Study Notes on the topic “Taxation Law in India” by Lex Repository.
Introduction to Taxation Law in India
Revenue through tax is utilized in multiple ways by Governments such as education, infrastructure, health, etc. Tax is the basic source of revenue for the Government and it is broadly divided into two parts i.e., direct taxes and indirect taxes. The levy of Income Tax is governed by the Income Tax Act, 1961, and Income Tax Rules, 1962. Moreover, the taxpayers are divided into two forms of residential purposes i.e., Resident of India and Non-Resident of India. In order to understand the significance of tax liability one should understand the residential status of the taxpayers. If the source of Income is in India then the amount will be taxable no matter if the person resides in India or not. On the flip side, foreign-based income is taxable in India only if the person is a resident of India. This article will provide a brief about Constitutional Provisions, significant definitions, and other provisions related to the Act, 1961.
Components of Income Tax Laws
There are five major components of Taxation Law in India which are explained below-
- Income Tax Act, 1961: This Act subsist 298 sections and XIV schedules, whereas the sub-section and clauses under section make this Act lengthy. Further, this Act is amended annually with the introduction of the Annual Finance Act passed by Parliament every year.
- Finance Act: The Finance Bill is introduced every year in the month of February which later when consented by the President of India becomes the Finance Act. Generally, the Finance Act came into effect from 1st April 2020 i.e., the first day of new financial year.
- Income Tax Rules, 1962: The CBDT (Central Board of Direct Taxation) is empowered to make rules for executing purposes provided in the Act. These rules are framed out from time to time and known as Income Tax Rules, 1962.
- Circular and Notification: Circulars are issued by the Tax Department to resolve the specific problems and to clarify queries related to the certain provision of the provided Act. The purpose of Circulars is to guide the officers or assessees and they are bound to follow the circulars.
Notifications: Notifications are issued by the Government of India for better enactment of the Act.
- Case Laws: Case Laws are a significant part of a study under Income Tax Law. Basically, the case laws interpret the legislations for a better understanding of the subject. Indeed, it is not possible for the Parliament to conceive and provide a solution for all possible issues that may arise during the implementation of the Act.
Jurisdiction under Taxation Law in India
Jurisdiction means legal authority over a certain area or certain persons. The purpose of jurisdiction is to ease the functioning and investigation of legal matters. The territorial jurisdiction in Income Tax matters is divided under Assessing Officer depending on the range or a circle. The jurisdiction of AO is provided under Section 124 of the Income Tax Act, 1961 as follows:
- In respect of any person carrying on a business or profession, if the place of business or profession is situated with the particular is, moreover, in case the person has more than one business then the place of business or profession is situated within the area.
- Any question regarding jurisdiction to assess or any other person, it will be decided by the Principal Director General or Director-General of the Principal Chief Commissioner or Commissioner.
- No person can question the jurisdiction of the Assessing Officer when the return is made under the following sections:
- sub-section (1) of section 115WD, or;
- under sub-section (1) of section 139, or;
- after the expiry of one month from the date on which he was served with a notice under sub-section (1) of section 142, or;
- sub-section (2) of section 115WE, or;
- sub-section (2) of section 143, or after the completion of the assessment, whichever is earlier.
- Where he has made no return, after the expiry of the time allowed by the notice under:
- sub-section (2) of section 115WD, or;
- subsection (1) of section 142, or;
- under sub-section (1) of section 115WH, or;
- under section 148 for the making of the return, or;
- by the notice under the first proviso to section 115WF, or;
- Under the first proviso to section 144 to show cause why the assessment should not be completed to the best of the judgment of the Assessing Officer, whichever is earlier.
- Where an action has been taken under section 132 or section 132A, after the expiry of one month from the date on which he was served with a notice under sub-section (1) of section 153A or sub-section (2) of section 153C or after the completion of the assessment, whichever is earlier.
Significant Definitions under the Act
The Act provided certain definitions for a thorough knowledge of the meanings of various key terms. These definitions are provided under section 2 of the Act as follows:
- ‘Person’ is defined under section 2(31) as it includes an individual, HUF, company, firm, AOP, BOI, local authority; and every artificial juridical person not falling above.
- ‘Assessee’ is defined under section 2(7) as a person by whom income tax or any other sum of money is payable under this Act, and includes-
(a) Every person in respect of whom any proceeding under the Act has been taken for the assessment of his income or the income of any other person in respect of which he is assessable;
(b) Every person who is deemed to be an assessee, or
(c) Every person who is an assessee in default under any provision of this Act
- ‘Previous year’ is elaborated in two sections of the Act as:
- As under Section 2(34), it is defined as “Previous year means the previous year as defined in section 3”.
- Whereas, as per section 3 “previous year” means the financial year immediately preceding the assessment year, or, year in which income is earned is known as the previous year. All assessee required to follow the financial year (i.e. April 1 to March 31) as the previous year.
- Assessment year is defined under Section 2(9) of the Income Tax Act as:
- The 12 months period beginning from 1st April and ending on 31st March of the next year.
- The previous year’s income is taxed during the assessment year which is the following year.
- Income is defined under section 2 (24) is inclusive but by no means exhaustive or comprehensive:
- Any illegal income arising to the assessee
- Any income that is received at irregular intervals
- Any Taxable income that has been received from a source outside India
- Any benefit that can be measured in money
- Any subsidy or relief or reimbursement
- Gift the value of which exceeds INR 50,000 without any consideration by an individual or HUF.
- Any prize
- Casual incomes like winning from lotteries or horse race gambling etc.
Taxation Law in India and Constitutional Provisions
Articles 245 to 255 of the Indian Constitution relate taxation law with Union and States in the form of Legislative powers between the Parliament and Legislature of a State. Powers to make laws are provided under Articles 245, 246, and 248 of the Indian Constitution. Subject matter related to taxation laws is listed in Schedule VII of the Indian Constitution which means that laws can be made by parliament or state legislature. In respect of levy of taxes and duties, Union and States have the division of powers under Union List and State List, the summary of which is as follows:
- Article 265 No tax shall be collected except by the authority of law.
- Article 286(1) State Government cannot impose a tax on sale or purchase during imports or exports; or tax on sale outside the State.
- Article 286(2) Parliament is authorized to form principles related to sale or purchase in both the cases, outside the State and in the course of import and export.
- Article 286(3) Parliament can place restrictions such as a tax on sale or purchase of goods declared as goods of special significance and the State Government can tax such declared goods subject to these restrictions.
- Article 301 Trade and commerce, throughout the territory of India shall be free under Article 302 to 304 of the Indian Constitution.
- Article 302 Parliament in the public interest can place restriction on trade and commerce.
- Article 303 No discrimination should be made between one State and another, except in the situation when the Parliament has made such law to deal with the situation arising from the scarcity of goods.
- Article 304 State has a right to impose a tax on the goods brought from another State or Union Territories; however, State is not allowed to discriminate between goods manufactured in State and goods brought from other States. Moreover, the restriction imposed should be reasonable and such a bill should be sanctioned by President before introducing in State Legislature.
In the case of Justice K.S. Puttaswamy (RETD.) v. Union of India upholds the linking of Aadhaar number with PAN under Section 139AA in the Income-Tax Act, 1961. The mentioned section was introduced under the Finance Act 2017. The Apex Court held that every eligible person has to link Aadhaar with PAN Card. The contention rose under Article 14 and 19 of the Constitution of India were repelled. The court declared that privacy is a fundamental right, yet it is not an absolute right and is subject to certain limitations. The Court opined that “To prevent income tax evasion by requiring, through an amendment to the Income Tax Act, that the Aadhaar number be linked with the PAN.”
- India: Jurisdiction Under Income Tax; 20 March 2020; Singh & Associates; Available at https://www.mondaq.com/india/income-tax/904934/jurisdiction-under-income%20tax#:~:text=India%3A%20Jurisdiction%20Under%20Income%20Tax&text=Jurisdiction%20means%20legal%20authority%20over,make%20pronouncements%20on%20legal%20matters.
- LAW OF TAXATION; Girish Chandra and Revised by Dr. Furqan Ahmad; Available at http://126.96.36.199:8080/jspui/bitstream/123456789/738/17/Law%20of%20Taxation.pdf
- Addition Advertising v. Union of India 1998 (98) ELT 14
- MA Lagbu Udyog Bharati v. UOI 1999 (89) ELT 247
- Justice K.S. Puttaswamy (RETD.) v. Union of India  97 taxmann.com 585 (SC)