Definition of Income Tax
Income tax is a tax charged on the annual income of an individual or
business earned in a financial year. The Income Tax system in India is
governed by The Income Tax Act, 1961, which lays out the rules and
regulations for income tax calculation, assessment, and collection.
Assessment year: [Sec. 2(9)]
Assessment year means a period of 12 months commencing on 1 st April every
year. The total income earned by the assessee during the previous year shall
be chargeable to tax in the next year; which is termed as the assessment
year. For example, for the previous year 2022-23, the relevant assessment
year shall be 2023-24 (1.4.2023 to 31.3.2024).
2024-25
Previous year: [Sec. 3]
The year in which income is earned, i.e. the financial year immediately
preceding the assessment year, is called the previous year and the tax shall
be paid on such income in the next year which is called the assessment year.
This means that the tax is levied on the income in the year in which it is
earned; referred as previous year and the tax on such income will be paid in
the assessment year. All assessees are required to follow a uniform previous
year i.e. the financial year starting from 1st April and ending on 31st March.
2023-24
5. Person: [Sec. 2(31)]
As the income tax is levied on the total income of the previous year of every
‘person’, it becomes important to understand the term ‘Person’. The term
‘person’ includes the following seven categories:
(i) an individual,
(ii) a Hindu Undivided Family (HUF),
(iii) a company,
(iv) a firm,
(v) an Association of Persons (AoP) or a Body of Individuals (BoI), whether
incorporated or not,
(vi) a local authority, and
(vii) every artificial juridical person not falling within any of the preceding
sub-clauses e.g., a university or deity.
As per Explanation to Sec. 2(31), an AoP/BoI/Local authority or any artificial
juridical person shall be deemed to be a person, irrespective of whether they
were formed or established with the purpose of earning or deriving profits or
not.
6. Assessee: [Sec. 2(7)]
Assessee means a person by whom any tax or any other sum of money
is payable under this Act. It also includes the following:
(i) Every person in respect of whom any proceeding under this Act has
been taken for the assessment of his income;
(ii) Every person who is deemed to be an assessee under any provisions
of this Act. Sometimes, a person becomes assessable in respect of the
income of some other persons. In such case also, he is considered as an
assessee. For example, legal representative of a deceased person;
(iii) Every person who is deemed to be an assessee in default under any
provision of this Act. For example, where a person making any payment to
other person is liable to deduct tax at source, and if he has not deducted tax
at source or has deducted but not deposited the tax with the government; he
shall be deemed to be an assessee in default.
Heads of Income: [Sec. 14]
For the purpose of computation of total income under the Income-tax Act,
1961, all the incomes shall be classified under the following 5 heads of
income:
(i) Salaries [Secs. 15 to 17]
(ii) Income from House Property [Secs. 22 to 27]
(iii) Profits and Gains of Business or Profession [Secs. 28 to 44DB]
(iv) Capital Gains [Secs. 45 to 55A]
(v) Income from Other Sources [Secs. 56 to 59]
Gross Total Income means aggregate of income computed under the
above five heads, after making clubbing provisions and adjustments of set
off and carry forward of losses.
Income: [Sec. 2(24)]
The definition of ‘Income’ given under section 2(24) is inclusive and
not exhaustive and therefore it may be possible that certain items may be
considered as income under this Act according to its general and natural
meaning, even if it is not included under section 2(24). The term ‘Income’
includes the following:
Profits and gains;
Dividend;
Voluntary contributions received by a trust which is created wholly or partly for
charitable or religious purposes; or by educational institutions, hospitals or electoral
trust;
The value of any perquisite or profit in lieu of salary taxable u/s 17;
Any special allowance granted to the assessee to meet expenses wholly, necessarily
and exclusively for the performance of office or employment duties;
The value of any benefit or perquisite, whether converted into money or not, obtained
from a company either by a director or by a person who has substantial interest in the
company or by a relative of the director or such person, and any sum paid by any such
company in respect of any obligation which, otherwise, would have been payable by the
director or other person aforesaid;
The value of benefit or perquisite to a representative assessee like a trustee appointed
under a trust;
Any sum chargeable to income-tax under clauses (ii) and (iii) of sec. 28 or sec. 41 or
sec. 59;
Any sum chargeable to income-tax under clauses (iiia), (iiib), (iiic), (iv), (v), (va) and
(via) of sec. 28;
Any capital gains chargeable u/s 45;
The profits and gains of any insurance business 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 profit and gains by virtue of provisions contained in the First
Schedule;
The profits and gains of any of banking business (including providing credit facilities)
carried on by a co-operative society with its members;
Winnings from lottery, crossword puzzles, races (including horse races), card games or
other games of any sort or from gambling or betting;
Any sum received by the assessee from his employees as contributions to any provident
fund or superannuation fund or any fund set up under Employees’ State Insurance Act,
1948 or any fund for the welfare of such employee; [Sec. 2(24)(x)]
Any amount received under the Keyman insurance policy including the sum allocated by
way of bonus; [Sec. 2(24)(xi)]
Any sum chargeable to income-tax u/s 56(2)(v), (vi);
Any sum of money or specified movable or immovable properties received without
consideration or inadequate consideration as provided u/s 56(2)(vii), (via);
Any consideration received for issue of shares as exceeds the FMV of shares referred to
in section 56(2)(viib);
Any sum of money received as advance in the course of negotiation for transfer of a
capital asset, if such sum is forfeited as the negotiation do not resulted in transfer of the
asset 56(2)(ix);
Any sum chargeable to income-tax u/s 56(2)(x);
Any compensation or other payment referred to in Sec. 56(2)(xi);
Income shall include assistance received in the form of a subsidy or grant or cash
incentive or duty drawback or waiver or concession or reimbursement (by whatever
name called) from the Central Government or a State Government or any other
authority or body or agency in cash or kind to the assessee other than:
(a) the subsidy or grant or reimbursement which is taken into account for
determination of the actual cost of the asset in accordance with the
provisions of Explanation 10 to clause (1) of section 43,
(b) the subsidy or grant by the Central Government for the purpose of the
corpus of a trust or institution established by the Central Government or the
State Government, as the case may be .
