Thank you for the reply sir. Sir 5jj asked me to be specific with my questions but I forgot that and made the same mistake here. I'll be careful next time, and not pose such general questions but be more specific.
Anyway, here are a few example sentences, where I find myself in trouble, as I don't know what to use , "it" or "that".
1- Yesterday, we watched a movie called 'Life is beautiful', have you watched that/it?
2- She bought a new car. Did you see that/it. How is that/it?
3- While chatting with a friend on the internet, what am I supposed to say when he shows me his anything(gift, watch etc), It's beautiful, or that's beautiful?
Regardless of gender, we generally don't address eachother by anything but our usernames on the forum, so "Sir" is unnecessary even to the men!
Anyway, back to your question -
1) Yesterday, we watched "Life is Beautiful". Have you seen it?
Yesterday, we watched "Life is Beautiful". Have you seen that film?
2) She bought a new car. Did you notice?
She bought a new car. Have you seen it?
3) When being shown something, either "That's beautiful" or "It's beautiful" would be appropriate.
I have tried to come up with some kind of rule that you can follow, but to be honest a lot of it is a matter of just learning which sounds more natural. Sometimes, only one is appropriate (like the "It is raining" example I gave earlier).
In many cases, "that" is followed by a noun, whereas "it" can replace "that + noun". However, please don't take this as an absolute rule.
Here's an example of mixed uses:
- Can you see that strange thing over there?
- Yes.
- What is it?
- I don't know.
- (Pointing at a dark shape on the other side of the room) What is that?
- I have no idea what that is.
- I don't know what it is either, but it's a very strange shape.
Once an object has already been indicated in a sentence, it's frequently possible to refer to it as either "that" or "it" later on.