M.

Com -I Semester-I
Advanced Accountancy - Paper-IV
(Tax)
Unit-I: Introduction to Income Tax-
Introduction to Income Tax Act 1961 and
Taxes are financial charges imposed by the government on earnings, commodities, services,
activities, or transactions. The term “tax” comes from the Latin term “tax.” Taxes are the
government’s primary source of income, and they are used to benefit the citizens of the nation
through government policies, regulations, and practices.
The Indian tax system has evolved throughout the decades to meet the government’s rising
demand for finances. The system is also designed to help the government accomplish its socio-
economic goals. Tax reform is a continual activity that should be carried out regularly to assess the
system for revamping and repairs.
India is now governed by the Income Tax Act of 1961 (IT Act). The current Income Tax
Act was passed in 1961 and went into effect on April 1, 1962. The Income Tax Act was referred to
the Law Commission by the government in 1956, and the report was submitted in 1958. Shri
Mahavir Tyagi was appointed as Chairman of the Direct Tax Administration Enquiry
Commission in 1958. The current Income Tax Act was created based on the suggestions of both of
these groups. The 1961 Act has been revised several times since then.
A brief overview of the Income Tax Act, 1961
Sir James Wilson implemented income tax in India for the first time in 1860 in order
to compensate for the damage suffered by the military mutiny in 1857. A distinct Income Tax Act
was created in 1886, and it remained in effect for a long period, subject to different revisions from
time to time. A new Income Tax Statute was enacted in 1918, however, it was quickly repealed by
a new act enacted in 1922. The Act of 1922 grew extremely difficult as a result of several
modifications. This statute is still in effect for the fiscal year 1961-62. The Law Commission was
referred to by the Indian government in 1956 to clarify the law and combat tax cheating.
In September 1958, the Law Commission delivered its findings in collaboration with the Ministry
of Law. This legislation is now controlled by the Act of 1961, also known as the Income Tax Act of
1961, which came into effect on April 1, 1962. It is applicable across India, including the state of
Jammu & Kashmir.
Any legislation, in and of itself, is insufficient until the loopholes are addressed. The
Income Tax Act of 1961 governs income tax legislation in India, along with the help of certain
income tax rules, notifications, circulars, and judicial pronouncements, including tribunal
judgments.
 Finance Act-
A Finance Act is the fiscal legislation enacted by the Indian Parliament to give effect to
the financial proposals of the Central Government. It is enacted once a year and contains provisions
relating to income taxes, customs, excise, Central and Integrated GST and other cess, exemptions,
and reliefs. It may also contain provisions to amend other acts as the Government to effect its fiscal
policy. The bill is usually termed the budget and it is introduced in Parliament by the Finance
Minister.
Important elements of Finance Act
All the elements included in the Finance Act associated with a particular Financial
Year are of course important. Even so, there are particular elements that take precedence over the
others. The most important element is the rules laid down in the Act with respect to Income Tax
Rates. Every year, the Act lays down in detail all the associated provisions related to Income Tax in
the country. Since this applies to a large number of taxpayers, it is considered one of the most
important elements.
The Finance Act is responsible for laying down the tax slabs that applies to
taxpayers. The Act includes various details related to:
 Income through Salary
 Agricultural Income
 Tax slabs for Senior Citizens
 Tax slabs for Very Senior Citizens
 Income Tax Surcharges
 Taxes chargeable to companies
 Advance tax
These are a few important elements included and elaborated upon in detail in
the Finance Act for a particular year.

Indian Tax System – Direct Tax and Indirect Tax

Tax is an obligatory expense enforced on an individual by the state and central
government. It is one of the government’s most significant sources of income that helps them build
a country’s economy and infrastructure.
Therefore, as a responsible citizen, you must pay taxes. However, it is also crucial to know the
different types of taxes in India implemented in the taxation system of India.
Here’s all about the types of taxes.
How many types of taxes are there in India?
The tax structure in India is a three-tier structure: local municipal bodies, state, and
central government. Typically, taxation in India is broadly classified into direct tax and indirect
tax. Let us look at these two types of taxes and catch the difference between direct and indirect
taxes.
Direct taxes
Direct tax is levied on the income or profits of people. For example, a taxpayer pays
the government for different purposes, including income tax, personal property tax, FBT, etc.
The burden has to be borne by the person on whom the tax is levied and cannot be passed on to
someone else. Direct tax is governed and administered by the Central Board of Direct Taxes
(CBDT).
Indirect taxes
Conversely, indirect tax is levied by the government on goods and services.
Therefore, it can be shifted from one tax-paying individual to another. E.g. The wholesaler
can pass it on to retailers, who then pass it on to customers. Therefore, customers bear the brunt
of indirect taxes. Indirect taxes are governed and administered by the Central Board of Indirect
Taxes and Customs (CBIC).
Taxes

Direct Taxes Indirect Taxes Other Taxes

Income Tax Sales Tax Property Tax

Corporate Tax Service Tax Registration Fees

Securities Transaction Tax Coctroi Duty Toll Tax

Capital Gains Tax Custom Duty Education Cess

Gift Tax Value Added Tax (VAT) Entertainment Tax

Wealth Tax Goods & Services Tax (GST) Professional Tax

Difference between Direct and Indirect tax
Direct Tax Indirect tax

Tax on income or wealth Tax on goods or services

Progressive in nature Regressive in nature

The tax burden cannot be shifted, i.e., the person who The tax burden can be shifted, i.e. the person
pays the tax to the Government cannot recover it from paying the tax passes on the incidence to
somebody else. another person.

Major types of Indirect taxes and Direct taxes in India

Here is the list of major types of Indirect taxes:
 Goods and Service Tax– It is one of the existing indirect taxes imposed on various goods
and services. One significant benefit of GST is that it eliminates the tax-on-tax or cascading
effect of the previous tax regime.
 Excise duty – It is a tax imposed on licensing, sale or production of certain goods produced
within the country.
 Sales Tax - Sales tax is a type of indirect tax in which the seller charges a buyer at the time
of selling or exchanging a taxable good. Then the seller repays the tax to the government on
behalf of that buyer. However, the sales tax generally relies upon the authority in power
and the policies implemented by the authority. Some major sales tax types are
manufacturer’s sales tax, wholesale sales tax, use tax, value-added tax, and retai sales tax.
Here is the list of major types of Direct taxes:
 Income tax – It is a type of tax that is imposed on the profits and income earned during the
year. Income tax is the most common example of direct tax. As the term “income tax”
suggests, it is a tax levied by the Central government on income generated by individuals
and businesses in a particular financial year. However, the amount payable for your income
tax depends on how much money you earn under different heads of income. Additionally,
for the financial year of 2022-2023, income tax is applicable to those with an annual
income exceeding Rs 2.5 lakh p.a.
In addition, other examples of direct and indirect tax include corporate tax, value-added tax,
customs duty, and many more.

Now that you know about some of the common types of direct and indirect taxes, it is important to
know the pros and cons of direct and Indirect taxes.

Advantages and disadvantages of direct tax

Benefits
 Individuals with lower incomes pay lower taxes than people with higher incomes.
Therefore, it is known to be impartial and progressive in nature.
 It curbs inflation and reduces inequalities.
Drawbacks
 There are many fraudulent practices through which taxpayers often pay lower tax or avoid
taxes.
 The documentation process is sometimes complex and time-consuming, thereby creating
inconvenience. Therefore, it is often considered a burden.
Advantages and disadvantages of indirect tax
Benefits
 It ensures that every individual, including the poor, contributes toward nation-building.
 This payment is more convenient as such taxes are already included in the price when
purchasing any product or service.
Drawbacks
 It can result in an increase in the overall price of goods and services.
 Consumers often lack civic consciousness of the tax they are paying.
 The rich and the poor pay the same tax. Therefore, it known to be regressive in nature.
Now that you are aware of the different types of taxes in India, you will have a better idea of the
types of taxes you are paying.

Introduction to Income tax-

The most important source of revenue of the Government is taxes. The act of levying
taxes is called taxation. A tax is compulsory charge or fees imposed by the Government on
individuals or corporations. The persons who are taxed have to pay the tax irrespective of any
corresponding return from the Goods and Services by the Government. The taxes may be imposed
on income and wealth of persons or corporations and the rate may vary.
What is Tax? :
Compulsory monetary contribution to the states revenue, assessed and imposed by a
Government on the activities, enjoyment, expenditure, income, occupation, privilege, property, etc
of individuals and organizations. Tax is imposition of financial charge or other levy upon a
taxpayer by a state or other the functional equivalent of the state.
1. Selingman : ‘Tax means a compulsorily collected donation from public which is used for the
benefit of all. Tax does not cater to individual needs’.
2. Taylor : ‘Tax means a compulsory donation by public without any direct benefit for such
donation’.
3. Dr. Dalton : ‘Tax is mandatory liability and it does not resemble any reciprocal or
proportionate benefit’.
Income Tax Characteristics-
Income Tax is a typical example of a direct tax. The tax imposed on a person or
entity under the orbit of income tax law is called income tax. It is the tax levied directly on
personal income. The resulting revenue is usually one of the chief sources of cash for a
government entity. Income Tax Ordinance (ITO), 1984 provides that income tax is one which
is imposed, charged payable and collected in relation to the income of a person for income
year/years, on the basis of the tax rate of the assessment year.
Characteristics of income tax: From the analysis of the definition and nature of
income tax, the following characteristics can be identified –
 It is a direct tax.
 It is charged on the total income of a person.
 It is charged on the income of the income year at the rate applicable in assessment
year.
 It is payable in the year following the income year.
 It is generally charged on revenue income of a person.
 It is a tax charged on a person for income that comes within the preview of relevant
income tax law.
 Whether the income is permanent or temporary, it is immaterial from the tax point of
view. Even temporary income is taxable.
 If a person receives tax—free income on which tax is paid by the person making
payment on behalf of the recipient, it has to be grossed up for inclusion in his total
income

procedure of charging tax and Income Tax Return-

Basis of Charge of Income Tax:
The following basic principles are the basis of charging income tax –
1. Income tax is an annual tax on income.
2. Income of previous year is taxable in the next following assessment year at the rate or rates
applicable to that assessment year. However, there are certain exceptions to this rule. For Example,
Tax in the same Financial Year – a) Income of non-resident from shipping (Sec. 172) b) Person
leaving permanently / long time (Sec 174) c) Bodies form for short duration (174A) d) Person
trying to alienate his assets to avoid tax (175) e) Income of discontinued business (176)
3. Tax rates are fixed by the annual Financial Act.
4. Tax is charged on every person as defined in Section 2(31).
5. The tax is charged on the total income of every person computed in accordance with the
provisions of the Income Tax Act.
6. Income tax is to be deducted at the sources or paid in advance as provided under provisions of
the Act.
Classification of Income :
The total income is computed on the basis of the residential status of the assessee. The
income is classified into the following five heads. Introduction to Income Tax Page 8
1. Income from Salaries;
2. Income from House Property;
3. Profits of Business and Profession
; 4. Capital gains and
5. Income from other sources.
Procedure for computing the total income:
For computing the total income of an assesses and the tax payable by him, following
procedure is followed –
1. Classify the income under each of the five heads and then deduct from the income under each
head the deductions permissible under the Act in respect of that head of income. The balance of
amount left under each head of income is its assessable income.
2. Total upto the assessable income of each head and the aggregate of all these assessable incomes
is called the Gross Total Income.
3. From the Gross Total Income deduct the deductions permissible under Sec. 80C to 80U of the
Act for computing the total income. The balance left after subtracting the allowable deductions is
called the ‘Total Income’.
4. The amount of income tax payable is then calculated on this total income according to the rates
prescribed by the Finance Act for the relevant assessment year and the rates prescribed under
different sections of the Act.

Meaning of PAN, TAN, TDS-

Tax deduction at Source (TDS):
The tax deduction at source means that the person responsible for making payment of
certain incomes to the income earners, deduct income tax at the prescribed rates on such incomes
before payment is made to them. The amount so deducted at source shall be deposited by the
diductor in the government treasury within the prescribed time limit. The tax so deducted is called
deduction of tax at source. TDS should be deposited to government on or before 7 days from the
end of the month in which the deduction is made.
Tax Collected at Source (TCS):
Tax collected at source (TCS) is the tax payable by a seller which he collects from
the buyer at the time of sale. The Income-tax act governs the goods on which the seller has to
collect tax from the purchasers. The seller deposits the TCS amount within 7 days from the last day
of the month in which the tax was collected.
Permanent Account Number (PAN):
PAN means a number which the Assessing Officer may allot to any person for the
purpose of identification. PAN has ten alphanumeric characters. Application for PAN: If an assesses
has not been allotted a Permanent Account Number, he must apply for it in Form No. 49A within the
prescribed time. The Assessing Officer has also got power to allot to any other person a Permanent
Account Number if tax is payable by such person.
Quoting PAN: Once a Permanent Account Number has been allotted, such number must be quoted
in all Returns, correspondence with Income Tax Authorities, challans for payment and in all
documents prescribed by the Board.
It helps in linking the aforesaid documents to his assessment records to facilitate quick
disposal of his assessment and refund claim.
 The assesses must intimate to Assessing Officer about any change in the address, name or
nature of business carried on by him.
Tax Deduction and Collection Account Number (TAN):
Introduction to Income Tax Page 13 Every person, deducting tax or collecting tax at source,
who has not been allotted a tax deduction account number or a tax collection account number shall
apply in duplicate in Form No. 49B within one month from the end of the month in which the tax was
deducted or collected to the A.O. for the allotment of a ‘Tax Deduction and Collection Account
Number’ (TAN).
Where a ‘Tax Deduction and Collection Account Number’ has been allotted to a person, he
shall quote such number in prescribed documents.

Unit-II Basic Information about Income Tax-

Income Tax Act, 1961 is an act to levy, administrate, collect & recover Income-tax in
India. It came into force from 1st April 1962. Income Tax including surcharge (if any) & cess is
charged for any person at the rate as prescribed by Central Act for that assessment year. Income-tax
Act has provided separate provisions with respect to levy of tax on income received in advance as
well as the income with respect of which the amount has not yet been received. A person also has to
keep track of his TDS deducted while calculating his final tax liability at the end of the year.
Income Tax holds its importance for it is the money which tends to support the running of our
government. It is one of the major sources of revenue for the government and thus helps to meet the
funds required to develop the country and other defence related needs of a nation.
Some Important Definition under Income-Tax Act 1961:
 Assesses:
As per section 2(7), an assesses is a person who is liable to pay the taxes under any
provision of Income Tax Act 1961. assesses can also be a person with respect of whom any
proceedings have been initiated or whose income has been assessed under the Income Tax Act
1961, assesses is any person who is deemed assesses under any of the provisions of this act or an
assesses in default under any provisions of this Act.
 Assessment:
Assessment is primarily a process of determining the correctness of income declared by
the assesses and calculating the amount of tax payable by him and further procedure of imposing
that tax liability on that person.
 Previous Year:
As per Section 2(34) of the defines Previous Year as
1. Previous year means the previous year as defined in section 3;
2. As per section 3 of the Income Tax Act 1961, previous year is defined as the financial year
which immediately precedes the assessment year. Income earned in a particular year is taxable in
the next year. The year in which income is earned is known as ‘previous year’ and the next year in
which it becomes taxable is known as ‘assessment year’. The Financial year is a period of 12
months beginning from April 1 to March 31 of next year. For instance, if your financial year is
from 1 April 2019 to 31 March 2020, then it is known as FY 2019-20 and the assessment year
would be AY 2020-21. In case the source of income is new or the business set up is new, previous
year for that entity will start from the date of setting up of that business or profession or from the
date when the source of income of this new existence starts and ends in the said financial year.
Exception to Previous Year:
These incomes are taxed as the income of year immediately preceding the assessment year
at the rates applicable to such person.
1. Income of a person who is leaving India for a long period or permanently.
2. Income of a person who is trying to alienate his assets with an intention to avoid taxes.
3. Income of a discontinued business.
4. Income of non-resident shipping companies who don’t have any representative in India.
 Assessment Year:
As per section 2(9), Assessment year is the 12 months’ period commencing on 1st of
April till 31st March of next year. It is the year in which the income of previous year is assessed.
For instance, if your previous year is from 1 April 2019 to 31 March 2020, then the assessment year
begins on 1st of April 2020 to 31st march 2021 would be AY 2020-21.
 Person:
As per section 2(31), “person" includes—
(i) an individual,
(ii) a Hindu undivided family,
(iii) a company,
(iv) a firm,
(v) an association of persons or a body of individuals, whether incorporated or not, (vi) a local
authority, and
(vii) every artificial juridical person, not falling within any of the preceding subclauses.
Explanation. —for the purposes of this clause, an association of persons or a body of individuals or
a local authority or an artificial juridical person 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.
 Income: The definition of Income as per section 2 (24) includes—
(i) profits and gains ;
(ii) dividend ;
(ilia) voluntary contributions received by a trust created wholly or partly for charitable or religious
purposes or by an institution established wholly or partly for such purposes or by an association or
institution referred to in clause (21) or clause (23), or by a fund or trust or institution referred to in
sub-clause
(iv) or sub-clause
(v) or by any university or other educational institution referred to in sub-clause (Iliad) or sub-
clause
(vi) or by any hospital or other institution referred to in sub-clause
(ilia) or sub-clause (via) of clause (23C) of section 10 or by an electoral trust. Explanation. —For
the purposes of this sub-clause, "trust" includes any other legal obligation;
 Total Income:
According to Section 2(45), total income of an assesses is gross total income as reduced by
the amount deductible under Chapter VIA, i.e., Section.80C to 80U.
 Income Tax:
It is the tax that is collected by Central Government for each financial year levied on total
taxable income of an assesses during the previous year. The Income-tax Act contains the provisions
for computing taxable income, but the rate of tax is given by the Finance Act passed by the
Parliament along with the Union Budget every year.
 Maximum marginal rate of tax:
As per section 29(C), "maximum marginal rate" means the rate of income-tax (including
surcharge on income-tax, if any) applicable in relation to the highest slab of income in the case of
an individual, association of persons or, as the case may be, body of individuals as specified in the
Finance Act of the relevant year.
 Tax Planning:
It is the duty of every citizen to pay legitimate tax but at the same time it is his right not
to pay taxes which are not due. Tax planning means reducing tax liability by taking advantage of
the legitimate concessions and exemptions provided in the tax law. It involves the process of
arranging business operations in such a way that reduces tax liability.
 Tax Evasion:
Tax evasion means avoiding tax by illegal means. Generally, it involves suppression of
facts, falsifying records, fraud or collusion. It is an attempt to evade tax liability with the help of
unfair means. Tax evasion is illegal and would result in punishment by way of penalty, fines and
sometimes prosecution.

Residential Status-
Under Income Tax, the residential status of a person is one of the most important criteria
in determining the tax implications. The residential status of a person can be categorised into:
 Resident and Ordinarily Resident (ROR),
 Resident but Not Ordinarily Resident (RNOR) and
 Non- Resident (NR)
Let us understand how a residential status of the person can be identified
Resident A resident taxpayer is an individual who satisfies any one of the following conditions:
 Resides in India for a minimum of 182 days in a year, or
 Resided in India for at least 365 days in the immediately preceding four years and for a
minimum of 60 days in the current financial year.
For example, consider the case of Mr. D, who is business head for Asia Pacific regions for a private
firm. Mr. D was born and brought up in India. He has to travel to various locations of the continent
for business purposes. He has spent 200 days travelling in the current financial year. Also, he has
been travelling abroad from the past two years and has stayed out of India for about 400 days in this
period. Let us evaluate whether Mr. D was resident in India for the current financial year.
Procedure of Assessment (Sec. 139 to 149)-
Assessment under section 143(1)
This is a preliminary assessment and is referred to as summary assessment
without calling the assesses (i.e., taxpayer).
Scope of assessment under section 143(1) Assessment under section 143(1) is like
preliminary checking of the return of income. At this stage no detailed scrutiny of the return of
income is carried out. At this stage, the total income or loss is computed after making the following
adjustments (if any), namely: -
(i) any arithmetical error in the return; or
(ii) an incorrect claim (*), if such incorrect claim is apparent from any information in the return;
(iii) disallowance of loss claimed, if return of the previous year for which set-off of loss is claimed
was furnished beyond the due date specified under section 139(1); or
(iv) disallowance of expenditure indicated in the audit report but not taken into account in
computing the total income in the return; or
(v) disallowance of deduction claimed u/s 10AA, 80IA to 80-IE, if the return is furnished beyond
the due date specified under section 139(1); or
(vi) addition of income appearing in Form 26AS or Form 16A or Form 16 which has not been
included in computing the total income in the return. However, no such adjustment shall be made in
relation to a return furnished for the assessment year 2018-19 and thereafter.
Procedure of assessment under section 143(1)
 After correcting arithmetical error or incorrect claim (if any) as discussed above, the tax and
interest and fee*, if any, shall be computed on the basis of the adjusted income.
 Any sum payable by or refund due to the taxpayer shall be intimated to him.
 An intimation shall be prepared or generated and sent to the taxpayer specifying the sum
determined to be payable by, or the amount of refund due to the taxpayer.
 An intimation shall also be sent to the taxpayer in a case where the loss declared in the return of
income by the taxpayer is adjusted but no tax or interest is payable by or no refund is due to him.
 The acknowledgement of the return of income shall be deemed to be the intimation in a case
where no sum is payable by or refundable to the assesses or where no adjustment is made to the
returned income.
Assessment under section 143(3)
This is a detailed assessment and is referred to as scrutiny assessment. At this stage a
detailed scrutiny of the return of income will be carried out is to confirm the correctness and
genuineness of various claims, deductions, etc., made by the taxpayer in the return of income.
Faceless Assessment [Section 144B]
Faceless assessment means the assessment proceedings conducted electronically in
“proceeding” facility through assesses registered account in the designated portal. Designated portal
means the web portal designated as such by the Principal Chief Commissioner or Principal Director
General, in charge of the National Faceless Assessment Centre. The CBDT had issued the
instructions, guidelines and notice formats for conducting scrutiny assessments electronically.
Assessment under section 144
This is an assessment carried out as per the best judgment of the Assessing Officer on the
basis of all relevant material he has gathered. This assessment is carried out in cases where the
taxpayer fails to comply with the requirements specified in section 144.
Assessment under section 147
The Finance Act, 2021 has substituted the existing sections 147, 148, 149 and 151 and
also inserted a new section 148A making a complete change in the assessment proceedings related
to Income escaping assessment and search-related cases. The new provisions related to re-
assessment are as follow: If any income of an assesses has escaped assessment for any assessment
year, the Assessing Officer may, subject to the new provisions of sections 148 to 153, assess or
reassess such income and also any other income which has escaped assessment and which comes to
his notice subsequently in the course of the proceedings, or recompute the loss or the depreciation
allowance or any other allowance, as the case may be, for such assessment year.