Income Tax

It is a matter of general belief that taxes on income and wealth are of recent origin but there is enough evidence to show that taxes on income in some form or the other were levied even in primitive and ancient communities. The origin of the word “Tax” is from “Taxation” which means an estimate. These were levied either on the sale and purchase of merchandise or livestock and were collected in a haphazard manner from time to time.

The system of direct taxation has been in force in one form or another even from ancient times. There are references both in Manu Smriti and Arthasastra to a variety of tax measures. The detailed analysis is given by Manu on the subject clearly shows the existence of a well-planned taxation system, even in ancient times. Not only this, but taxes were also levied on various classes of people like actors, dancers, singers and even dancing girls. Taxes were paid in the shape of gold-coins, cattle, grains, raw materials and also by rendering personal service.

The rapid changes in the administration of direct taxes, during the last decades, reflect the history of socio-economic thinking in India. From 1922 to the present day changes in direct tax laws have been so rapid that except in the bare outlines, the traces of the I.T. Act, 1922 can hardly be seen in the 1961 Act as it stands amended to date.

The organisational history of the Income-tax Department starts in the year 1922. The Income-tax Act, 1922, gave, for the first time, a specific nomenclature to various Income-tax authorities. The foundation of a proper system of administration was thus laid. In 1924, the Central Board of Revenue Act constituted the Board as a statutory body with functional responsibilities for the administration of the Income-tax Act. Commissioners of Income- tax were appointed separately for each province and Assistant Commissioners and Income-tax Officers were provided under their control.

The amendments to the Income-tax Act, in 1939, made two vital structural changes: (i) appellate functions were separated from administrative functions; a class of officers, known as Appellate Assistant Commissioners, thus came into existence, and (ii) a central charge was created in Bombay. In 1940, with a view to exercising effective control over the progress and inspection of the work of Income-tax Department throughout India, the very first attached office of the Board, called Directorate of Inspection (Income Tax) – was created. As a result of the separation of executive and judicial functions, in 1941, the Appellate Tribunal came into existence. In the same year, a central charge was created in Calcutta also.

World War II brought unusual profits to businessmen. From 1940 to 1947, Excess Profits Tax and Business Profits Tax were introduced and their administration handed over to the Department. In 1951, the 1st Voluntary Disclosure Scheme was brought in. It was during this period, in 1946, that a few Group ‘A’ officers were directly recruited. Later on, in 1953, the Group ‘A’ Service was formally constituted as the ‘Indian Revenue Service’.

In 1947, Taxation on Income (Investigation) Commission was set up which was declared ultra vires by the Supreme Court in 1956 but the necessity of deep investigation had by then been realised. In 1952, the Directorate of Inspection (Investigation) was set up. It was in this year that a new cadre known as Inspectors of Income Tax was created. The increase in ‘large income’ cases necessitated checking of the work done by departmental officers. Thus in 1954, the Internal Audit Scheme was introduced in the Income-tax Department.

In 1957, I.R.S. (Direct Taxes) Staff College started functioning in Nagpur. Today this attached office of the Board functions under a Director-General. It is called the National Academy of Direct Taxes. By 1963, the I.T. department, burdened with the administration of several other Acts like W.T., G.T., E.D., etc., had expanded to such an extent that it was considered necessary to put it under a separate Board. Consequently, the Central Board of Revenue Act, 1963 was passed. The Central Board of Direct Taxes was constituted, under this Act.

The developing nature of the economy of the country brought with it both steep rates of taxes and black incomes. In 1965, the Voluntary Disclosure Scheme was brought in followed by the 1975 Disclosure Scheme. Finally, the need for a permanent settlement mechanism resulted in the creation of the Settlement Commission.

The recovery of arrears of tax which untill 1970 was the function of State authorities was passed on to the departmental officers. A whole new wing of Officers – Tax Recovery Officers was created and a new cadre of a post of Tax Recovery Commissioners was introduced w.e.f. 1-1-1972.

In order to improve the quality of work, in 1977, a new cadre known as IAC (Assessment) and in 1978 another cadre known as CIT (Appeals) was created. The Commissioners’ cadre was further reorganised and five posts of Chief Commissioners (Administration) were created in 1981.

Tax Reforms

Certain important policy and administrative reforms carried out over the past few years are as follows:

(a). The policy reforms include:
  • Lowering of rates
  • Withdrawals/reduction of major incentives
  • Introduction of measures for presumptive taxation
  • Simplification of tax laws, particularly relating to capital gains
  • Widening the tax base
(b). The administrative reforms include:
  • Computerisation involving allotment of a unique identification number to tax payers which is emerging as a unique business identification number
  • Realignment of the available human resources with the changed business needs of the organisation.

Computerisation: Computerisation in the Income-tax Department started with the setting up of the Directorate of Income-tax (Systems) in 1981. Initially, computerisation of processing of challans was taken up. For this 3 computer centres were first set up in 1984-85 in metropolitan cities using SN-73 systems. This was later extended to 33 major cities by 1989. The computerized activities were subsequently extended to allotment of PAN under the old series, allotment of TAN, and payroll accounting. These computer centres used batch process with dumb terminals for data entry.

Restructuring of the Income-tax department

The restructuring of the Income-tax Department was approved by the Cabinet in its meeting held on 31-8-2000 to achieve the following objectives:

  • Increase in effectiveness and productivity
  • Increase in revenue collection
  • Improvement in services to taxpayers
  • Reduction in the expenditure by downsizing the workforce
  • Improved career prospects at all levels
  • Induction of information technology
  • Standardization of work norms

The aforementioned objectives have been sought to be achieved by the department through a multi-pronged strategy of :

  • Redesigning business processes through functionalisation
  • Increasing the number of officers to rationalise the span of control for better supervision, control and management of workload and to improve tax-payer services
  • Re-orient, retrain and redeploy the workforce with appropriate incentives in the form of career advancement.

Benefits

Allows carry forward of losses

Most businesses in their initial years face losses from the business. The business loss or capital losses can be carried forward up to 8 years if the ITR is filed. This loss can also be adjusted against the future income that lowers taxable income in the future. If ITR is not filed, the taxpayer is deprived of this benefit.

Define financial worth

The ITR filed with the Government defines the financial worth of the taxpayer. The track of ITR shows the financial capacity and also increases the capital base of a person. Hence, the track of income and financial worth is decided by the previously filed ITR. The investors and institutions look forward for returns filed to know the capacity of the business.

Loan Processing and high risk cover

The numbers and the capital base defined by the income tax return is helpful for the loan processing. Higher the financial worth, easier the loan processing. The same applies to high-risk cover insurance. The ITR is a considerable document for making decisions in this regards.

Claim refund of TDS paid from salary

Salaried personnel receives the income after deduction of applicable TDS. It may happen that after the eligible deductions, the tax liability is lower than the amount of TDS actually deducted. In such cases, the excessive payment can be claimed in the form of refund only if ITR is filed by the person.

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Documents Required

1.

PAN Card

PAN Card of the taxpayer

2.

Entities PAN Card

In case of company or firm, PAN card of all directors or partners is required

3.

Aadhar Card

In case of company or firm, Aadhar card of all directors or partners is required

4.

Cancelled Cheque

Cancelled cheque of the taxpayer’s bank account is required

5.

Bank Account Statement

The statement for concerned Financial Year is required to assess other incomes

6.

Financial Statements

For business entities, except proprietorship, financial statements are required

7.

Investment/ expenses u/s 80

Details about the investments made or expenditure u/s 80 must be provided

8.

Form 16

The salaried person should provide the TDS Certificate, known as Form 16

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