Basics of income tax act understanding

Basics of Understanding of
Income Tax Act
By
CA.M.V.SARMA
B.Com., F.C.A.

Basics of Understanding of Income
Tax Act
How to identify whether the provision is a sub-section
or a clause?
A sub-section is a part of a section, whereas a clause may
be a part of either a section or a sub-section.
If a section doesn’t have any sub-sections within it but
has clauses instead, it gets difficult to distinguish between
a sub-section and a clause. Let’s understand how we can
make this distinction without any confusion.

Tax Act
Sub-section: When parts of a section are
interrelated, or when one whole provision
emerges out by putting all the parts of the
section together, then those parts are referred
to as sub-sections.

Tax Act
Clauses: Whereas, when these parts are
independent of each other and are not
interrelated then these are referred to as
clauses.

Tax Act
For example, Section 2 of the Income Tax Act, 1961
(which deals with definitions for purposes of the Act) has
all ‘clauses’ and these parts are not ‘sub-section’ as these
parts are independent of each other and not co-related.
See section 2(1) - defines “advance tax”, section 2(1A) -
defines “agricultural income”, section 2(31) - “persons”
and so on and these parts are not co-related to project a
whole provision. Similarly section 10(1) - agricultural
income, section 10(2A) - share of total income of the
firm, section 10(5)-travel concession or assistance and so
on are all ‘clauses’. As they are not interrelated (1), (2A),
(5) and so on are ‘clause’ of section 10. Similar is the case
with sections 6, 43, 47 and so on

Tax Act
Again examples of parts being sub-sections may
be seen in sections 1, 44AD, 139 and so on as
parts of these sections like section 1(1), 1(2),
1(3) and 44AD (1), 44AD (2), 44AD (6), 139 (4)
and 139 (9) are interrelated and one whole
provision of the respective section emerges out
by putting together all the parts of these
sections.

Tax Act
There is one clue to locate a ‘clause’ in a section. Where soon
after the reference of section something is stated and
thereafter a reference is made like (1) then that (1) is a ‘clause’
and where soon after the reference of section without stating
anything a reference is made like (1) then that (1) is a sub-
section.

Tax Act
Refer section 2 in which after 2 it is stated as “In this Act, unless the context
otherwise requires,” then (1) is stated. Therefore (1) is a ‘clause’ of section 2.
Similarly all other such references like (1A), (7), (24) of section 2 are ‘clauses’.
Again see section 10 in which after 10 it is stated “In computing the total
income of a previous year of any person, any income falling within any of the
following clauses shall not be included” then (1) is stated. Therefore (1) is a
‘clause’ of section 10.

Tax Act
Now refer section 1, without stating anything a
reference of (1) is made therefore this (1) is a
sub-section of section 1. Similarly refer section
4, here also without stating anything a reference
of (1) is made therefore this (1) is a sub-section
of section 4.

Tax Act
•Another noticeable difference is that a sub-
section starts with a capital letter and ends
with a full stop
•whereas a clause starts with a small letter and
ends with a semicolon. But the last clause ends
with a full stop.
•This is because a sub-section is a complete
sentence whereas a clause is a part of a
sentence.

Tax Act
Keeping the above in mind for :
‘sub-sections’ refer sections 1, 4, 5, 5A, 9, 11,
12 and similar other sections and
for ‘clauses’ refer sections 2, 6, 7, 8, 10, 16, 17,
24, 27, 28 and so on.

Tax Act
How to know the NUMBER of a Proviso?
First proviso begins with the phrase ‘Provided that’,
second proviso with ‘Provided further that”, and
subsequent provisos with ‘Provided also that’.
If the proviso starts with ‘Provided also that’ it has to be
manually counted to know whether it is third proviso,
fourth proviso, and so on.
Reference may be made to section 10(23C) as it has
eighteen provisos

Tax Act
How to locate the provisions for the IT Rules?
In section 2(33) of the Income Tax Act, 1961, the word
'prescribed' is defined as follows:-"prescribed" means
prescribed by rules made under this Act ;
Whenever in any provisions of the Income Tax Act, 1961, the
word ‘prescribed’ or group of words ‘as may be prescribed’ or
'prescribed form verified in the prescribed manner' is found, it
suggests that there shall be some provisions in a rule or Form
in the Income Tax Rules, 1962.
Reference may be made to section 10(5) to find Rule 2B,
section 10(13A) to find Rule 2A, and so on.

Tax Act
What is a proviso?
A proviso defeats the operation or
conditionality of a ‘rule’ (section/sub-
section/clause/sub-clause etc.) below which it
is placed.
The subject matter of ‘rule’ and the proviso
thereof should relate to each other.

Tax Act
Let us say rule relates to ‘fruit’ then the proviso should also relate to ‘fruit’.
Say the rule is, ‘In breakfast one should eat sufficient fruits’ the proviso then
may be, ‘Provided that more than one banana should not be eaten’ but it
cannot be, ‘Provided that more than one piece of bread should not be eaten’.
Here ‘banana’ is related with ‘fruit’, whereas ‘bread’ is not.
In the above example if the rule is modified as, ‘In breakfast one should eat
sufficient food’ then both the provisos are possible as both ‘banana’ and
‘bread’ relate to food.
Keeping the above example in mind please read second proviso to section
44AB and see the meaning of ‘such person’ used twice in the second proviso.
Therefore a company having turnover less than one crore rupees is not
required to audit under section 44AB though it may be required to audit
under the Companies Act.

Tax Act
“EXPLANATION” AND “PROVISO”
Ordinarily, an Explanation is introduced by the Legislature for
clarifying some doubts or removing confusion which may
possibly arise from the existing provisions.
Normally, therefore, an Explanation would not expand the
scope of the main provision and the purpose of the
Explanation would be to fill a gap left in the statute, to
suppress a mischief, to clear a doubt or as is often said to
make explicit what was implicit as held in Katira Construction
Ltd. vs. Union of India (2013) 352-ITR-513 (Gujarat).

Tax Act
The normal principle in construing an Explanation is to understand it as
explaining the meaning of the provision to which it is added.
The Explanation does not enlarge or limit the provision, unless the
Explanation purports to be a definition or a deeming clause.
If the intention of the Legislature is not fully conveyed earlier or there has
been a misconception about the scope of a provision, the Legislature steps in
to explain the purport of the provision; such an Explanation has to be given
effect to, as pointing out the real meaning of the provision all along. If there is
conflict in opinion on the construction of a provision, the Legislature steps in
by inserting the Explanation, to clarify its intent. Explanation is normally
clarificatory and retrospective in operation.

Tax Act
The orthodox function of an Explanation is to explain the meaning and effect
of the main provision. It is different in nature from a proviso, as the latter
excepts, excludes or restricts, while the former explains or clarifies and does
not restrict the operation of the main provision.
An Explanation is also different from rules framed under an Act. Rules are for
effective implementation of the Act whereas an Explanation only explains the
provisions of the section. Rules cannot go beyond or against the provisions of
the Act as they are framed under the Act and if there is any contradiction, the
Act will prevail over the Rules. This is not the position vis-à-vis the section and
its Explanation. The latter, by its very name, is intended to explain the
provisions of the section; hence, there can be no contradiction. A section has
to be understood and read hand in hand with the Explanation, which is only
to support the main provision, like an example does not explain any situation,
held in N.Govindaraju vs. I.T.O. (2015) 377-ITR-243 (Karnataka).

Tax Act
Proviso:
A proviso qualifies the generality of the main enactment by providing an
exception and taking out from the main provision, a portion, which, but for
the proviso would be part of the main provision. A proviso, must, therefore,
be considered in relation to the principal matter to which it stands as a
proviso. A proviso should not be read as if providing by way of an addition to
the main provision which is foreign to the principal provision itself.
Indeed, in some cases, a proviso may be an exception to the main provision
though it cannot be inconsistent with what is expressed therein and, if it is, it
would be ultra vires the main provision and liable to be struck down. As a
general rule, in construing an enactment containing a proviso, it is proper to
construe the provisions together without making either of them redundant or
otiose. Even where the enacting part is clear, it is desirable to make an effort
to give meaning to the proviso with a view to justifying its necessity.

Tax Act
Definition of words and phrases
under the Income Tax Act, 1961

Tax Act
In the Income Tax Act, 1961 (the Act), ‘definitions’ can be found
in section 2 of the Act, which applies to the whole Act unless the
context otherwise requires.
Definitions are also found in sections 3, 17, 27, 43, 55, among
several other sections of the Act. It has to be carefully noted
whether a particular definition applies to the whole Act, or a
Chapter, or a section, or group of sections or a sub-section.
If a particular definition applies to a specific Chapter, its meaning
cannot be used in another Chapter unless it is stated otherwise.
This is also true for sections, groups of sections, and so on.

Basics of Understanding of Income Tax Act
Generally definitions can be categorized in five types :
i) ‘inclusive definitions’,
ii) ‘exhaustive definitions’,
iii) ‘adoptive definition’,
iv) ‘exclusive definitions’ and
v) ‘combined definitions’ (a combination of two or
more of the earlier types).
Let us try to understand each of these categories with
reference to the Act.

i) ‘Inclusive definitions’ can be identified by the presence of the
word ‘includes’ in the definition. An inclusive definition allows
including, within its ambit, anything which is similar to the term
defined.
Examples of this category are sections 2(8) "assessment"
includes reassessment. Therefore ‘protective assessment’ is also
an assessment.
2(12A) "books or books of account" includes ledgers, day-books,
cash books…”,
2(13) "business" includes any trade, commerce or
manufacture…”,
2(15) "charitable purpose" includes relief of the poor, education,
medical relief…”, 2(24) "income" includes—(i) profits and gains;
(ii) dividend..”

ii) ‘Exhaustive definitions’ can be identified by the presence of
the word ‘means’ in the definition. An exhaustive definition does
not allow including anything from outside to the scope of the
definition. It restricts the meaning therefore it may also be called
restrictive definitions. .
Examples are sections 2(1) "advance tax" means the advance tax
payable in accordance with the provisions of Chapter XVII-C.”
Therefore anything which is not stated in Chapter XVII-C cannot
be interpreted as advance tax.
2(33) "prescribed" means prescribed by rules made under this
Act,
2(42B) "short-term capital gain" means capital gain arising from
the transfer of a short-term capital asset. In this category of
definitions anything beyond the scope of definitions is not
permitted.

Let us understand the two categories mentioned above with the
following example:
If the definition is “Colour includes Violet, Indigo, Blue, Green,
Yellow, Orange, Red.” then even Magenta (a mixture of Red and
Blue), Cyan (a mixture of Blue and Green) and even Black can
also be interpreted as colour.
Argument that technically Black is absence of all colours hence
it cannot be interpreted as a colour is not acceptable as
ordinarily Black is understood to be a colour. Ordinary and
commonly understood meaning has to be assigned to the term.
But if the definition is “Colour means Violet, Indigo, Blue, Green,
Yellow, Orange, Red” then Magenta or Cyan or Black cannot be
interpreted as a colour

iii) ‘Adoptive definition’ can be identified by the presence of a
reference of other Acts in the definition.
In this category instead of defining the term afresh, for the
purpose of the Act, the definitions from other Acts are adopted
in the Act.
Examples of this category are section 2(20)"director", "manager"
and "managing agent", in relation to a company, have the
meanings respectively assigned to them in the Companies Act,
1956 (1 of 1956)”, section 2(29D) "National Tax Tribunal" means
the National Tax Tribunal established under section 3 of the
National Tax Tribunal Act, 2005”; section 2(37)"public servant"
has the same meaning as in section 21 of the Indian Penal Code
(45 of 1860)”.

iv) ‘Exclusive definitions’ can be identified by the presence of
the phrase ‘does not include’. In this category something is
expressly excluded from the definition. Examples of this category
is section 2(14)"capital asset" means property of any kind held
by an assessee, whether or not connected with his business or
profession, but does not include — (i) any stock-in-trade,
consumable stores or raw materials held for the purposes of his
business or profession…”

v) ‘Combined definitions’ can be identified by the presence of
both the words ‘means’ and ‘includes’ in the definition.
In this category, on one hand it restricts inclusion, and on the
other, it allows inclusion.
Examples of this category are section 2(7) "assessee" means a
person by whom any tax or any other sum of money is payable
under this Act, and includes — (a) every person in respect of
whom any proceeding under this Act has been taken…

Let us try to understand the significance of a few
phrases used generally at the beginning of some of the
provisions to indicate a special meaning assigned to
them.

a) “Notwithstanding anything contained in…
” It is a ‘non obstante’ (Notwithstanding) clause, and it means ‘in
spite of’/ ‘even if’ / ‘although’. The provision containing the word
‘notwithstanding’ shall have an overriding effect on any other
provision, even if something contrary is stated in the other
provision. The contrary provision may be contained in – sub-
section/section/clause/any other provisions of this Act/the
foregoing provisions of this Act/to the contrary in sections XX to
YY. [Refer sections 9(2), 12(3), 13(4), 10A (6), 10A (8), 40
respectively].

b) “Subject to the provisions of…”
When any provision contains this phrase, it attaches a condition
that the provisions of the specified section are also to be
complied with. That is, while complying with the provision where
this phrase occurs, other provision mentioned therein must also
be complied with. Those provisions may be this Act/sub-
section/clause/this section/other provisions of this
section/sections XX to YY. [Refer sections 5(1)/10(2)/xx/10A
(1)/32AB (1)/11 (1) respectively]

c) “Save as otherwise provided in this Act…”
When any provision contains this phrase it implies that the
provision of this section has to be applied without affecting any
provisions in which something else has been stated. [Refer
sections 1(3) and 14]

d) “Without prejudice to…”
When any provision contains this phrase it implies that the
provision has to be applied without affecting other provision of
the Act which may deal with same subject matter. Other
provisions may be – the provisions of sub-section/the generality
of the provisions of. [Refer sections 12AA (4)/13(2) respectively]

e) “Nothing contained in section XX or section YY shall operate
so as to exclude from…”
When any provision contains this phrase it implies that referred
sections are excluded from the applicability of the whole section.
[Refer section 13(1), 13 (7), 13 (8)]
]

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