Charge of Income-tax [Section 4]

The levy of income-tax in India is governed by the Income-tax Act, 1961 ((the Act”). This Act came into force on 1st April, 1962. The Act contains 298 sections and XIV schedules. Section 4 of the Act, 1961 is the backbone of the Income-tax Act and the basic charging section under which income-tax is chargeable on the total income of every person.

Text of Section 4

Charge of income-tax

4. (1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person :

PROVIDED that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly.

(2) In respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act.

Taxation Only by Authority of Law [Article 265 of the Constitution of India]

Article 265 of the Constitution of India provides that “no tax shall be levied or collected except by the authority of law”. No tax can be imposed by an executive order. Therefore, no tax can be levied or collected in India, unless it is explicitly and clearly authorised by way of legislation. The Income-tax Act, 1961 was enacted to provide for levy and collection of tax on income earned by a person.

In the case of Chhotabhai v. Union of India, it was held that the law providing for imposition of tax must be a valid law that it should not be prohibited by any provisions of the constitution.

Basic Principles for Charging Income Tax [Section 4]

(i)       Income-tax is to be charged at the rate or rates fixed for the year by the annual Finance Act

(ii)     Tax is charged on every person as defined in section 2(31)

(iii)   The income of the previous year is taxed and not of the year of assessment

(iv)    The levy is on the total income of the assessable entity computed in accordance with and subject to the provisions of the Act

Tax is on Income of Previous year

Under section 4, the subject of charge is the Income of any person is to be assessed on the income earned by the person in the previous and not of assessment year. It means that if assessment year is 2022-23, then the income tax shall be paid on the amount earned by a person in the previous year i.e. 2021-22.

However there are certain exceptions under section 172 to 176 in which income tax can be levied on the income earned by a person in the assessment year.

Exceptions to the rules of previous year - Tax on Income earned in theIncome is Taxed in the same Year in which it is earned

As a normal rule, the income earned during any previous year is assessed or charged to tax in the immediately succeeding assessment year. However, in the following circumstances the income is taxed in the same year in which it is earned. Therefore, the assessment year and the previous year in these exceptional circumstances will be the same. These exceptions have been provided to safeguard the collection of taxes so that assessees, who may not be traceable later on, are not allowed to escape the payment of the taxes. The exceptions are as follows:

(i)          Shipping business of non-residents [Section 172]

(ii)         Assessment of persons leaving India [Section 174]

(iii)     Assessment of association of persons or body of individuals or artificial juridical person formed for a particular event or purpose [Section 174A]

(iv)       Assessment of persons likely to transfer property to avoid tax [Section 175]

(v)         Discontinued business [Section 176]

The word “income” is defined under section 2(24) of the Act.

The Act provides an inclusive definition of the expression “income”. Therefore, income includes not only those things which this definition explicitly declares, but also all such things as the word signifies according to its natural import.¹ 

Therefore, before arriving at a conclusion as to the tax implications of a receipt of money, it is imperative to determine whether or not such a receipt amounts to income under the Act. There will be no incidence of income tax if a receipt of money does not amount to income. For instance, it is important to distinguish a capital receipt from a revenue receipt because, while all revenue receipts are taxable under the Act, unless specifically exempted, a capital receipt cannot be taxed as income, unless otherwise provided for by the statute.

Rate of tax is applicable as specified by Annual Finance Act

According to the Act, every person, whose total income exceeds the maximum amount not chargeable to tax, shall be chargeable to income tax at the rate or rates prescribed in First Schedule of the Annual Finance Act of that year. Further, though the Finance Act prescribes the rates of tax, in respect of certain income, the Act itself has prescribed specific rates, e.g. Lottery income is to be taxed @ 30% (Section 115BB), Long term capital gain is to be taxed @ 20% (Section 112), short term capital gain on listed shares under section 111A is to be taxed @ 15%, etc.

Clause 31 of Section 2 of the Act defines the term “person” to include an individual, an HUF, a company, a firm (including LLP), an AOP or a BOI; a local authority and every other artificial juridical person.

Tax on ‘Total Income’ of Assessee, Subject to Provisions of the Income Tax Act

Income-tax is levied on an assessee’s total income. Such total income has to be computed as per the provisions contained in the Act. Full effect must be given to all exemptions and deductions granted under the provisions of the act.

Each year is Separate, Self-contained Period

It is a cardinal principle of the income-tax law that each assessment year is a separate self-contained period. Each "previous year" is a distinct unit of time for the purposes of assessment. For the purpose of computing yearly profits and gains, each year is a separate self-contained period of time, in regard to which profits earned or losses sustained before its commencement are irrelevant. It thus follows that a debt, which had in fact become a bad debt before the commencement of a particular year, could not properly be deducted in ascertaining the profits of that year, because the loss had not been sustained in that year.

Law to be applied is that in force in the assessment year

In income tax matters, the law to be applied is that in force in the assessment year in question, unless stated otherwise by express intendment or by necessary implication.

Income tax is to be deducted at the sources or paid in advance as provided under the provision of the Act [Section 4(2)]

In respect of income chargeable under section 4(1), income-tax shall be deducted at source, or paid in advance where it is so deductible or payable under any provision of this Act. The concept of TDS was introduced with an aim to collect tax from the very source of income. As per this concept, a person (deductor) who is liable to make payment of specified nature to any other person (deductee) shall deduct tax at source and remit the same into the account of the Central Government. As per section 208 of the Income Tax Act 1961, every person whose estimated tax liability for the year is more than or equal to  Rs. 10,000 is liable to pay advance tax.