Who is liable to pay income tax

Under the Income Tax Act, income tax is payable by every assessee at the rates fixed by the Finance Act every year. An "Assessee" means a person by whom any tax or any other sum of money (i.e. penalty or interest) is payable under the Act. It includes :

• Every person in respect of whom any proceeding under this Act has been taken for the assessment of his income or of the income of any other person in respect of whom he is assessable, or of the loss sustained by him or by such other person, or of the amount of refund due to him or to such other person;

• Every person who is deemed to be an assessee under any provision of this Act;

• every person who is deemed to be an assessee in default under any provision of this Act.

The term "person" under the Act includes :

An Individual

The word individual means only a natural person i.e. a human being. Trustees of a discretionary trust have to be assessed in status of individual and not in status of association of persons. An individual will pay income tax on income from salary, house rent, business, profession, interest etc. He does not have to pay income tax on dividend income . The income of a proprietary firm is added to his income for purpose of income tax. If a person gets salary from a partnership firm where he is a partner, the income is treated as 'business income' though termed as 'salary'.

A Hindu Undivided Family(HUF)

A HUF has not been defined under the tax laws. However, as per the Hindu law, it means a family which consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters. Profits made by a joint Hindu family are chargeable to tax as income of the HUF as a distinct entity or unit of assessment.

A Company

A Company under the Income Tax Act means :

• Any Indian company, or

• Any body corporate incorporated by or under the laws of a country outside India, or

• Any institution, association or body which is or was assessable or was assessed as a company for any assessment year under the Indian Income-tax Act, 1922 or which is or was assessable or was assessed under this Act as a company for any assessment year commencing on or before the 1st day of April, 1970, or

• Any institution, association or body, whether incorporated or not and whether Indian or non-Indian, which is declared by general or special order of the Central Board of Direct Taxes, to be a company.

A company has been defined as a juristic person having an independent and separate legal entity from its shareholders. Income of a company is computed and assessed separately in the hands of the company. A company is liable to pay tax at a flat rate.

A Firm

Under the Income-tax Act, 'firm', 'partner' and 'partnership' have been given the same meaning as assigned to them in the Indian Partnership Act. But the expression 'partner' has been extended to include any person who, being a minor, has been admitted to the benefits of a partnership. Only the members who have entered into partnership are to be regarded as partners. A firm, under the Partnership Act, is a "relationship between persons who have agreed to share the profits of business carried on by all or any of them acting for all". In income-tax law a firm is a unit of assessment by special provisions but is not a full person. A firm is liable to pay tax at a flat rate.

An Association of Persons (AOP) or a Body of Individuals (BOI), whether incorporated or not.

An association of persons (AOP) under the Income Tax Act is an entity or unit of assessment. It means two or more persons who join for a common purpose with a view to earn an income. The term Person includes any company or association or body of individuals, whether incorporated or not. The association need not be on the basis of a contract. Therefore, if two or more persons join hands to carry on a business but do not constitute a partnership they may be assessed as an AOP. But, an AOP does not mean any and every combination of persons. It is only when they associate themselves in an income-producing activity that they become an association of persons.

Body of individuals (BOI) means a conglomeration of individuals who carry on some activity with the objective of earning some income. It would consist only of individuals. Entities like companies or firms cannot be members of a body of individuals. Income tax shall not be payable by an assessee in respect of the receipt of share of income by him from BOI and on which the tax has already been paid by such BOI.

There ia distinction between an AOP and BOI :

An AOP may consist of non-invidividuals but a BOI has to consist of individuals only. If two or more persons (like firm, company, HUF, individual etc) join together, it is called an AOP. But if only individuals join together then it is called a BOI.

An AOP implies a voluntary getting together for a common design or combined will to engage in an income producing activity, whereas a BOI may or may not have common design or will.

A Local Authority

A local authority is a separate unit of assessment. The expression local authority means :

• Panchayat

• Municipality

• Municipal Committee and District board,legally entitled to, or entrusted by the Government with, the control or management of a Municipal or local funds; or

• Cantonment Board as defined in the Cantonments Act,1924.

Artificial juridical persons

It includes entities which are not natural persons but are separate entities in the eyes of law. Though they may not be sued directly in a court of law but they can be sued through persons managing them. Therefore, God, idols and deities are artificial persons. Though they may not be sued directly they can be legally sued through the priests or the managing committee of the place of worship, etc. They are persons and their income, like offerings, are taxable. However, under the Income Tax Act, they have been provided exemption from payment of tax, if certain conditions mentioned therein are satisfied.

Similarly, all other artificial persons, with a juristic personality, will also fall under this category, if they do not fall within any of the preceding categories of persons e.g. University of Delhi is an artificial person as it does not fall in any of the above categories. This is thus a residuary classification and therefore it does not cover those falling within any of the preceding classifications.

These are the seven categories of persons chargeable to tax under the Income Tax Act. Any person, not falling in the above mentioned categories may still fall in the four corners of the term "person" and may be liable to tax.

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