Tag: University of Mumbai BMS Notes

Life insurance plans help the insured’s family take care of their financial responsibilities and live a normal life after the demise of the policyholder. This means, when the policyholder passes away, the insurance provider will pay an accumulated amount to the loved ones of the deceased. However, there are some exemptions in this plan the beneficiary may not receive a death benefit if the insured dies after trying suicide, getting involved in violent activities and adventurous games.

A principle is a fundamental truth or statement upon which other truths or statements depend. Understanding the basic principles of life insurance allow you to know general truths about all life insurance policies, which in turn will help you make better decisions about the types of policies you buy and how you use your life insurance contract before you die. It can also help you make better decisions about how you save, spend, and invest your money.

The ultimate or primary purpose of life insurance is to create certainty out of the greatest uncertainty confronting an individual. Namely, the fact that almost everything in life (and even life itself) is a speculation and difficult (or impossible) to predict accurately When will you die? Will you die before you’ve accomplished everything you want to accomplish? Will your business succeed? Will you accumulate enough savings to retire comfortably? Will your investments pan out as you hope? Will you save enough money to send your child to college or get them into a trade school? Will you have enough money for a vacation next year? Will your computer last another year before dying? Will you get into a car accident (totaling your vehicle) before it’s paid off? Will you be able to afford your insurance deductibles? Will you become temporarily or permanently disabled and unable to work? Will you develop a degenerative disease and be unable to work? Will you. Life insurance levels these financial uncertainties by providing a guaranteed sum of money now and for your future.

Life insurance is for any productive individual who values their earning potential, income, and savings and believes it’s worth protecting against loss, whether from disability, illness, or death.

Basic Principles of Life Insurance

1. Principle of Indemnity

Applicable as well as not! Paradox right? Indemnity means to make good the losses or to pay back what is the loss amount. In case of a life insurance, you cant measure a persons life’s worth hence the payout is not on calculation basis of loss assessment as in case of general insurance but the full Sum Insured is payable at death. There could be multiple policies covering the same life and they all are liable to pay.

2. Principle of Contribution

This again will not apply for Life insurance as in case of trigger of policy, the insurer has to pay the full amount. Also, in the event of death, if insured had taken multiple policies, they all have to pay the nominees the full amount.

3. Principle of Subrogation

Essentially it means that loss to one can be claimed by insurance company and the company can in turn claim it from the loss maker. But again in Life insurance it does not hold true and damages and insurance cover is payable to insured/deceased.

4. Principle of Mitigation of loss

Just as in case of General insurance, here too the insured has to take utmost care of himself and should not indulge in activity that can harm his health or cause death.

5. Causa Proxima

The Latin term for nearest cause holds true for life insurance just as in the case of general insurance. The nearest cause of death is found and if it is not covered under the policy the total SI is not payable.

1. The Principle of Utmost Good Faith

• Both parties involved in an insurance contract the insured (policy holder) and the insurer (the company) should act in good faith towards each other.
• The insurer and the insured must provide clear and concise information regarding the terms and conditions of the contract

This is a very basic and primary principle of insurance contracts because the nature of the service is for the insurance company to provide a certain level of security and solidarity to the insured person’s life. However, the insurance company must also watch out for anyone looking for a way to scam them into free money. So each party is expected to act in good faith towards each other.

If the insurance company provides you with falsified or misrepresented information, then they are liable in situations where this misrepresentation or falsification has caused you loss. If you have misrepresented information regarding subject matter or your own personal history, then the insurance company’s liability becomes void (revoked).

2. The Principle of Insurable Interest

Insurable interest just means that the subject matter of the contract must provide some financial gain by existing for the insured (or policyholder) and would lead to a financial loss if damaged, destroyed, stolen, or lost.

• The insured must have an insurable interest in the subject matter of the insurance contract.
• The owner of the subject is said to have an insurable interest until s/he is no longer the owner.

In auto insurance, this will most times be a no brainer, but it does lead to issues when the person driving a vehicle doesn’t own it. For instance, if you are hit by a person who isn’t on the insurance policy of the vehicle, do you file a claim with the owner’s insurance company or the driver’s insurance company? This is a simple but crucial element for an insurance contract to exist.

3. The Principle of Indemnity

Indemnity is a guarantee to restore the insured to the position he or she was in before the uncertain incident that caused a loss for the insured. The insurer (provider) compensates the insured (policyholder).

The insurance company promises to compensate the policyholder for the amount of the loss up to the amount agreed upon in the contract.

Essentially, this is the part of the contract that matters the most for the insurance policyholder because this is the part of the contract that says she or he has the right to be compensated or, in other words, indemnified for his or her loss.

The amount of compensation is in direct proportion with the incurred loss. The insurance company will pay up to the amount of the incurred loss or the insured amount agreed on in the contract, whichever is less. For instance, if your car is inured for $10,000 but damages are only $3,000. You get $3,000 not the full amount.

Compensation is not paid when the incident that caused the loss doesn’t happen during the time allotted in the contract or from the specific agreed upon causes of loss (as you will see in The Principle of Proximate Cause). Insurance contracts are created solely as a means to provide protection from unexpected events, not as a means to make a profit from a loss. Therefore, the insured is protected from losses by the principle of indemnity, but through stipulations that keep him or her from being able to scam and make a profit.

4. The Principle of Contribution

Contribution establishes a corollary among all the insurance contracts involved in an incident or with the same subject.

Contribution allows for the insured to claim indemnity to the extent of actual loss from all the insurance contracts involved in his or her claim.

For instance, imagine that you have taken out two insurance contracts on your used Lamborghini so that you are covered fully in any situation. Let’s say you have a policy with Allstate that covers $30,000 in property damage and a policy with State Farm that cover $50,000 in property damage. If you end up in a wreck that causes $50,000 worth of damage to your vehicle. Then about $19,000 will be covered by Allstate and $31,000 by State Farm.

This is the principle of contribution. Each policy you have on the same subject matter pays their proportion of the loss incurred by the policyholder. It’s an extension of the principle of indemnity that allows proportional responsibility for all insurance coverage on the same subject matter.

5. The Principle of Subrogation

This principle can be a little confusing, but the example should help make it clear. Subrogation is substituting one creditor (the insurance company) for another (another insurance company representing the person responsible for the loss).

After the insured (policyholder) has been compensated for the incurred loss on a piece of property that was insured, the rights of ownership of this property go to the insurer.

So lets say you are in a car wreck caused by a third party and your file a claim with your insurance company to pay for the damages on your car and your medical expenses. Your insurance company will assume ownership of your car and medical expenses in order to step in and file a claim or lawsuit with the person who is actually responsible for the accident (i.e. the person who should have paid for your losses).

The insurance company can only benefit from subrogation by winning back the money it paid to it’s policyholder and the costs of acquiring this money. Anything paid extra from the third party, is given to the policyholder. So lets say your insurance company filed a lawsuit with the negligent third party after the insurance company had already compensated you for the full amount of your damages. If their lawsuit ends up winning more money from the negligent third party than they paid you, they’ll use that to cover court costs and the remaining balance will go to you.

6. The Principle of Proximate Cause

• The loss of insured property can be caused by more than one incident even in succession to each other.
• Property may be insured against some but not all causes of loss.
• When a property is not insured against all causes, the nearest cause is to be found out.
• If the proximate cause is one in which the property is insured against, then the insurer must pay compensation. If it is not a cause the property is insured against, then the insurer doesn’t have to pay.

When buying your insurance policies, you will most likely go through a process where you select which instances you and your property will be covered for and which ones they will not. This is where you are selecting which proximate causes are covered. If you end up in an incident, then the proximate cause will have to be investigated so that the insurance company validates that you are covered for the incident.

This can lead to disputes when you have suffered an incident you thought was covered but your insurance provider says it’s not. Insurance companies want to make sure they are protecting themselves but sometimes they can use this to get out of being liable for a situation. This might be a dispute where you’ll need a lawyer to help argue for you.

7. The Principle of Loss Minimization

This is our final principle that creates an insurance contract and the most simple one probably.

In an uncertain event, it is the insured’s responsibility to take all precautions to minimize the loss on the insured property.

Insurance contracts shouldn’t be about getting free stuff every time something bad happens. Therefore, a little responsibility is bestowed upon the insured to take all measures possible to minimize the loss on the property. This principle can be debatable, so call a lawyer if you think you are being unfairly judged under this principle.

The main motive of insurance is cooperation. Insurance is defined as the equitable transfer of risk of loss from one entity to another, in exchange for a premium.

1. Nature of contract

Nature of contract is a fundamental principle of insurance contract. An insurance contract comes into existence when one party makes an offer or proposal of a contract and the other party accepts the proposal.

A contract should be simple to be a valid contract. The person entering into a contract should enter with his free consent.

2. Principal of utmost good faith

Under this insurance contract both the parties should have faith over each other. As a client it is the duty of the insured to disclose all the facts to the insurance company. Any fraud or misrepresentation of facts can result into cancellation of the contract.

3. Principle of Insurable interest

Under this principle of insurance, the insured must have interest in the subject matter of the insurance. Absence of insurance makes the contract null and void. If there is no insurable interest, an insurance company will not issue a policy.

An insurable interest must exist at the time of the purchase of the insurance. For example, a creditor has an insurable interest in the life of a debtor, A person is considered to have an unlimited interest in the life of their spouse etc.

4. Principle of indemnity

Indemnity means security or compensation against loss or damage. The principle of indemnity is such principle of insurance stating that an insured may not be compensated by the insurance company in an amount exceeding the insured’s economic loss.

In type of insurance the insured would be compensation with the amount equivalent to the actual loss and not the amount exceeding the loss.

This is a regulatory principal. This principle is observed more strictly in property insurance than in life insurance.

The purpose of this principle is to set back the insured to the same financial position that existed before the loss or damage occurred.

5. Principal of subrogation

The principle of subrogation enables the insured to claim the amount from the third party responsible for the loss. It allows the insurer to pursue legal methods to recover the amount of loss, For example, if you get injured in a road accident, due to reckless driving of a third party, the insurance company will compensate your loss and will also sue the third party to recover the money paid as claim.

6. Double insurance

Double insurance denotes insurance of same subject matter with two different companies or with the same company under two different policies. Insurance is possible in case of indemnity contract like fire, marine and property insurance.

Double insurance policy is adopted where the financial position of the insurer is doubtful. The insured cannot recover more than the actual loss and cannot claim the whole amount from both the insurers.

7. Principle of proximate cause

Proximate cause literally means the ‘nearest cause’ or ‘direct cause’. This principle is applicable when the loss is the result of two or more causes. The proximate cause means; the most dominant and most effective cause of loss is considered. This principle is applicable when there are series of causes of damage or loss.

Life Insurance is an arrangement between the Insurance company/Government which guarantees of compensation for loss of life in return for payment of a specified premium. In Life Insurance, the beneficiary whose name has been mentioned in the contract receives the specified sum, from the insurer in case of happening of the event i.e. Loss of Life.

Types of Life Insurance Policies

1. Term insurance plan

As the name says Term insurance plan are those plan that is purchased for a fixed period of time, say 10, 20 or 30 years. As these policies don’t carry any cash value their policies do not carry any maturity benefits, hence their policies are cheaper as compared to other policies. This policy turns beneficial only on the occurrence of the event.

2. Endowment policy

The only difference between the term insurance plan and the endowment policy is that endowment policy comes with the extra benefit that the policyholder will receive a lump sum amount in case if he survives until the date of maturity. Rest details of term policy are same and also applicable to an endowment policy.

3. Unit Linked Insurance Plan

These plans offer policyholder to build wealth in addition to life security. Premium paid into this policy is bifurcated into two parts, one for the purpose of Life insurance and another for the purpose of building wealth. This plan offers to partially withdraw the amount.

4. Money Back Policy

This policy is similar to endowment policy, the only difference is that this policy provides many survival benefits which are allotted proportionately over the period of the policy term.

5. Whole Life Policy

Unlike other policies which expire at the end of a specified period of time, this policy extends up to the whole life of the insured. This policy also provides the survival benefit to the insured.  In this type of policy, the policyholder has an option to partially withdraw the sum insured. Policyholder also has the option to borrow sum against the policy.

6. Annuity/ Pension Plan

Under this policy, the amount collected in the form of a premium is accumulated as assets and distributed to the policyholder in form of income by way of annuity or lump sum depending on the instruction of insured.

Benefits of Life Insurance

1. Risk Coverage

Insurance provides risk coverage to the insured family in form of monetary compensation in lieu of premium paid.

2. Difference plans for different uses

Insurance companies offer a different type of plan to the insured depending on his need for insurance. More benefits come with the more premium.

3. Cover for Health Expenses

These policies also cover hospitalization expenses and critical illness treatment.

4. Promotes Savings/ Helps in Wealth creation

Insurance policies also come with the saving plan i.e. they invest your money in profitable ventures.

5. Guaranteed Income

Insurance policies come with the guaranteed sum assured amount which is payable on happening of the event.

6. Loan Facility

Insurance companies provide the option to the insured that they can borrow a certain sum of amount. This option is available on selected policies only. 

7. Tax Benefits

Insurance premium is tax deductible under section 80C of the income tax Act, 1961.

Principles of Life Insurance

Life insurance is based on a number of principles that are tailored to meet market conditions and ensure insurance companies make profits, while offering security policies to insured individuals.

There are broadly four major insurance principles applied in India, these being:

• Insurable Interest: This principle pertains to the level of interest an individual is expected to have in a particular policy. The interest could be a family bond, a personal relationship and so on. Based on the interest level, an insurance company can choose to accept or reject an application in order to protect the misuse of a policy.
• Law of large numbers: This is a theory that ensures long-term stability and minimizes losses in the long run when experiments are done with large numbers.
• Good faith: Purchasing an insurance is entering into a contract between company and individual. This should be done in good faith by providing all relevant details with honesty. Covering any information from the insurance company may result in serious consequences for the individual in the future. This being said, the insurer must explain all aspects of a policy and ensure that there are no unexplained or hidden clauses and that the applicant is made aware of all terms and conditions.
• Risk & Minimal loss: Insurance is a risky and companies have to do business and make profits keeping in mind the risk factor. The principle of minimal risk states that the insured individual is expected to take necessary action to limit him/her self from any hazards. This includes following a healthy lifestyle, getting a regular health check-up and more.

Claim Settlement Process

On the happening of the event, the beneficiary is required to send claim intimation form to the insurance company as soon as possible. Claim intimation should contain details such as Date, Place, and Cause of Death. On successful submission of claim intimation form, an insurance company can ask for additional information about

• Certificate of Death
• Copy of Insurance Policy
• Legal Evidence of title in case insured has not appointed a beneficiary
• Deeds of assignment

On successful submission of all the document, the insurance company shall verify the claim and settle the same.  

Points to Consider for Life Insurance

1. Research

As an applicant for life insurance, there are numerous policy options at your fingertips to choose from. It is essential that you do your research before making an informed decision on purchasing a life insurance policy, as it can help you save money and receive maximum benefits.

2. Read terms and conditions

The terms and conditions of an insurance plan contain all relevant information regarding the particular policy. Make sure that you read the fine print in detail and completely understand it before purchasing an insurance policy of your choice.

3. Remember lock-in period

There are instances when individuals purchase insurance policies without making an informed decision and later realise that they are unhappy with the insurance policy. In such scenarios, some insurance companies offer a lock-in time frame, which is a short time usually 15 days where a policyholder can return the policy to the insurer and purchase another in case they were unsatisfied with the initial purchase.

4. Consider premium payment options

Almost all insurance providers offer premium payment options consisting of annual, semi-annual, quarterly or on monthly basis. It is essential that you opt for Electronic Check System (ECS) payment that will periodically debit your bank account with the required insurance amount. Also, you can choose from a schedule that will allow you to make a premium payment with the convenience of interval payments.

5. Don’t Mask Information

There are times where individuals try to hide information when filling out the insurance application form. All personal credentials and medical history must be accurately presented to the insurance company. Misinformation can cause serious issues when trying to make claims later on.

Life Insurance Companies in India

Some of the prominent life insurance companies in India are:

1. LIC – Life insurance corporation of India
2. SBI Life Insurance
3. ICICI Prudential Life Insurance
4. HDFC Standard Life Insurance
5. Bajaj Allianz Life Insurance
6. Max Life Insurance
7. Birla Sun Life Insurance
8. Kotak Life Insurance

We all are uncertain of the future and although no one wishes anything unfortunate to happen to them, we should be prepared for unforeseen circumstances. Having a life insurance policy is a financial cushion that makes sure your family is well protected. A life insurance policy hence is a very small investment compared to the greater peace of mind it will bring you.

In India, Insurance has well established history of more than thousand years. In Rigveda, there is a concept called Yogakshema, which means prosperity, well being and security of people. Also Insurance was mentioned in Manusmrithi, Dharmashastra and Arthashastra. In those times insurance refers to pooling of resources that could be re-distributed in times of natural calamities such as fire, floods, epidemics and famine. This was probably a pre-cursor to modern day insurance.

Modern Day Insurance

The modern form of Life Insurance came to India from England in the year 1818. Oriental Life Insurance Company started by Europeans in Calcutta was the first life insurance company on Indian Soil.

The insurance companies established during that period were brought up with the purpose of looking after the needs of European community and Indian natives were not being insured by these companies. However, later with the efforts of eminent people like Babu Muttylal Seal, the foreign life insurance companies started insuring Indian lives. But Indian lives were being treated as sub-standard lives and heavy extra premiums were being charged on them.

Bombay Mutual Life Assurance Society heralded the birth of first Indian life insurance company in the year 1870, and covered Indian lives at normal rates. Bharat Insurance Company (1896) was also one of such companies inspired by nationalism. The Swadeshi movement of 1905-1907 gave rise to more insurance companies such as The United India in Madras, National Indian and National Insurance in Calcutta and the Co-operative Assurance at Lahore.

Life Insurance Companies Act, 1912

In the year 1912, the Life Insurance Companies Act, and the Provident Fund Act were passed. The Life Insurance Companies Act, 1912 made it necessary that the premium rate tables and periodical valuations of companies should be certified by an actuary. But the Act discriminated between foreign and Indian companies on many accounts, putting the Indian companies at a disadvantage.

Insurance Act 1938

From 44 companies with total business-in-force as Rs.22.44 Crores, it rose to 176 companies with total business-in-force as Rs.298 Crores in 1938. With a view to protect the interests of the Indian Insurance companies, the earlier legislation was amended with the enactment of the Insurance Act 1938, which consists comprehensive provisions for effective control over the activities of insurers or insurance organizations.

The Insurance Act 1938 was the first legislation governing the life insurance and non-life insurance and to provide strict state control over insurance business.

Birth of Life Insurance Corporation of India

On 19th of January, 1956, that life insurance in India was nationalized. About 154 Indian insurance companies, 16 non-Indian companies and 75 provident were operating in India at the time of nationalization. Nationalization was accomplished in two stages; initially the management of the companies was taken over by means of an Ordinance, and later, the ownership too by means of a comprehensive bill.

The Parliament of India passed the Life Insurance Corporation Act on June 1956, and the Life Insurance Corporation of India was created on September 1956, with the objective of spreading life insurance much more widely and in particular to the rural areas with a view to reach all insurable persons in the country, providing them adequate financial cover at a reasonable cost.

The LIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector.

History of General (non-life) Insurance

The history of general insurance dates back to the Industrial Revolution in the west during the 17th century. General Insurance in India has its roots in the establishment of Triton Insurance Company Ltd. at Kolkata in the year 1850 by the Britishers. In 1907, the Indian Mercantile Insurance Ltd. was established and was the first company to transact all classes of general insurance business.

In 1957, General Insurance Council (GIC), a wing of the Insurance Associaton of India was established The General Insurance Council framed a code of conduct for ensuring fair conduct and sound business practices across Non-Life or General insurance sector.

In 1968, the Insurance Act was amended to regulate investments and set minimum solvency margins. The Tariff Advisory Committee was also established in the same year.

With the passing of the General Insurance Business (Nationalization) Act in 1972, general insurance business was nationalized. A total of 107 insurers were amalgamated and grouped into four companies namely National Insurance Company Ltd. at Kolkata, the New India Assurance Company Ltd. at Mumbai, the Oriental Insurance Company Ltd at New Delhi and the United India Insurance Company Ltd at Chennai.

Malhotra Committee

The Government set up a committee in 1993 under the chairmanship of R.N. Malhotra, former Governor of RBI (Reserve Bank of India), to propose recommendations for initiation and implementation of reforms in the Indian insurance sector. The objective of setting up this committee was to complement the pace of reforms initiated in the financial sector.

The aforesaid committee submitted its report in 1994 wherein it was recommended that the private sector be permitted to enter the Indian insurance sector. It also recommended the participation of foreign companies by allowing them to enter into an MOU (Memorandum of Understanding) by floating Indian companies, preferably a joint venture with Indian partners.

Birth of IRDA

Following the recommendations of the Malhotra Committee report, the Insurance Regulatory and Development Authority (IRDA) Act, in 1999 was passed by the Indian Parliament.

The IRDA opened up the Indian insurance market in August 2000 by inviting application for registration proposals. Foreign companies were allowed entry into Indian insurance sector with an upper ceiling on ownership of up to 26% participation. The IRDA has been granted the powers to frame regulations under Section 114A of the Insurance Act, 1938.

From 2000 onwards, IRDA has framed various regulations for carrying on insurance business to protection of Indian policyholders’ interests including the registration of Life & Non-Life (General) Insurance companies.

Insurance A thriving sector

At present there are 28 general insurance companies including the ECGC and Agriculture Insurance Corporation of India and 24 life insurance companies operating in the country.

The insurance sector is a massive one and is thriving at a speedy rate of 15-20%. Together with banking services, insurance services add about 7% to the country’s GDP. A well-developed and evolved insurance sector is a boon for economic development as it provides long- term funds for infrastructure development at the same time strengthening the risk taking ability of the country.

There are some incomes which do not form part of total income and thus, are also called as income exempt from tax. Such exempted incomes are given under section 10 of the Income-tax Act, 1961.

Some of those incomes are explained below:

Agricultural income [Sec. 10(1)]:

Agricultural income in India is totally exempt from tax. However, such income is to be aggregated in case of certain assessees for the purpose of determining rate of tax on non-agricultural income.

Receipts by a member from a HUF [Sec. 10(2)]:

Any sum received by an individual as a member of a Hindu Undivided Family either out of income of the family or out of income of estate belonging to the family is exempt from tax.

Share of profit received by a partner from a firm [Sec. 10(2A)]:

In case of a person being a partner of a firm which is separately assessed as such, his/ her share in the total income of the firm is exempt from tax.

Interest on Non-resident (External) Account [Sec. 10(4)]:

In the case of an individual who is not resident in India, any income by way of interest on money standing to his credit in a Non-resident (External) account in any bank in India shall be exempt from tax if certain conditions are satisfied.

Remuneration to persons who are not citizens of India [Sec. 10(6)]:

In case of an individual who is not a citizen of India, the following income shall be exempt from tax:

• Remuneration received by diplomats, etc.
• Remuneration received by a foreign national as an employee of a foreign enterprise.
• Non-resident employed on a foreign ship.
• Remuneration of employee of foreign Government during his training in India.

Allowance or perquisites outside India [Sec. 10(7)]:

Any allowances or perquisites paid or allowed, as such, outside India by the Government to a citizen of India, for rendering services outside India, are exempt.

Payments under Bhopal Gas Leak Disaster (Processing of Claims) Act, 1985 [Sec. 10(10BB)]:

Any payments made, under the above Act or any scheme made thereunder, shall be exempt from tax in the hands of the recipient.

Exemption for compensation received or receivable on account of any disaster [Sec. 10(10BC)]:

Any amount received or receivable from the Central Government or a State Government or a local authority by an individual or his legal heir by way of compensation on account of any disaster shall be exempt from tax.

However, the exemption is not allowable in respect of amount received or receivable to the extent such individual or his legal heir has been allowed a deduction under the Income-tax Act on account of any loss or damage caused by such disaster.

Tax on non-monetary perquisites paid by employer [Sec. 10(10CC)]:

The tax actually paid by the employer on a perquisite provided to the employee [other than the perquisite provided by way of monetary payment within the meaning of section 17(2)] shall be exempt from tax in the hands of the employee.

Provident Fund [Sec. 10(11)]:

Any payment from a provident fund to which the Provident Fund Act, 1925 applies or from Public Provident Fund set up by the Central Government shall be exempt from tax.  

Educational scholarships [Sec. 10(16)]:

Scholarships granted to meet the cost of education are exempt from tax. In order to avail the exemption, it is not necessary that scholarship should be financed by the Government.

Daily allowances of Members of Parliament [Sec. 10(17)]:

The following incomes shall be exempt from tax in the hands of the persons specified:

• Daily allowance received by any person by reason of his membership of Parliament or of any State Legislature or of any Committee thereof;
• Any allowance received by any person by reason of his membership of Parliament under the Members of Parliament (Constituency Allowance) Rules, 1986;
• Any constituency allowance received by any person by reason of his membership of any State Legislature under any Act or Rules made by that State Legislature.

Pension received by certain awardees/ any member of their family [Sec. 10(18)]:

Any income by way of pension/ family pension received by an individual or any member of his family shall be exempt from tax if such individual has been in the service of Central/ State Government and has been awarded Param Vir Chakra or Maha Vir Chakra or Vir Chakra or such other gallantry award as may be notified.

Exemption of the family pension received by the family members of armed forces (including para-military forces) personnel killed in action in certain circumstances [Sec. 10(19)]:

Where the death of a member of the armed forces (including para-military forces) of the Union has occurred in the course of operational duties, in such circumstances and subject to such conditions as may be prescribed, the family pension received by the widow or children or nominated heirs, as the case may be, shall be exempt from tax.

Annual value of one palace of the ex-ruler [Sec. 10(19A)]:

The ‘annual value’ in respect of any one palace which is in occupation of an ex-ruler is exempt from tax, provided such annual value was exempt before 28.12.1971 by virtue of any law or order then prevailing.

Income of minor clubbed in the hands of a parent [Sec. 10(32)]:

Under section 64(1A), the income of a minor child is includible in the total income of the parent under the circumstances mentioned therein, section 10(32) provides that such parent in whose income the minor’s income is included shall be entitled to exemption to the extent such income does not exceed of ` 1,500 in respect of each minor child, whose income is so includible. In other words, the exemption shall be allowed to the extent of the income of each minor child included or ` 1,500 per child, whichever is less.

Capital gain on transfer of units of US-64 exempt if transfer takes place on or after 1-4-2002 [Sec. 10(33)]:

Any income arising from the transfer of a capital asset, being a unit of the Unit Scheme, 1964 where the transfer of such asset takes place on or after 1-4-2002, shall be exempt from tax.

Dividend to be exempt in the hands of the shareholders [Sec. 10(34)]:

Any dividend declared, paid or distributed by a domestic company shall be liable to dividend distribution tax @ 15% plus surcharge @ 10% plus education cess @ 2% plus secondary and higher education cess @ 1% of the amount so declared, distributed or paid. Hence, such dividend received by the shareholders shall be exempt from tax in their hands.

Income from units to be exempt in the hands of the unit-holders [Sec. 10(35)]:

Like dividends, income received on units of UTI (now known as specified undertaking and specified company) and Mutual Funds covered under section 10(23D) shall be exempt from tax in the hands of the unit-holders.

Exemption of long-term capital gain arising from sale of shares and units [Sec. 10(38)]:

Any income arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund shall be exempt from tax provided:

• Such equity shares are sold through recognized stock exchange, whereas units of an equity oriented fund may either be sold through the recognized stock exchange or may be sold to the mutual fund.
• Such transaction is chargeable to securities transaction tax.

Exemption of amount received by an individual as loan under reverse mortgage scheme [Sec. 10(43)]:

Any amount received by an individual as a loan, either in lump sum or in instalment, in a transaction of reverse mortgage referred to in section 47(xvi) shall be exempt from tax.

The Income Tax law in India consists of the following components:

1. Income Tax Act, 1961: The Act contains the major provisions related to Income Tax in India.
2. Income Tax Rules, 1962: Central Board of Direct Taxes (CBDT) is the body which looks after the administration of Direct Tax. The CBDT is empowered to make rules for carrying out the purpose of this Act.
3. Finance Act: Every year Finance Minister of Government of India presents the budget to the parliament. Once the finance bill is approved by the parliament and get the clearance from President of India, it became the Finance Act.
4. Circulars and Notifications: Sometimes the provisions of an act may need clarification and that clarification usually in a form of circulars and notifications which has been issued by the CBDT from time to time. It includes clarifying the doubts regarding the scope and meaning of the provisions.

Types of Taxes

Taxes are levied by the government on the taxpayer. Taxes are broadly divided into two parts namely, Direct Tax and Indirect Tax. Direct Tax is levied directly on the income of the person. Income Tax and Wealth Tax are the part of Direct Tax. Whereas, in indirect taxes, the person who pays the tax, shifts the burden to the person who consumes the goods or services. Before 2017 the Indirect Tax comprises of various taxes and duties like Service Tax, Sales Tax, Value Added Tax, Customs Duty, Excise Duty and etc. From July 1st, 2017 all such Indirect Taxes are submerged in one tax law which was named as ‘The Goods and Services Tax Act, 2017”.

Basic Concept of Income Tax Act

“Income Tax is levied on the total income of the previous year of every person”. To understand the basic concept.It is very important to know the various other concepts.

Concept of Income

In common parlance, Income is known as a regular periodic return to a person from his activities. However, the Income has broader classified in Income Tax law. The Income Tax Act, even take consideration of income which has not arisen regularly and periodically. For instance, winning from lotteries, crossword puzzles, income from winning of shows is also subject to tax as per income tax.

The Income includes income from:

Cash or Kind

Income in terms of Cash is not the only way to receive income, it can also be received in terms of a kind. The calculation of income from kind is subject to different treatments in both Direct and Indirect Tax. When the income is received in kind, its valuation will be made.

Legal or Illegal Income

A man of ordinary prudence may think that the illegal income may not be falling under the concept of income, but income tax does not make any distinction between the income received from a legal or illegal source. In CIT v. Piara Singh, the Supreme Court held that the loss of business of smuggling shall be allowed for deduction under Income Tax. The rationale behind the decision was that the smuggling activity is also regarded as a business. Therefore, the confiscation of currency notes employed in smuggling activity is a loss which arises directly from the carrying on of the business.

Temporary or Permanent

As per Income Tax Act, there is no distinction in computing income whether nature is temporary or permanent.

Receipt basis or Accrual basis

Income arises either on receipt basis or accrual basis. It may accrue to a taxpayer without its actual receipt. The income in some cases is deemed to accrue or arise to a person without its actual accrual or receipt. Income accrues where the right to receive arises.

Gifts 

Gifts up to Rs. 50,000 received in Cash do not constitute tax liability. Gifts in kind having the fair value maximum up to Rs. 50,000 is not liable to tax. However, the whole amount will be taxed if the value exceeds the prescribed limit. Moreover, the treatment of valuation of the gift is different in the different situation especially gifts received on occasion of marriage.

Lump sum or Instalments 

Income Tax does not make any distinction in computing income, whether it receive in lump sum or instalment.

Moreover, the income is defined in Section 2(24) of the Act.

Person

Income tax is levied on the total income of the previous year of every person. In general terms, the meaning of a person can be interpreted in a short term. Whereas, as per Section 2 (31), Person includes:

1. an individual,
2. a Hindu undivided family (HUF),
3. a company,
4. a firm,
5. an association of persons (AOP) or a body of individuals (BOI), whether incorporated or not,
6. a local authority, and
7. every artificial juridical person (AJP), not falling within any of the preceding sub-clauses.

The definition of Person starts with the word includes, therefore, the list is inclusive, not exhaustive.

Assessee

An assessee is a taxpayer means a person who under the income tax act is subject to pay taxes or any other sum of money, as defined under section 2 (7) of the Act. The expression ‘any other sum of money’ includes other such obligations payable, for instance fine, interest, penalty and other tax etc.

Assessment Year

“Assessment Year” means the year in which income of the previous year of an assessee is taxed. The timed lap of assessment year is of twelve months beginning from the 1st April every year. The period starts from 1st April of one year and ending on 31st March of next year. Broadly, assessment year is defined under section 2 (9) of the Act.

Previous Year

Income earned during the year is taxable in the next year. The definition of “Previous Year” is given under section 3 of the Act. Previous Year is the year in which income is earned. Previous year is the financial year immediately preceding the relevant assessment year. From 1989-90 onwards, every taxpayer is obliged to follow financial year (i.e., April 1st of one year to March 31st of next year) as the previous year.

For a newly set up business or profession, the first previous year will start from the day from which that business or profession has commenced, but the period of ending will remains same (i.e., 31st March).

Heads of Income

As per Income tax, section 14 classifies income under five heads:

1. Income from salaries
2. Income from House Property
3. Profits and gains of business and profession
4. Capital Gains
5. Income from other sources

Tax Rates

The Income is taxed at the rates prescribed by the relevant Finance Act. The tax levied on the basis of a slab system where different tax rates have been directed for the different slab. In India, there are three categories of individual taxpayers:

1. An individual below the age of 60 years,
2. A senior citizen above the age of 60 years, but below the age of 80 years,
3. A super senior citizen above 80 years of age.

The tax slab varies according to the different persons.

Surcharge

The Surcharge is commonly known as Tax on Tax. It is an additional tax levied on the taxpayers on a special group of people. It is an additional tax liability levied on the person having more income than prescribed.

 Education Cess and Secondary Higher Education Cess

The amount of income tax shall be increased by an Education Cess on Income Tax by 2% and Secondary and Higher Education Cess by 1% of the tax liability.

Agricultural Income

The Income-tax Act, 1961 does not define what agricultural income is. Its definition is wide and inclusive. It tells us which incomes are agricultural incomes. It covers the income of cultivators and land-owners both. Under section 2(lA) of Income Tax Act 1961 : “agricultural income” means:

(a) Any rent or revenue derived from land which is situated in India and is used for agricultural purposes

(b) Any income derived from such land by:

• (i) Agriculture; or
• (ii)the performance b’ a cultivator or receiver of rent-in-kind, of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by hun, fit to be taken to the market; or
• (iii)the sale by a cultivator or receiver of rent-in-kind in respect of which no process has been performed other than a process described in the above paragraph

(c) Any income derived from any building and occupied by the receiver of rent or revenue of such land, or occupied by the cultivator or the receiver of rent-in-kind of any land with respect of which or the produce of which any process mentioned in (ii) and (iii) above is carried on, provided the following two conditions are fulfilled:

• (A)The building is situated on or in the immediate vicinity of the land and is a building which the cultivator or the receiver of rent-in-kind requires as dwelling house or as a store-house or other out-building. The house must be needed by reason of its connection with land
• (B)The land is either assessed to land revenue in India or is subject to a local rate assessed and collected by the officers of the Govt. as such.

Types Of Agricultural Income

1. Any income received as rent or revenue from agricultural land

Rent can very simply be defined as a payment in cash or in-kind which the owner of the land receives from another person in consideration of a grant of a right to use land. When the owner of land is not performing agricultural operations himself but gives his land on contract basis, any amount received from the actual cultivator by the owner of the land shall be agricultural income. Such rent may he in cash or in-kind, i.e., a share in the produce grown by the cultivator. 

2. Income derived from Agriculture

Income derived from land situated in India by applying agricultural operations shall be agricultural income. If all the basic operations like preparation of land for sowing, planting, watering, harvesting etc. are applied, any income resulting from such operations shall be agricultural income. On the other hand, if grass, trees etc. have grown spontaneously or without the aid of human skill, effort, labor etc., any income resulting from the sale of such grass, trees or lease rent of such land shall not he agricultural income.

Agricultural income also includes income from orchards or from horticulture.

3. Any income accruing to the person by the performance of any process to render the produce marketable

If, in the ordinary course, a process is to he employed by the cultivator himself or the landlord who receives the produce as rent-in-kind, any income derived from such a process shall he agricultural income. Such a process must be employed to render the produce fit for marketing. The process may he manual or mechanical. It should be noted that the produce should not change its original character in spite of the processing unless the produce cannot be sold in that form or condition.

Following points are to he noted in this connection:

1. The process must him one which is ordinarily employed by the cultivator.
2. The process is employed to render the produce fit to be taken to the market.
3. The produce must retain its original character in spite of process unless the produce is having no market if offered for sale in its original condition.

4. Any income received by the person by the sale of produce raised or received as rent-in-kind

5. Income from buildings used for agriculture

Casual Income

Casual income means any receipts which are of a casual and non-recurring nature. For example, income earned by way of winnings from lotteries, races including horse races, crossword puzzles, etc.

Conditions:

1. No expenditure or allowance can be allowed from such income.
2. Deduction under Chapter VI-A is not allowable from such income.
3. Adjustment of unexhausted basic exemption limit is also not permitted against such income.

Assessment in income tax is estimation of total income and tax thereon either by assessee himself or by income tax officer. Assessment is broadly covered in following types:

(1) Self-assessment u/s 140A

Every assessee before filing income tax return under various sections viz. 139, 142(1), 148 or 153A is supposed to find whether he is liable for any tax, interest or penalty.

For this purpose section 140A has been introduced in Income tax act.

Procedure of self-assessment is as follows:

Self-assessment calculation Summary:

	Particulars	Amount
	Compute total income	XX
	Calculate tax payable on total income	XX
Add	Edu. Cess +Surcharge if any	XX
Less	Relief under section 89, 90, 91 & 90A	XX
Less	MAT credit under 115JAA or 115JD	XX
Less	TDS/TCS	XX
Less	Advance tax Paid, if any	XX
Add	Interest u/s 234A, 234B, 234C	XX
Amount Payable as Self-Assessment u/s 140A		XX

If any amount is payable under section 140A then amount so paid shall be adjusted against interest payable first and then balance amount to be adjusted toward tax payable.

Enquiry before assessment: Secton 142

Section 142(1): for making assessment, the assessing officer may take any / all of the following steps:

i) Notice u/s 142 (1) (i): this notice can be issued to assessee (only those who have not filed return) requiring him to furnish return when no any return has been u/s 139(1) has been filed, within the time allowed u/s 139(1) or before the end of the relevant assessment year.

ii) Notice u/s 142 (1) (ii): this notice can be issued to all assessees who filed return or not to produce or cause to be produced such accounts or documents as the assessing officer may require but shall not require the assesse to produce any accounts relating to period of more than three years prior to the previous year along with accounts of previous year under assessment.

Example: suppose assessment for AY 2018-19 is to be made then accounts for last 3 years FY 2014-15, FY 2015-16, FY 2016-17 and previous year 2017-18 may be required by officer.

iii) Notice u/s 142 (1)(iii): this notice can be issued to ay assessee who has filed a return of income of whose time to file return u/s 139(1) has been expired, to furnish, in writing and verified in prescribed manner information in such form as he may require and he may also ask for a statement of all assets and liabilities of the assessee for any number of previous year.

Enquiry from other u/s 142(2):

This section empowers assessing officer to collect information from sources other than assessee in view of the provisions of sections 131, 133(6), 142(2).

Audit of accounts u/s 142(2A) to (2D): 

The assessing officer may, at any time at any stage of the assessment, direct the assesse to get the accounts audited by a Chartered Accountant nominated by Chief Commissioner / Commissioner of Income Tax, such a decision may be taken by assessing officer, if having regard to the nature, volume, multiplicity of transactions, doubts about the correctness of accounts, specialized nature of business activity and in the interest of revenue is of opinion that it is necessary to do so.

Above direction of Audit can be given even if accounts are already audited under the income tax Act or any other law.

Audit report instructed under this notice shall be submitted in Form 6B not later than 180 days from the date of such direction.

Expenses of such Audit determined by Chief Commissioner / Commissioner shall be paid by Central Govt.

Section 142(3): The assessing officer before using such information gathered u/s 142(2) and 142(2A) for any assessment shall give an opportunity of being heard to the assessee. However no such opportunity is necessary when the assessment is made u/s 144.

Consequences of non-compliance of section 142(1) and section 142(2A):

a) Best judgement assessment u/s 144

b) Penalty u/s 271(1)(b) which has been fixed at Rs. 10000/-

c) Prosecution u/s 276D: rigorous imprisonment up to 1 year or fine from Rs. 4 to Rs. 10 per day or both

d) Issue of warrant u/s 132 for search

(2) Summary Assessment u/s 143(1)

Where a return under section 139 or in response to notice under section 142 (1) is filed then u/s 143(1) this return is checked form the point of arithmetical accuracy and will not be scrutinized in detail, in following way:

1) The total income or loss shall be computed after making the following adjustments, namely:

(i) Any arithmetical error in the return; or

(ii) An incorrect claim, if such incorrect claim is apparent from any information in the return;

(iii) disallowance of loss claimed, if return of the previous year for which set off of loss is claimed was furnished beyond the due date specified under sub-section (1) of section 139;

(iv) Disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return;

(v) Disallowance of deduction claimed under sections 10AA, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID or section 80-IE, if the return is furnished beyond the due date specified under sub-section (1) of section 139; or

(vi) Addition of income appearing in Form 26AS or Form 16A or Form 16 which has not been included in computing the total income in the return. However no adjustment shall be made under this in relation to a return furnished for the assessment year commencing on or after the 1st day of April, 2018

However no such adjustments shall be made unless intimation is given to the assessee of such adjustments either in writing or in electronic mode:

The response received from the assessee, if any, shall be considered before making any adjustment, and in a case where no response is received within thirty days of the issue of such intimation, such adjustments shall be made.

2 .The tax and interest, if any, shall be computed on the basis of the total income computed under clause (a);

3. the sum payable by, or the amount of refund due to, the assessee shall be determined after adjustment of the tax and interest and fee, if any, computed under clause (b) by any tax deducted at source, any tax collected at source, any advance tax paid, any relief allowable under an agreement under section 90 or section 90A, or any relief allowable under section 91, any rebate allowable under Part A of Chapter VIII, any tax paid on self-assessment and any amount paid otherwise by way of tax or interest and fee;
4. an intimation shall be prepared or generated and sent to the assessee specifying the sum determined to be payable by, or the amount of refund due to, the assessee under clause (c); and
5. the amount of refund due to the assessee in pursuance of the determination under clause (c) shall be granted to the assessee.

An intimation u/s 143(1) shall also be sent if loss declared is adjusted but no any tax/interest/fee/ is payable by or no refund is due to him.

No intimation u/s 143(1) shall be sent after the expiry of one year from the end of the financial year in which return is filed. In case of revised return (section 139(5)) the one year period shall be counted from end of financial year in which return was revised.

(3) Scrutiny assessment u/s 143(3)

Scrutiny assessment u/s 143(3) is also known as regular assessment.

To initiate assessment u/s 143(3), assessing officer has to issue notice u/s 143(2), which can only be issued in case where return u/s 139 or in response to section 142(1) has been filed by the assessee. Means notice u/s 143(2) and assessment u/s 143(3) cannot be issued / done if no return is filed.

Assessing officer, u/s 143(2), if consider it necessary or expedient to ensure that –

i) The assessee has not understated the income or

ii) Has not computed excessive loss or

iii) Has not under paid the tax in any manner shall require assessee to attend his office to produce documents / evidences in support of return.

Note:

1. No notice u/s 143(2) shall be served on the assessee after the expiry of 6 months from the end of financial year in which return is furnished.

Example: suppose return for FY 2016-17 was filed on 30/07/2017 then notice u/s 143(2) can be issued on or before 30/09/2018

Suppose above return was revised on 24/05/2018 then notice u/s 143(2) can be issued on or before 30/09/2019.

2. Fresh notice u/s 143(2) is requied to be issued if return is revised u/s 139(5).
3. Non-compliance of notice u/s 143(2) may result in ex parte, best judgement assessment u/s 144 and may also attract penalty u/s 271(1)(b) which has been fixed at Rs. 10000/-.

Assessment u/s 143(3)

On the day specified in the notice issued under sub-section (2), or as soon afterwards as may be, after hearing such evidence as the assessee may produce and such other evidence as the Assessing Officer may require on specified points, and after taking into account all relevant material which he has gathered, the Assessing Officer shall, by an order in writing, make an assessment of the total income or loss of the assessee, and determine the sum payable by him or refund of any amount due to him on the basis of such assessment.

No order of assessment/ reassessment under section 143(3) shall be made after the expiry of 21 months (18 months for A.Y. 2018-19 and 12 months wef A.Y. 2019-20) from the end of relevant Assessment Year.

Example: Last date for assessment order u/s 143(2):

for FY 2015 -16 (AY 2016-17) – 31^st Dec. 2018

for FY 2016 -17 (AY 2017-18) – 31^st Dec. 2019

for FY 2017 -18 (AY 2018-19) – 30^th Sep. 2020

for FY 2018 -19 (AY 2019-20) – 31^st Mar. 2021

3.Where a reference has been made to Transfer Pricing Officer to determine Arm’s Length Price, then no order of assessment/ reassessment under section 143(3) shall be made after the expiry of 33 months(30 months for A.Y. 2018-19 and 24 months wef A.Y. 2019-20) from the end of relevant Assessment Year.

(4) Best judgment assessment u/s 144

Where any person:

(a) Fails to make the return required u/s 139 (1) / 139(4) or 139(5) depending upon circumstances, or

(b) Fails to comply with

(i) All the terms of a notice issued u/s 142(1) or

(ii) Directions issued under sub-section (2A) of that section], or

(c) Fails to comply with all the terms of a notice issued under sub-section (2) of section 143,

the Assessing Officer, after taking into account all relevant material which he has gathered, shall, after giving the assessee an opportunity of being heard (not necessary in case where notice u/s 142(1) is already served), make the assessment of the total income or loss to the best of his judgment and determine the sum payable by the assessee on the basis of such assessment:

Provided that such opportunity shall be given by the Assessing Officer by serving a notice calling upon the assessee to show cause, on a date and time to be specified in the notice, why the assessment should not be completed to the best of his judgment.

Note: The assessing officer under this section cannot assess income below the returned income or cannot assess the loss higher than the returned income.

No order of assessment/ reassessment under section 144 shall be made after the expiry of 21 months(18 months for A.Y. 2018-19 and 12 months wef A.Y. 2019-20) from the end of relevant Assessment Year.

Example: Last date for assessment order u/s 143(2):
for FY 2015 -16 (AY 2016-17) – 31^st Dec. 2018
for FY 2016 -17 (AY 2017-18) – 31^st Dec. 2019
for FY 2017 -18 (AY 2018-19) – 30^th Sep. 2020
for FY 2018 -19 (AY 2019-20) – 31^st Mar. 2021

Where a reference has been made to Transfer Pricing Officer to determine Arm’s Length Price, then no order of assessment/reassessment under section 144 shall be made after the expiry of 33 months (30 months for A.Y. 2018-19 and 24 months wef A.Y. 2019-20) from the end of relevant Assessment Year.

Situation	Treatment
Assessing Officer has not provided opportunity of being heard by servicing notice?	Assessment is Void
Assessing Officer has not provided opportunity of being heard but notice under 142(1) was already issued?	Assessment is Void
If assessment carried out after 2 years of completion of assessment year	Assessment is Void

(5) Protective Assessment

Sometimes it may happens that one particular income is assessed in one more than one hand i.e. one assessing officer is treating the some income in the hands of ‘A’ and same income might be treated in the hands of ‘B’ by some different assessing officer. And some time same officer may assess the same income in the hands of one person and also in the hands of a firm / family also.

It has been held by the Supreme Court in Lalji Haridas v. ITO, (43 ITR 387), that the officer may, when in doubt, to safeguard the interest of revenue, assess it in more than one hand. But this procedure is allowed at the level of assessment only and at higher level it is possible to give clear findings as who is really liable to be assessed leaving the one and in such case department should provide relief suo motu to one of them. (ITO vs. Bachu lal kapoor (1966) 60 ITR 74 (SC))

(6) Income escaping assessment u/s 147

Subject to provisions of section 148 to 153, if any assessing officer believes that any income, chargeable to tax, has escaped assessment for any assessment year, he may:

a) assess or reassess such income which has escaped assessment;

b) recompute the loss or depreciation allowance or any other allowance as the case may be, for the assessment year concerned i.e. the relevant assessment year

Deemed cases of escapement:

a) where no return has been filed and no assessment is done but his total income or total income of any other person in respect of which he is assessable, exceeds the maximum amount which is not chargeable to tax

b) where a return of income filed but no assessment is done and assessing officer noticed understatement of income or excessive claim of loss, deduction, allowance or relief etc.

c)  where assessee fails to report international transactions u/s 92E

d) where assessment u/s 143(3) / 144 has been made but income chargeable to tax:

(i) has been under assessed; or

(ii) has been assessed at low rate; or

(iii)has been assessed with excessive relief; or

(iv) excessive loss or depreciation or other allowance has been computed

Note: if any case is pending under appeal / revision then that case cannot be opened under section 147.

Notice u/s 148 (1)

Before making any assessment u/s 147, the assessing officer shall serve on the assesse a notice requiring him to furnish a return of his income or income of any other person in respect of which he is assessable during the previous year corresponding to the relevant assessment year with in such period as may be specified in the notice.

Note:

i) even though notice u/s 139 or 142(1) have been issued, then also notice under section 148 is must.

ii) return filed in response to notice u/s 148 (1) shall be treated as if the same is filed u/s 139 and for making assessment u/s 147 read with section 143(3), assessing officer is required to issue notice u/s 143(2) within a period of 6 months from the end of financial year in which such return is filed by the assessee.

iii) As per section 148(2), assessing officer is required to record the reasons for issuing notice u/s 148(1).

iv) However as per explanation 3 to section 147, reassessment can be done for an issue which is not already recorded.

v) Separate notice u/s 148(1) is required for each assessment year for which income has escaped.

Time limit and sanctions for issue of notice: section 149 /151

As per section 149(1) notice u/s 148(1) can be issued only:

a) within 4 years from the end of the relevant assessment year for any income escaping assessment’ or

Example: for FY 2015 -16 notice u/s 148(1) can be issued on or before 31^st March 2021.

b) within 6 years from the end of the relevant assessment in cases where the amount of income escaping assessment is likely to be Rs. 1,00,000/- or more for that year, or

c) within 16 years from the end of the relevant assessment year if the income in relation to any asset (including financial interest in any asset) located outside India, chargeable to tax, has escaped assessment.

In clause b) and c) above notice can be issued only after getting sanction from Principle Chief Commissioner or Chief Commissioner or Principle Commissioner or Commissioner.

Proviso to section 147

Where an assessment u/s 143(3) or 147 has already been made for relevant assessment year no any action u/s 147 is possible after expiry of 4 year as mentioned in clause b) and c) above, unless any income chargeable to tax has escaped assessment by reason of the failure on the part of assessee. However above proviso do not apply in relation to income from asset located outside India.

No time limit for issue of notice u/s 148 (1) in following situation:

If the notice u/s 148(1) is required to be issued to give effect to any finding or direction contained in a passed by:

i) By any authority in any proceeding under this Act by way appeal or revision

ii) By a Court / Supreme Court / High Court

iii) CIT Appeal u/s 250, ITAT u/s 254, Commission u/s 263 or 264 of Income Tax Act

(7) Assessment in case of search u/s 153A

Commissioner of Income Tax:

He is an important income tax authority which has executive and judicial powers. The central board of revenue is the appointing authority for commissioner of income tax. Normally commissioner is appointed as an incharge of a zone. He is responsible for the administration of the area assigned to him. He is subordinate regional commissioner income tax.

Appointment of Income-Tax Authorities [Sec. 117]

1. Power of Central Government: The Central Government may appoint such persons as it thinks fit to be income-tax authorities. It kept with itself the powers to appoint authorities upto and above rank of an Assistant Commissioner of Income-Tax [ Sec. 117 (1) ]
2. Power of the Board and Other Higher Authorities: Subject to the rules and orders of the Central Government regulating the conditions of service of persons in public services and posts, the Central Government may authorize the Board, or a Director-General, a Chief Commissioner or a Director or a Commissioner to appoint income-tax authorities below the rank of an Assistant Commissioner or Deputy Commissioner.  [ Sec. 117 (2) ]
3. Power to appoint Executive and Ministerial Staff: Subject to the rules and orders of the Central Government regulating the conditions of service of persons in public services and posts, an income-tax authority authorized in this behalf by the Board may appoint such executive or ministerial staff as may be necessary to assist it in the execution of its functions.

Control of Income: Tax Authorities [ Sec. 118 ]

The Board may, by notification in the Official Gazette, direct that any income-tax authority or authorities specified in the notification shall be subordinate to such other income-tax authority or authorities as may be specified in such notification.

Jurisdiction:

1. In a specific area which is assigned to him, he performs both the function judicial and executive.
2. If specific area is not assigned then he performs his duties according the directions of central board of revenue.

Function and powers of commissioner of income tax:

The commissioner exercises the power to control the staff of income tax department working in his jurisdiction. He is also responsible for the efficiency of work in all respect in his zone.

Following are the important functions and powers of commissioner of income tax.

1. Determine The Jurisdiction:

He has the power to determine the jurisdiction and assign the work to subordinate inspecting additional commissioners income tax and deputy commissioners.

2. Final Authority To Decide The Dispute:

Commissioner income tax is the final authority to decide the disputes if two subordinate income tax authorities are not in agreement regarding their areas of juries diction or the assessment of a person.

3. Transfer Of Jurisdiction:

He is empowered to transfer the jurisdiction from one income tax authority to another.

4. Revision Of Orders:

He may revise any other passed by his subordinates however these orders should not be prejudicial to the assessee.

5. Power To With Held The Refund:

The commissioner of income tax is empowered to order that the refund must be with held if the department wants to appeal against the refund.

6. Refer The Case To High Court:

If he is not satisfied with the decision of appalled tribunal, he can request the tribunal to refer the case to high court provided that the decision involves the point of law.

7. Power To Compound Offence:

He may either before or after the institution of proceedings compound such offence where a person has committed any offence under the income tax law.

8. Order To Person For Payment:

He may order a person who has committed an offence to pay the amount for which the offence may not compound.

9. Power To Disqualify The Practitioners:

If he finds any practitioners qualify of misconduct, he may disqualify an income tax practitioner to appear before any income tax authority.

10. Power To Amend His Orders:

To rectify any mistake from the record the commissioner income tax may amend his orders passed by him.

11. Power To Receive Evidence:

The commissioner has the power to receive the evidence on affidavit.  For the examination of witness he can issue the orders to commissioners.

12. Power To Demand Documents:

He can compel any person to produce his books of accounts or any other documents for investigation. He can also enforce any person to attend his office and he can examine him.

13. Power to Extend the Petition Period:

He can extend the normal period for filling a revision petition, If he is satisfied about the cause of delay.

14. Power to Decide the Revision Petitions:

Against the decision of his subordinates he entertains, hears and decides the revision petitions of aggrieved assesses.

15. May Direct for Appeal:

The commissioner of income tax (Head quarter) may direct the deputy commissioner to appeal to appellate tribunal against the decision made by the commissioner income tax (appeal).

16. Penalty:

If the notice has been issued to any taxpayer but he has failed to obey the notice. In this case commissioner income tax may impose penalty on that person.

17. Best Judgement Assessment:

If any person fails to file the return of income tax with in due date then the commissioner can make the best judgement of assessment.

18. Power of Recovery Of Tax:

The commissioner income tax can take various steps to recover the amount if any person fails to pay the due tax.

19. Inventory of Articles:

If any article is not entered and it is found in the premises the commissioner can make inventory of that article.

20. Provisional Assessment:

The commissioner income tax has the power to make the provisional assessment if any person fails to file the return.

21. Notice for Tax:

The commissioner income tax can issue the notice to any person for filling the return or for the collection of tax from the tax payer.

22. Retain The Documents:

The commissioner income tax is empowered to retain the important documents of the taxpayers for the purpose of prosecutions.

23. Change The Method Of Accounting:

If any person wants to change his method of accounting, the commissioner income tax may allow him to change.

Every assessee, who earns income in excess of the basic exemption limit in a Financial Year (FY), must file a statement containing details of his income, deductions, and other related information. This is called the Income Tax Return. Once you as a taxpayer file the income returns, the Income Tax Department will process it. There are occasions where, based on set parameters by the Central Board of Direct Taxes (CBDT), the return of an assessee gets picked for an assessment.

The various forms of assessment are as follows:

1. Self Assessment

The assessee himself determines the income tax payable. The tax department has made available various forms for filing income tax return. The assessee consolidates his income from various sources and adjusts the same against losses or deductions or various exemptions if any, available to him during the year. The total income of the assessee is then arrived at. The assessee reduces the TDS and Advance Tax from that amount to determine the tax payable on such income. Tax, if still payable by him, is called self assessment tax and must be paid by him before he files his return of income. This process is known as Self Assessment.

2. Summary Assessment

It is a type of assessment without any human intervention. In this type of assessment, the information submitted by the assessee in his return of income is cross-checked against the information that the income tax department has access to. In the process, the reasonableness and correctness of the return are verified by the department. The return gets processed online, and adjustment for arithmetical errors, incorrect claims, disallowances etc are automatically done. Example, credit for TDS claimed by the taxpayer is found to be higher than what is available against his PAN as per department records. Making an adjustment in this regard can increase the tax liability of the taxpayer.

After making the aforementioned adjustments, if the assessee is required to pay tax, he will be sent an intimation under Section 143(1). The assessee must respond to this intimation accordingly.

3. Regular Assessment

The income tax department authorizes the Assessing Officer or Income Tax authority, not below the rank of an income tax officer, to conduct this assessment. The purpose is to ensure that the assessee has neither understated his income or overstated any expense or loss or underpaid any tax.

The CBDT has set certain parameters based on which a taxpayer’s case gets picked for a scrutiny assessment.

• If an assessee is subject to a scrutiny assessment, the Department will send a notice well in advance. However, such notice cannot be served after the expiry of 6 months from the end of the Financial year, in which return is filed.
• The assessee will be asked to produce the books of accounts, and other evidence to validate the income he has stated in his return. After verifying all the details available, the assessing officer passes an order either confirming the return of income filed or makes additions. This raises an income tax demand, which the assessee must respond to accordingly.

4. Best Judgement Assessment

This assessment gets invoked in the following scenarios:

1. If the assessee fails to respond to a notice issued by the department instructing him to produce certain information or books of accounts
2. If he/she fails to comply with a Special Audit ordered by the Income tax authorities
3. The assessee fails to file the return within due date or such extended time limit as allowed by the CBDT
4. The assessee fails to comply with the terms as contained in the notice issued under Summary Assessment

After providing the assessee with an opportunity of being heard, the assessing officer passes an order based on all the relevant materials and evidence available to him. This is known as Best Judgement Assessment.

5. Income Escaping Assessment

When the assessing officer has sufficient reasons to believe that any taxable income has escaped assessment, he has the authority to assess or reassess the assessee’s income. The time limit for issuing a notice to reopen an assessment is 4 years from the end of the relevant Assessment Year. Some scenarios where reassessment gets triggered are given below.

1. The assessee has taxable income but has not yet filed his return.
2. The assessee, after filing the income tax return, is found to have either understated his income or claimed excess allowances or deductions.
3. The assessee has failed to furnish reports on international transactions, where he is required to do so.

Assessment, in the case of some taxpayers, could close quickly while for some, it could prove to be quite gruelling. In case you are not comfortable dealing with income tax officers, it is suggested that you take the help of a Chartered Accountant to help you with your case.