The Income Tax Department is a government agency undertaking direct tax collection of the government of India. It functions under the Department of Revenue of the Ministry of Finance. The income tax Act, 1961 has a wide scope and empowers ITD to levy tax on income of individuals, firms, companies, local authorities, societies or other artificial judicial persons.

Law enforcement powers of Income Tax Department (ITD)

1. Assessment – Assessment is done to ensure correct estimate of total taxable income of an assessee and it determines amount of tax to be payable by assessee.

2. Fines and Penalty – These are financial punishments for non-compliance with any specific provision of the Income-tax Act.

3. Surveys – ITD can survey any business premises for physical verification of records and other valuables.

4. Search and Seizure – ITD can search residential and business premises of any taxpayer to check records and valuables to ensure that no evasion of tax is taking place.

5. Prosecution – Certain actions of taxpayers, for example willful evasion of tax, are considered as criminal offence by the income-tax Act and hence these offences result in prosecution.

Provision for Income Tax

This provision is created from profit. This is below the line entry. After adjusting necessary items from gross profit, (e.g. depreciation booked in books of accounts and depreciation allowable as per income tax rules) taxable income arrives. On that taxable profit we have to make provision for income tax at prevailing rate of income tax.

Accounting entry will be as under:

Profit & Loss A/C DR (provision for income tax)

To provision for Income Tax A/C. This provision being a liability, showed at “Capital & Liability” side of Balance Sheet in the bracket of “other Assets”.

Various Heads for Income under Income Tax Act 1961

Every income arising to any person will always be classified under one of the following headers provided by the Act:-

1. Salaries
2. Income from house property
3. Profit and gains of business or profession
4. Capital gains
5. Income from other sources.

Exception to previous Year

These incomes are taxed as the income of the year immediately preceding the assessment year at the rates applicable to such person.

1. Income of a person who is leaving India for a long period or permanently.
2. Income of a person who is trying to alienate his assets with an intention to avoid taxes.
3. Income of a discontinued business.
4. Income of non-resident shipping companies who don’t have any representative in India.