THE INDIAN INCOME TAX ACT IN 1860 AND INCOME TAX DEPARTMENT THROUGH AGES

James Wilson, while introducing the I-T Act in 1860, quoted from Manu for levying income-tax in the country.

“128. After (due) consideration the king shall always fix in his realm the duties and taxes in such a manner that both he himself and the man who does the work receive (their due) reward.
129. As the leech, the calf and the bee take their food little by little, even so must the king draw from his realm, moderate annual taxes.“  CHAPTER VII.  ‘The Laws of Manu’

The Act received the assent of the Governor General on July 24, 1860, and came into effect immediately. It was divided into 21 parts consisting 259 sections.

The salient features of the Act were:

Income was classified under four schedules:

i) income from landed property;

ii) income from professions and trade;

iii) income from securities, annuities and dividends; and

iv) income from salaries and pensions.

Tax was imposed on each of these sources. Exemption limit for the general public was fixed at Rs. 200 against the exemption limit of Rs. 4,980 to the military and police and Rs. 2,100 for the naval and marine officers.

Agricultural income was subject to tax. The rate of tax was 2 per cent for incomes ranging from Rs. 200 to Rs. 499. And for incomes above this, 4 per cent. Of the 4 per cent charge, 1 per cent was to be retained by provincial governments and 3 per cent w as to go to the Central Government. Compulsory returns were required to be submitted by all who were liable to tax. Except in Calcutta, the administration of the tax was left in the hands of the land-revenue officers. And the financial year commenced on August 1, 1860.

This first Act of 1860 yielded about Rs. 1.50 crores of tax revenue. This Act continued for five years before lapsing in 1865. The income-tax receipts in1860-61 was 1.1 millions, in 1861-62, 2 millions; in 1862-63, 1.9 millions; in 1863-64, 1.5 millions; and in 1864-65, 1.3 millions.

Thereafter, several amendments were made in it from time to time.

It was Abolished in 1873.

Again, reintroduced in 1886, a separate Income tax act was passed. This act remained in force up to1918, with various amendments from time to time.

In 1918, a new income tax was passed and again it was replaced by another new act which was passed in 1922. This Act remained in force up to the assessment year 1961-62 with numerous amendments

The Income Tax Act of 1922 had become very complicated on account of innumerable amendments. The Government of India therefore referred it to the law commission in1956 with a view to simplify and prevent the evasion of tax. The law commission submitted its report-in September 1958, but in the meantime the Government of India had appointed the Direct Taxes Administration Enquiry Committee submitted its report in 1956. In consultation with the Ministry of Law finally the Income Tax Act,1961 was passed.

 The Income Tax Act 1961 has been brought into force with 1 April 1962. It applies to the whole of India and Sikkim(including Jammu and Kashmir). Since 1962 several amendments of far-reaching nature have been made in the Income Tax Act by the Union Budget every year. which also contains Finance Bill. After it is passed passed by both the houses of Parliament and receives the assent of the President of India, it becomes the Finance act. Besides this, amendments have also been made by various Amendment acts, for instance, Taxation laws Amendment Act, 1984, Direct Taxes Amendment Act,1987, Direct Taxes Law(Amendment)Acts of 1988 and 1989, Direct Tax Law (Second amendment)Act,1992 and1993, are mostly based on the recommendation of Chelliah Committee Report.

As a matter of fact, the Income Tax Act, 1961, which came into force on 1st April, 1962,  has been amended and re-amended drastically. It has there for become very complicated both for the administering authorities and the tax-payers.

Income tax levels in India were very high during 1950-1980, in 1970-71 there were 11 tax slabs with highest tax rate being 93.5% including surcharges. In 1973-74 highest rate was 97.75%. But to reduce tax evasion tax rates were reduced later on, by 1992-93 maximum tax rates were reduced to 40%.

The rapid changes in administration of direct taxes, during the last decades, reflect the history of socio-economic thinking in India. From 1922 to the present day changes in direct tax laws have been so rapid that except in the bare outlines, the traces of the I.T. Act, 1922 can hardly be seen in the 1961 Act as it stands amended to date. It was but natural, in these circumstances, that the set up of the department should not only expand but undergo structural changes as well.

The organisational history of the Income-tax Department starts in the year 1922. The Income-tax Act, 1922, gave, for the first time, a specific nomenclature to various Income-tax authorities. The foundation of a proper system of administration was thus laid. In 1924, Central Board of Revenue Act constituted the Board as a statutory body with functional responsibilities for the administration of the Income-tax Act. Commissioners of Income- tax were appointed separately for each province and Assistant Commissioners and Income-tax Officers were provided under their control.

The amendments to the Income tax Act, in 1939, made two vital structural changes:

(i) appellate functions were separated from administrative functions; a class of officers, known as Appellate Assistant Commissioners, thus came into existence, and

(ii) a central charge was created in Bombay.

In 1940, with a view to exercising effective control over the progress and inspection of the work of Income-tax Department throughout India, the very first attached office of the Board, called Directorate of Inspection (Income Tax) - was created. As a result of separation of executive and judicial functions, in 1941, the Appellate Tribunal came into existence. In the same year, a central charge was created in Calcutta also.

1.  World War II brought unusual profits to businessmen. During 1940 to 1947, Excess Profits Tax and Business Profits Tax were introduced and their administration handed over to the Department (These were later repealed in 1946 and 1949 respectively). In 1951, the 1st Voluntary Disclosure Scheme was brought in.

 It was during this period, in 1946, that a few Group 'A' officers were directly recruited. Later on in 1953, the Group 'A' Service was formally constituted as the 'Indian Revenue Service'.

2. This era was characterised by considerable emphasis on development of investigation techniques. In 1947, Taxation on Income (Investigation) Commission was set up which was declared ultra vires by the Supreme Court in 1956 but the necessity of deep investigation had by then been realised. In 1952, the Directorate of Inspection (Investigation) was set up. It was in this year that a new cadre known as Inspectors of Income Tax was created. The increase in 'large income' cases necessitated checking of the work done by departmental officers. Thus in 1954, the Internal Audit Scheme was introduced in the Income-tax Department.

3. As indicated earlier, in 1946, for the first time a few Group A officers were recruited in the department. Training them was important. The new recruits were sent to Bombay and Calcutta where they were trained, though not in an organised manner. In 1957, I.R.S. (Direct Taxes) Staff College started functioning in Nagpur. Today this attached office of the Board functions under a Director-General. It is called the National Academy of Direct Taxes. By 1963, the I.T. department, burdened with the administration of several other Acts like W.T., G.T., E.D., etc., had expanded to such an extent that it was considered necessary to put it under a separate Board. Consequently, the Central Board of Revenue Act, 1963 was passed. The Central Board of Direct Taxes was constituted, under this Act.

In 1956, the Government of India referred the Act to a Law Commission to make the Income Tax Act simpler, logical and revenue oriented. The Law Commission submitted its report in September 1958 and in the meantime the Govt. also appointed a Direct Taxes Administration Enquiry Committee to suggest the measures for minimizing the inconvenience to the assessees and prevention of tax evasion. This committee submitted its report in 1959. The recommendations of the Law Commission and the Enquiry Committee were examined and extensive tax reform programme was undertaken by the Government of India under the supervision of Prof. Nicholas Kaldor.

The Income Tax Bill 1961, prepared on the basis of the Committee’s recommendations and suggestions from Chamber of Commerce, was introduced in the Lok Sabha on 24.4.1961. It was passed in September 1961 by Lok Sabha. The Income Tax Act 1961 came into force on April 1, 1962. It applies to whole of India including the state of Jammu and Kashmir. It is a comprehensive piece of legislation having 23 Chapters, 298 Sections, various sub sections and 14 schedules. Since 1962, it has been subjected to numerous amendments by the Finance Act of each year to cope with changing scenario of India and its economy. Moreover the Central Board of Direct Taxes is empowered to amend rules and to clarify instructions as and when it becomes necessary.

4.  The developing nature of the economy of the country brought with it both steep rates of taxes and black incomes. In 1965, the Voluntary Disclosure Scheme was brought in followed by the 1975 Disclosure Scheme. Finally, the need for a permanent settlement mechanism resulted in the creation of the Settlement Commission.

5. A very important administrative change occurred during this period. The recovery of arrears of tax which till 1970 was the function of State authorities was passed on to the departmental officers. A whole new wing of Officers - Tax Recovery Officers was created and a new cadre of post of Tax Recovery Commissioners was introduced w.e.f. 1-1-1972.

6.  In order to improve the quality of work, in 1977, a new cadre known as IAC (Assessment) and in 1978 another cadre known as CIT (Appeals) were created. The Commissioners' cadre was further reorganised and five posts of Chief Commissioners (Administration) were created in 1981.

7. Tax Reforms:

The economic crisis of 1991 led to structural tax reforms in India with aim of correcting the fiscal imbalance. Subsequently, the Tax Reforms Committee headed by Raja Chelliah (Government of India, 1992) and Task Force on Direct Taxes headed by Vijay Kelkar (Government of India, 2002) made several proposals for improving Income Tax System. These recommendations have been implemented by the government in phases from time to time. As regarding the personal income tax, the maximum marginal rate has been drastically reduced, tax slabs have been restructured with low tax rates and exemption limit has been raised. In addition to this, government rationalised various incentive provisions and widened TDS scope. In case of corporate tax, the government has reduced rates applicable to both domestic and foreign companies, introduced depreciation on intangible assets and rationalised various incentive provisions. Some new taxes have been introduced such as Minimum Alternative Tax and Dividend Distribution Tax, Securities Transaction Tax, Fringe Benefit Tax and Banking Cash Transaction Tax. However, Fringe Benefit Tax and Banking Cash Transaction Tax were withdrawn by Finance Act, 2009.

Certain important policy and administrative reforms carried out over the past few years are as follows:-

(a). The policy reforms include:- Lowering of rates;

o   Withdrawls/reduction of major incentives;

o   introduction of measures for presumptive taxation;

o   simplification of tax laws, particularly relating to capital gains; and

o   widening the tax base.

(b). The administrative reforms include:-

o   Computerisation involving allotment of a unique identification number to tax payers which is emerging as a unique business identification number; and

o   realignment of the available human resources with the changed business needs of the organisation.

8. Computerisation:

Computerisation in the Income-tax Department started with the setting up of the Directorate of Income tax (Systems) in 1981. Initially computerisation of processing of challans was taken up. For this 3 computer centres were first set up in 1984-85 in metropolitan cities using SN-73 systems. This was later extended to 33 major cities by 1989. The computerized activities were subsequently extended to allotment of PAN under the old series, allotment of TAN, and pay roll accounting. These computer centres used batch process with dumb terminals for data entry.

In 1993 a Working Group was set up by the Government to recommend computerisation of the department. Based on the report of the Working Group a comprehensive computerisation plan was approved by the Government in October, 1993. In pursuance of this, Regional Computer Centres were set up in Delhi, Mumbai, and Chennai in 1994-95 with RS6000/59H Servers. PCs were first provided to officers in these cities in phases. The Plan involved networking of all users on LAN/WAN. Network with leased data circuits were accordingly set up in Delhi, Mumbai and Chennai in Phase-I during 1995-96. A National Computer Centre was set up at Delhi in 1996-97. Integrated application software were developed and deployed during 1997-99. Thereafter, RS6000 type mid range servers were provided in the other 33 Computer Centres in various major cities in 1996-97. These were connected to the National Computer Centre through leased lines. PCs were provided to officers of different level upto ITOs in stages between 1997 and 1999. In phase II offices in 57 cities were brought on the network and linked to RCCs and NCC.

9. Restructuring of the Income-tax department:

The restructuring of the Income-tax Department was approved by the Cabinet in its meeting held on 31-8-2000 to achieve the following objectives:-

o   Increase in effectiveness and productivity;

o   Increase in revenue collection;

o   Improvement in services to tax payers;

o   Reduction in expenditure by downsizing the workforce;

o   Improved career prospects at all levels;

o   Induction of information technology; and

o   Standardization of work norms

The aforementioned objectives have been sought to be achieved by the department through a multi-pronged strategy of:

A. redesigning business processes through functionalisation;

B. increasing the number of officers to rationalise the span of control for better supervision, control and management of workload and to improve tax-payer services and

C. re-orient, retrain and redeploy the workforce with appropriate incentives in the form of career advancement.

The Income-tax Act, 1961 is the charging Statute of Income Tax in India. It provides for levy, administration, collection and recovery of Income Tax. Recently the Government of India has brought out a draft statute called the "Direct Taxes Code" intended to replace the Income Tax Act,1961 and the Wealth Tax Act, 1956. Public Commentary has been called for the Draft Bill.  The redrafted bill is supposed to be made public soon.

Disclaimer

In this note, we have attempted to summarise some of the significant aspects to be kept in mind by readers to ensure compliance of Income tax laws and regulations. Readers should ensure to verify specific provisions as applicable to each case before taking any business decisions. It would be pertinent to note that some changes are being made to the Income tax laws and rules and regulations on a continuous basis by way of notifications, clarifications etc issued by the department based on their practical experience in implementing the legislation.

It may be noted that nothing contained in this note should be regarded as our opinion.  Professional advice should be sought for applicability of legal provisions based on specific facts. Though reasonable efforts have been taken to avoid errors or omissions in this note we are not responsible for any liability arising to readers directly or indirectly due to any mis-statements or error contained in this note. It must be noted that the views expressed in the note are based on our understanding of the law and regulations as published by the Government authorities and we may or may not agree or subscribe to such views/ interpretations.