History of Income Tax in India | Income Tax Laws - B Com PDF Download

 Page 1


 
Brief history income tax in india 
In India ,this tax was introduced for the first time in 1860,by Sir James Wilson in order to 
meet the losses sustained by the Government on account of the Military Mutiny of 
1857.Thereafter ,several amendments were made in it from time to time. In  
1886,a separate Income tax act was passed. This act remained in force up to, with 
various amendments from time to time. In 1918, a new income tax was passed and again it 
was replaced by another new act which was passed in 1922.This Act remained in force up to 
the assessment year 1961-62 with numerous amendments. The Income Tax Act 1961 has 
been brought into force with 1 April 1962.It applies to the whole of India and 
Sikkim(including Jammu and Kashmir).Since 1962 several amendments of far-reaching 
nature have been made in the Income Tax Act by the Union Budget every year. 
Income tax 
Annual charge levied on both earned income (wages, salaries, commission) and unearned 
income (dividends, interest, rents). In addition to financing a government's operations, 
progressive income taxation is designed to distribute wealth more evenly in a population and 
to serve as automatic fiscal stabilizer to cushion the effects of economic cycles. Its two basic 
types are (1) Personal income tax, levied on incomes of individuals, households, partnerships, 
and sole-proprietorships; and (2) Corporation income tax, levied on profits (net earnings) of 
incorporated firms. However, presence of tax loopholes (whose number increases in direct 
proportion to the complexity of tax code) may allow some wealthy persons to escape higher 
taxes without violating the letter of the tax laws. 
jagannath ramanuj das v/s state of orissa AIR 1954 
supreme court held “a tax is undoubtly in nature of a compulsory exaction of money by 
public authority for public purpose” 
 important concepts in income tax 
Income: Income is money that an individual or business receives in exchange for 
providing a good or service or through investing capital 
under section 2 (24) "income" includes— 
Page 2


 
Brief history income tax in india 
In India ,this tax was introduced for the first time in 1860,by Sir James Wilson in order to 
meet the losses sustained by the Government on account of the Military Mutiny of 
1857.Thereafter ,several amendments were made in it from time to time. In  
1886,a separate Income tax act was passed. This act remained in force up to, with 
various amendments from time to time. In 1918, a new income tax was passed and again it 
was replaced by another new act which was passed in 1922.This Act remained in force up to 
the assessment year 1961-62 with numerous amendments. The Income Tax Act 1961 has 
been brought into force with 1 April 1962.It applies to the whole of India and 
Sikkim(including Jammu and Kashmir).Since 1962 several amendments of far-reaching 
nature have been made in the Income Tax Act by the Union Budget every year. 
Income tax 
Annual charge levied on both earned income (wages, salaries, commission) and unearned 
income (dividends, interest, rents). In addition to financing a government's operations, 
progressive income taxation is designed to distribute wealth more evenly in a population and 
to serve as automatic fiscal stabilizer to cushion the effects of economic cycles. Its two basic 
types are (1) Personal income tax, levied on incomes of individuals, households, partnerships, 
and sole-proprietorships; and (2) Corporation income tax, levied on profits (net earnings) of 
incorporated firms. However, presence of tax loopholes (whose number increases in direct 
proportion to the complexity of tax code) may allow some wealthy persons to escape higher 
taxes without violating the letter of the tax laws. 
jagannath ramanuj das v/s state of orissa AIR 1954 
supreme court held “a tax is undoubtly in nature of a compulsory exaction of money by 
public authority for public purpose” 
 important concepts in income tax 
Income: Income is money that an individual or business receives in exchange for 
providing a good or service or through investing capital 
under section 2 (24) "income" includes— 
(i) profits and gains; 
(ii) dividend; 
(iii) the value of any perquisite or profit in lieu of salary taxable under clauses (2) 
and (3) of section 17; 
(iv) the value of any benefit or perquisite, whether convertible into money or not, 
obtained from a company either by a director or by a person who has a 
substantial interest in the company, or by a relative of the director or such 
person, and any sum paid by any such company in respect of any obligation 
which, but for such payment, would have been payable by the director or other 
person aforesaid; 
(v) any sum chargeable to income-tax under clauses (ii) and (iii) of section 28 or 
section 41 or section 59; 
(vi) any capital gains chargeable under section 45; 
(vii) the profits and gains of any business of insurance carried on by a mutual 
insurance company or by a co-operative society, computed in accordance with 
section 44 or any surplus taken to be such profits and gains by virtue of 
provisions contained in the First Schedule; 
In commissioner of income-tax v/s shaw wallace and company 1923 
Sir george lowndes defined income as follows 
“Income,  in this Act connotes a periodical monetary return " coming in" with some 
sort of regularity, or expected regularity, from definite sources. The source is not 
necessarily one which is expected to be continuously productive, but it must be one 
whose object is the production of a definite return, excluding anything in the nature of 
a mere windfall.” 
Agricultural income 
As per section 2(1A), agricultural income generally means: 
(a) Any rent or revenue derived from land which is situated in India and is used for 
agricultural purposes. 
(b) Any income derived from such land by agriculture operations including processing of 
agricultural produce so as to render it fit for the market or sale of such produce. 
(c) Any income attributable to a farm house subject to satisfaction of certain conditions 
Page 3


 
Brief history income tax in india 
In India ,this tax was introduced for the first time in 1860,by Sir James Wilson in order to 
meet the losses sustained by the Government on account of the Military Mutiny of 
1857.Thereafter ,several amendments were made in it from time to time. In  
1886,a separate Income tax act was passed. This act remained in force up to, with 
various amendments from time to time. In 1918, a new income tax was passed and again it 
was replaced by another new act which was passed in 1922.This Act remained in force up to 
the assessment year 1961-62 with numerous amendments. The Income Tax Act 1961 has 
been brought into force with 1 April 1962.It applies to the whole of India and 
Sikkim(including Jammu and Kashmir).Since 1962 several amendments of far-reaching 
nature have been made in the Income Tax Act by the Union Budget every year. 
Income tax 
Annual charge levied on both earned income (wages, salaries, commission) and unearned 
income (dividends, interest, rents). In addition to financing a government's operations, 
progressive income taxation is designed to distribute wealth more evenly in a population and 
to serve as automatic fiscal stabilizer to cushion the effects of economic cycles. Its two basic 
types are (1) Personal income tax, levied on incomes of individuals, households, partnerships, 
and sole-proprietorships; and (2) Corporation income tax, levied on profits (net earnings) of 
incorporated firms. However, presence of tax loopholes (whose number increases in direct 
proportion to the complexity of tax code) may allow some wealthy persons to escape higher 
taxes without violating the letter of the tax laws. 
jagannath ramanuj das v/s state of orissa AIR 1954 
supreme court held “a tax is undoubtly in nature of a compulsory exaction of money by 
public authority for public purpose” 
 important concepts in income tax 
Income: Income is money that an individual or business receives in exchange for 
providing a good or service or through investing capital 
under section 2 (24) "income" includes— 
(i) profits and gains; 
(ii) dividend; 
(iii) the value of any perquisite or profit in lieu of salary taxable under clauses (2) 
and (3) of section 17; 
(iv) the value of any benefit or perquisite, whether convertible into money or not, 
obtained from a company either by a director or by a person who has a 
substantial interest in the company, or by a relative of the director or such 
person, and any sum paid by any such company in respect of any obligation 
which, but for such payment, would have been payable by the director or other 
person aforesaid; 
(v) any sum chargeable to income-tax under clauses (ii) and (iii) of section 28 or 
section 41 or section 59; 
(vi) any capital gains chargeable under section 45; 
(vii) the profits and gains of any business of insurance carried on by a mutual 
insurance company or by a co-operative society, computed in accordance with 
section 44 or any surplus taken to be such profits and gains by virtue of 
provisions contained in the First Schedule; 
In commissioner of income-tax v/s shaw wallace and company 1923 
Sir george lowndes defined income as follows 
“Income,  in this Act connotes a periodical monetary return " coming in" with some 
sort of regularity, or expected regularity, from definite sources. The source is not 
necessarily one which is expected to be continuously productive, but it must be one 
whose object is the production of a definite return, excluding anything in the nature of 
a mere windfall.” 
Agricultural income 
As per section 2(1A), agricultural income generally means: 
(a) Any rent or revenue derived from land which is situated in India and is used for 
agricultural purposes. 
(b) Any income derived from such land by agriculture operations including processing of 
agricultural produce so as to render it fit for the market or sale of such produce. 
(c) Any income attributable to a farm house subject to satisfaction of certain conditions 
specified in this regard in section 2(1A). 
Any income derived from saplings or seedlings grown in a nursery shall be deemed to be 
agricultural income. 
Mustafa Ali Khan v/s CIT 1948 :Held, rent of agricultural land received from subtenant by 
mortgage in possession is agricultural income 
CIT V/s cidanbaran pillai(1970): Held ,share of profit of a partner from firmengaged in 
agricultural operation is agricultural income 
following is not agricultural income 
a)    Income from poultery farming. 
(b)   Income from bee hiving. 
(c)    Income from sale of  spontaneously grown trees. 
(d)   Income from dairy farming. 
(e)    Purchase of standing crop. 
(f)    Dividend paid by a company out of its agriculture income. 
(g)   Income of salt produced by flooding the land with sea water. 
(h)   Royalty income from mines. 
(i)     Income from butter and cheese making. 
(j)     Receipts from TV serial shooting in farm house is not agriculture income.  
Certain points to be remembered; 
(a)    Agricultural income is considered for rate purpose while computing tax of 
Individual/HUF/AOP/BOI/Artificial Judicial Person. 
(b)   Losses from agricultural operations could be carried forward and set off with agricultural 
income of next eight assessment years. 
Page 4


 
Brief history income tax in india 
In India ,this tax was introduced for the first time in 1860,by Sir James Wilson in order to 
meet the losses sustained by the Government on account of the Military Mutiny of 
1857.Thereafter ,several amendments were made in it from time to time. In  
1886,a separate Income tax act was passed. This act remained in force up to, with 
various amendments from time to time. In 1918, a new income tax was passed and again it 
was replaced by another new act which was passed in 1922.This Act remained in force up to 
the assessment year 1961-62 with numerous amendments. The Income Tax Act 1961 has 
been brought into force with 1 April 1962.It applies to the whole of India and 
Sikkim(including Jammu and Kashmir).Since 1962 several amendments of far-reaching 
nature have been made in the Income Tax Act by the Union Budget every year. 
Income tax 
Annual charge levied on both earned income (wages, salaries, commission) and unearned 
income (dividends, interest, rents). In addition to financing a government's operations, 
progressive income taxation is designed to distribute wealth more evenly in a population and 
to serve as automatic fiscal stabilizer to cushion the effects of economic cycles. Its two basic 
types are (1) Personal income tax, levied on incomes of individuals, households, partnerships, 
and sole-proprietorships; and (2) Corporation income tax, levied on profits (net earnings) of 
incorporated firms. However, presence of tax loopholes (whose number increases in direct 
proportion to the complexity of tax code) may allow some wealthy persons to escape higher 
taxes without violating the letter of the tax laws. 
jagannath ramanuj das v/s state of orissa AIR 1954 
supreme court held “a tax is undoubtly in nature of a compulsory exaction of money by 
public authority for public purpose” 
 important concepts in income tax 
Income: Income is money that an individual or business receives in exchange for 
providing a good or service or through investing capital 
under section 2 (24) "income" includes— 
(i) profits and gains; 
(ii) dividend; 
(iii) the value of any perquisite or profit in lieu of salary taxable under clauses (2) 
and (3) of section 17; 
(iv) the value of any benefit or perquisite, whether convertible into money or not, 
obtained from a company either by a director or by a person who has a 
substantial interest in the company, or by a relative of the director or such 
person, and any sum paid by any such company in respect of any obligation 
which, but for such payment, would have been payable by the director or other 
person aforesaid; 
(v) any sum chargeable to income-tax under clauses (ii) and (iii) of section 28 or 
section 41 or section 59; 
(vi) any capital gains chargeable under section 45; 
(vii) the profits and gains of any business of insurance carried on by a mutual 
insurance company or by a co-operative society, computed in accordance with 
section 44 or any surplus taken to be such profits and gains by virtue of 
provisions contained in the First Schedule; 
In commissioner of income-tax v/s shaw wallace and company 1923 
Sir george lowndes defined income as follows 
“Income,  in this Act connotes a periodical monetary return " coming in" with some 
sort of regularity, or expected regularity, from definite sources. The source is not 
necessarily one which is expected to be continuously productive, but it must be one 
whose object is the production of a definite return, excluding anything in the nature of 
a mere windfall.” 
Agricultural income 
As per section 2(1A), agricultural income generally means: 
(a) Any rent or revenue derived from land which is situated in India and is used for 
agricultural purposes. 
(b) Any income derived from such land by agriculture operations including processing of 
agricultural produce so as to render it fit for the market or sale of such produce. 
(c) Any income attributable to a farm house subject to satisfaction of certain conditions 
specified in this regard in section 2(1A). 
Any income derived from saplings or seedlings grown in a nursery shall be deemed to be 
agricultural income. 
Mustafa Ali Khan v/s CIT 1948 :Held, rent of agricultural land received from subtenant by 
mortgage in possession is agricultural income 
CIT V/s cidanbaran pillai(1970): Held ,share of profit of a partner from firmengaged in 
agricultural operation is agricultural income 
following is not agricultural income 
a)    Income from poultery farming. 
(b)   Income from bee hiving. 
(c)    Income from sale of  spontaneously grown trees. 
(d)   Income from dairy farming. 
(e)    Purchase of standing crop. 
(f)    Dividend paid by a company out of its agriculture income. 
(g)   Income of salt produced by flooding the land with sea water. 
(h)   Royalty income from mines. 
(i)     Income from butter and cheese making. 
(j)     Receipts from TV serial shooting in farm house is not agriculture income.  
Certain points to be remembered; 
(a)    Agricultural income is considered for rate purpose while computing tax of 
Individual/HUF/AOP/BOI/Artificial Judicial Person. 
(b)   Losses from agricultural operations could be carried forward and set off with agricultural 
income of next eight assessment years. 
(c)    Agriculture income is computed same as business income. 
Assessee Section 2(7) 
Is a noun derived from verb “assess” dictionary meaning of which is “to evaluate or estimate 
the value”  
 " assessee" means a person by whom
 
 any tax or any other sum of money is payable under 
this Act, and includes- 
(a) every person in respect of whom any proceeding under this Act has been taken for the 
assessment of his income or of the income of any other person in respect of which he is 
assessable, or of the loss sustained by him or by such other person, or of the amount of refund 
due to him or to such other person; 
(b) every person who is deemed to be an assessee under any provision of this Act; 
(c) every person who is deemed to be an assessee in default under any provision of this Act; 
CIT v/s udhoji Shri Krishanadas (M.P high court, 2004) 
Held from section 2(7), its clear that term assessee includes actual as well as deemed assesses 
under provisions of Act. 
Assessment year S.2(9) Income Tax 
Assessment year is basically a 12 months period starting from April 1, during which an 
assessee is required to file the return of income (ITR) and the ITO has to initiate assessment 
proceedings for income as per ITR and tax thereon. Since Income Tax is on income of a 
financial/ previous year or period, so tax filings and assessment can start thereafter. 
Probably, that’s why it’s called assessment year/ period. 
As per S.2(9) of the Income Tax Act, 1961, unless the context otherwise requires, the term 
“assessment year” means the period of twelve months commencing on the 1st day of April 
every year 
What is the difference between Financial Year and Assessment Year? 
Page 5


 
Brief history income tax in india 
In India ,this tax was introduced for the first time in 1860,by Sir James Wilson in order to 
meet the losses sustained by the Government on account of the Military Mutiny of 
1857.Thereafter ,several amendments were made in it from time to time. In  
1886,a separate Income tax act was passed. This act remained in force up to, with 
various amendments from time to time. In 1918, a new income tax was passed and again it 
was replaced by another new act which was passed in 1922.This Act remained in force up to 
the assessment year 1961-62 with numerous amendments. The Income Tax Act 1961 has 
been brought into force with 1 April 1962.It applies to the whole of India and 
Sikkim(including Jammu and Kashmir).Since 1962 several amendments of far-reaching 
nature have been made in the Income Tax Act by the Union Budget every year. 
Income tax 
Annual charge levied on both earned income (wages, salaries, commission) and unearned 
income (dividends, interest, rents). In addition to financing a government's operations, 
progressive income taxation is designed to distribute wealth more evenly in a population and 
to serve as automatic fiscal stabilizer to cushion the effects of economic cycles. Its two basic 
types are (1) Personal income tax, levied on incomes of individuals, households, partnerships, 
and sole-proprietorships; and (2) Corporation income tax, levied on profits (net earnings) of 
incorporated firms. However, presence of tax loopholes (whose number increases in direct 
proportion to the complexity of tax code) may allow some wealthy persons to escape higher 
taxes without violating the letter of the tax laws. 
jagannath ramanuj das v/s state of orissa AIR 1954 
supreme court held “a tax is undoubtly in nature of a compulsory exaction of money by 
public authority for public purpose” 
 important concepts in income tax 
Income: Income is money that an individual or business receives in exchange for 
providing a good or service or through investing capital 
under section 2 (24) "income" includes— 
(i) profits and gains; 
(ii) dividend; 
(iii) the value of any perquisite or profit in lieu of salary taxable under clauses (2) 
and (3) of section 17; 
(iv) the value of any benefit or perquisite, whether convertible into money or not, 
obtained from a company either by a director or by a person who has a 
substantial interest in the company, or by a relative of the director or such 
person, and any sum paid by any such company in respect of any obligation 
which, but for such payment, would have been payable by the director or other 
person aforesaid; 
(v) any sum chargeable to income-tax under clauses (ii) and (iii) of section 28 or 
section 41 or section 59; 
(vi) any capital gains chargeable under section 45; 
(vii) the profits and gains of any business of insurance carried on by a mutual 
insurance company or by a co-operative society, computed in accordance with 
section 44 or any surplus taken to be such profits and gains by virtue of 
provisions contained in the First Schedule; 
In commissioner of income-tax v/s shaw wallace and company 1923 
Sir george lowndes defined income as follows 
“Income,  in this Act connotes a periodical monetary return " coming in" with some 
sort of regularity, or expected regularity, from definite sources. The source is not 
necessarily one which is expected to be continuously productive, but it must be one 
whose object is the production of a definite return, excluding anything in the nature of 
a mere windfall.” 
Agricultural income 
As per section 2(1A), agricultural income generally means: 
(a) Any rent or revenue derived from land which is situated in India and is used for 
agricultural purposes. 
(b) Any income derived from such land by agriculture operations including processing of 
agricultural produce so as to render it fit for the market or sale of such produce. 
(c) Any income attributable to a farm house subject to satisfaction of certain conditions 
specified in this regard in section 2(1A). 
Any income derived from saplings or seedlings grown in a nursery shall be deemed to be 
agricultural income. 
Mustafa Ali Khan v/s CIT 1948 :Held, rent of agricultural land received from subtenant by 
mortgage in possession is agricultural income 
CIT V/s cidanbaran pillai(1970): Held ,share of profit of a partner from firmengaged in 
agricultural operation is agricultural income 
following is not agricultural income 
a)    Income from poultery farming. 
(b)   Income from bee hiving. 
(c)    Income from sale of  spontaneously grown trees. 
(d)   Income from dairy farming. 
(e)    Purchase of standing crop. 
(f)    Dividend paid by a company out of its agriculture income. 
(g)   Income of salt produced by flooding the land with sea water. 
(h)   Royalty income from mines. 
(i)     Income from butter and cheese making. 
(j)     Receipts from TV serial shooting in farm house is not agriculture income.  
Certain points to be remembered; 
(a)    Agricultural income is considered for rate purpose while computing tax of 
Individual/HUF/AOP/BOI/Artificial Judicial Person. 
(b)   Losses from agricultural operations could be carried forward and set off with agricultural 
income of next eight assessment years. 
(c)    Agriculture income is computed same as business income. 
Assessee Section 2(7) 
Is a noun derived from verb “assess” dictionary meaning of which is “to evaluate or estimate 
the value”  
 " assessee" means a person by whom
 
 any tax or any other sum of money is payable under 
this Act, and includes- 
(a) every person in respect of whom any proceeding under this Act has been taken for the 
assessment of his income or of the income of any other person in respect of which he is 
assessable, or of the loss sustained by him or by such other person, or of the amount of refund 
due to him or to such other person; 
(b) every person who is deemed to be an assessee under any provision of this Act; 
(c) every person who is deemed to be an assessee in default under any provision of this Act; 
CIT v/s udhoji Shri Krishanadas (M.P high court, 2004) 
Held from section 2(7), its clear that term assessee includes actual as well as deemed assesses 
under provisions of Act. 
Assessment year S.2(9) Income Tax 
Assessment year is basically a 12 months period starting from April 1, during which an 
assessee is required to file the return of income (ITR) and the ITO has to initiate assessment 
proceedings for income as per ITR and tax thereon. Since Income Tax is on income of a 
financial/ previous year or period, so tax filings and assessment can start thereafter. 
Probably, that’s why it’s called assessment year/ period. 
As per S.2(9) of the Income Tax Act, 1961, unless the context otherwise requires, the term 
“assessment year” means the period of twelve months commencing on the 1st day of April 
every year 
What is the difference between Financial Year and Assessment Year? 
AY is the assessment year and FY is the financial year. From an income tax perspective, FY 
is the year in which you earn an income. AY is the year following the financial year in which 
you have to evaluate the previous year’s income and pay taxes on it.  
For example, if your financial year is from 1 April 2015 to 31 March 2016, then it is known 
as FY2015-16. The assessment year for income earned during this period would begin after 
the financial year ends–that is on 1 April 2016 till 31 March 2017. Hence, the assessment 
year would be AY2016-17. 
Previous Year: S.2(34)  Income Tax 
Previous basically indicates an event previous to another event. Under Income Tax main 
event is assessment, i.e. filings by assessees and their review by the ITO, which may start 
after end of the year / period during which earnings are made and that period is called 
previous year / financial year. Those earnings are subjected to tax in the following period / 
year which is called assessment year / period. 
As per S.2(34) of Income Tax Act, 1961, unless the context otherwise requires, the 
term “previous year” means the previous year as defined in section 3. 
In view of above, we need to visit definition of previous year under Section 3 also, as under: 
As per S.3 of Income Tax Act, 1961, for the purposes of this Act, the term “previous year” 
means the financial year immediately preceding the assessment year. 
Provided that, in the case of a business or profession newly set up, or a source of income 
newly coming into existence, in the said financial year, the previous year shall be the period 
beginning with the date of setting up of the business or profession or, as the case may be, the 
date on which the source of income newly comes into existence and ending with the said 
financial year. 
What is the difference between previous Year and Assessment Year? 
assessment year is the year in which income is evaluated and taxed. This evaluation and 
taxation is done on income that is earned in the previous year, which is known as the 
financial year.