Basic Concept - II

• Income

Defined under the Act

• Tax

Defined under the Act

• Act

Meaning an enactment, a law, a legislation passed in both the houses of the

parliament and assented by the President of India

• Income Tax

Not defined under the Act

Income Tax Act, 1961 is the Act to be understood.

Income Tax Act, 1961

Sec 1 – short title, extent and commencement

1. This Act may be called the Income Tax Act, 1961

2. It extends to the whole of India

3. It shall come into force on the 1st day of April 1962

IT Act contains 298 Sections,

• XXIII Chapters and

• XIV Schedules

A section may have sub-sections, clauses, sub-clauses, Provisos and

Explanations.

Proviso(S)

It spells out the exception(s) to the provision contained in the respective

section/sub-section/clause i.e. it spells out the cases where provision contained

would not apply or where the provision would apply with certain modification to

the respective section/sub- section/clause

Explanation

Explanation to a section/sub-section/clause gives a clarification relating to the

provision contained in the respective section/sub- section/clause

Income Tax

• Income Tax is levied on the Total Income of the previous year of every

person. Such total income has to be computed as per the provisions of

Income-tax Act, 1961 by following the below mentioned steps:

1. Determine the category of person

2. Determination of residential status of the person

3. Classification of income under different heads

 4. Compute income under each head

5. Clubbing of income of spouse, minor child, etc.

6. Set-off or carry forward and set-off of losses

7. Computation of Gross Total Income

8. Deductions from Gross Total Income

9. Total income

10. Application of the rates of tax on the total income

11. Surcharge / Rebate under section 87A

12. Health and education cess on income-tax

13. Advance tax and tax deducted at source

14. Tax payable / Tax refundable

15. Filing of Income Tax Returns

Section 2 - Definition
This section provides definitions for various terms. It has subsections from (1) to

(48) and this section actually defines around 92 terms. Definitions are of 2 types:-

1. Exclusive Definitions - exclusive definitions starts with the word “means”

and it gives a complete meaning to a particular term. The list given in this

definition is “exhaustive.”

2. Inclusive Definitions – inclusive definitions start with the word “includes”

meaning, the definition will have a wider scope. The list given in this

definition is “illustrative” and other similar nature of items can be included

in this definition.

We are going to discuss few of the important definitions in this chapter and other

necessary definitions will be discussed under other chapters. For Intermediate

level, all definitions are not required to be understood.

Important Definitions

Sec. 2(7) - Assessee

“Assessee” means a person by whom any tax or any other sum of money is

payable under this Act, and includes: -

a) Every person in respect of whom any proceeding under this Act has been taken

• for the assessment of his income or

• of the income of any other person in respect of which he is assessable or

• of the loss sustained by him or by such other person or

• of the amount of refund due to him or to such other person

b) Every person who is deemed to be an assessee under any provision of this Act

c) Every person who is deemed to be an assessee-in-default under any provision

of this Act

The above definition includes Assessee, Representative Assessee and

Assessee-in Default

Sec. 2(8) – Assessment

“Assessment” includes reassessment.

This is the procedure by which the income of an assessee is determined by the

Assessing Officer. It may be by way of a normal assessment or by way of

reassessment of an income previously assessed.

Section 2(31) – Person

Sec. 2(24) – Income

“Income” includes: -

1. Profits and gains

2. Dividend

3. Voluntary contribution rec’d by trust/institution

4. Value of perquisite taxable u/s. 17

5. Special allowance or benefit, other than perquisites paid to an employee

for performance of duties of office or employment of profit

6. Allowance granted to the assessee to meet his personal expenses at the

place of his office or employment

7. Value of benefit or perquisite obtained from a company either by a director

or by a person who has substantial interest in the co.,

8. Deemed profits chargeable to tax u/s. 41 & 59

9. Profits and gains of business or profession to tax u/s. 28

10. Capital gains chargeable u/s. 45

11. Profits or gains of any insurance business

12. Profits or gains of any banking business

13. Any winnings from lottery, crossword puzzles, races including horse races,

card games and other games

14. Any sum rec’d by employers as contributions to any provident fund, or

superannuation fund or employees state insurance fund or any other fund

for the welfare of such employees

15. Any sum received under a keyman insurance policy

16. Any sum received as non-competing fees in relation to any business or

profession

17. Fair market value of inventory which is converted into, or treated as a

capital asset

18. Any consideration received for issue of shares as exceeds the fair market

value of the shares

19. Any sum of money received as advance, if such sum is forfeited consequent

to failure of negotiation for transfer of a capital asset

20. Any sum of money or value of property received without consideration or

for inadequate consideration by any person

21. Any compensation or other payment, received in connection with the

termination of his employment or modification of terms and conditions

relating to employment

22. Assistance in the form of subsidy or grant or cash incentive or duty

drawback or waiver or concession or reimbursement rec’d by central or

state government or any authority or body or agency in cash or kind to the

assessee
Concept of Income under the Income-tax Act, 1961

• Regular receipt V/s. Casual receipt

• Revenue receipt V/s. Capital receipt

• Net receipt V/s. Gross receipt

• Due basis V/s. Receipt basis

• Actual income V/s. Deemed income

Capital Receipts V/s. Revenue Receipts: Tests to be applied

• Transactions entered in the course of business

• Profit arising from sale of shares and securities

• A Single transaction – can it constitute business

• Liquidated damages

• Compensation on termination of agency

• Gifts

Sec. 2(25A) – India

The term “India” means

1. The territory of India as per article 1 of the constitution,

2. Its territorial waters, seabed and subsoil underlying such waters,

3. Continental shelf,

4. Exclusive economic zone or

5. Any other maritime zone and

6. The air space above its territory and territorial waters

Sec. 2(43) – Tax

“Tax” in relation to the assessment year means income-tax chargeable under the

provisions of this Act.

Sec. 2(10) – Average rate of income-tax
“Average Rate of Income-Tax” means the rate arrived at by dividing the amount of

income-tax calculated on the total income, by such total income

Sec. 2(29C) – Maximum marginal rate

“Maximum Marginal Rate” means the highest slab rate of tax (including sur-

charge, if any) applicable to Indl., AOP or BOI as specified in Finance Act of relevant

year.

Sec. 2(9) - Assessment Year

It means a period of 12 months commencing on 1st day of April every year.

The year in which income is earned is the previous year and such income is

taxable in the immediately following year which is the assessment year.

Sec. 2(34) - Previous Year

“Previous Year” means the previous year as defined in section 3

Sec. 3 – Previous year defined

• For the purposes of this Act, “previous year” means the financial year

immediately preceding the assessment year.

• Provided, if a business or profession or a source of income is newly coming

into existence in a financial year, then the previous year shall be from the

date of commencing of the new source till the end of the financial year.

• The income earned during the previous year is taxable in the assessment

year.
Previous year for undisclosed sources of income

Cash Credits Unexplained Investments Unexplained Money

[Sec 68] [Sec 69] [Sec 69A]

Amount of Investments -
Amount borrowed or
not fully disclose in the Unexplained Expenditure
repaid on hundi
books [Sec 69C]
[Sec 69D]
[Sec 69B]

Certain cases when income of a previous year will be assessed in the previous

year itself

General Rule: -

Income of a previous year is assessed in the assessment year following the

previous year

AUTHOR: COTHA S SRINIVASAN