Understanding Person and Assessee under Income Tax Act

Hello. In this post, we will discuss in detail about different types of Person and Assessee under Income tax based on different categories.

Who is an Assessee under ITA?

An assessee is a person who pays a certain amount to the government as tax in a financial year. This is as per the Income Tax Act of 1961.

It contains every individual who has been assessed for his income, the income of another person, or the profit and loss he has sustained.

It includes:

  • The person who had done an assessment of his income or the income of any other person, or the loss sustained / the amount of refund by him or by another person.
  • A person who is considered to be an assessee under this Act.
  • The person who is assumed to be an assessee in default under this Act.

Types of assessees

  • Normal Assessee
  • Representative Assessee
  • Deemed Assessee
  • Assessee-in-default

1. Normal Assessee

An individual who pays tax for the total income earned during a financial year is a normal assessee.

Every individual who had earned any income or had a loss during the previous financial years is accountable to pay tax to the government in the current financial year.

All individuals who pay interest or who are supposed to get a refund from the government are categorised as normal assessees.

For example, Mr A is a salaried individual who has been paying taxes on time over the past 5 years. Then, Mr A can be considered as a normal assessee under the Income Tax Act, 1961.

2. Representative Assessee

A representative assessee is a person who is responsible to pay tax for the income or loss caused by a third party.

It happens when the person liable for tax payment is a non-resident, minor, or lunatic. They can not file tax by themselves. Therefore, It can either be an agent or guardian.

For example, Mr X. He has been residing abroad for the past 7 years. However, he receives rent for two house properties he owns in India. With the help of a relative Mr Y, he files tax in India. Here Mr Y is a representative assessee.

When any investigation on the tax filing comes, Mr Y needs to provide the necessary documents as the guardian of the property and he also represents Mr X.

3. Deemed Assessee

A deemed assessee is an individual who is responsible to pay the tax by the legal authorities. A deemed assessee can be:

  • The eldest son / a legal heir of a deceased person who had died without writing a will.
  • The executor / a legal heir of the property of a deceased person who has passed on his property to the executor in a writing.
  • The guardian of a lunatic, an idiot, or a minor.
  • The representative of a non-resident Indian receiving income from India.

For example, Mr A owns a commercial building and he earns income by rent. He had a will stating that this property is to be to his niece after his death.

So after his death, his niece is the deemed assessee and she needs to pay tax for the income earned by the rent.

4. Assessee-in-default

Assessee-in-default is a person who failed to pay taxes to the government or did not file his income tax return.

For example, an employer should deduct tax from the salary of his employees before giving the salary.

The employer pays deducted taxes to the government as per the due date. If the employer fails to deposit this tax he is an assessee-in-default.

Who is a Person under ITA?

The term ‘person’ under the Income-tax Act includes natural as well as artificial persons.

It can be an association of persons or a body of individuals or a local authority or an artificial juridical person.

Different types of Persons

The 7 categories of “persons” mentioned under the Income Tax Act.

  • An Individual
  • Hindu Undivided Family(HUF)
  • Company
  • Firm
  • Association of Persons (AOP) or a Body of Individuals (BOI)
  • Local Authority
  • Artificial juridical persons

An Individual

The trust has to be assessed as an individual, not as an association of persons.

An individual will pay tax on total income he earns from salary, house rent, business, profession, interest etc and does not pay tax on the dividend income.

So, the income from a proprietary firm becomes a part of his income as per income tax.

When a partner working in his partnership firm that income is treated as ‘business income’ even though it is his salary.

Hindu Undivided Family(HUF)

As per the Hindu law, it means a family in which all persons descended from a common ancestor. It also includes their wives and unmarried daughters.

Thus the profits made by a joint Hindu family are chargeable to tax as income of the HUF as a distinct entity.

Company

It contains:-

  • An Indian company, or corporation under the law of a country outside India, or
  • Any institution or body assessed as a company under the Income-tax Act, 1922 for any assessment year commencing on or before 1st April 1970, or
  • Any institution (incorporated or not / Indian or non-Indian) which by general or special order of the Central Board of Direct Taxes, to be a company.

A company is a juristic person who is independent and is a separate legal entity from its shareholders.

So, the income of a company is assessed by the company itself. It has to pay tax at a flat rate.

Firm

The ‘firm’, ‘partner’ and ‘partnership’ as per the Indian Partnership Act is the same. Therefore, the members who have partnership are called partners.

So under the Partnership Act, a firm is a “relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.”

As per income-tax law, it is a unit of assessment by special provisions, not a full person. It also has to pay tax at a flat rate.

Association of Persons (AOP) or a Body of Individuals (BOI)

AOP is a unit of assessment. This means two or more persons joined for a common purpose with a view to earning an income. It also includes any company or body of individuals, (incorporated or not).

Therefore, if two or more persons join hands to carry on a business but not into partnership then it is AOP.

It is only when they associate themselves in an income-producing activity and become an association of persons.

Body of Individuals (BOI) means a combination of individuals who carry out activities to earn an income.

In other words, it would only contain individuals, not entities (like companies or firms).

Income tax is not payable by an assessee who got his share of income from BOI because the tax has already been paid by the BOI.

Differences between an AOP and BOI:-

  • An AOP has non-individuals while BOI will only have individuals. If two or more persons (like firm, company, HUF, individual etc) join together, it is an AOP. But if only individuals join together then it is BOI.
  • An AOP needs a voluntary meeting to get a combined will to engage in an income-producing activity, whereas it is not necessary for BOI to have a common will.

Local Authority

The local authority is a separate unit of assessment. It comprises:-

  • Panchayat.
  • Municipality.
  • Municipal Committee and District Board, entrusted by the Government to control or manage the Municipal or local funds; or
  • Cantonment Board as per the Cantonments Act,1924.

Artificial juridical persons

The entities who are not natural persons but separate entities as per law. They can be sued through persons managing them.

For example, God, idols and deities are artificial persons. They can only be sued through the priests or the managing committee of the place of worship, etc. Therefore, their income (offerings) are taxable.

When certain conditions are met, they can get an exemption from payment of tax.

Note:

Similarly, all other artificial persons who have juristic personality will be in this category (if they do not fall in any previous categories of persons).

For example, the University of Delhi is an artificial person as it does not fall in any of the above categories.

We have come to the end of this post. Let us know your views and opinions in the comment section below.

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