What is Income Tax? Describe the history of Income Tax in India.

---

Q1. What is Income Tax? Describe the history of Income Tax in India.

(14 Marks)

---

Meaning of Income Tax:

Income tax is a direct tax that the government imposes on the income of individuals, Hindu Undivided Families (HUFs), companies, firms, and other entities.
It means that when a person earns income, a certain percentage of that income is paid to the government as tax.

In simple words, income tax is the money paid by citizens and organizations to the government from their income so that the government can use it for public welfare — like building roads, schools, hospitals, defense, and other social services.

Under Indian law, income tax is governed by the Income Tax Act, 1961, which is applicable all over India.

---

Features of Income Tax:

1. Direct Tax: Paid directly by the person who earns income.
2. Progressive Nature: Higher income → Higher tax rate.
3. Annual Levy: Tax is charged every financial year on the income earned during that year.
4. Legal Obligation: It is compulsory under law.
5. Main Source of Government Revenue: It helps the government fund developmental and welfare schemes.

---

History of Income Tax in India:

The history of income tax in India can be divided into different phases:

---

1. Before British Period (Ancient and Medieval India):

• In ancient India, there was no formal income tax law.
• However, texts like Manusmriti and Arthashastra (by Kautilya) mention that kings used to collect a part of the produce or income as tax, usually one-sixth of the produce.
• These taxes were mainly for the protection and administration of the kingdom.

---

2. British Period:

The modern income tax system in India started under British rule.

• Year 1860:
  The first Income Tax was introduced in India by Sir James Wilson, the then British Finance Minister, to meet the financial needs after the 1857 Revolt (Indian Mutiny).

  • The law was called The Income Tax Act, 1860.
  • It was a temporary measure for revenue collection.

• Between 1860–1886:
  Several acts were passed and repealed due to dissatisfaction with their structure.

• Year 1886:
  A more systematic law was passed called The Income Tax Act, 1886.

  • It became the base for future income tax systems.
  • Income was divided into categories like salary, business, property, etc.

• Subsequent Amendments:
  The Act was modified several times in 1918 and 1922.

  • The Income Tax Act, 1922 was a major and long-lasting reform, laying the foundation for the modern system.
  • It gave wide powers to the Income Tax Department and introduced the concept of "assessment" and "appeals".

---

3. Post-Independence Period (After 1947):

• After independence, the 1922 Act continued till 1961.
• The Government of India appointed the Law Commission (1956) to simplify and modernize the tax system.
• Based on its recommendations, the present Income Tax Act, 1961 was enacted.
  • It came into force on 1st April 1962.
  • It is a comprehensive law that governs all aspects of income tax in India.

---

4. Recent Developments:

• The Act has been amended many times to meet modern economic needs.
• The government introduced:
  • Goods and Services Tax (GST) (2017) to simplify indirect taxes.
  • Faceless Assessment System (2020) to reduce corruption.
  • New Income Tax Regime (2020 onwards) to provide simplified tax slabs.
• Digital filing of returns (e-filing) and PAN–Aadhaar linking are part of modernization.

---

Purpose of Income Tax:

1. Revenue Collection: For public welfare and development projects.
2. Redistribution of Wealth: Helps reduce inequality by taxing the rich more.
3. Economic Regulation: Encourages or discourages certain activities through tax exemptions or deductions.
4. Nation Building: Supports defense, education, and infrastructure.

---

Conclusion:

The Income Tax system in India has evolved from the ancient “king’s share” to a well-structured legal framework under the Income Tax Act, 1961.
It reflects the growth of India’s economy and its administrative capacity.
Income tax today is not only a source of revenue but also a tool for achieving social and economic justice, in line with the goals of the Indian Constitution.

---

Excellent — including case laws in your answer makes it perfect for LLB exam writing (14 marks).
Here’s a complete, easy, humanized, and detailed analysis of “Income Tax in India with relevant case laws” — ideal for long-answer format 👇

---

Q. What is Income Tax? Describe the History of Income Tax in India with Relevant Case Laws.

(14 Marks — Law Exam )

---

Meaning of Income Tax:

Income tax is a direct tax imposed by the government on the income of individuals, companies, and other entities.
It means that a part of what a person earns is paid to the government, so the money can be used for national development, like roads, hospitals, education, and welfare schemes.

The present law governing income tax in India is the Income Tax Act, 1961, which came into force on 1st April 1962.

---

Key Features of Income Tax:

1. Direct Tax: Paid by the person who earns the income.
2. Annual Levy: Charged every financial year.
3. Progressive Nature: Higher income → higher rate of tax.
4. Legal Enforceability: Non-payment leads to penalties or prosecution.
5. Source of Revenue: Major source for government expenditure.

---

⚖️ Historical Development of Income Tax in India

---

1. Ancient and Medieval Period:

• In early India, taxes were collected by kings in the form of crops, gold, or service.
• Manusmriti mentioned that the king could collect one-sixth of the produce as tax.
• Kautilya’s Arthashastra also referred to various forms of taxes — income, trade, and agriculture-based.
  These were moral duties rather than legal obligations.

---

2. British Period:

(a) The Income Tax Act, 1860

• Introduced by Sir James Wilson in 1860 after the Revolt of 1857 to meet financial losses.
• It was the first law of income tax in India — but temporary.

(b) The Act of 1886

• Introduced the concept of “tax on income from different heads” — salary, business, property, etc.
• Became the foundation for modern taxation.

(c) The Act of 1918 and 1922

• 1918 Act: Improved administrative framework but had defects.
• 1922 Act: More stable and systematic — introduced concepts of assessment, appeal, and penalty.
  • This Act remained the main income tax law till 1961.

---

3. Post-Independence Period:

After independence (1947), the Income Tax Act, 1922 continued.
However, due to economic growth and complexity, the government appointed the Law Commission (1956) and Nicholas Committee (1958) to modernize the law.

The Income Tax Act, 1961:

• Enacted on 1st April 1962.

• Comprehensive, covering all income heads, exemptions, deductions, and procedures.

• It introduced five heads of income:

  1. Salary
  2. House Property
  3. Business or Profession
  4. Capital Gains
  5. Other Sources

• It is amended every year through the Finance Act during the Union Budget.

---

⚖️ Important Case Laws on Income Tax in India

---

1. Navnit Lal C. Javeri v. K.K. Sen, Appellate Assistant Commissioner of Income Tax (1965 AIR 1375, SC)

Facts: The case challenged the constitutional validity of certain provisions of the Income Tax Act related to taxation of loans given by closely held companies to shareholders.

Held:
The Supreme Court held that the Income Tax Act, 1961 is constitutionally valid and such provisions are reasonable restrictions for preventing tax evasion.

Importance:

• Established that the Income Tax Act falls within the scope of “reasonable taxation” under Article 265 (no tax shall be levied or collected except by authority of law).
• Upheld the legislative competence of Parliament in tax matters.

---

2. Keshav Mills Co. Ltd. v. Commissioner of Income Tax (1953 AIR 187, SC)

Facts: The question was about reopening an old assessment under the Income Tax Act, 1922.

Held:
The Supreme Court held that income tax proceedings are quasi-judicial, and reopening an assessment is valid only if there is clear evidence of income escaping assessment.

Importance:

• Strengthened procedural fairness in taxation.
• Clarified that tax authorities cannot arbitrarily reopen cases without evidence.

---

3. Commissioner of Income Tax v. B. C. Srinivasa Setty (1981 AIR 972, SC)

Facts: The issue was whether goodwill (an intangible asset) could be taxed as capital gains.

Held:
The Supreme Court ruled that goodwill has no cost of acquisition, so its transfer cannot attract capital gains tax.

Importance:

• Landmark case explaining what constitutes taxable income.
• Clarified the scope of “capital gains” under the Act.

---

4. Commissioner of Income Tax v. Sun Engineering Works (P) Ltd. (1992 AIR 43, SC)

Facts: Concerned with the scope of reassessment proceedings.

Held:
The court held that reassessment is only for bringing escaped income to tax, not for revising or reopening concluded matters.

Importance:

• Protected taxpayers from harassment.
• Established the limited purpose of reassessment.

---

5. Azadi Bachao Andolan v. Union of India (2004) 10 SCC 1

Facts: The validity of the India–Mauritius Double Taxation Avoidance Treaty was challenged.

Held:
The Supreme Court upheld the treaty, allowing tax benefits to foreign investors.

Importance:

• Confirmed that the government can enter into international tax agreements.
• Promoted foreign investment in India.

---

Constitutional Provisions Related to Income Tax:

1. Article 265: No tax shall be levied or collected except by authority of law.
2. Article 246 & Seventh Schedule:
   • Union List (Entry 82): Parliament has the power to make laws on income tax (except agricultural income).
   • State List (Entry 46): States can levy tax on agricultural income.

These articles ensure that the taxation system in India is constitutionally backed and legally valid.

---

📘 Conclusion:

The Income Tax system in India has evolved from ancient moral obligations to a structured legal mechanism under the Income Tax Act, 1961.
Through various case laws, the judiciary has balanced the power of taxation with the protection of citizens’ rights.
It now functions not only as a revenue tool but also as a means of social and economic justice — a true reflection of India’s constitutional values.

---