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In India, this tax was introduced for the first time in 1860, by Sir James Wilson in order
to meet the losses sustained by the Government on account of the Military Mutiny of
1857. 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.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.
The direct tax which is paid by individual to the Central Government of India is known as
Income Tax. It is imposed on our income and plays a vital role in the economic growth
&stability of our country. For years the Government is generating revenue through this
tax system.
The word 'Tax' originated from the 'Taxation.' which mean 'Estimate.' Hence, 'Income
Tax' mean 'Income Estimate,' which helps the government to know the actual economic
strength of a person. It is also a way to set up an economic standard for general people. It
helps the Government to know the distribution of money among country's people.
Income Tax has been in force in different forms since years. If we go through the history
of India, we get relevant information regarding the taxation system of India. In ancient
history, it is mentioned about such system which was imposed on the income,
expenditure and other subject. Even information of the same is given in Manu Smriti and
Arthasatra which confirms its existence at that time.
In modern India, Income Tax came into existence in 1860 with the implementation
of first Income Tax Act. After implementation of this Act, people became aware of
theactual meaning of Income Tax. This act was in force for first five years. After this,
in1865, second Act came into force. There were major changes in this Act relative to the
first. It proved itself as a good factor for the growth of our economy. With this Act a new
concept of Agriculture Income came into existence.
After this, different new Act was also implemented. The most important of them is the
Income Tax Act, 1961. According to ruling of Income Tax Act, 1961, any person whose
salary from any source of income is more than the maximum limit of unchangeable
amount will be liable to pay Income Tax. There is also a provision of deduction and
exemptions in Income Tax, depending upon the type of assessee, source of income,
residential status and investment in saving schemes. Income tax rates are a matter
of change, which is declared by Ministry of Finance, Government of India regularly,
usually on annual basis.
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TYPES OF INCOME TAX
1) Direct Taxes, as the name suggests, are taxes that are directly paid to the government
by the taxpayer. It is a tax applied on individuals and organizations directly by the
government e.g. income tax, corporation tax, wealth tax etc.
2) Indirect Taxes are applied on the manufacture or sale of goods and services. These are
initially paid to the government by an intermediary, who then adds the amount of the tax
paid to the value of the goods / services and passes on the total amount to the end
user.Examples of these are sales tax, service tax, excise duty etc.
1. Income Tax
Income Tax is paid by an individual based on his/her taxable income in a given financial
year. Under the Income Tax Act, the term ‘individual’ also includes Hindu Undivided
Families (HUFs), Co-operative Societies, Trusts and any artificial judicial person.
Taxable income refers to total income minus applicable deductions and exemptions.
Tax is payable if the taxable is above the minimum taxable limit and is paid as per the
differing rates announced for each tax slab for the financial year.
2. Corporation Tax
Corporation Tax is paid by Companies and Businesses operating in India on the income
earned worldwide in a given financial year. The rates of taxation vary based on whether
the company is incorporated in India or abroad.
3. Wealth Tax
Wealth tax is applicable on individuals, HUFs or companies on the value of their assets in
a given financial year on the date of valuation. It is taxed at the rate of 1% of the net
wealth of any assesse exceeding Rs 30,00,000.
‘Net wealth’ here includes, unproductive assets like cash in hand above Rs 50,000,
second residential property not rented out, cars, gold jewellery or bullion, boats, yachts,
aircrafts or urban land. It does not include productive assets like commercial property,
stocks, bonds, fixed deposits, mutual funds etc.
The profits made on sale of property are taxable under Capital Gains Tax. Property here
includes stocks, bonds, residential property, precious metals etc. It is taxed at two
different rates based on how long the property was owned by the taxpayer – Short Term
Capital Gains Tax and Long Term Capital Gains Tax. This deciding period of ownership
varies greatly for different classes of property.
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2. Indirect Taxes
1. Sales Tax
1.Late Return
Any person not filing the return within the time mentioned is allowed to file a late return
at any time before the expiry of one year from the end of the relevant assessment year
or before the completion of the assessment year, whichever is earlier.
2. Penalty
Penalty for delay filing of return is calculated as a percentage of the shortfall of tax.
Incase where tax has been deducted at source, or advance tax has been duly paid,
no penalty is livable.
3. Defective Return
If the return of income furnished by the assessee is defective according to assessing
officer, it is intimated to the assessee and given an opportunity to rectify the defect
within15 days from the date of such intimation or within such further period as may
be allowed by the assessing officer on the request of the assessee. If this is not rectified
by the assessee within the aforesaid period then the return shall be deemed invalid
and further its hall be deemed that the assessee had failed to furnish the return.
Under section 139(1) of the Income Tax Act, there are additional six conditions, which
forces a person to file his income tax return.
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INCOME TAX SLABS :
3 ) Above 80 years
Up to Rs. 5 lakh Nil
Rs. 500001 – Rs. 10 lakh 20%
Above Rs. 10 lakh 30%
Heads of Income:
Under chapter 4 of Income Tax Act, 1961 (Section 14), income of a person is calculated
under various defined heads of income. The total income is first assessed under
heads of income and then it is charged for Income Tax as under rules of Income Tax Act.
According to Section 14 of Income Tax Act, 1961, there are following heads of income
under which total income of a person is calculated.
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3) Profit and gains of business or profession
4) Capital gains
5) Income from other sources
1) Income from salary :-
Income can be charged under this head only if there is an employer employee relationship
between the payer and payee. Salary includes basic salary or wages, any annuity or
pension, gratuity, advance of salary, leave encashment, commission, perquisites in lieu of
or in addition to salary and retirement benefits.
The aggregate of the above incomes, after exemptions available, is known as Gross
Salary and this is charged under the head income from salary.
Basic salary along with commissions and bonuses is fully taxable.
In case of Government employees a deduction is allowed u/s 16(ii) at the rate of least of
following :
(a) Statutory Limit Rs. 5,000 p.a.
(b) 1/5 (20%) th of Basic Salary ; or
(c) Actual Entertainment Allowance received.
1) House Rent Allowance: If the employee stays in his own house then the allowance is
fully taxable. The allowance exemption is the least of.
1.The actual house rent allowance
2. If he pays additional rent above 10% of his salary
3.If the rent is equal to 50% of his salary (metros) or 40% (other areas).
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2) Entertainment allowance [U/s 16(ii)] : (except for Central and State Government
employees). Deduction u/s 16(ii) admission to govt. employee shall be an amount equal
to least of following :
a) Statutory Limit of Rs.5,000 p.a.
b) 1/5 th of Basic Salary
c) Actual amount of entertainment allowance received during the previous year.
3) Special allowances like uniform, travel, research allowance etc.
Perquisites :
are payments received by employees over their salaries. They are not reimbursement
of expenses. Some perquisites are taxable for all employees, they are:
1) Rent free accommodation
2) Concession in accommodation rent
3) Interest free loans
4) Movable assets
5) Club fee payments
6)Educational expenses
7) Insurance premium paid on behalf of employees
Some are taxable only to specific employees like directors or those who have
substantial interest in the organisation, they are taxed for:
1) Free gas, electricity etc. for domestic purpose
2) Concessional educational expenses
3) Concessional transport facility
4) Payment made to gardener, sweeper and attendant.
Some perquisites are exempt from tax. The fringe benefits that are exempt from tax
are:
1) Medical benefits
2) Leave travel concession
3) Health Insurance Premium
4) Car, laptop etc. for personal use.
5) Staff Welfare Scheme
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2) income from house property : -
It is the second head of income. Under the head “ Income from House property ” income
tax is payable by the assessee on the annual value of property consisting of any building
or land appurtenant to building of which he is the owner. Such property should not be
used for own business of profession.
A house property could be your home, an office, a shop, a building or some land attached
to the building like a parking lot. The Income Tax Act does not differentiate between a
commercial and a residential property. All types of properties are taxed under the head
‘income from house property’ in the income tax return. An owner for the purpose of
income tax is its legal owner, someone who can exercise the rights of the owner in his
own right and not on someone else’s behalf. When a property is used for the purpose of
business or profession or for carrying out freelancing work – it is taxed under the ‘income
from business and profession’ head. Expenses on its repair and maintenance are allowed
as business expenditure.
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Steps to Calculate Income From House Property :-
The table given below shows how you can calculate Income from House Property:
Total of income thus obtained from all the house properties owned by you will be
treated as income from house property and added to your total income. If the income
under the head house property is negative (loss) you can offset that loss against your
other taxable income including salary. But Budget 2017 has put a cap of Rs. 2 lakh on the
house property loss which can be adjusted against income from other heads in a financial
year. So it means that starting 2017-18 you will be able to offset maximum Rs. 2 lakh
house property loss against your other income and balance can be carried forward to next
8 assessment years to be adjusted against income under the same head.
To understand how income on house property & subsequent tax on such income is
calculated, one needs to gain some knowledge about the following related terms.
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d) Gross Annual Value (GAV):
The one which has highest value among the below three terms is considered Gross
Annual Value:
a) Rent received or receivable
b) Fair Market Value
c) Municipal Valuation
If the Rent Control Act is applicable, then the one which has highest value among the
below two items is considered Gross Annual Value:
a) Standard Rent
b) Rent Received
4) Deductions u/s 24 :
To calculate the actual taxable income from house property, the following two deductions
are allowed under section 24 of the Income Tax Act.
a) Standard Deduction which is 30% of the NAV, is allowed as a deduction towards
repairs, rent collection, etc. irrespective of the actual expenditure incurred.This deduction
is not allowed if the Gross Annual Value is nil.
b) Interest on home loan is allowed as a deduction under section 24.
Annual Value: Annual Value = NAV Deductions.
Owner/deemed owner:
The person who is entitled to receive the income is called owner of the property, while
the person who receives financial benefits from the property but is not registered as its
owner is called deemed owner of the property. Income from house property is taxable for
the person who actually receives monetary benefits from the property but may or may not
be the registered owner of the property.
1.Standard deduction:
A tax deduction of 30% of net annual value of the property is allowed to the taxpayer. Net
annual value is calculated as gross annual value minus municipal taxes Paid. This
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deduction is allowed irrespective of the amount spent on insurance, repairs, water and
electricity supply, etc.
Pre-construction interest :-
Deduction on pre-construction interest is allowed when you have taken a loan for
purchase or construction of a house property. However, if the loan is taken for repairs or
reconstruction then deduction is not allowed. The deduction for this interest is allowed in
5 equal instalments starting from the year in which the house is purchased or the
construction is completed.
Though pre-construction interest is allowed to be claimed as tax deducted in 5 equal
yearly instalments, which can be claimed beginning the year in which the construction of
property is completed, the total amount that can be claimed in a year is subject to a
threshold of Rs 2,00,000 in case of a self-occupied house property.
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available on payment basis and does not depend on the year for which the payment has
been made by the assessee.
Section 80EE:
1) Deduction for First Time Home Buyers
Just like the deduction u/s 24, deductions under section 80EE is also available on the
interest paid on home loan by taxpayer or assessee. However, unlike section 24, this
deduction is only available to first time home buyers. It was first introduced in the Union
Budget for Financial Year 2018-19 as a means to help home buyers in the lower income
group through tax reliefs.
At that time, the amount of tax benefit given by this section was Rs 1 lakh, which was
available to be claimed only once by the first time home buyer.
Revised Deduction Limit.
The government reintroduced section 80EE in the Union Budget 2016-17. The quantum
of deduction has been changed to Rs 50,000 for interest paid on home loan. This
deduction is available over and above the deduction of section 24 and section 80C which
are Rs 2,00,000 and Rs 1,50,000 respectively.
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4. The home loan amount should not exceed Rs 35 lakh
5. The tax benefit here can be claimed till the time repayment of loan continues
6. Deduction is only applicable on home loan paid for first house property
7. The property in question can be either self-occupied or non-self-occupied
If you claim deduction under this section then you will not be eligible to claim the
deduction u/s 24 again for the same amount of interest
Section 80EE is applicable on a per person basis instead of a per property basis. So,
suppose you have purchased property jointly with your spouse and you both are paying
the instalments of loan, then you both can individually claim this deduction
It is not necessary to reside in the property for which you want to claim this deduction.
So, borrowers staying in a rented accommodation can also claim this deduction
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3) Profit and gains of business or profession:-
Income from business or profession is the most important head of income because of the
following reasons:
Maximum amount of revenue is collected from this head of income.
Maximum number of assessees is belonging to this head of income.
Majority of income tax provision and rules are related to this head of income.
1.Profits and gains of any business which was carried on by the assessee at any time
during the previous year/
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b)Any person holding an agency in India for any part of the activities relating to the
business of any other person at or in connection with the termination or modification of
the terms of the agency.
c) Any person for or in connection with the vesting in the Government, or in any
corporation owned by or controlled by the Government, under any law for the time being
imposed, of the management of any property or business.
5)Value of any benefit or perquisite, whether convertible into money or not, arising
during the course of the carrying on of any business/profession.
8) Any sum received under a Keyman Insurance Policy including the sum allocated by
way of bonus on such policy.
9) Any sum whether received or receivable, in cash or kind, on account of any capital
asset being demolished, destroyed, discarded or transferred, if the whole of the
expenditure on such capital asset has been allowed as a deduction under Section 35AD.
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Communication expenses.
Traveling and conveyance expenses.
Membership fees etc.
Advertisement expenses in respect of promotion of business products.
Discount allowed to customers.
Interest on loans (Whether Private of Institutional).
Bank Charges/Bank Commission expenses.
Entertainment/Business Promotion expenses
Staff Welfare expenses.
Festival Expenses.
Printing and stationery expenses
Postage expenses.
All other expenses relating to business/profession.
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12.Where a deduction has been claimed on accrual basis during an assessment year and
the payment is made in a subsequent year, and the payment or aggregate of payments
made to a person in a day otherwise than by way of an account payee cheque/DD,
exceeds Rs.20000/= (Rs.35000/= in case of goods carriages), such payments shall be
deemed as profit of the assessee for the year in which the payment is made.
13.Any provision for the payment of gratuity to the employees.
14.Any personal expenditures.
15.Expenses on defending in any proceedings for breach of any law relating to sales tax
etc.
Depreciation is allowed not on individual asset items, but on block of assets under
following categories:
1) Buildings
2) Plant & Machinery
3) Furniture
4) Intangible Assets acquired after March 31, 1998 such as know how, Patents,
Trademarks, licenses, franchises or any other business or commercial rights of similar
nature.
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The term plant includes ships, vehicles, books, scientific apparatus and surgical
equipments used for the business but excludes tea bushes or live stock.
If any asset falling in block of assets is acquired during the year and put to use
during the previous year for less than 180 days depreciation on such asset shall be
restricted to 50% of the normal depreciation.
Methods of Accounting :-
1) Cash system of Accounting
2) Mercantile (Accrual) System of Accounting
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relevant previous year are allowed as deductions irrespective of the period for which
they belong.
Any profit or gain that arises from the sale of a ‘capital asset’ is a capital gain. This gain
or profit is considered as income and hence charged to tax in the year in which the
transfer of the capital asset takes place. This is called capital gains tax, which can be
short-term or long-term. Capital gains are not applicable when an asset is inherited
because there is no sale, only a transfer. However, if this asset is sold by the person who
inherits it, capital gains tax will be applicable. The Income Tax Act has specifically
exempted assets received as gifts by way of an inheritance or will.
Capital Assets:
It is any property held by the income tax assessee excluding
a) Jewellery, drawings and paintings
b) Any item held for a person's business or profession (stock, ready goods, raw material)
will be taxed under the head profits and gains of business or profession
c) Agricultural land means any land from which agricultural income is derived. Land
which is not urban and is outside of 8 kilometres of a municipality, where population is
less than 10,000 qualifies to be agricultural land.
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sell house property after holding it for a period of 24 months, any income arising will be
treated as long-term capital gain provided that property is sold after 31st March 2018.
Capital Gains:
Any profits or gains arising from the transfer of a capital asset effected in the
previous year shall be chargeable to income-tax under the head capital gains.
Examples of assets are a flat or apartments, land, shares, mutual funds, gold
among many others. There are two types of capital gains:
a) Short-term capital gain: capital gain arising on transfer of short term
capital asset.
b) Long-term capital gain: capital gain arising on transfer of long term capital
asset.
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Short term capital gain = Full value consideration Less expenses incurred exclusively
for such transfer Less cost of acquisition Less cost of improvement.
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As per Section 10(38) of Income Tax Act, 1961 long-term capital gains on shares
or securities or mutual funds on which Securities Transaction Tax (STT) has been
deducted and paid, no tax is payable. Higher capital gains taxes will apply only on
those transactions where STT is not paid.
Concept of Indexation
In case of computation long- term capital gain, the deduction can be claimed for the cost
of acquisition and cost of improvement after indexing them. The principle of indexation
has been introduced from the assessment year1993-94.
The value of a rupee today is not same as will be its value tomorrow because of inflation.
Likewise to be fair when paying capital gain tax, the effect of inflation on the purchase is
included. For instance if you bought a flat in January 2002 for Rs 20 lakh and sold it in
January 2017 for Rs 60 lakh; you don't pay tax on the Rs 40 lakh gain. The tax
authorities allow the concept of indexation so that you can show a higher purchase cost,
lowering the overall profit and reducing the tax you pay on the gain. Using the inflation
index, one needs to increase the purchase price of the asset to reflect inflation-adjusted
true price in the year of sale.
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completed within 3 years from the date of transfer of residential house
property.
6. The new house property which is purchased or constructed should be
situated in India.
7. The assessee should not transfer the new house within the period of three
years from the date of its acquisition/ purchase. In case it is transferred,
the exemption given earlier would be taken back.
Amount of Exemption
Basic conditions for availing exemption under Section 54B of Income Tax Act.
Following conditions should be satisfied to claim the benefit of section 54B.
1.The benefit of section 54B is available only to an individual or a HUF
2.The asset transferred should be agricultural land. The land may be a long-term capital
asset or short-term capital asset.
3.The agricultural land should be used by the individual or his parents for agricultural
purpose at least for a period of two years immediately preceding the date of transfer. In
case of HUF the land should be used by any member of HUF.
4.Within a period of two years from the date of transfer of old land the taxpayer should
acquire another agricultural land. In case of compulsory acquisition the period of
acquisition of new agricultural land will be determined from the date of receipt of
compensation. However, as per section 10(37), no capital gain would be chargeable to tax
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in case of an individual or HUF if agricultural land is compulsorily acquired under any
law and the consideration of which is approved by the Central Government or RBI and
received on or after 01-04-2004.
Amount of Exemption
The amount of exemption under section 54B would be lower of the following:
The new agricultural land can be purchased within 2 years from the date of
transfer of original asset. However, the taxpayer has to submit his return of
income on or before the due-date of submission of return of income. If the
amount of capital gain is not utilised for purchase of the new agricultural land till
the due-date of submission of return of income, then it should be deposited in the
“Capital Gains Deposit Account Scheme.”
The deposit should be utilised for purchase of new agricultural land within the
stipulated time-frame.
The unutilised amount will be taxable in the year in which the 2 year time limit
expires. It shall be treated as long-term capital gain of the year in which the time-
limit expires.
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5. The assessee should purchase any other land or building within a period of
three years from the date of receipt of compensation or construct a
building within such period.
6. Newly acquired land or building should be used for the purpose of shifting
or re-establishing the said undertaking or setting up another industrial
undertaking.
7. The assessee should not transfer the new land and building within a period
of three years from the date of its acquisition. In case it is transferred, the
exemption given earlier would be taken back.
Amount of Exemption
The amount of exemption under section 54D would be lower of the following:
The amount of capital gain generated on compulsory acquisition of land or building;
or
The amount invested in new land and building including the amount deposited in the
deposit scheme.
Under the Income Tax act, income of every kind which is not to be excluded from the
total income shall be chargeable to income tax under the head 'Income from other
sources', if it is not chargeable to income tax under any of the other heads of income.
Thus, income from other sources is a residuary head of income i.e. income not chargeable
under any other head is chargeable to tax under this head. All income other than income
from salary, house property, business and profession or capital gains is covered under
'Income from other sources'.
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receiver. Accordingly dividend received from a cooperative bank or dividend received
from a foreign company will be taxable as income from other sources.
b) Any pension received by the legal heirs of an employee.
Any winnings from lotteries, crosswords, puzzles, races including horse races, card
games or other games of any sort or gambling or betting of any form or nature.
c) Income from any plant, machinery or furniture let out on hire where it is not the
business of the assessee to do so.
d) Income from securities by way of interest.
e) Any sum received by the assessee from his employees as contribution to any staff
welfare scheme. However when the assessee makes the payment of such contribution
within the time limit under the scheme of welfare, then the payment will be allowed as a
deduction and only the balance amount will be taxable.
f) Income from subletting.
g) Interest on bank deposits.
h) Money received under a keyman insurance policy including bonus.
i) Any contribution to a fund for welfare of employees received by the employer.
j) Gifts received by an individual or HUF ( which are chargeable to tax ) are also tax
under this head.
k) Interest received on compensation or on enhanced compensation is taxed under the
head “Income from other sources.”
Gift received in following situations will not be charged to tax.
Money received from relatives.
Money received by a HUF from its members.
Money received on occasion of the marriage of the individual.
Money received under Will/ by way of inheritance.
Money received in contemplation of death of the payer or donor.
Money received from a local authority.
Money received from any fund, foundation, university, other educational
institution, hospital or other medical institution, any trust or institution referred to in
section 10(23C). Money received from a trust or institution registered under section
12AA.
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c) In case of any expenditure other than capital expenditure or personal expenditure
which has been incurred wholly, necessarily and exclusively for earning income like
revenue expenditure, such expenditure will also be allowed as a deduction.
d) In case of family pension received by legal heirs of an employee, a standard deduction
of 1/3rd of such amount or Rs 15,000 whichever is less will be allowed by way of
deduction.
CONCLUSION:
Reforming taxation is an on going process, through which tax policy makers and tax
administrators are continuously adapting their tax system to reflect changing economic,
social and political circumstances. The present study examines the Taxation of Income in
India during post liberalisation period and policy perspective in this regard. It has
analysed the growth of income tax revenue, performance of Income Tax Department and
perception of tax professionals regarding Income Tax System in India.
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