Unit 1: English Summary – Income Tax Law and Accounts

Introduction to Taxation Policy of Raja Todarmal

Taxation has been an integral part of governance for centuries, forming the backbone of state revenue collection. One of the most significant historical tax systems in India was introduced by Raja Todarmal, the finance minister in the court of Emperor Akbar. His taxation policy laid the foundation for structured and systematic revenue collection in medieval India.

1. Todarmal’s Taxation System: An Overview

Raja Todarmal’s taxation policy was introduced as part of Akbar’s revenue reforms, commonly known as the Zabt System. This system was formulated based on long-term agricultural productivity assessments and aimed at creating an equitable, transparent, and efficient taxation mechanism.

2. Key Features of Todarmal’s Tax System

·       Survey and Measurement of Land: The entire agricultural land was measured, categorized, and recorded using standard measuring units.

·       Classification of Land: Land was classified into three categories:

·       Polaj: Land cultivated regularly and yielded maximum output.

·       Parauti: Temporarily uncultivated land due to natural causes.

·       Chachar & Banjar: Land left uncultivated for an extended period.

·       Standardization of Revenue Collection: Tax was fixed at one-third of the average produce of the land, payable in cash or kind.

·       Direct Collection Mechanism: The taxation system minimized corruption by eliminating intermediaries.

·       Provision of Relief: In cases of natural calamities like floods or droughts, tax reliefs and exemptions were granted.

3. Impact of Todarmal’s Taxation Policy

·       Revenue Stability: Provided a steady source of income for the Mughal Empire.

·       Fairness and Equity: Farmers were taxed based on actual productivity rather than arbitrary demands.

·       Foundation for Modern Revenue Systems: Influenced later British and Indian taxation policies.

Important Definitions in Income Tax Act

Understanding tax laws requires knowledge of fundamental concepts and definitions. The Income Tax Act, 1961, defines several essential terms that govern the computation, assessment, and applicability of taxes.

1. Assessee

An assessee refers to any individual or entity liable to pay taxes or against whom proceedings have been initiated under the Income Tax Act. It includes:

·       Individuals

·       Hindu Undivided Families (HUFs)

·       Companies

·       Firms

·       Associations of Persons (AOPs)

·       Body of Individuals (BOIs)

·       Local authorities

2. Person

The term person under the Income Tax Act, 1961, is broader and includes:

·       Individual

·       HUF (Hindu Undivided Family)

·       Company

·       Firm

·       Association of Persons (AOP) or Body of Individuals (BOI)

·       Local Authority

·       Any other artificial juridical person

3. Income

Income refers to the earnings or receipts that an individual or entity generates over a period. Under Section 2(24) of the Income Tax Act, income includes:

·       Salary

·       Business Profits

·       Capital Gains

·       House Property Income

·       Interest, Dividends, and Royalties

·       Casual Income (Winning from Lotteries, Betting, etc.)

4. Total Income

Total income refers to the aggregate of all incomes earned by an assessee during a financial year, computed after considering deductions and exemptions allowed under the Income Tax Act.

5. Assessment Year (AY) & Previous Year (PY)

·       Assessment Year (AY): The financial year in which an individual files income tax returns and pays taxes. Example: If income is earned in 2023-24, the assessment year will be 2024-25.

·       Previous Year (PY): The financial year in which income is earned before filing the return in the assessment year.

Agricultural Income & Its Assessment

Agricultural income enjoys exemption from income tax under Section 10(1) of the Income Tax Act. However, it must fulfill specific conditions.

1. Meaning of Agricultural Income

According to Section 2(1A), agricultural income includes:

·       Rent or revenue derived from land used for agriculture.

·       Income from agricultural operations like farming, harvesting, and selling crops.

·       Income from buildings situated near agricultural land used for storing produce.

2. Tax Treatment of Agricultural Income

·       Fully Exempt from Tax: If agricultural income is the sole income source, it is entirely exempt.

·       Partial Taxation (Indirect Method): If an individual earns both agricultural and non-agricultural income, the Partial Integration Method is applied to compute tax liability.

Residence & Tax Liability (Basis of Charge)

The taxation of an individual depends on residential status, which is determined under Section 6 of the Income Tax Act.

1. Classification of Residential Status

An individual can be:

1.        Resident and Ordinarily Resident (ROR): Taxed on global income.

2.      Resident but Not Ordinarily Resident (RNOR): Taxed on income earned in India and income arising outside India if derived from an Indian source.

3.      Non-Resident (NR): Taxed only on income earned in India.

2. Tax Liability Based on Residence

Residential Status	Income Earned in India	Income Earned Outside India
Resident (ROR)	Taxable	Taxable
Resident (RNOR)	Taxable	Partially Taxable
Non-Resident (NR)	Taxable	Not Taxable

Capital & Revenue

In taxation, distinguishing between capital and revenue transactions is crucial as they determine taxability.

1. Capital Receipts vs. Revenue Receipts

·       Capital Receipts: One-time receipts, not taxable (e.g., sale of land, capital investments).

·       Revenue Receipts: Regular earnings, taxable (e.g., salaries, business profits).

2. Capital Expenditure vs. Revenue Expenditure

·       Capital Expenditure: Costs incurred for acquiring long-term assets (e.g., purchasing machinery).

·       Revenue Expenditure: Recurring expenses for day-to-day operations (e.g., salaries, rent).

Exempted Incomes

Certain incomes are exempted from taxation under Section 10 of the Income Tax Act.

1. Key Exempted Incomes

·       Agricultural Income (Section 10(1))

·       Scholarships (Section 10(16))

·       Provident Fund Receipts (Section 10(11))

·       Pension under Gallantry Awards (Section 10(18))

·       Dividends from Indian Companies (Section 10(34))

·       LTC (Leave Travel Concession) (Section 10(5))

2. Importance of Exempted Incomes

·       Encourages savings and investments.

·       Supports economic growth.

·       Reduces tax burdens on individuals with essential incomes.

Conclusion

This summary provides B.Com students with an in-depth understanding of Income Tax Law and its various components. Understanding taxation policies, fundamental tax concepts, and tax exemptions is essential for aspiring commerce professionals. The knowledge of Raja Todarmal’s tax reforms, important tax definitions, agricultural income, residence-based taxation, capital & revenue distinctions, and tax-exempt incomes equips students with the analytical ability to interpret and apply tax laws effectively.