Section 4 — Charge of Income-tax

Section 4 of the Income-tax Act, 1961 is the charging section that imposes the liability to pay income tax on every person. It specifies that income tax shall be charged for any assessment year at the rates prescribed by the Finance Act for that year. This section is significant as it establishes the foundational principle that tax is levied on the total income of the previous year of every person. The statutory test involves determining the total income of the taxpayer as per the provisions of the Act. The burden of proof lies on the taxpayer to correctly compute and report their income. In practice, this section is crucial as it sets the stage for the entire taxation process, ensuring that individuals and entities contribute to the national revenue based on their income.

Common Litigation Flashpoints

1. Disputes over the correct assessment year
2. Challenges in determining total income
3. Interpretation of 'previous year' for income computation
4. Application of rates as per the Finance Act

Judgments on Section 4 — Charge of Income-tax

• M/S. W. T. Suren & Co. Ltd. Vs. The Commissioner of Income Tax. Bombay — SC, 1998
  Payment of gratuity made by the assessee to Rallis India Ltd. was an allowable deduction as it was incurred wholly and exclusively for the purpose of business.
• DCIT Cir-3(1) Kol. vs. M/s Narayani Ispat Pvt. Ltd. — ITAT, 2017
  Interest paid for late deposit of service tax and TDS is allowable as a deduction under Section 37(1) of the Income-tax Act, 1961.
• NAYAN C SHAH vs INCOME TAX OFFICER — HC, 2016
  A mere technical breach does not warrant the imposition of penalty under section 271(1)(c) of the Income Tax Act.
• M/s. Goldman Sachs Services Pvt. Ltd. vs Joint Commissioner of Income Tax — ITAT, 2020
  Disallowance under section 14A is not applicable if no exempt income is earned during the assessment year.
• AT & T Global Network Services India Private Limited vs Assistant Commissioner of Income Tax — ITAT,
  Inadvertent errors in reporting should not preclude the allowance of legitimate deductions if the factual basis is verified.
• Checkmate Services P. Ltd. vs Commissioner of Income Tax-1 — SC,
  The non-obstante clause in Section 43B does not absolve the assessee from the liability to deposit employees' contributions on or before the due date as a condition for deduction.
• Kotak Mahindra Bank Limited vs DCIT — ITAT,
  Claims for deductions not made in the original return cannot be entertained unless filed through a revised return.
• DCIT-7(1)(1) vs Goldman Sachs (India) Securities Pvt. Ltd. — ITAT,
  Discount on issue of employees stock options is allowable as deduction in computing the income under the head profits and gains of business.
• Action Gold vs Deputy Commissioner of Income Tax — ITAT,
  A liability that is subsequently discharged cannot be treated as having ceased during the year under consideration.
• State, CBI vs Sashi Balasubramanian & Anr. — SC,
  Public servants cannot claim immunity under the Kar Vivad Samadhan Scheme, 1998, as the Scheme does not apply to them.
• Reliance Capital Ltd. vs Dy. Commissioner of Income Tax — ITAT,
  If there are sufficient interest-free funds available, it can be presumed that investments were made from these funds rather than borrowed funds.
• Vodafone International Holdings B.V. vs Union of India & Anr. — SC,
  Section 9 of the Income Tax Act does not cover indirect transfers of capital assets situated in India.
• E. D. Sassoon and Company Ltd. vs The Commissioner of Income-Tax, Bombay City — SC,
  Income accrues only when the right to receive it is vested, not merely when services are rendered.
• Munjal Sales Corporation vs Commissioner of Income Tax, Ludhiana & Anr — SC,
  Section 40(b) is not a stand-alone section but a limitation on deductions under Sections 30 to 38.
• Vijay Kumar Ahuja vs ACIT — ITAT,
  Outstanding trade creditors cannot be added to income if they are genuine and relate to past transactions.
• Union of India & Anr. vs M/s. Ganpati Dealcom Pvt. Ltd. — SC,
  The 2016 Amendment Act cannot be applied retrospectively as it creates new offences and substantive changes, which cannot be applied to past transactions.
• PR. COMMISSIONER OF INCOME TAX CENTRAL-2 NEW DELHI vs MEETA GUTGUTIA PROP. M/S FERNS 'N' PETALS — HC,
  Completed assessments can be interfered with by the AO under Section 153A only on the basis of some incriminating material unearthed during the course of search.
• DCIT, Circle 13(1) vs M/s. National Fertilizers Ltd. — ITAT,
  Demurrage and wharfage charges are compensatory and not penalties, and accrued interest is not taxable until it is realized.
• Price Waterhouse Coopers Pvt. Ltd. vs Commissioner of Income Tax, Kolkata-I — SC, 2012
  A bona fide and inadvertent error does not amount to furnishing inaccurate particulars or concealment of income.
• Commissioner of Income Tax, Bangalore vs B. C. Srinivasa Setty — SC,
  Goodwill generated in a newly commenced business cannot be described as an 'asset' within the terms of Section 45 and therefore its transfer is not subject to income-tax under the head 'capital gains'