Income tax is a direct tax levied on the annual income of every person as defined under S.2(31) of the Income Tax Act, 1961. It is charged on the total income of the previous year at the rates prescribed by the annual Finance Act.
Legal Framework
| Provision | Content |
|---|---|
| S.4 | Charge of income tax: tax shall be charged on every person's total income |
| S.2(7) | "Assessee" means a person by whom any tax or other sum is payable |
| S.2(31) | "Person" includes individual, HUF, company, firm, AOP, BOI, local authority, artificial juridical person |
| S.5 | Scope of total income (based on residential status) |
| S.4(2) | Income tax charged at rates enacted by Finance Act for the year |
| S.2(45) | "Total income" means income as computed in accordance with the Act |
Key Definitions
| Term | Section | Meaning |
|---|---|---|
| Person | S.2(31) | Individual, HUF, Company, Firm, AOP, BOI, Local Authority, Artificial Juridical Person |
| Assessee | S.2(7) | Person by whom tax or sum of money is payable; includes deemed assessee and assessee in default |
| Assessment | S.2(8) | Determination of income and tax liability |
| Total Income | S.2(45) | Aggregate of incomes computed under 5 heads, after deductions u/s 80C-80U |
| Gross Total Income | S.80B(5) | Total of incomes under all heads before Chapter VI-A deductions |
Why: The Act uses these definitions as building blocks. Every computation starts by identifying who is the "person," what is their "income," and what is their "total income" after permissible deductions.
Categories of Assessee
| Category | Example |
|---|---|
| Ordinary assessee | Taxpayer who files return |
| Representative assessee (S.160) | Guardian of minor, trustee, agent of NRI |
| Deemed assessee (S.161) | Person treated as assessee in certain situations |
| Assessee in default (S.201) | Person who fails to deduct/deposit TDS |
Charging Section: S.4
The charging section is the foundation of income tax liability:
- Income tax shall be charged for any assessment year
- At the rates enacted by the Finance Act of that year
- In respect of total income of the previous year
- On every "person" as defined in S.2(31)
Why: S.4 is the charging section without which no liability arises. All other provisions are machinery provisions that facilitate computation and collection.
Recall Check
- Who is an "assessee" under S.2(7) of the Income Tax Act?
- What are the seven categories of "person" under S.2(31)?
- What is the distinction between "gross total income" and "total income"?
Key Cases
Navnit Lal Javeri v. KK Sen (1965) Navnit-Lal-Javeri-v-KK-Sen-1965 Issue: Whether the Income Tax Act can attribute income of one person to another. Rule: S.4 read with deeming provisions; income can be deemed to be that of a person other than the one who earned it. Held: The Act is a self-contained code. Deeming provisions are constitutionally valid; Parliament has power to attribute income for preventing tax evasion.
CIT v. Shaw Wallace and Co (1932) CIT-v-Shaw-Wallace-and-Co-1932 Issue: What constitutes "income" for the purpose of income tax. Rule: Income is a periodical monetary return coming in with regularity or expected regularity from a definite source. Held: Income implies a concept of periodicity, regularity, and source. It does not include casual or non-recurring receipts unless specifically included by statute.
Distinctions
| Feature | Gross Total Income (S.80B(5)) | Total Income (S.2(45)) |
|---|---|---|
| Stage | Before deductions | After deductions |
| Deductions | Not applied | Chapter VI-A (S.80C-80U) applied |
| Computation | Sum of 5 heads of income | GTI minus deductions |
| Use | Base for calculating deduction limits | Base for computing tax liability |
| Statutory reference | S.80B(5) | S.2(45) |
Flashcards
Q: What is the charging section for income tax? A: Section 4 of the Income Tax Act, 1961.
Q: Name the seven categories of "person" under S.2(31). A: Individual, HUF, Company, Firm, AOP (Association of Persons), BOI (Body of Individuals), Local Authority, Artificial Juridical Person.
Q: What is the difference between an ordinary assessee and a representative assessee? A: Ordinary assessee is liable on own income; representative assessee (S.160) is liable on behalf of another (e.g., guardian for minor, agent for NRI).
Q: At what rates is income tax charged? A: At the rates enacted by the Finance Act for the relevant assessment year (S.4(2)).
Q: What is "assessee in default" under S.201? A: A person who is required to deduct or collect tax at source but fails to do so.
Q: Define "Total Income" under S.2(45). A: Total income means the aggregate of incomes computed under the five heads, after allowing deductions under Chapter VI-A.
Exam Scenario
A trust manages income on behalf of a minor child whose parents are deceased. The Income Tax department issues a notice to the trust demanding payment of tax on the minor's income. The trust argues it is not the "person" earning the income. Advise.
Approach: Under S.160, a representative assessee (here, the trust/guardian) is liable to pay tax on behalf of the person (minor) whose income they manage. The trust qualifies as representative assessee. S.2(7) definition of assessee includes representative assessees. The notice is valid.