MS5210 - Legal Aspects of Business

Group – 7

Assignments – Income Tax Act 1961

Submitted By:

Abhishek S(MS19A002)

Anushya S (MS19A006)

Lakshmanan R(MS19A023)

Manan Banga (MS19A026)

Shruthi P (MS19A049)
1) Income Tax Act 1961 is used to implement the compliance of the other laws - discuss with
examples.

Overview of Income Tax in India: Income Tax in India is one of the biggest sources of revenue
for the Union Government. It is governed by Entry 82 of the Union List of the Seventh
Schedule to the Constitution of India, empowering the central government to tax non-
agricultural income. The Income Tax Act 1961 grants the Government powers for the levy,
administration, collection, and recovery of Income Tax. The purview of Income Tax falls under
the Central Board of Direct Taxes (CBDT).

Income Tax in India has a very chequered past, with the origins for the same going way back
to some of the earliest times in Ancient India. It finds mention in Raghuvansh, Arthashastra,
the Manusmriti etc. During British rule, in order to assuage the finance crisis that the
government was facing, the first ever Income Tax Act was introduced February 1860 by James
Wilson, British India's first finance minister. The Act kept being amended in 1918, 1922, 1939,
before being completely overhauled in 1961 by the present-day version of the Act that we
know today.

Features of the Income Tax Act 1961: Income Tax is levied on the income earned by different
classes of persons as defined in the Act. Persons here include:

• an individual
• a Hindu undivided family
• a company
• a firm
• an association of persons or a body of individuals, whether incorporated or not
• a local authority
• every artificial juridical person, not falling within any of the preceding sub-clauses.

They shall be taxed on all income, except for their agricultural income. This income is classified
under five broad heads. They are:

• Income from Salary

• Income from House Property
• Income from Business/Profession
 • Income from Capital Gains
• Income from Other sources (income not falling under any of the above heads)

Importance of Income Tax: Income tax, being one of the biggest examples of a direct tax,
plays a crucial role in the shaping of any country’s economic and social policies. It is a very
progressive tax, as compared to an indirect tax, in the sense that it taxes richer people higher.
Direct taxes, in addition to financing government expenditure, serve several functions. They
help in resource allocation, encourage, or discourage certain kinds of economic and social
behaviour, redistribute income and wealth, stimulate, and stabilise economic growth. Thus,
taxation, which started as an exercise to mobilising revenue for the Government, has become
an important instrument for achieving various objectives. Let us take a closer look at how
the Income Tax Act 1961 helps in the success of other laws.

Relation to compliance of other laws: Other than its primary objective of ensuring revenue
generation for the government through taxing incomes, the Income Tax Act 1961 also helps
in the compliance of other laws in the country. For instance, Section 43B of the Act provides
the details regarding the eligible deductions that can be claimed by the persons filing the
return. As the provisions of the section state, Section 43B provides that certain expenditure/
payments which are otherwise eligible for deduction under the Act shall be allowed as a
deduction only in the year of actual payment irrespective of the year of accrual of such
expenditure. The Nature of expenses covered under this section include any tax, duty, cess,
or fee under any law. It also takes cognizance of any contribution made by employer to any
provident fund or superannuation fund or gratuity fund or any other fund for the welfare of
employees; Bonus or commission to employees; Interest on any loan or borrowing from any
public financial institution or a State financial corporation or a State Industrial Investment
corporation; Interest on any loan or advances from a Scheduled bank; Sum payable by the
assessee as an employer by way of leave encashment.

Section 43B of the Act is covered by the Non-Obstante clause. This is a Latin word which
means 'notwithstanding anything contained'. That means this clause empowers the
legislation or a provision in which it contains, to override the effects of any other legal
provisions contrary to this under the same law or any other laws.
What this indicates is that the assessee would be able to claim any of these expenses under
his/her income as deductions only in the year in which they are paid. People paying their
expenses off in the current year would enable them to claim the same as expenses and
deductions under their income earned, helping them to lower their taxes to be paid. This
means that the assessee would have more incentives to file his/her returns and pay these
expenses under the other relevant laws as and when they incur it, instead of pushing them
for later. This aspect of the Act serves as a huge boost for the guardians or gatekeepers of the
numerous other laws that are prevalent in India. One of the biggest stumbling blocks for the
government with regard to the revenue generation is the problem of tax evasion by assesses
in the country. The government and all the various taxation authorities in the country have
tried coming up with multiple solutions to this growing menace and have seen varying
degrees of success in the same. In that regard, this section of the Income Tax Act 1961
provides a small, albeit crucial fill-up for higher compliances of more laws in the country, as
and when applicable.
2) Are so many exemptions, deductions, allowances, and reliefs given in the Income Tax Act
necessary – discuss with examples.

Before getting on to the necessities and place for the various deductions, exemptions,
allowances etc. given in the Income Tax Act, it would be pertinent to note that a tax deduction
and a tax exemption are completely different and have varying purposes to serve. A deeper
analysis needs to be done on what they mean and consist of before we could get into
answering the question at hand. Let us now take a brief look at each of them. A tax exemption
is an amount that is completely exempt from tax and thus, not included in one’s total tax
liability. A tax deduction is a particular amount, which is reduced from an individual’s total
tax liability.

Exemption: Tax exemptions in India are covered under Section 10 of the Income Tax Act 1961.
All the allowances that are part of the Act come under the definition of an exemption. The
most famous ones among them being:

• House Rent Allowance (HRA)

• Entertainment Allowance
• Conveyance Allowance
• Education Allowance
• Leave travel Allowance
• Hostel Allowance
• City Compensatory Allowance

Exemptions are such that, for a specified portion of the amount for the relevant item, no tax
will be charged on it. For instance, exemptions received on HRA will be the minimum of; (A)
Total HRA received be one’s employer, (B) 50% of income of individuals living in metro cities,
or 40% for those living in non-metro cities, and (C) Rent minus 10% of income. This is one of
the most famous allowances provided under the Income Tax Act, with cognizance being taken
of the fact that a salaried individual would likely find house rent to be a very crucial part of
his/her salary component. Similarly is the case for the rest of the allowances that are allowed
for. Hence, it can be safely said that exemptions are a very significant and sizeable portion of
the individual tax payer.
Deduction: Income tax deductions help lower one’s taxable income and ultimately lower how
much income tax an individual pays at the end of a fiscal year. Put simply, income tax
deductions are tax-free expenses made during the year, which are then subtracted from one’s
gross annual income at the time of filing tax returns. Tax deductions are covered between the
scope of Section 80C to 80U of the Income Tax Act. Some examples of Income Tax deductions
are investments made in Equity Linked Savings Scheme (ELSS), Public Provident Fund (PPF),
and National Pension Scheme (NPS). However, there is one other form of deduction covered
under Section 16 of the Act, which specifically provides for deduction of three different items
from salary income, i.e., Standard Deduction, Entertainment Allowance, and Professional Tax.
Section 80C is the most extensively used option for saving income tax. Here, an individual or
a HUF (Hindu Undivided Families) who invests or spends on stipulated tax-saving avenues can
claim deduction up to Rs. 1.5 lakh for tax deduction.

Section 33 of the Act provides a deduction of a developmental rebate for an assessee

possessing a ship, and carrying out his/her business out of the ship. The costs of any
machinery or plant installed in the ship would also come under the purview of this section
with regards to earning the deduction of rebate. On similar lines, Section 35 of the Act
provides for deduction for any expenditure laid out or expended on scientific research related
to the business in nature of salary of person engaged in such research or acquisition of
material required for such research.

Getting to the subject matter at hand, what is the point of all the exemptions, deductions,
reliefs that have been provided in the Income Tax Act? These exemptions and deductions
serve the purpose of giving the tax payer some leeway in the filing and payment of his/her
income tax return. India has been suffering from the issue of too many tax evasions and
avoidances, with less than 5% of the country’s adult population paying income taxes. This is
one issue that the government has been desperately hoping to find a solution to, in order to
shore up its treasuries and reserves. An exemption provides a taxpayer lesser amounts of
taxable income in which he/she has to finally pay tax. A deduction on the other hand, allows
the taxpayer to make certain expenditure throughout the previous year for various reasons,
specified under the Act, following which, he/she would be eligible for either whole or partial
amount of deduction from their taxable income, before paying tax. These would go a great
way in reducing the eventual tax burden of the assessee, and are seen as incentives provided
by the government in order to ensure more compliance in the country.

One crucial aspect that also needs to be taken into account is the fact that these deductions
and exemptions are granted for various research activities and project works. Providing
taxation benefits for these go a huge way in signalling intent and support in helping boost
their viability and eventual success. A country’s scientific achievements and research and
development fields should always be incentivised and given more tax benefits, and relief
measures. These can also be seen in the way Special Economic Zones (SEZ) are set up and
allowed to operate and function. These go beyond the usual profit earning objectives, and
contribute to the purpose of nation building. Tax free zones are also much heard of, wherein
new businesses and operations would be given sizeable opportunities for setting up.

Considering all the above points, it would make prudent sense for the income tax laws to
continue with the existing exemptions, allowances, deductions and reliefs that are being
provided to taxpayers, as they contribute to the ultimate goal of creating a larger ecosystem
of development and growth for the country. Hence, the above benefits are very much
necessary in the Income Tax Act.