Income Tax 2025

Appearance

Interpretation. ​

261 ​

For the purposes of this Chapter, the expressions—

  • (a) “approving authority” means–– (i) the Principal Director General or the Director General; or (ii) the Principal Chief Commissioner or the Chief Commissioner; or (iii) the Principal Director or the Director; or (iv) the Principal Commissioner or the Commissioner;
  • (b) “asset” includes any money, bullion, jewellery or other valuable article or thing, held in physical or virtual form;
  • (c) “authorised officer” means–– (i) the Joint Director or the Additional Director; (ii) the Joint Commissioner or the Additional Commissioner; (iii) the Assistant Director or the Deputy Director; (iv) the Assistant Commissioner or the Deputy Commissioner; or (v) the Income-tax Officer or the Tax Recovery Officer;
  • (d) “competent authority” means–– (i) the Principal Director General or the Director General; or (ii) the Principal Chief Commissioner or the Chief Commissioner; o (iii) the Principal Director or the Director; or (iv) the Principal Commissioner or the Commissioner; or (v) the Joint Director or the Additional Director; or (vi) the Joint Commissioner or the Additional Commissioner;
  • (e) “computer system” means computers, computer systems, computer networks, computer resources, communication devices, digital or electronic data storage devices, used on stand-alone mode or part of a computer system, linked through a network, or utilised through intermediaries for information creation or processing or storage or exchange, and includes the remote server or cloud server or virtual digital space;
  • (f) “date on which the last of the authorisations for search was executed” means— (i) in the case of search, the date of conclusion of search as recorded in the last panchnama drawn in relation to any person in whose case the warrant of authorisation has been issued; or (ii) in the case of requisition under section 248, the date of actual receipt of the books of account or other documents or assets by the requisitioning officer;
  • (g) “material seized” means books of account or other documents or digital data storage devices, computer systems, and extracts seized from a person during the course of search under section 247 or requisitioned under section 248, and includes seizure of backup taken from any specialised programs like tally software, excel sheets, word files and all electronic records including data and information in the electronic form containing figures and any other relevant noting, and shall be construed to mean as book of accounts maintained by the said person;
  • (h) “proceeding” means any proceeding in respect of any year, whether under the Income-tax Act, 1961or under this Act, which may be pending on the date on which a search under section 247 or requisition under section 248 is authorised or powers under section 253 are exercised, as the case may be, or which may have been completed on or before such date and includes all proceedings under this Act or the Income-tax Act, 1961which may be commenced after such date in respect of any year;
  • (i) “virtual digital space” means an environment, area or realm, that is constructed and experienced through computer technology and not the physical, tangible world which encompasses any digital realm that allows users to interact, communicate and perform activities using computer systems, computer networks, computer resources, communication devices, cyberspace, internet, worldwide web and emerging technologies, using data and information in the electronic form for creation or storage or exchange and includes–– (i) email servers; (ii) social media account; (iii) online investment account, trading account, banking account, etc.; (iv) any website used for storing details of ownership of any asset; (v) remote server or cloud servers; (vi) digital application platforms; and (vii) any other space of similar nature.
Explanation

Section Summary: ​

Section 261 provides definitions for key terms used in the chapter of the new income tax law. These definitions clarify the roles of authorities, the scope of assets, and the interpretation of terms like "computer system," "material seized," and "virtual digital space." The section ensures uniformity in understanding these terms for the purpose of tax administration, particularly in the context of searches, requisitions, and digital assets.

Key Changes: ​

  1. Expanded Definition of "Asset": The term "asset" now explicitly includes virtual or digital forms, such as cryptocurrencies, digital wallets, and other intangible valuables, in addition to physical assets like money, bullion, and jewellery.
  2. Inclusion of Digital Terms: New terms like "computer system," "virtual digital space," and "material seized" have been introduced to address the growing relevance of digital assets and electronic records in tax compliance.
  3. Clarification on Authorities: The section defines the hierarchy and roles of various tax authorities (e.g., approving authority, authorised officer, competent authority) to streamline enforcement and compliance processes.

Practical Implications: ​

  1. Taxpayers with Digital Assets: Individuals or businesses holding digital assets (e.g., cryptocurrencies, online trading accounts, cloud-stored data) must ensure these are accurately reported and accounted for during tax assessments or searches.
  2. Compliance in Digital Era: Taxpayers must maintain proper records of digital transactions and ensure that electronic data (e.g., backups, cloud storage) is accessible and verifiable during tax audits or searches.
  3. Search and Seizure Operations: Authorities now have explicit powers to seize digital data, including backups, emails, and online accounts, during searches. Taxpayers must cooperate in providing access to such digital records.

Critical Concepts: ​

  1. Virtual Digital Space: Refers to any digital environment where assets or transactions are stored or conducted, such as email servers, social media accounts, online banking, or cloud storage.
  2. Material Seized: Includes not only physical books of account but also digital data storage devices, electronic records, and backups from software like Tally or Excel.
  3. Computer System: Encompasses all devices and networks used for creating, processing, storing, or exchanging digital information, including remote or cloud servers.

Compliance Steps: ​

  1. Maintain Digital Records: Ensure all digital assets and transactions are documented and stored securely, with backups accessible for verification.
  2. Prepare for Audits: Be ready to provide access to digital records, including cloud storage, email accounts, and online platforms, during tax audits or searches.
  3. Understand Authorities: Familiarize yourself with the roles of approving authorities, authorised officers, and competent authorities to ensure smooth interactions during compliance checks.

Examples: ​

  1. Digital Asset Reporting: A taxpayer holds cryptocurrency in a digital wallet. Under the new law, this cryptocurrency is considered an "asset" and must be disclosed in tax filings. During a search, the taxpayer must provide access to the wallet for verification.
  2. Seizure of Digital Data: A business uses Tally software for accounting. During a search, tax authorities seize a backup of the Tally data stored on a cloud server. This backup is treated as "material seized" and can be used for tax assessment.
  3. Virtual Digital Space: A taxpayer has an online trading account. The account details, including transaction history, are stored on a remote server. Tax authorities can access this data as part of the "virtual digital space" definition.

This section ensures clarity in interpreting key terms, especially in the context of digital assets and modern tax administration.