

A person who fulfils the one basic condition out of two and all the additional condition is a Resident and Not-Ordinary Resident of India.

A person who fulfils neither basic condition nor additional condition is a Non-Resident of India.

Resident status of Hindu Undivided Family:

Basic Condition:

  • Control and Management of its affairs from India.

Additional Condition:

  • He must live in India for 2 years out of 10 years just preceding from the previous year.
  • He is in India for 730 days in 7 years preceding the previous year.

Resident status of Firm/Company:

  • Control and Management of its affairs from India.

Person Section 2(3):

A person includes an individual, HUF, company, a firm, an association of persons or bodies of individual, whether corporate or incorporate, a local authority, every artificial and judicial person not under above classes.

Indian Income Tax Act, 1961




The criteria for taxability under Indian income tax Act is residence, not citizenship. There is clear provision in the Act that income of taxpayer shall be determined on the basis of his residential position.

Union of India v/s Azadi Bachao Andolan (A.I.R. 2004)

Supreme court held that’ Term residence means any person who under the laws of the state is liable to taxation law, therein by reason of his domicile, residence, place of management or any other criteria of similar nature.’

The taxpayer may be classified into three categories on the basis of residential position:

  • Resident,
  • Not ordinary Resident, and
  • Non – resident.

The determination of the residential status of taxpayer depends upon the number of days of his residence in India during the previous year or management and control of trade, etc. On the basis of the number of days of living in Indian citizen may be non-resident. Therefore, it can be said that Residence and not the citizenship is the criteria for taxability,” Residential status is determined for every previous year. There are separate rules for determined residential status for different types of the taxpayer, like – individual firm, company, Hindu undivided family, the community of persons, etc. Section 6 of Income-tax, 1961 lays down provisions in this respect.

  • Residential status of Individual

Commissioner of Income Tax v/s P.L.M.T.T. Firm, A.I.R 1973

It was held that the tax shall be imposed on the income earned during the previous year and the taxpayer is required to be resident during the previous year.

  • Residential status ‘ of Hindu undivided family and firm

Income tax Officer v/s Raja Textile Ltd. A.I.R 1997

It was held that any joint Hindu family, firm or institution of a person shall be called to be resident for the previous year when its management and control is wholly or partially in India.

  • Residential status of Company

Narkottan and Pretoria v/s Commissioner of Income-tax, A.I.R 1953 

On the other hand, if a company is not an Indian company or its management and control has been completely outside India, it is called ‘Non –Resident Company’.

Taxability

Section6 provides for the residential status of the taxpayer. Section 5 provides for the taxability of the taxpayer. As the liability of imposing a tax upon the taxpayer keeps on changing along with there residential status.

  • Resident- The total income of the previous year of the resident taxpayer shall include following-
  • Income received or deemed to be received in India during that previous year,
  • Income accrues or arises or is deemed to accrue or arise in India during that previous year, or
  • Income accrues or arises outside India during that previous year.
  • Not Ordinary Resident- The total income of the previous year of not ordinary resident Taxpayer shall include following-
  • Income received or deemed to be received by him or on his behalf during that previous year, or
  • Income accrues or arises or deemed to accrue or arise by him his behalf during that previous year, or
  • Income accrues or arises outside India during that previous year, but the control of such business is in India or any profession established in India.
  • Non –Resident- The total Income of previous year of Non – Resident taxpayer shall include following-
  • Income received or deemed to be received by that taxpayer or on his behalf in India during that previous year, or
  • Income accrues or arises or deemed to accrue or arise created in India by that tax taxpayer during that previous year.

 

 

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