Basics, Important Terms and Definitions under the Income Tax Act,

1961

Constitutional Provisions of Taxes in India

The basis of every legislation in India is rooted in the constitution. As per article
265 of the constitution, no tax must be levied or collected except by the
authority of law. There are various other provisions under the constitution that
distribute the power.

Entry 82 of List I of Seventh Schedule of the Constitution of India grant power on

Parliament to impose taxes on income other than agricultural income. In this
way, Income Tax is under the Union list and therefore Central Government is in
charge of the collection of income tax.

The Central Government has the authority to collect taxes on income aside from
the tax on agricultural income, which is being collected by the State
Government. Entry 46 of List II of the Seventh Schedule of the Constitution of
India lays down that the State Government has the authority to collect taxes on
agricultural income.

Schedule 7List 1

Entry 82: Tax on Income other than the agriculture income.

List 2

Entry 46 – Taxes on agricultural income.

Need for Income Tax in India

Income tax is a tax on the income of an individual or an entity. Income tax is the
main source of income for the government to carry out its functions. The jobs of
government are not just restricted to defense, law, and order, etc., but it also
has to undertake activities like welfare and development under sectors of
health, education, rural development, etc. the government also has to pay for its
own administration. All of these activities need huge public finance which is
raised by the collection of taxes.

What is Purpose of Taxation

1. The money spent on the development of roads, schools, and hospitals,

market regulations or legal systems, etc. is raised by the revenue generated by
the collection of taxes

2. Redistribution of resources by the richer section to the poorer section of the

society.

3. Taxes are levied on certain products to eliminate externalities such as the

taxes on tobacco to discourage smoking

TYPES of categories

Taxes are broadly divided into two categories- Direct and Indirect taxes.

Income tax is a direct tax imposed on an individual. Estate and wealth tax were
also direct taxes, however, these are abolished now

Indirect taxes that were imposed in India are customs duty, central excise duty,
service tax, sales tax, and value-added tax. it is always expense nature. Indirect
tax is assets or liabilities for businessman .
As of now GST has been implemented and has made all the other indirect taxes
obsolete.

Important Terms and Definitions under the Income Tax Act, 1961

Assessment year and previous year Assessment Year:

Assessment year is the 12 months’ period commencing on 1st of April till
31st March of next year. It is the year in which the income of previous year
is assessed.

As per Section 2(9) of the Income Tax Act, 1961, states that assessment year
means the 12 month period beginning on the 1st day of April every year. The
assessee is required to file the income tax return of the previous year in the
assessment year. As per S.2(34) of Income Tax Act, 1961, unless the context
otherwise requires, the term “previous year” means the previous year as
defined in section 3.

As per Section.3 of Income Tax Act, 1961, the term “previous year” means the
financial year immediately proceeding the assessment year

Say, for example, the year starting from 1st April 2020 and ending on 31st
March 2021 is the assessment year 2021-22, the previous year would be 2020-
21. The rates of assessment year are taken into consideration.

For Income Tax Act 1961, previous year is defined as the financial year
which immediately precedes the assessment year. In case the source of
income is new or the business set up is new, previous year for that entity
will start from the date of setting up of that business or profession or from
the date when the source of income of this new existence starts and ends in
the said financial year. Exception to
Previous Year:
These incomes are taxed as the income of year immediately preceding the
assessment year at the rates applicable to such person.

1. Income of a person who is leaving India for a long period or permanently

2. Income of a person who is trying to alienate his assets with an intention
to avoid taxes

3. Income of a discontinued business

4. Income of non-resident shipping companies who don’t have any

representative in India

Who is a person under income tax?

A person is defined under section 2(31) of the act. The term ‘person’ includes –

1. An individual.
2. A Hindu Undivided Family.
3. A Company.
4. A Firm.
5. An association of persons or body of individuals whether incorporated
or not;
6. A local authority; and
7. Every artificial judicial; person not falling within any of the preceding

Who is an Assessee
Any individual who has income earned or losses incurred, and is liable to pay
taxes on these to the government in a particular assessment year, is an
assessee.

. Assessee:
As per Income Tax Act 1961 section 2(7), an assessee is a person who is liable to pay the taxes under

any provision of Income Tax Act 1961. Assessee can also be a person with respect of whom any

proceedings have been initiated or whose income has been assessed under the Income Tax Act 1961

Assessee is any person who is deemed assessee under any of the provisions of this act or an assessee

in default under any provisions of this Act

Categories of the assessee –

1. Normal Assessee

 a person against whom proceedings are going on under the Income Tax
Act, despite the fact that any tax or other amount is payable by him or
not;
 a person who has undergone loss and filed a return of loss u/s 139(3);
 a person by whom some amount of interest or tax or penalty is payable
under the income tax Act;
 any person who is entitled to refund of tax under this Act.

2. Representative Assessee

 A person may not be liable for his own income or loss but he might also
be liable for the income or loss of other persons say for example agent
of a non-resident, guardian of a minor or a lunatic person, etc. In such
cases, the person responsible for the assessment of the income of such
a person is called representative assessee. Such a person is deemed to
be an assessee.

3. Deemed Assessee

 In the case of a deceased person who has died after writing down his
will, the administrators of the property of the deceased are deemed as
assessee.
 In case if a person dies intestate (without writing down his will) the
eldest son or other legal heirs of the deceased person are deemed as
assessee.
 In case a minor, lunatic or an idiot person has income taxable under
the Income Tax Act, their guardian is deemed to be an assessee.
 In case a non-resident has income in India, any person acting on his
behalf is deemed as an assessee.
4. Assessee-in-default

 A person is deemed as an assessee-in-default if he fails to fulfill his

statutory obligations. In case an employer is paying a salary or a
person who is paying interest, it is their duty to deduct TDS and deposit
the amount of tax so collected in Government treasury. If he fails to
deduct TDS or deducts tax but does not deposit it in the treasury, he is
known as assessee-in-default.

Concept of income
The Income Tax Act does not define the term Income but section 2 (24) of the
Act describes the various receipts which are included under the ambit of
income.

Definition of INCOME under Income Tax [Section 2(24)]

Income includes :

1. Profits and gains

2. Dividends
3. Voluntary Contributions received by a trust. Voluntary
contributions received by a trust are included in the definition
of income. As such contributions received by following types of
trusts, funds, associations, bodies etc. are included in the
income of such bodies.
i. Contributions received by a trust created wholly or partly
for charitable or religious purposes.
ii. Contributions received by a scientific research
association.
iii. Contributions received by a fund or institution set up for
charitable purposes and notified u/s 10(23c)(iv)(v).
iv. Contribution received by any university or other
educational institution, hospital referred in section
10(23c).
 4. The value of any perquisite or profit in lieu of salary taxable
under section 17(2)(3)
5. Any special allowance or benefit, other than perquisite included
under sub-clause (iii), specifically granted to the assessee to
meet expenses wholly, necessarily and exclusively for the
performance of the duties of an office or employment of profit
6. Any allowance granted to the assessee either to meet his
personal expenses at the place where the duties of his office or
employment of profit are ordinarily performed by him or at a
place where he ordinarily resides or to compensate him for the
increased cost of living
7. Value of any benefit or amenity, whether convertible
into money or not, obtained by a representative assessee or
by any person on whose behalf such benefit is received by
representative assessee and sum paid by representative
assessee in respect of any obligation which hut for such
payment would have been payable by the person on whose
behalf representative assessee has made such payments

A. The profits and gains of any business of banking

(including providing credit facilities) carried on by a co-
operative society with its members;
The value of any benefits or perquisites, whether convertible
into money or not, obtained from a company either by a
director or by a person, who has a substantial interest in the
company, or by a relative of a director of such person, and any
sum paid by such company in respect of any obligation but for
which, such payment would have been payable by the director
or other person aforesaid
Any sum chargeable to income-tax under section 28(ii) and (iii)
or

Any sum chargeable to income-tax under section 41- Where an

allowance or deduction has been made in the assessment for any year in respect
of loss, expenditure or trading liability incurred by the assessee (hereinafter
referred to as the first- mentioned person) and subsequently during any previous
year or Any sum chargeable to income-tax under section section
59;

PROFITS CHARGEABLE TO TAX U/S. 59 OF I.T. ACT, 1961

If any allowance or deduction has been made while computing income from other
sources for any year in respect of any loss, expenditure or trading liability but
subsequently or later on due to recovery of any amount in cash or any other manner
or some benefit on account of remission or cessation of loss, expenditure or trading
liability is derived, then the same shall be chargeable to tax under “Income from Other
Sources” as applicable under the head “Profits and Gains of Business or Profession”.

Any sum chargeable to tax u/s 28 (iiia)-

(iii-a) profits on sale of a licence granted under the Imports (Control) Order, 1955,
made under the Imports and Exports (Control) Act, 1947 (18 of 1947);

Any sum chargeable to tax u/s 28(iiib):

cash assistance (by whatever name called) received or receivable by any person against
exports under any scheme of the Government of India ;

Any sum chargeable to tax u/s 28 (iiic) , -

any duty of customs or excise repaid or repayable as drawback to any person against exports
under the Customs and Central Excise Duties Drawback Rules, 1971;

The value of any benefit or perquisite taxable under section 28

(iv)

Any capital gain taxable under section 45

-Any sum whether received or receivable in cash or in kind

under an agreement for—not carrying out any activity in
relation to any business ; or not sharing any know-how, patent,
copyright, trade-mark, license, franchise or any other business
or commercial right of similar nature or information or
technique likely to assist in the manufacture or processing of
goods or provision of services
-The profit and gains of any business of insurance carried on by
a mutual insurance company or by a co-operative society,
computed in accordance with section 44 or any surplus taken to
be such profits and gains by virtue of provisions contained in
the first schedule
-Any winnings from lotteries, crossword puzzles, races including
horse races, card games and other games of any sort or from
gambling or betting of any form or nature whatsoever
-Any sum received by the assessee as his employers’
contributions to any provident fund or superannuation fund or
any fund set up under the provisions of the Employee’s State
 Insurance Act, 1948 or any other fund for the welfare of’ such
employees
-Any sum received under a key man insurance policy including
the sum allocated by way of bonus on such policy
Any sum received by an individual or HUF from any person
during 2013-14 in cash or by issue of cheque ordraft or by any
other mode or by way of credit otherwise than by way of
consideration for goods or services but does not include
An aggregate amount of gift or gifts received (whether in cash
or in the form of property) exceeding Rs. 50,000 in a previous
year by an individual or Hindu undivided family from non-
relatives shall be treated as income which will be taxable in the
hands of the recepient. (For details, please refer to chapter on
Other Sources)
Gifts received by a firm or closely held company as provided in
Section 56(2) (viia).
Any consideration for issue of shares by a closely held company
as exceeds the fair market value of shares as provided in
Section 56(2)(viib) [w.e.f. Assessment year 2013-14].

The definition of term ‘Income’ as given above does

not explain what income is ? It only tells that the above
mentioned receipts are also included in the meaning of term
income. The definition given u/s 2(24) is inclusive and not
exhaustive. According to English dictionary, the term income
means “periodical receipts from one‘s business, land, work,
investments etc.”

The term income simply means something which comes in. It is a

periodical return with regularity or expected regularity. It’s nowhere
mentioned that income refers to only monetary return. It includes
value of benefits and perquisites. Anything which can reasonably and
properly be described as income is taxable under this Act unless
specifically exempted under the various provisions of this Act.

The term income includes not only what is received by using the
property but also the amount saved by using it himself. Any thing
which is convertible into income can be regarded as source of
accrual of income.
Charging section
 Section 4 of the Income-Tax Act, 1961 is the Charging section of the
Act

Accordingly, the section provides that:

 The rates are prescribed under the finance act of every assessment
year. Income tax for the previous year is to be charged according to
the given rates.
 The taxable income is that of the previous year not the assessment
year
 The total income, computed according to the provisions of the act, is
leviable
 TDS or advance tax wherever applicable is to be charged

Heads of income -Various Heads for Income under Income

Tax Act 1961:
Every income arising to any person will always be classified under one of
the following headers provided by the Act: -
Income is classified under 5 main heads under section 14 of the act

1. Income from salary

2. Income from house property
3. Income from capital gains
4. Profit and gains from business and profession
5. Other sources of income

Scope of Total income:

As per Income Tax Act 1961, the total income of previous year for a person
who is resident of India will include all his income irrespective of source of
that income which is either received or has accrued in India in previous
year.
 However, if person is not an ordinarily resident in India as per Section 6 of
Income Tax Act, 1961, income from the sources which accrues or arises for
him outside India shall not be included in total income. In respect of non-
residents any income which is received or arises in India is taxable in India.