Charge of Income Tax

Charge of Income Tax (Section 4 of Income Tax)

Charge of Income Tax - Section 4 of Income Tax Act, 1961

According to Article 265 of Constitution of India, no tax can be levied or collected except with the authority of Law. Therefore, in every tax law there is a charging section which gives authority to charge such tax from the assessee.

Under Income Tax Act, 1961, Section 4 is the charging section. It gives authority for charging of Income Tax.

Section 4 of Income Tax Act, 1961

  1. Where any Central Act (Finance 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 of, this Act (Income Tax Act, 1961) 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.

Thus according to Section 4(1),

  • Income-tax shall be charged only if a Central Act (Finance Act) states so.
  • Income-tax shall be charged at the rate or rates as specified in the Central Act (Finance Act)
  • Income-tax shall be charged in respect of the total income of the previous year of every person
  • Income-tax shall be charged in the assessment year

It means, according to Section 4(1),

  • income of one financial year (known as previous year) is taxable in following financial year (known as assessment year)

Concept is very simple. We can ascertain our total income of any year after completion of that year only. Suppose I earned Rs. 10 Lakhs throughout the year but on the last day of year I suffered loss of Rs. 7 lakhs. Thus my final income of entire year is Rs. 3 L only.

But

  • Government needs continuous revenue to administer country. Government can’t wait for one year.
  • Further deferment (delay) of tax payment may increase the chance of tax evasion.
  • People may spend all money they earn. It is possible that some people may not save money to pay taxes in next year.

Therefore, according to Section 4(2),

  • income tax payable in assessment year can be collected by government in the previous year itself in the form of
    • tax deduction at source (TDS) and
    • advance tax

So according to Section 4(1), final assessment shall be done in assessment year only, but according to Section 4(2), assesse may be required to pay some amount of tax as soon as income comes into existence. This concept is also known as pay as you earn.

Example of TDS
Suppose I have taken the house of Mr. Aallu on rent for which I have to pay Rs. 30,000 p.m as rent.

Now, this amount of Rs. 30,000 p.m is the income of Mr. Aallu. According to the concept of TDS, it is my (source of income) duty/responsibility to deduct certain amount from the rent as per income tax laws and deposit such amount with the government as tax on behalf of Mr. Aallu.

Suppose, according to income tax laws, I deducted 10% rent (Rs. 3000). Thus Mr. Aallu will get Rs. 27,000 only. So, we can say that tax of Rs. 3000 is paid by Mr. Aallu to the government in the same year (previous year) in which income is earned.

This is not the final tax. Final assessment of total tax liability of Mr. Aallu shall be done in the next year (assessment year).

Thus according to the concept of TDS, it is the duty of source to deduct the amount stated in income tax laws and deposit that amount with the government on behalf of assessee.

What if the final tax liability of assesse is less than the amount of TDS deposited on his behalf throughout the previous year?

  • Assessee will get refund of excess tax deposited on his behalf in the form of TDS.

What if the final tax liability of assesse is more than the amount of TDS deposited on his behalf throughout the previous year?

  • Assessee shall pay the difference between final tax liability and TDS deposited on his behalf throughout the previous year

Example of Advance Tax
Suppose I am businessman. In the first 2 months (April and May), I earned profit of Rs. 3 Lakhs. On the basis of this earning, it is estimated that this year I may earn profit of Rs. 15 Lakhs nearly. According to the provisions of advanced tax, I am required to calculate my advance tax liability on the basis of income which is estimated to be earned throughout the year and I shall pay atleast 15% of such tax liability by 15th June.

Similarly, in September, I have to re-make an estimate of my income which I may earn in the year. On the basis of that estimate I have to calculate my advance tax liability and I shall pay atleast 45% of such tax liability (after reducing the amount which I paid earlier) by 15th September.

In this way advanced income tax is collected by government.

Cases where income is assessable in the same financial year (previous year) instead of next year (assessment year) - Exceptions of Section 4

According to Section 4, income of previous year is assessable in the assessment year, although government may take some amount of tax in the previous year in the form of TDS and advance tax.

But in some cases, where government feels that it would be difficult to recover taxes in the assessment year, income of previous year is assessable in the previous year itself.

  1. Shipping business of non-residents [Section 173]
    A non-resident who is carrying on a shipping business and earns income from carrying passengers / livestock/goods from a port in India, shall be charged to income-tax before the ship is allowed to leave the Indian port.

    In this case 7.5% of the amount of fare/freight/charge, etc. shall be deemed to be income of such assessee on which the income-tax will be charged. Therefore, in this case the tax is chargeable on the income in the same year in which it is earned.

  2. Assessment of persons leaving India [174]
    When it appears to the Assessing Officer that any individual may leave India during the current assessment year or shortly after its expiry, and such individual has no present intention of returning to India, the total income of such individual, from the expiry of previous year for that assessment year (i.e. from 1st April of the assessment year) up to the probable date of his departure from India shall be chargeable to tax in the same assessment year.
    Example —Mr Aallu wishes to migrate to USA permanently and plans to leave India on 15-11-2021. He submitted his return for assessment year 2021-22 on 31-7-2021, the assessment of which is still pending.

    In this case the Assessing Officer will make two assessments:

    • Regular assessment for previous year income of 2020-21 at the rates applicable for assessment year 2021-22.
    • Assessment of income of the period 1-4-2021 to 15-11-2021 (either actual or on estimated basis) and tax should be levied on such income in the assessment year 2021-22 itself but at the rates of advance tax for financial year 2021-22  given in part III of First Schedule of Finance Act, 2021.
  1. Assessment of association of persons or body of individuals or artificial juridical person formed for a particular event or purpose [Section 174A]
    Where it appears to the Assessing Officer that any association of persons or a body of individuals or any artificial juridical person formed or established or incorporated for a particular event or purpose is likely to be dissolved in the financial year in which such association of persons or body of individuals or artificial juridical person was formed or established or incorporated or immediately after such financial year, the total income of such person or body or juridical person, for the period from the expiry of the previous year for that assessment year up to the date of its dissolution, shall be chargeable to tax in that assessment year.

    Example: If an AOP, which is formed in the previous 2021-22, is going to be dissolved on 16-6-21, then the income of the period 1-4-2021 to 16-6-2021 shall be charged to income tax in the financial year 2021-22 itself although its assessment year should be assessment year 2022-23.
  1. Assessment of persons likely to transfer property to avoid tax [Section 175]
    If it appears to the Assessing Officer during any current assessment year that any person is likely to charge, sell, transfer, dispose of or otherwise part with any of his assets with a view to avoiding any payment of his tax liability, than the total income of such person for the period from the expiry of the previous year for that assessment year (i.e. from 1st April of that assessment year) till the date when the assessing officer commences proceedings, shall be chargeable to tax in the same financial year.
  1. Discontinued business [Section176]:
    Where any business or profession is discontinued in any assessment year, the income of the period from expiry of the previous year for that assessment year up to the date of such discontinuance may, at the discretion of the assessing officer, be charged to tax in that assessment year.

    For example, if a business is discontinued on 16-7-2021 then the income for the period 1-4-2021 to 16-7-2021 may be assessed in the financial year 2021-22 itself. The tax will be charged at the rates in force for advance tax payable during financial year 2021-22. [i.e. rates given in Part III of the First Schedule].

    Any person discontinuing any business or profession shall give Assessing Officer a notice of such discontinuance within 15 days thereof.

It may be noted that in the first four exceptions given above, it is mandatory for the Assessing Officer to charge the tax in the same previous year. On the other hand, in the fifth exception given above the Assessing Officer has the discretionary power and as such he may charge in the same previous year or may wait till the assessment year.

Multiple Choice Questions (MCQs) on Charge of Income Tax


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_____________ is the charging section under Income Tax Act, 1961.
Income-tax in India is charged at the rates prescribed by
According to Section 173 of Income Tax Act, 1961, income of a non-resident who is carrying on a shipping business and earns income from carrying passengers/livestock/goods from a port in India shall be assessed
________________ of the amount of fare/freight/charge, etc. shall be deemed to be income of a non-resident assessee who is carrying on a shipping business and earns income from carrying passengers / livestock/goods from a port in India.
Mr Aallu wishes to migrate to USA permanently and plans to leave India on 15-11-2021. According to Section 174 of Income Tax Act, 1961, his income for the period beginning from 1-4-2021 shall be taxable in India in the
Four friends created an association on 1.5.2021 for selling goods in a business fair. The association was dissolved on 30.6.2021 with the end of fair. Income of this association is taxable in the
If a business is discontinued on 16-7-2021 then the income for the period 1-4-2021 to 16-7-2021 is assessable in

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