Bailabel Type : non-bailable

Description

Section 4 of the Income Tax Act, 1961, is a fundamental provision that lays down the basic framework for taxation in India. It specifies the charge of income tax on individuals and other taxpayers, clarifying when and how income will be subject to tax. This section is the starting point for determining the tax liability of an assessed under the Act. It establishes the basis of charging income tax, setting out the income that is subject to tax and the rate at which it is taxed.

Here’s a detailed breakdown of Section 4:

1. Purpose of Section 4:

• Section 4 defines the charge of income tax on a taxpayer for a given financial year.
• It specifies that income tax shall be levied on total income of an assessed during a particular previous year at the rate or rates prescribed under the Finance Act.
• This section establishes the legal basis for taxing income and the tax rates applicable to different categories of income.

2. Key Provisions of Section 4:

4(1) – Charge of Income Tax:

• Subsection (1) is the main provision under Section 4 that states that income tax shall be charged for each assessment year on the total income of the previous year.
• Taxable Income: Tax is charged on the total income that an assessee earns in the previous year. The previous year is the financial year in which the income is earned, and the assessment year is the year in which the income is assessed and taxed.
• Rate of Tax: The income tax will be charged at the rates prescribed in the Finance Act for that year, which is passed by the Parliament. The Finance Act specifies the tax rates and any surcharge, rebates, or exceptions for that year.
• The total income is the income after considering all deductions, exemptions, and allowances under the Act.
• Example: If an individual has a total income of ?5,00,000 in the previous year, the income tax will be charged on this amount at the rate prescribed by the Finance Act for the current assessment year.

4(2) – Income of a Non-Resident:

• Subsection (2) deals with the taxation of non-resident individuals or entities. It states that the total income of a non-resident is subject to tax under the same basis as a resident.
• However, non-residents are subject to tax only on the income earned or received in India, or income that is deemed to be earned in India.
• Non-residents are also entitled to certain tax treaties and exemptions under the Double Taxation Avoidance Agreements (DTAA) between India and other countries, which may reduce their tax liability.

4(3) – Income of a Resident:

• Subsection (3) elaborates on the total income of a resident. A resident is taxed on their global income, meaning they are taxed on all income earned, whether within India or outside, subject to exemptions and deductions.
• The section applies the principle of worldwide taxation for residents, meaning any income from abroad, such as foreign salary, dividends, or income from assets outside India, is taxable in India.
• The exceptions to this can be found in the form of tax exemptions under specific sections, such as Section 10, which lists various incomes exempt from tax.

3. Total Income:

• “Total income” is defined as the gross income of an individual, after deducting exemptions, deductions, and rebates available under the Income Tax Act.
• It includes:
  • Income from salaries
  • Income from house property
  • Income from business or profession
  • Capital gains
  • Income from other sources (e.g., interest, dividends, etc.)
• Certain incomes may be exempt from tax under Section 10 (such as agricultural income or some allowances), and these are not included in the total income for tax purposes.

4. Rate of Tax:

• Section 4 explicitly mentions that the rate of tax is prescribed in the Finance Act each year. The Finance Act outlines the slabs for income tax rates for individual taxpayers, companies, and other entities.
• Example: The Finance Act for the year may prescribe income tax rates like:
  • For individuals:
    • Income up to ?2.5 lakh: Nil
    • ?2.5 lakh to ?5 lakh: 5%
    • ?5 lakh to ?10 lakh: 20%
    • Above ?10 lakh: 30%
• The Finance Act can also provide different tax rates or surcharges for other types of taxpayers, such as companies, Hindu Undivided Families (HUFs), or firms.

5. Types of Income Subject to Tax:

• Income from Salary: Salaries, wages, bonuses, pensions, and other employment-related benefits are included in the total income.
• Income from House Property: Income earned from owning and renting out property is taxed.
• Income from Business or Profession: Profits from business or professional activity are included.
• Capital Gains: Income from the sale of capital assets such as real estate or stocks, including long-term and short-term capital gains.
• Income from Other Sources: This includes dividends, interest, and any income not falling into the above categories.

6. Taxability of Specific Income:

• Certain incomes may be exempt under the Income Tax Act (e.g., agricultural income, certain types of government allowances, or interest on specific bonds). Section 4 provides the framework for identifying what income is taxable and what is not.
• If an individual or business receives income that is subject to tax, it will be included in their total income for the assessment year.

7. Tax Deducted at Source (TDS):

• Income tax may be deducted at the source for certain types of income, such as salary or interest. This means that the tax is deducted by the payer (employer, bank, etc.) before making the payment to the taxpayer. The amount of tax deducted is then remitted to the government.
• TDS acts as an advance payment of tax, which will be adjusted against the total income when filing the return.

8. Double Taxation Avoidance Agreement (DTAA):

• Section 4 allows for the avoidance of double taxation for non-residents by permitting them to claim exemptions or credits for taxes paid in other countries, provided India has a DTAA with that country.
• This ensures that non-residents are not taxed twice on the same income—once in India and once in their home country.

9. Taxable Entities:

• Section 4 applies to all categories of taxpayers, including:
  • Individuals
  • Hindu Undivided Families (HUF)
  • Companies
  • Firms
  • Association of Persons (AOP)
  • Body of Individuals (BOI)
• Each entity is taxed according to the provisions that apply to it, such as the tax rates and exemptions available to them.

Punishment

Section 4 itself does not directly prescribe punishments for non-compliance. However, if an assessed fails to file their income tax returns or underreports their income, the following actions may be taken under different sections:

• Penalties under Section 270A for underreporting income.
• Interest under Sections 234A, 234B, and 234C for late payment of taxes or filing returns.
• Prosecution under Section 276C for willful tax evasion.