Definition and Concept of Income Tax

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Before one can embark on a study of the law of income-tax, it is absolutely vital to understand some of the expressions found under the Income-tax Act, 1961. The purpose of this Chapter is to enable the students to comprehend basic expressions. Therefore, all such basic terms are explained and suitable illustrations are provided to define their meaning and scope.

1. Person [ Section 2(31) ]

The word “Person” is a very wide term and embraces in itself the following :

  1. Individual :         It refers to a natural human being whether Male or Female , Minor or Major.
  2. Hindu Undivided Family (HUF) : It is a relationship created due to operation of Hindu Law. The Manager of HUF is called “ Karta” and its member are called ‘Coparceners’.
  3. Company : It is an artificial person registered under Indian Companies Act 1956 or any other Law.
  4. Firm : It is an entity which comes into existence as a result of partnership agreement. The Income Tax accepts only these entities as Firms which are accessed as Firms under Section 184 of the Act.
  5. Association of Persons (AOP) or Body of Individuals (BOI) : Co-operative societies, MARKFED, NAFED, etc are the example of such persons. When persons combine together to carry on a joint enterprise and they do not constitute partnership under the ambit of law, they are assessable as an Association of Persons. An A.O.P. can have firms, companies, associations and individuals as its members. A Body of Individual ( B.O.I.) cannot have non-individuals as its members. Only natural human being can be members of a Body of Individuals.
  6. Local Authority : Municipality, Panchayat, Cantonment Board, Port Trust etc. are called Local Authority.
  7. Artificial Judicial Person : Statutory Corporations like Life Insurance Corporation, a University etc. are called Artificial Judicial Persons.

These are seven categories of person chargeable to tax under the Act. The aforesaid definition is inclusive and not exhaustive . Therefore, any person, not falling in the above-mentioned seven categories, may still fall in the four corners of the term “Person” and accordingly may be liable to tax under Sec.4.

Definitions and Basic  Concept of Income Tax
Definitions and Basic Concept of Income Tax

2. Assessment Year [Section 2(9)]

Assessment Year” means the period of 12 months commencing on the 1st day of April every year.

In India, the Govt. maintains its accounts for a period of 12 months i.e. 1st April to 31st March every year. As such it is known as Financial Year. The Income Tax department has also selected same year for its Assessment procedure.

The Assessment Year is the Financial Year of the Govt. of India during which income a person relating to the relevant previous year is assessed to tax. Every person who is liable to pay tax under this Act, files Return of Income by prescribed dates. These Returns are processed by the Income Tax Department Officials and Officers. This processing is called Assessment. Under this Income Returned by the assessee is checked and verified.

Tax is calculated and compared with the amount paid and assessment order is issued. The year in which whole of this process is under taken is called Assessment Year.

At present the Assessment Year 2020-2021 ( 1-4-2019 to 31-3-2020) is going on.

Example-
Assessment year 2020-21 which will commence on April 1, 2019, will end on March 31, 2020.

Income of Previous Year of an assessee is taxed during the next following Assessment Year at the rates prescribed by the relevant Finance Act

3. Previous Year [ Section 3 ]

As the word ‘Previous’ means ‘coming before’, hence it can be simply said that the Previous Year is the Financial Year preceding the Assessment Year e.g. for Assessment Year 2020-2021 the Previous Year should be the Financial Year ending 31st March 2020.

  • Previous Year in case of a continuing Business:

It is the Financial Year preceding the Assessment Year. As such for the assessment year 2020-2021, the Previous Year for continuing business is 2019-2020 i.e. 1-4-2019 to 31-3-2020.

  • Previous Year in case of newly set up Business:

The Previous Year in case of newly started business shall be the period between commencement of business and 31st March next following . e.g. in case of a newly started business commencing its operations on Diwali 2019, the Previous Year in relation to Assessment Year 2020-2021. shall be the period between Diwali 2019 to 31 March 2020.

  • Previous Year in case of newly created source of income :

In such case the Previous Year shall be the period between the day on which such source comes existence and 31st March next following.

Sl. No.IncomeSectionPrevious Year
1.Cash Credit[68]Financial Year in which found to be entered.
2.Unexplained Investment[69]Financial Year preceding the Assessment Year
3.Unexplained Bullion, Cash, Jewelley[69A]Financial Year in which found in the possession of the assessee.
4.Partly explained Investment[69B]Financial Year in which Investment was made.
5.Unexplained Expenditure[69C]Financial Year in which expenditure was incurred.
6.Payment of Hundi, Money in Cash[69D]Financial Year in which such payment was made.

4. Cases where income of Previous Year is assessed in the same year:

As a normal rule, the income earned during any previous year is assessed or charged to tax in the immediately succeeding assessment year. However, in the following circumstances the income is taxed in the same year in which it is earned. Therefore, the assessment year and the previous year in these exceptional circumstances will be the same. These exceptions have been provided to safeguard the collection of taxes so that assessees, who may not be traceable later on, are not allowed to escape the payment of the taxes. The exceptions are as follows:

1. Shipping business of Non-Residents [Section 172]

A non-resident who is carrying on a shipping business  and earns income from carrying passengers/livestock/goods from a port in India, will be charged income tax before the ship is allowed to leave the Indian port.

2. Assessment of Persons leaving India [Section 174]

When it appears to the Assessing Officer that any  individual may leave India during the current assessment year or shortly after its expiry, and such  individual has no present intention of returning to India, the total income of such individual, from the  expiry of previous year for that assessment year (i.e. from 1st April of the assessment year) up to the  probable date of his departure from India shall be chargeable to tax in the same assessment year.

Example :

Mr. X  wishes to migrate to USA permanently and plans to leave India on 15.11.2019. He  submitted his return for assessment year 2019-20 on 31.7.2019 the assessment of which is still pending. 

In this case the Assessing Officer will make two assessments: 

(a) regular assessment for previous year income of 2018-19 at the rates applicable for assessment year  2019-20. 

(b) assessment of income of the period 1.4.2019 to 15.11.2019 (either actual or estimated basis) and tax  should be levied on such income in the assessment year 2019-20 itself.

3. Assessment of Association Of Persons (AOP) or Body Of Individuals (BOI) or Artificial Juridical Person formed for a particular event or purpose [Section 174A]

Where it appears to the Assessing Officer that any  Association Of Persons (AOP) or a Body Of Individuals (BOI) or an artificial juridical person formed or established or  incorporated for a particular event or purpose is likely to be dissolved in the assessment year in which  such AOPs or BOIs or Artificial Juridical Person was formed or established  or incorporated or immediately after such assessment year, the total income of such person or body or juridical person shall be chargeable to tax in that assessment year.

Example :
if AOP which is formed in the previous year 2019-20 is going to be dissolved on 16.6.2020 then the  income of the period 1.4.2020 to 16.6.2020 shall be charged to income tax in the assessment year 2020-21  itself although its assessment year should have been assessment year 2021-22.

4. Assessment of Persons likely to Transfer Property to avoid tax [Section 175]:

If it appears to the  Assessing Officer during any current assessment year, that any person is likely to charge, sell, transfer,  dispose of or otherwise part with any of his assets with a view to avoiding any payment of his tax  liability, then the total income of such person for the period from the expiry of the previous year for that  assessment year shall be chargeable to tax

5. Business or Profession Discontinued during the Previous Year [Section 176]:

Where any business or profession is discontinued in any  assessment year, the income of the period from expiry of the previous year for that assessment year up to  the date of such discontinuance may be charged to tax in that  assessment year.

Example:
if a business is discontinued on 16.7.2019 then the income for the period  1.4.2019 to 16.7.2019 may be assessed in the assessment year 2019-20 itself.

4. Assessee [ Section 2(7)]

Assessee means a person by whom any tax or any other sum of money is payable under this Act and includes the following:

(a) person who is liable to pay tax on behalf of others

Every person in respect of whom any proceeding under the Income-tax Act has been taken:

for the assessment of his income or the income of any other person in respect of which he is assessable; or

to determine the loss sustained by him or by such other person; or

to determine the amount of refund due to him or to such other person.

(b) deemed assessee

A person who is deemed to be an assessee under any provisions of this Act i.e. a person who is treated as an assessee. This would include the legal representative of a deceased person or the legal guardian of minor if minor is taxable separately.

(c) assessee deemed to be in default

Every person who is deemed to be an assessee in default under any provisions of this Act. A person is said to be an assessee in default if he fails to comply with the duties imposed upon him under the Income-tax Act. For example: a person, paying interest to another person, is responsible for deducting tax at source on this amount and to deposit the tax with the Government. If he fails in either of these duties i.e., if he does not deduct the tax, or deducts the tax but does not deposit it with the Government, he shall be deemed to be an assessee in default.

Every assessee is a ‘person’, but every person need not be an ‘assessee’.

For example, X, an individual has earned total income of Rs. 2,40,000 in the previous year. He is a person but not an assessee because his total income is less than the maximum exemption limit of Rs. 5,00,000 and no tax or any other sum is due from him.

A person may not have his own assessable income but may still be an assessee.

For example, an assessee, who has earned an income of Rs. 1,45,000 in a previous year, fails to deduct the tax at source on salary paid by him, which he was required to do under the Act, shall be deemed to be an assessee in default. Although, he is not assessable in respect of his own income, as it is below the maximum exemption limit, but shall still be an assessee for not deducting the tax at source, which he was obliged to do.

5. Meaning Of ‘Income’ [ Section 2(24) ]

The Definition given u/s 2 (24) is inclusive and not exhaustive. According to English dictionary, the term “Income” means periodical monetary return coming in regularly from definite sources like one’s business, Land, Work, Investments etc.”.

It’s nowhere mentioned that “Income” refers to only monetary return. It includes value of Benefits and Perquisites.

The term “Income” includes not only what is received by using the property but also the amount saved by using it himself. Anything which is convertible into income can be regarded as source of accrual of income.

“Income includes “ :

  • Profit and Gains : For instance, Profit generated by a businessman is taxable as “Income”.
  • Dividend : For instance, “Dividend” declared/paid by a company to a shareholders is taxable as “ income” in the hands of shareholders .
  • Voluntary contribution received by a Trust: In the hands of a Trust, income includes voluntary contributions received by it. This rule is applicable in the following cases..
    • Such contribution is received by a trust created wholly or partly for charitable or religious purpose ; or
    • Such contribution is received by a scientific research association ; or
    • Such contribution is received by any fund or institution established for charitable purposes ; or
    • Such contribution is received by any university or other educational institutions or hospital.

Features of Income

The following features of income can help a person to understand the concept of income.

  1. Definite Source : Income has been compared with a fruit of a tree or a crop from the field. Fruit comes from a tree and crop from fields. Thus the source of income is definite in both cases. The existence of a source for income is somewhat essential to bring a receipt under the charge of tax.
  2. Income must come from Outside : No one can earn income from himself. There can be no income from transaction between head office and branch office. Contributions made by members for the mutual benefit and found surplus cannot be termed as income of such group.
  3. Tainted Income : Income earned legally or illegally remains income and it will be taxed according to the provisions of the Act. Assessment of illegal income of a person does not grant him immunity from the applicability of the provisions of other Act. Any expenditure incurred to earn such illegal income is allowed to be deducted out of such income only.
  4. Temporary or Permanent : Whether the income is permanent or temporary, it is immaterial from the tax point of view.
  5. Voluntary Receipt : The receipts which do not arise from the exercise of a profession or business or do not amount to remuneration and are made for reasons purely of personal nature are not included in the scope of total income.
  6. Dispute regarding the Title : In case a person is receiving some income but his title to such receipts is disputed, it will not free him from tax liability. The receipt of such income has to pay tax.
  7. Income in Money or Money’s worth : The income may be in Cash or in kind. It is taxable in both cases.

Tax treatment of Income

For the purposes of treatment of income for tax purposes it can be divided into 3 categories :

A. Taxable Income : These incomes form part of total income and are fully taxable. These are treated u/s 14 to 69 of the Act. These are Salaries, Rent, Business Profits, Professional Gain, Capital Gain, Interest, Dividend, Winning from Lotteries, Races etc.

B. Exempted Incomes : These incomes do not from part of total income either fully or partially . hence, No Tax is payable on such incomes. These incomes are given u/s 10(1) to 10(32) of the Act.

C. Rebateable ( Tax Free) Incomes : These incomes form part of total income and are fully taxable. Tax is calculated on total income out of which a Rebate of Tax at average Rate is allowed . The Rebateable incomes given u/s 86 of the Act are :

  • Share of income received by a member of an association of persons provided the total income of such AOP is assessed to tax at the rates applicable to an individual.
  • Share of income received by a partner of a firm assessed as an association of persons (PFAOP) provided the total income of such PFAOP is assessed to tax at the rates applicable to an individual.

6. Gross Total Income (GTI) [Section 80B(5)]

U/s 14 the term “Gross Total Income” [ GTI ] means aggregate of incomes computed under the following Five heads :

  1. Income under the head “Salaries”
  2. Income under the head “ House Property
  3. Income under the head “Profit and Gains of Business or Profession”.
  4. Income under the head “Capital Gain”.
  5. Income under the head “ Other Sources”.

Aggregate of incomes computed under the above 5 Heads, after applying Clubbing Provisions and making adjustments of set off and carry forward of Losses, is known as Gross Total Income (GTI). [Section 80B(5)]

7. What Are Different Heads Of Income According To Income Tax Act. ?

There are 5 different Income heads. The Income under each head will be charged to Income Tax. Thus the tax will be computed on the basis of total income.

  1. Salaries including Allowances, value of Perquisites, Profits in lieu of salary and Pensions.
  2. Income from House Property whether residential, commercial or let out.
  3. Profits & Gains of Business / Profession.
  4. Capital Gains – Short & Long Term.
  5. Income from other Sources including Bank Interest, Interest on Securities, Lotteries, Cross word Puzzles, Races, Games, Gift received on or after 1-9-2004 in excess of Rs. 50,000 in cash etc. from unrelated persons.

8. Who All Have To Pay Income-Tax ?

  1. Individual including Non-resident, Hindu Undivided Families (HUF), Bodies of Individuals (BOI), Association of Persons (AOP) & Artificial Juridical Persons ( such as Deities of Temples) having taxable income exceeding Rs. 2,50,000 lakh (Rs. 3,00,000 for Resident assesses below 60 Years and Rs. 5,00,000 for Resident Senior Citizens whose age is > 80 years.)
  2. Societies & Charitable / Religious Trusts having taxable income exceeding Rs.2.5 lakh.
  3. All Partnership Firms irrespective of their Income.
  4. Co-Op. Societies irrespective of their Income.
  5. All Companies irrespective of Income.
  6. Local Authorities like, Panchayats, Municipal Corporation etc.

9. How Income-Tax Will Be Charged by The Income Tax Department?

Income Tax is charged on 5 different heads. Aggregate of taxable income under each head of income is known as Gross Total Income and so
Taxable Income = Gross Total Income – Allowance Deductions.

Deduction of Expenditure :
In computing income under various heads, deduction is allowed towards expenditure incurred in relation to earning the income. However, no deduction shall be allowed in respect of expenditure incurred in relation to incomes exempt from tax.

Computation of Gross Total Income :
It is the aggregate of incomes under various heads of income calculated after set-off of unabsorbed depreciation/loss, carried forward from earlier years.

Set-off and Carry Forward :
Set-off means adjustment of certain losses against the income under other sources / heads. Carry forward implies carrying forward of certain losses for set-off in subsequent years.

Total / Taxable Income :
Total / Taxable Income is computed after deducting permissible deductions under section 80A to 80U, from the Gross Total Income.

Where the Gross Total Income of the Assesses includes Short-Term Capital Gains from transfer of equity shares / units of an equity oriented mutual fund subject to Securities Transaction Tax or any Long-Term Capital Gains, then no deduction shall be allowed against such Capital Gains.

On this Taxable Income, Income Tax will be calculated as per the applicable Rates.

10. Rounding off of Total Income [Section 288A]:

The total income, as computed above, shall be rounded off to the nearest multiple often rupees and for this purpose any part of a rupee consisting of paise shall be ignored. Thereafter if such amount is not a multiple often, then, if the last figure is 5 or more, the amount shall be increased to the next higher multiple of 10 and if the last figure of Total Income is less than 5, the amount shall be reduced to the next lower multiple of 10 For example, if the total income is Rs. 8,79,467, it shall be rounded off to Rs. 8,79,470 and if it is Rs. 8,79,464.90, it shall be rounded off to Rs. 8,79,460.

11. Rounding Off of Tax, etc. [Section 288B]:

The amount of tax (including tax deductible at source or payable in advance), interest, penalty, fine or any other sum payable, and the amount of refund due, under the provisions of the Income-tax Act, shall be rounded off to the nearest multiple of Rs. 10 and, for this purpose, where such amount contains a part of Rs. 10 then, if such part is Rs. 5 or more, it shall be increased to ten rupees and if such part is less than Rs. 5 it shall be ignored

12. Maximum amount which is not chargeable to Income Tax from :

In case of certain assessees, there is no  income-tax on income earned during the previous year upto a certain limit. The limit for assessment year 2020-21  for different assessees is as under:

(a) In case of every individual (male or female), being resident in India, who is of the  age of 80 years or more at any time during the previous year₹5,00,000 
(b) In case of individual (male or female) being resident in India who is of the age of  60 years and above but less than 80 years at any time during the previous year₹3,00,000 
(c) Any other individual i.e. resident in India who is less than 60 years of age or an  individual who is a non-resident irrespective of whether his age is less than or more than 60  years₹2,50,000
(d) Hindu Undivided Family (HUF)₹2,50,000 
(e) AOP/BOI other than co-operative society (Where no member has income exceeding  maximum exemption limit)₹2,50,000 
(f) Artificial juridical person₹2,50,000 
(g) Firm, Company, Local Authority and Co-operative SocietyNil
The exemption limit in case of an individual (whether male or female) who is of the age of 60 years and above  but who is non-resident in India is ₹2,50,000 instead of ₹3,00,000 or ₹5,00,000 as the case may be.

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