Study MaterialWhat is Income Tax AND Important terms of Tax?

What is Income Tax AND Important terms of Tax?


What is Income Tax?

Income Tax is a direct tax. It is levied and picked up by the Central Government. The Government has found out a separate Income-Tax Department for this purpose.

It is a very important source of income for the Central Government Although income tax Is levied and collected by the Central Government yet a certain portion of it’s distributed among the states for his or their welfare projects.

The department functions under the direct control and supervision of the Central Board of Direct Taxes (CBDT) which is under the Finance Ministry of the Government.


The assessee is liable to pay tax on his income in the year immediately succeeding the year in which income was accrued. The income tax Act prescribed a uniform year to be allowed by all assessee for tax purposes.

The previous year (sec.3)

The previous year or the year of generation of income or financial year starts from Ist April of every year and ends on 31st March of next year.]

In the case of a newly established business, the primary previous year starts from the date of fixing of business and ends on 31st March of next year. The previous year is the same for all income of the assessee.

Assessment Year [(Sec.2(9)

Assessment year is a relative term used to denote the year in which tax is payable for the previous year. Assessment year for a previous year starts from 1″ April of Year in which Previous Year ends on 31 March of next year] Assessment year is always of 12 months.

In a simplified form, the previous year means the year in which income is earned and the assessment year means the year in which an assessee is liable to pay tax on the income earned during the previous year. The Current assessment year is 2018-19.

Definition of Person [Section-2 (31)]

According to Section 2(31) of the 1-T Act, the following are included in the term ‘person’.

1. An Individual: Individual means any natural person, whether he/she is a citizen of India or not.

2. A Hindu Undivided Family: Hindu Undivided family has not been defined in I-T Act but according to Hindu Law, a family which consists of all persons lineally descended from a common ancestor is a Hindu Undivided family.

It includes sons and unmarried daughters but excludes married daughters.

3. A company: A Company u/s-2(17) of the Income Tax Act includes the following:

a.Any Indian Company, or

b. Any body corporate incorporated under the laws of a far off country, or

c. Any institution, association, or body that is assessed or was assessable /assessed as an organization for any assessment year commencing on or before 1″ April 1970; or

institutions, association, or body, whether incorporated or not and whether Indian or not Indian, which is said by general or special order of Central Board of Directors Taxes (CBDT) to be a company.

4. A Firm: The firm includes a partnership firm whether registered or unregistered or a Limited liability partnership (LLP).

5. An Association of Persons: When two or more persons join in for common purposes or common action, it is called an association of persons. The term ‘Person’ includes natural persons, any company or AOP or BOI whether incorporated or not.

6. Body of Individuals: The body of Individuals is also like an association of persons but it cannot have members other than natural persons.

7. Local Authority: agency means a municipal committee, district board, body of port commissioners, or other authority legally entitled to or entrusted by the govt with the control and management of a municipal or local fund.

8. Every Artificial Judicial Person: It is a residual classification. Hence it covers only those persons or entities which are not covered by any of previous classifications like Bar Councils, Deities, etc.

Assessee’. [(Sec. 2(7)]

An assessee is a person who is liable to pay tax or any other sum due like interest or penalty under the income tax act. If any tax, penalty, interest, or any other sum is payable by a person under the Act, he will be termed as an assessee.

In addition, the following persons are also included:

(a) Any person liable to pay any sum under the Act whether or not any proceedings have been started against him.

(b) Any person against whom proceedings under the Act have been started whether or not he is liable to pay any sum.

(c)(The person liable for assessment for income of any person who is liable to be assessed for income and other person likes legal representative of a deceased person.

(d) The person is entitled to receive a refund in respect of himself or any other person mentioned above. (e) a person who is deemed to be an assessee e.g. representative assessee U/s 160 of Act.

(Any person who is treated as assessee in default e.g. If a person fails to deduct tax at source is assessee in default U/s 201(1) of the I.T. Act.


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