Income Tax Act, 1961- Basic Concepts of Direct Taxes.

Meaning, Concepts & Definitions:

Assessment Year means the period starting from April 1 & ending on March 31 of the next year.

E.g. The A.Y. 2023-24 which will commence on 1st April1, 2023 & will end on March31,
2024.The AY 2023-24 is for PY 2022-23.

•Income of previous year of an Assessee is taxed during the next following assessment year at
the rates prescribed by the relevant finance Act.

2. Previous Year: (Sec.3): Income earned in a year is taxable in the next year. The year in which
income is earned is known as previous year & the next year in which income is taxable is known
as Assessment Year.

The running PY is 2021-22 i.e. 1st April1, 2021 to 31st March, 2022.

•Uniform Previous Year: From the A.Y.1989-90 onwards, all assesses are required to follow
financial year (i.e. April 1 to March 31) as the Previous Year. This uniform Previous Year has to
be followed for all sources of Income.

•However, it is not necessary that the Co. should maintain its books of A/cs on the basis of
Financial Year. E.g.

•Previous Year In the case of newly set up Business/ Profession: It commences on the date of
setting up of the business/Profession or on the date when the new source of Income comes into
existence & it will end on the immediately following March 31.E.g…..

•Hence, in this case duration of the previous year can be 12 Months or less also. E.g.…..

•However, the second & subsequent previous year for such business will be of 12 Months only.

3. Person: [Sec.2 (31)]: The term Person. Includes –

a. An Individual;

b. A HUF (Hindu Undivided Family);

c. A Company;

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d. A Firm;

e. An Association of Persons (AOP) or Body of Individuals (BOI), whether incorporated or not;

f. A Local Authority;

g. Every artificial juridical person not falling within any of the preceding categories.

•These are seven categories of persons chargeable to tax under the Act. The Aforesaid definition
is inclusive & not exhaustive. Hence, any person, not falling in the above mentioned 7 categories
may still be assumed as Person & accordingly may be liable to Tax U/s 4….

4. Assessee [Sec.2 (7)]: “Assessee means a person by whom income tax or any other sum of
money is payable under the Act. It includes every person in respect of whom any proceeding
under the Act has been taken for the assessment of his income or loss or the amount of refund
due to him.

An Assessee is any Person whose income is liable to be assessed under IT Act, 1961.

An Assessee may or may not be liable to pay the taxes.

•It also includes person who is assessable in respect of income or losses of another person or who
is deemed to be an Assessee or an Assessee in default under any provision of the Act.

5. Tax Deducted At Source: Deduction of Tax at source means to deduct tax on certain incomes
at the time when the receiver of income receives them.

•Such incomes can be easily assessed at the time when are they are due to the recipient.

•To avoid cases of tax evasion, the income tax has made provisions to collect tax at source on
“Accrual of Income.”

•Cases included in the scheme are, generally, those where income can be computed at the time of
Accrual of Income.

•Under this scheme, persons responsible for making payment of income covered by the scheme
are responsible to deduct tax at source & deposit the same to the Govts treasury within the
stipulated time.

•The recipient of income- though he gets only the net amount (after deduction of tax at source) –
is liable to tax on the gross amount & amount deducted at source is adjusted against his final tax
liability.

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•With the object of reduce the cases of tax evasion, the provision regarding TDS has been
included in the Income Tax Act. It is an important way of collection of tax.

•Hence, a person who makes payment of incomes to others is required to follow the prescribed
procedure for TDS & credit it to the Govt. A/c within prescribed time limit.

•Generally, tax has to be collected at source in the case of following types of Incomes:

1. Income from Salary;

2. Interest on Securities;

3. Dividend;

4. Insurance commission;

5. Winning from lotteries, horse-races, gambling, etc.

6. Payment to Contractors;

7. Interest except Interest on securities;

8. Other Incomes.

•TDS Rates:

1. Salaries: As per Slabs.

6. Income [Sec. 2(24)]

•The definition of the term ‘Income’ in Section 2(24) is inclusive & not exhaustive.

•Hence, the term “Income not only includes those things which are included in section 2(24) but
also includes such things which the term signifies, according to its general & natural meaning.

•General Meaning: Income is a periodical monetary return with some sort of regularity. It may
be recurring in nature.

•It may be broadly defined as,” The true increase in the amount of wealth which comes to a
person during a fixed period of time.”

Extended Meaning Of Income: U/s Sec. 2(24), Income Includes the following:

1. Profits & Gains;

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2. Dividend;

3. Perquisites in the hands of an employee;

4. CCA/DA; (City Compensatory Allowance/Dearness Allowance)

5. Capital Gains;

6. Insurance Profit;

7. Banking income of a co-operative society;

8. Winning from Lottery, betting, horse-race, etc.

 Capital & Revenue Receipt.

•‘Capital Receipts’ are the amounts received against items of capital nature. These receipts are of
Non-recurring in nature & don’t arise through normal day to day business activities.

•Naturally, Capital Receipt doesn’t include Profit earned on A/c of Trading activities (that is
Profits earned during regular/normal course of business) - Sale of Goods & Services…

•Examples:

1. Selling Securities (Shares / Debentures) in IPO / Rights Issue / Private Placement

2. Premium on issue of securities

3. Sale of Fixed Assets/ Capital Assets.

4. Compensation received from Insurance Co./ Govt.

5. Amount received by shareholders on Liquidation.

•‘Revenue Receipts’ are accrued or received in the Normal/Regular course of business. Simply,
these are receipts on A/c of Day to Day activities of the business.

•These are Recurring in nature & accrue year after year. Profit earned by selling goods &
services is considered as Revenue Receipts.

•Examples:

1. Interest received on Debentures by the recipient;

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2. Profit from Seasonal business.

3. Insurance compensation received against damage of Stock/ Inventories;

4. The sale of Capital equipment by the person dealing in Trading of Machinery;

5. Compensation received by a Railway passenger for injury.

•Though, Income Tax doesn’t define the distinction between “Capital & Revenue. However, it is
essential to make the distinction between Capital & Revenue in order to ascertain the Total
Income of the Assessee.

•This distinction is necessary because the method of charging tax on Capital & Revenue items
differ from each other.

•For making the distinction, we have depend upon the Accounting principles & the decisions
given by competent courts of Law.

•Distinction Criteria / Tests:

1. Nature of Source of Payment – Salary paid out of capital by new business-Revenue receipt

2. Nature of Transaction- Sale/Purchase of Shares as Intraday transaction-Revenue receipt.

3. Compensation Received under Insurance Policy- it can be either Capital/Revenue receipt.

4. Nature Of Asset to which the Receipt is pertinent/related-

5. Regularity of the Receipt-

6. Intention of the Recipient-

 Capital & Revenue Expenditure.

•‘Capital expenditure’ is incurred for acquiring or bringing into existence an asset of

•Expenditure incurred for raising the capital resource / installing the capital resource is
considered as Capital Expenditure. E.g. Installation of plant/machi., raising money by way of
issuing securities.

•Examples:

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1. Buying Securities (Shares / Debentures) to acquire control of mngt of Co. or as long term
investment;

2. Purchase of Fixed Assets/ Capital Assets.

•‘Revenue Expenditure’ is incurred in the day to day activities or operations of the business. It
is incurred for running the existing business & profit out of the same.

•That is expenditure aims at revenue earning capacity is revenue expenditure.

•Examples:

1. Purchase of Raw Materials;

2. Payment of Salaries, Rent, wages, etc.

3. Payment of repairs & Maintenance;

4. Depreciation on Fixed Assets.

•Difference between Capital & Revenue Expenditure:

1. Purpose of Spending;

2. Period of Benefit;

3. Accounting Treatment;

4. Accounting Period;

5. Recurring & Non-Recurring;

6. Impact on Earning Capacity;

7. Deduction from the Profit.

 FBT (Fringe Benefit Tax) or Perquisites

•The Finance Act, 2005 has introduced FBT from the A.Y. 2006-07. It is taxed in the hands of
the employer.

•Employer means AOP, BOI, Firm, Company, A Local Authority or an artificial juridical person.

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•An important development about FBT is that, it will not be taxable in the hands of the employer
henceforth where as it will be taxable in the hands of the Employee taking these Fringe Benefits
(Perquisites) for the ongoing A.Y.2009-2010.

•What Constitute Fringe Benefit (FB) [Section 115 W]: Fringe Benefit means,

1. Privilege, Service, facility or amenity, directly or indirectly provided to Employees by

2. Free or concessional ticket provided to the Employees & their family members for private
journeys;

3. Contribution to approved super annuation fund;

4. FB also includes the aggregates of certain specified items, which are stated as below:

a. Entertainment;

b. Festival celebration;

c. Gifts;

d. Scholarships;

e. Health club & other similar facilities;

f. Telephone including mobile phones;

g. Use of Hotel (Boarding & Lodging);

h. Repairs, running & maintenance expenditure including fuel of Motor car;

i. Maintenance of Guest house;

j. Repairs, running & maintenance expenditure including fuel Aircraft;

k. Tours, travel (including foreign travels).

 Agricultural Income[Sec2(1A)]

•Agricultural income is fully exempted from tax U/s 10(1).

•Agricultural income refers to:

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1. Any rent or revenue derive from land, which is situated in India & used for Agricultural
purposes;

2. Any income derived from such land, which is used for agricultural operations. It includes
process by cultivator or receiver of rent in kind as well as in cash or receipt of sale of such
produce;

3. Any income from a farm house;

4. Any income derived from saplings or seedlings grown in a nursery will be deemed as
Agricultural Income [w.e.f.AY 2009-10].

•When a person can claim an exemption: A person can claim exemption towards
Agricultural income provided the following conditions are satisfied:

1. Income [rent or revenue] should be derived from Agricultural land. It may be in Cash or Kind.

2. The land must be used for Agricultural purposes & not for any other purposes. It means
cultivation of a fields, which implies expenditure of human skill & labor upon land. In includes
watering, tilling, sowing, planting & any other similar operations.

3. The land should be situated in India U/s 10(1) & not in any other place. If any income is
derived from land situated outside India then that income will be taxed as „Income from other
sources.

Treatment of composite Income.

•In case of Composite Income (Partly Agricultural & Partly Non-Agricultural), the total income
should be identified & the portion belonging to Agricultural Income should be separated and the
balance should be taxed as Non-Agricultural income.

•However, while doing this, it is the responsibility of the Assessee to prove that a part of income
belongs to Agricultural income.

Total Profit of Business - XXX

Less: Agricultural Income- XXX

Taxable Non-Agricultural Income XXX

•Aggregation of Agricultural Income for Rate purposes: The power to levy taxes on Agricultural
income is vested only with state Govts.

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•The Central Govt. can’t impose any tax on Agricultural Income. Accordingly, it is provided that
Agricultural Income is exempted from tax U/s 10(1).

•However, Agricultural Income is to be included for the determining the rate at which Non-
Agricultural Income is chargeable to tax.

•This is provided for in the Finance Act each year with view to increase the tax payable in
respect of Non-Agricultural Income.

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