Introduction and

Definitions 1
Income Tax : Income tax isa dircct and progressive tax which is imposed on incomie
In India. two types of taxes viz. (i) Direct taxes and (ii) Indircct taxes are charged. Dircct
1ax is such atax the incidence and impact of which is born by the assessee himself while
indirect taxN 1S tax the incidence and impact of it is borne by the customer, In the direct taxes
income tax is the main tax while in the indirect lax Goods and Services Tax is the maintax.
As in the other parts of the World, in India also the main source of revenue is incOie
tax. This tax (Income Tax) is levied by the Central Government and is distributed among
Centre and State as per certain pre-decided principles. For this purpose, the President of
India appoints Finance Commission once in every five years period of time. The Finance
Commission recommends as to how income tax should be charged and how it should be
apportioned among Central and State Governments.
In India. income tax was first time imposed by Sir James Wilson of the British
Government in 1860 but detailed act in this regard was formerly introduced in 1886.
The income tax procedure in India can be classified in the following three steps
(1)Computation of Taxable Income.
(2) Computation of the Amount of Tax.
(3) Tax Recovery and Administration.
To understand the above steps of income tax procedure in India, it is essential to
understand the following acts, rules, finance act, explanations and notifications
(1) Income Tax Act, 1961
(2)Income Tax Rules, 1962
(3)Government Notifications
(4)Finance Act (Annual)
(5)Circulars and Clarifications of Central Board of Direct Taxes
(6) Court Decisions.
The brief description of the above acts and rules is as given below
1, Income Tax Act, 1961:The Incomne Tax Act, 1961was made applicable to whole
of Indiafrom April 1, 1962. This Act contains 298 Sections, several Sub-sections and 14
Schedules. Amendments are made in the Act from time to time. Every year while presenting
the Finance Budget. some Sections and Sub-sections are generally amended.
2. Income Tax Rules, 1962: Income Tax Rules supplement the Income TaxAct. They
describe detailed rules, forms, proforma and classifications to various Sections of the Act.
The Income Tax Rules are amended from time to time.
3. Government Notifications : The Finance Ministry of Government of India issues
notifications regarding various aspects of Income Tax e.g. approval of provident fund
nstitutions, calculation of capital gains etc. For the purpose of calculating income tax.
information contained in the notifications have to be kept in mind.
4. Finance Act (Annual): Every year the Finance Minister to Government of India
presents Finance Act or Budget in the Parliament. Through this Finance Act. necessary
12 Income Tay
amendments are madc in the Incoe Tax Act For the assessmcnt ycar 2025-26 the Finan.
Act. 2024 and the Financc Act passcd carlicr will also be considered. if the provisions ar.
not changed. If there is any change in Finance Act. 2025 with retrospective effect than h
provision of Finance Act. 2025 will also apply.
S. Cirulars and Clarifications of the Central Board of Direct Taxes :On certa.
disputed matters or on such nmatters where there is doubt or difference of opinion, th.
Central Board of Direct Taxes may issue circulars and clarifications. The Income Ta.
departmcnt is boundto follow thc directions given in such circulars and clarifications
6. Court Decisions: If there is any dispute betwcen an Assessee and Income Tay
Department. then in such a situation,the matter can be referred to the High Court, Supreme
Court or thc Appellant Tribunal of Income Tax Department. The Income Tax Department wil
have to follow the decisions given by Court.
Charge of Income Tax
Section 4 of the Income Tax Act mentions the Charge of Income Tax. According to
Scction 4. "Where any Central Act enacts that income tax shall be charged for any
assessment year at any rate or rates, income tax at that rate or those rates shall be charged
for that ycar in accordance with, and subject to the provisions of this Act in respect to the
total income of the previous year of every person.
If in aparticular year, the Finance Act is not passed then provisions in such a
situation the Finance Act of the previous ycar or proposed Finance Act, whichever is
beneficial to the assessee. shall be followed.
Important Definitions
With a view to understand the provisions of Income Tax Act, 1961, it is necessar
to know the meaning of some important terms and phrases used therein. Section 2 and 3
of the Act. describe the meaning of different terms used in the Act. Some of these are as
follows
1. Assessee: As per Section 2(7) of the Act, assessee means a person by whom
any tax or any other sum of money is payable under the Income Tax Act, 1961 and includes
) every person in respect of whom any proceeding has been taken for the
assessment of his income or of the income of any other person or of the loss
sustained by him or any other person, or of the amount of refund due to him or
to any other person.
(ü) every person who is deemed to be an assessee under any provision of the
Income Tax Act.
(1) every person who is deemed to be an assessee in default under any provision
of the Income Tax Act. [Sec. 2(7))
The meaning of deemed assessee and assessee in default are as follows :
() Deemed Assessee:When a person has to pay tax on the incomnes of other persos
he is regarded as deemed assessee for the income of other persons. This may be a voluntan
or a statutory act. There are two circumstances of it mentioned in Section 2(7)(b) which ar
as follows
(a) If an individual expires without clearing his tax liability then the perso
inheritance is bound topay the tax on behalf of such deceased person. Howeve.
a person is not bound to pay tax more than the assets he has acquired Irom
deceased person.
 13
Introduction and Definitions

b) Reprcsentative assessee in respcct of income of a minor. a mad person. forcign

nation or trustee of a trust.
delault
i) Assessee in Default : A person who becomes an assessee duc to some
salary. insurance
istake) is known as assessce in default. For examplewhen dividend,
mmission etc. are paid. it is the liability of the payer to
deduct the prescribed tax and pay
tax deduction and short deduction
be halancing amount. But if he pays the amount without
default.
ftax then in this situation he will be regardcd as assessee in the following.
(2) Person : According to thc Income Tas Act. 1961 'person' includes [Sec. 2(31)]
understand from the following diagram
It can be
An
Individual
Every A Hind
Artificial undivided
Persons Family

ALocal PERSON) A
Authority Fim

An A
Association Company
of Persons
(AoP) or Body
of Individual
(Bol)

male, female,
Individual means a natural person or hunman being. It includes a
)An income of minor and lunatic is
taxable through their
minor child and a lunatic. The
taxable as individual.
representative. Trustees are also means a family
A HinduUndivided Family (HUF) is defined in the Hindu Law. It
(ü) a common ancestor including
their
whichconsists of all family members from
married or unmarried.
wives and daughters whether with a
an artificial person, having an independent legal entity
(ii) ACompany is carrying limited liability.
common seal and capital and "relationship
means apartnership. According to Partnership Act, 1932
(w) A Firm share profít of the business. The
persons
between persons who has agreed to
partnership are called partners (may
be an individual,
who have entered into
under which their business is carried on is called
company, HUF) and the name
Act, 2009.
liability from Finance
firm/partnership. A frm may be of limited
Persons (AOP) means an association of various persons (may be
() Association of common purpose. Body of
individuals, firm, HUF and company)
join in a
only be
having the same meaning but the members will
individuals (BOI)
individuals. Government with the
Authority means alegal entity entrusted by the
) A Local includes Panchayat.
management of a municipal or local fund. It
Control and District Board, Ports, Cantonment
Board.
Municipality, Municipal Comnittee,
Municipal Corporation, Urban Improvement Trust.
 Income Tay

but having separate

(ni) Artificial Persons and entitics which are not natural persons
person. The God, Idok
of law. These will be managed by natural
entity in the eve persons. with a juristiç
Deities are artificial Persons. Al other artificial falI within any of thc
and if they do not
personality. will also fall under this catcgory. of Rajasthan.
University
preceding categories of persons e.g. under Section 2(31) of the
the following
of
llustration 1.1 : Determine the status
Income Tax Act :
University of Rajasthan.
2. Jaipur Nagar Nigam.
Hindustan Machine Tools
Ltd.
3
4. M/s Ramesh Book Depot. Madhusudhan and their two son=
Undivided Family of
Mrs, & Mr.
5. A Joint Hindu
Ram and Shyam.
Sunder & Sons.
6. Shri Ramavatar Shyam
7. Life Insurance Corporation of India.
Solution:
Artificial Judicial Person
1
2 A Local Authority
3 A Company more than one owneE
(Including Limited Liability Partnership). Assuming
4. A Firm.
5. A Hindu Undivided Family
one owner.
6 A Firm, Assuming more than
7. A Company. Income Tax Ac
According to Section 2(9) of the
(3) Assessment Year : months commencing on the Ist
day of April ever
year means the period of 12 2026 ane
assessment
assessment year is the period from Ist April, 2025 to 31st March.
year. Thecurrent
known as assessment year 2025-26.
Income Tax Act. previous year means th
(4) Previous Year:As per Section (3) of assessmem
assessment year. For example-for the
financial year immediately preceding the will be known as th
2024 to 31st March. 2025
vear 2025-26 the period from Ist April,
previous year 2024-25.
establishcd in between the financial yea
In case of business or profession which is
than 12 months. For examplea
then in that situation first previous year may be of less
assessee sets up his business on lst October, 2024, then
his previous year will be of
31st March, 2025.
months period beginning with lst October. 2024 and ending with
General Rule : "Income of previous vear is taxed in the aSsessment year
Exceptions to the Rule : Generally tax is charged on the income of previous ycar. bL
will be taxed i
there are certain exceptions to the abOve rule. In such situation the income
the same year in which it arises. They are as follows
(a) Shipping Business of a Non-resident : Where any ship belonging or chartered b
Indi
anon-resident carries passengers. livestock, mail or goods shipped at any port in
7.5% of the amount paid or payable on account of such carriage is treated to be incom
accruing in India and tax on such income is charged in the same year in which it is carne
(Sec. 172
provided the ship owner has no agent in India.
In case. there is no agent then the return of income and tax must be deposited befor
departure from India. If the agent of non-resident is in India then the return of income ar
tax must be deposited within 30 days of departure.
The assesSment of such non-resident must be completed within 9 months from th
end of the previous year.
Introduction and Definitions 15

Officer that an
(b) Income of Persons Leaving India : If it appcars to thc Assess1ng
assessmcnt vcar or shortlv aftcr its
.ndvidual is likely to lcave India during the current
intention of returning to India. [Sec. 174]
eNDiN and that hc has no has becn inscrtcd from the
(c) Bodies Established for Short Duration : This scction
Persons or a B0dy of Individuals
assessment ycar 2004-05. It includes an Association of
income of such association's or
which are established for a spccific purpose and the total
assessment year upto the
bod for the period from the expiry of the previous year for the [Sec. 174A]
vear.
date of its dissolution shall be chargcable to tax in that assessment
assessing officer that an
(d) Transfer of Property to Avoid Tax: If it appears to the
assessee is likely to transfer his property to avoid
tax. then in such a situation the
vcar. [Sec. 175]
computation of tax is done immediately in the same assessimernt
any person is
(e) Discontinuation of Business : If the business or profession of
discontinued than it is the duty of such person to give anotice to
the assessing officer
profession is discontinued
of such discontinuation within 15 davs. Where any business or
expiry of the previous year for
in any assessinent year. the income of the period from the
discontinuance may at the discretion of the
that assessment year upto the date of such [Sec. 176]
assessing officer. be charged to tax in the same assessment year.
necessary to know the
(5) Income : Since tax is charged on income. therefore it is
Income clearly. Only
definition of income. Incomne Tax Act, 1961does not define the word
treated as income.
Section 2(24) of the act enumerates certain types of receipts which are
Accordingly. income includes the following :
i) Profits and Gains
(i) Dividend [receivable ws2(22)(e)]
(iii) Voluntary contributions received by a trust created wholly or partly for charitable
or religious purposes or by an institution established wholly or partly for such
purposes.
Voluntary Consideration received by a Scientific research association. games
association, university or other educational institute, hospital or medical institute
referred to u/s 10(23C) ther than those wholly or substantially financed by the
Government.
(iw) Thevaluc of any perquisite or profit in lieu of salary receivable to any employee
which is taxable under Sections 17(2) and 17(3).
() Any special allowance or benefit other than the perquisites mentioned in clause
(iv) above, specifically granted to an assessee to meet expenses wholly.
necessarily and exclusively for the performance of the duties of an ofice or
employment of profit.
(vi) Any allowancce granted to the assessee either to mcet his personal expenses at
the place where the dutics of his office or employment of profit are ordinarily
performed by him or al aplace where he ordinarily resides or to compensate him
for the increased cost of living.
(vii) The valuc of any benefit or perquisite, whether convertible into money or not.
oblaincd from a company either by a dircctor or by a person who has a
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, but
lor such payment would have becn payable by the director or other person
aforesaid.
(vii) The value of any benefit of perquisite, whether convertible into money or not.
Oblaincd by any representative assessee or by any person on whose behalf or
1.6 Income Tax
for whose bencfit any income is reccivable by the representative asseSscc and
which. but for
any sumn paid by the representativc in respect of any obligation
such payment, would have been payable by the bencficiary.
and (iii) of Section 28 or
(IN) Any sum chargeable to income-tax under clauses (ii)
Section 41or Section 59.
The related Sections are as follows
or received by any person, by
(a) Any compensation or other payment due to
Indian Company or in
whatever name called. managing the affairs of an
management or the modification of the
connectionwith the termination of his
terms and conditions relating thereto.
[Sec. 28 (i)
similar association from specific
(b) Income derived by a trade. professional or [Sec. 28 (iii)
services performed for its members. the head
etc. chargeable under
(c) Recovery of loss, depreciation, bad debts allowed as deduction in the
"Profits of Business or Profession" which were
treated as a taxable
carlier years and later on it is received back, then it will be
income of the recipient. [Sec. 41]
the head 'Income from
(d) Recovery of past losses or expenses chargeable under later-on
other sources' which were allowed as deduction in the carlier years and
it is received back. then it willbe treated as a taxable income of the recipient of the
year in which such amount is received or expenses saved. [Sec. 59|
(x) Any sum chargeable to income tax under clause (iiia) of Section 28 i.e. profit on
sale of an import licence.
(1) Any sum chargcable to income tax under clause (iiib) of Section 28 i.e. cas
assistance received or receivable by any person against exports under any
scheme of the Government of India.
(xi) Any sum chargeable to income tax under clause (iic) of Section 28 i.e. any duty
of customs or excise repaid or repayable as drawback to any person agains
exports under the Customs and Central Excise Duties Drawback Rules, 1971.
(xii) The value of any benefit or perquisite taxable under clause (iv) of Section 28, i.e
value of any bencfit or perquisite, whether convertible into money or not arising
from business or the exercise of aprofession.
(xiv) Any sum chargeable to income tax under clause (v) of Section 28 i.e. any interest
salary, bonus etc. due to, or received by a partner of a firm from such firm.
(xv) If an assessee receives any amount for not doing any activity of a business, no
taking advantage of technical knowledge or for not using rights of patent
copyright, trade mark, licence, franchise or for not using business rights, tha
amount received will be treated as income.
(xvi) Any capital gain chargeable under Section 45.
(xvi) The profits and gains of any business of insurance carried on by a mutua
insurance company or by a cooperative society, computed in accordance wit!
Section 44 or anysurplus taken to be such profits and gains by virtue o
provisions contained in the First Schedule.
(xvii) Any winning from lotteries, crosswordpuzzles, races including horse races, car
games and any other games of any sort or from gambling or betting of any forn
or nature whatsoever.
(ix) Any sum received by the assessee from his employee as contributions to an
provident fund or superannuation fund or any fund set up under the provision
of the Emploýees State Insurance Act, 1948 or anyother fund for the welfare o
such employees. [Sec. 2(24)(x)
Introduction and lDefinitions
1.7

Keyman Insurance Policy and Its Taxability :

(w Soction 2(24)\xi)trcats any sumreccivcd undera Kevman insurance includ1ng thc
sum rcccived as bonus on such policy as income. The definition of Key man
insurance policy is given under Explanation to Scction l0(10D) as "Keymarn
life ol
insurance policy mcans a life insurance policy taken by a person on the
15
another person who is or was the emplovce of the first mentioncd perSon or
of the irst
or was connected in any manner whatsoever with the business
mentioned person
Taxability :
sul
() In case the Kevman insurance policy is assigned to an employce. any
received on its maturity (including the sum allocated by way of bonus on Such
policy) is taxable as "profits in lieu of salary" under Section 17(3).
hands the policy
(2) In case of a person carrying on business or profession in whose on
matures. the sum so received including the sum allocated by way of bonus
Business or
such policy is chargeable under the head Profits and Gains of
Profession".
(3) In case the policy is taken in name of any other person or assigned to any other
consideration) any
person (other than employer or emplovee) (with or without
taxable under the head
sum received on its maturity by such person shall be
'Income from Other Sources [Sec. 2(24)(xi)|
(xxi) Any sum received under life insurance policy issued after 1.4.2003
but before
1-4-2012 in respect of which Premium payable for any of the years during the term
of policy exceeds 20% of actual capital sum assured and policy issued on or after
1-4-2012 and premium is more than by 10% of value of policy, would be taxable
as the Income. But any sum received on the condition of death of a insured
person would be exempt.
Incase policy is taken on or after l-4-2013 on the life of following persons and
amount is more than by 15% of actual capital sum assured, than the amount
received on maturity (not on death), would be taxable as the Income :
0) Disabled persons discussed with Section 80Uof the Income Tax Act.
(ii) Suffering from the disease or ailment mentioned in the rules made under
Section 80DDB.
Note : In case policy is taken on the life of above two persons related to Section
80U and 80DDB on or after 1-4-2012 but before 1-4-2013 and amount is more than
by 10% of actual capital sum assured, than the amount received on maturity (not
on death), would be taxable as the income.
(xxi) If a person receives any gift from another person due to personal relations (not
because of business and employer-employee relations) then it is not an income
if such gift is upto 50,000. These gifts may be in cash or kind(movable or
immovable property). If gift is received from relatives or gift is received on the
occasion of marriage from any one then this limit of ? 50,000 will not apply.
[Sec. 56(2)\(vi)]
Note : Gift received due to business relations is always taxable what ever the
amount may be.
(xii) The profitand gains of any business of banking including credit facilities carricd
on by cooperative society with its members.
(xxiv) The shares issucd by closely held company at more than the market price of
shares than such excess amount will be treated as income of the company.
(xxv) Forfeiture of advance money received for transfer of a capital asset taxable under
the head "Income from Other Sources" |Sec. 56(2)(ix)|
I n t r o d u c t i n a n dD e f i n i t i o n s

1.9

as diversion of
income and accordinply su
treatced
willbe ount will be
thcnit tavable income of the assesscc
ofuill.
the
and Acenal Concept of Inconme If an nome s
from
dtntod

(oii) Receipt it uil be taxcd in the previous ycar cvcn if it acced or: future
Vcarthan ICCCNCd
the ifthe salary of
prevzoUs
an cmploycc for (wo months is outstand1np than alw ins
cvample. months o
For for all the 12
l l be taved Price is not treated as Income: In casc thc markct
Increase in valuc of
(i) be trcated as income unlcss the stock is sold out
it will not
Is () Anticipated or Probable Income is not treated as Income AntiCipatcd iA
iNCTCaScd.

regardedlas
'income' unless it is received in caslh. For cxanplc. if atrader purha
arc not 1,00,000 and anticipates to
sell the same for ? 1.50,000, no incoc will ao ))
goodsfor him.
sold by
the goods are Temporary Source : It is not necessary that thcrc should e t#.
(xi) Permanent and
source of income. Income
from temporary source is also regarded asi E
Account of Dharmada etc. :If an amount is reccivcd on / 1
permanent

(xii) Receipt on
Dharnada. Gaushala etc.. it is
not treated as income.
moncy savcd by a lah, t
riii) Pin Monev is not an Income : Pin money means the
received from her husband to meet
out the household
of the amount
and is regarded as 'Stridhan'.
Ireated as income in Income Tax Act
there are losses from any soure.
(xiv) Income Includes Losses : If in place of income
income of other heads. Thus income can also
of income then such losses are adjusted with
be negative.
are treated
(xv) Revenue Receipt and Capital Receipts : Generally all revenue receipts
not treated as income
as income unless they are tax-free but capital receipts are generally
unless the Income Tax Act clearly accept them as income.
whether the
(xvi) Adjustment of Principal Amount and Interest : If it is not clear
Ofticer tirx
amount is of principal or of interest then in such a situation the Income Tax
treats the amount as towards interest and the balancing amount as towards principal
(xvii) Unexplained Sources of Income:If an assessee is unable to explain about th
sources of income, than such income will be treated as his income.
(xvii) If First Time Receipt is Income, it will be Treated as Income Otherwise No:
it cnnot be
If some receipt is not treated as income when it is received then later on
advance for
regarded as income. For example, if Ram receives 15,000 from a purchaser as
paid within
a contract of sale of building with acondition that if the balance amount is not
the
acerlain period. the advance will be forfeited. Now if the purchaser is unable to pay
be
balance amount within the certain period and the vendor forfeits the advance it cannot
treated as income.
(xix) The profit and gains of any business of banking including credit facilities carries
On oy ac0operative society with its members. scientific
(Xx) Voluntary contribution reccived by a charitable or religious trust,
institute hospital
sarch association, games association, University or other educational
Or medical institute referred to Section 10(23C) other than those wholly or substaintially
financed by the Government.
(xxi) Contingent income will not be included in the income until the contingency has
happened.
(xxii) Income may be received lumpsum or in instalments would not eflect its
taxability.
 1.8 Income Tax

will be trcatcd as incomc

(XVi) Subsidy or grant or cash incentives, duty drawback ctc.
from thc assessmcnt vcar 20 16-17.
under any wclfarc scheme (LPG
However, subsidy provided by the Gjovernmcnt
by the cducational institutc) and
subsidy. scholarslhip. rcimburscmcnt of fcc ctc.
particular asset (its rcduces the
subsidy provided by the Government to acquirc will not be
particular arca (backward. rural etc.)
cost of assct) and to promote a
trcated as incomne. 50,000 then
considcration, if more than
(\w7i) Any sum of moncy reccivcd without
whole moncy reccivcd.
consideration, if stamp duty value is
(wii) Any immovable property roceived without
more than 50,000 then whole value.
(NN) Any immovable property received with
an inadcquate consideration. if stamn
duty value is more than 50.000 then the excess of stamp duty value over amount
of consideration rcccivcd.
complete
The above definition of income is not conclusive and do not give
information about income. it only communicates the Scope of income. In this connection a
significant effort was made by Sir George Lowndes in the famous judgement of CIT y, Shaw
Wallace and Co. where he stated, "Income connotes periodical monetary return coming in
with some regularity or expected from definite sources. Thus incomne has been likened tr
pictorially to the fruit of a tree or a crop of a field."
For considering any amount to be income the following facts are to be considered
()Source of Income : Any amount will be treated as income only when it is received o
from a definite source or sources of income. These definite sources are salaries, income from be
house property etc.
() Regularity of Income : There must be a regular basis to receive the income. This as
basis may be a daily, weekly. fortnightly, monthly or yearly. There are certain exceptions to UE
this rule e.g. income from lottery, horse race, gambling, crossword puzzles etc.
(iii) In the Form of Money: The consideration which can be measured in monev is ar
treated as income. If non-monetary considerations e.g. free facility and various perquisites tre
can be measured in terms of money they will be treated as income.
(iv) Income should come from External Sources : Income must always come
external sources because no person can earn income from himself. It is due to from sO
this reason
that subscriptions received by a club from its member is not
between head office and branch do not generate income. taxable. Similarly transactions If
re
Exception : In the case of a cooperative society where it derives income from its
members is treated as its income. a
(v) Income from Illegal Sources: Income Tax Act does not
between legal and illegal income. Income received from illegal acts consider the difference ba
bribe, etc. are included in income and such as smuggling. thet. tre
are taxed as incomes.
(vi) Disputed Income is also Income : there is
income, the assessment of such income cannotIf be any dispute regarding the uue o on
of such disputed income will postponed. In such cases the receive
have to pay the tax.
(vii) Application and Diversion of Income : For res
necessary to know the difference the assessment of income. or
assessee applies or transfers incomebetween application and diversion of income. If the fin
from his salary for insurance for any purpose e.g. if an employee makes deduction
as application of income and premium, provident fund. ctc. than such deductions aretrcatcd hap
taxation purpose. On the other accordingly
hand if the
added back into the net receipts of employ ee
income
as his own income it is not taxable in the hands ofisthe assessce.bebefore
diverted, For itexample,
reaches ifthean assess"
amounl taxa
1S paid to someone out
of rental income of
house as per court decision or as per the terms
 Income Tax

Heads of Income sourcos

from various
income reccivcd
|Scction 14]. the
Acrd1ng to
Income Tax Act income
the following 5 heads of
un clas1ficd under
hne Salaries
)Inom from
Housc Property.
2)Inomc from Busincss or Profession.
( )Income from
(4)CapBtal Gains
Other Sources.
(5)Income from Gross Total Income incone
of all the five heads of
income computed deductions
income implies the total before making any
Gross total Tax Act.
with the Section
14 of the Income aggregateamount of
allincomes
in accordance total income is the
to 80U. Thus gross if any.
under Scction 80C income and set off of losses.
adjustment for
deemed
after mak1ng Total Income
total amount of
Act. total income means the
Tax
As per Section 2(45)
of the Income
manner laid down in
this act. Thus total
Section 5. computed in the therefrom
income referred to in income left after deducting alldeductions
gross total
income mcans the balance of
i.e.
under Scction 80C to 80U. 80Cto 80U.
GTI Deductions under Section
Total Income =
calculated on total income
of an assessee.
Tax is
Rounding Off of Total Income
provisions of Incomne Tax Act will be
computed according to the five upees or
The total income as this purpose. if last figure is
multiple of ten rupees. For
rounded off in the higher muliple of 10 otherwise
amount shall
increased to the next
more. the amount shall be [Section 288A]
lower of multiple of 10.
be reduced to the
Agricultural Income
exempt from
According to Section 10(1) of Income
Tax Act agricultural income is land
derived from agricultural
income includes any rent or revenue
income tax. Agricultural
agricultural purposes. Income derived
on account of
situated in India and is used for agricultural income. In agricultural
income the
agricultural land is not treated as
transfer of
following points are to be considered : necessary
Agricultural Land: For agriculture, land is a
1. Income should be Derived from land must be an
exempted which is related to land. The
requirement. Only that income will be source of income
cffective and immediate source of income and
not an indirect or secondary
agricultural land for amount of life annuity, it is
not inconk
For example, if a person transfers his immediate source of income is contract of lie
derived from land because the effective and
Compensation received from government on account
of acquisition 0
annuity and not land.
income. Similarly dividends paid by
agricultural land is also not regarded as agricultural
income derived from land since the effective and
Company out of its agricultural income is not
land. If the land is cultivated and thk
immediate source of income is shareholding and not the
products are sold then such profits are treated as agricultural income.
Agricultural income from lan i
2. The Agricultural Land Must be Situated in India:
situated outside India is taxable.
agricultur
3. Land should be treated as Agricultural Land: If any land used for
purposes IS Situated in avillage population of which is not more
than 10,000 in last censuI
the following tab
then it is agricultural land. If the land is situated in area mentioned in
then the income derived will not be treated as agricultural income
 Introduction and Definitions 1.11

Situation of land Population in such arca

Not more than 2 kms fronn the local
limit More than 10,000but not norc
than 1,00,000
of municipality or cantonmcnt Board
Not more than ókms from the local limit More than 1,00,000 but not more
than 10,00,000
of municipal1ty or cantonmcnt Board
Not mor than 8 kms from the local limit More than 10,00,000
of municipality or cantonment Board
4. Land Must be Used for Agricultural Work: If the land is not used for agricultural
work then theincome derived will not be treated as agricultural income. If the land was used
for agricultural work in the previous year but in the current year it is used for some other
purposes then its income will not be treated as agricultural income. Agricultural work mcans
tilling of the land. sowing of the sceds. planting, harvesting. ploughing ctc. According to
the judgement given by the Supreme Court in 'C.IT. v. Raja Benoy Kumar Sahas Roy'
agricultural works are classified into two parts :
)Preliminary Work :Preliminary work are performed before the plant comes out
of land such as tilling of land, sowing of seeds, watering the land, planting etc.
(i) Subsidiary Work:Subsidiary work are performed after the plant comes out of
land such as weeding. pruning. cutting. using pesticides, harvesting etc.
According to the judgements given by various courts if no preliminary work are
eperformed and only the subsidiary work are performed then the income will not be treated
as agricultural income. For example--Income arising from sale of wild grass, forest trees,
| fruits and flowers which grow on land spontaneously without the aid of human skill and
labour are not treated as agricultural income because here no preliminary work is performed.
Similarly if a person purchases standing crop from a cultivator then the income derived from
selling of the standing crop will not be treated as agricultural income as no preliminary work
has been performed by the purchaser of standing crop.
Kinds of Agricultural Income
According to the Income Tax Act agricultural income is mainly divided into five parts.
which are as follows
(1) Rent Received on Land : If the owner of land grants the right of cultivating his
land to another person, then the consideration received by the owner for this act is known
as rent and such income is treated as agricultural income. The rent may be received in cash
k or in kind.
(2) Income Derived from Agricultural Work : The income derived from agricultural
work performed by any person (owner, tenant, mortgagee etc.) is known as agricultural
income. Agricultural work means tilling of land, sowing of seeds, watering of land.
harvesting etc.
(3) Income from Processing of Agricultural Produce : Any income derived from
performance of such operations by the cultivator which are necessary to bring the produce
in saleable (marketable) condition is agricultural income. For example income derived from
Separating wheat and grass, drying of tobacco leaves etc. It should be noted that if such
processing is mechanized and not essential, for example, income derived from extracting oil
Irom ground nuts, producing sugar or converting unginned cotton to ginned cotton etc.
then such incomes are not
included in agricultural income.
L12 Income Tay
(4) Income Derived from Sale of Agricultural Produce: Ifthe armer sells his OWn
pradnc (crops) or producc, which he has received in the form of rent. the income derivcd
ll earrcultural incomc cven if he sclls it at his own shop. But if the farmer sclls Such
prxtne nhrch he has purchascd from othcr person then such income will not be Ireatcd
ultural come For cxample if afarmer produccd 100 kg of wheat and sold it to Ram
nd Ram further sold it to Shyam then the incone derived from such sale
will be treated
gs axncultural incomc in case of the farmer but not in case of Ram.
(5) Income from Building Used for Agriculture : The income
IISd for agriculture is treated as agricultural income if it derived from building
satisfies the following conditions
(a) The building must be situated on the
agricultural land or must be adjoining to
(b) The building must be in the ownership of
the rent. the cultivator or the person receiving
(c) The building is used as a residence of
the cultivator or as a store house or other
outer building.
(d) The land on which the building is
situated is either assessed to land revenue or
local taxes in India. If there is no tax
not be situated in any area mentioned in
applicable on such land then the land mus
the table of point 3 earlier.
(6) Other Agricultural Incomes : The
agricultural income : following incomes will be included in th¹
) Self generated (spontaneous) grass for
(ii)
cattles.
Rent from forest.
(ii)Cultivation of flowers and fruits.
(i) Sale of fruits, flowers and wood
if cultivated by assessee.
(V)Interest on capital to partners and salary to
partners engaged in
while calculating income of agricultural
Work if same amnount was deducted
(vi) Claim from insurance firm.
company if the crops are damaged by
rainfall, fireetc. cyclone, exceS
Non-Agricultural Income
The following incomes though related
to land or agriculture are not
income: agricultura
(1) Income from land used for small
markets and exhibitions:
(2) Income from sale of wild grass,
land:
bamboos or trees which grow spontaneously o
(3) Income from poultry farm;
(4) Income from rent of land used for
godown or
(5) Royalty of stone quarries or other mines; machinery for agricultural purposc
(6) Income from land used for making
bricks;
(7) Income from sale of surplus water of a
well built on agricultural land to otN
farmers,
(8) Dividend received out of
agricultural income of a company:
(9) Income from fisheries:
(10) Income from extracting salt from sea water;
(11) Salary of employees of an agricultural farm:
(12) Interest on the arrears of rent of land uscd for agricultural purposes
 Introduction and Definitions 1.13

13) Award reccivcd by a cultivator for high production of

crop
(14) Income from dairy farm
(15) Remuncration reccivecd by a manager from a agricultural farm.
(l6) lncome accnuing fromthe purchase of a standing crop after some agriculturc work
Partly Agricultural Income
There are certain incomes which are partly agricultural and partly non-agricultural
(business). for cxample. if the assessce grows and manufactures tca his income is partially
agncultural income and partially business income chargeable to tax.Similarly in thecasc of
income ot cotton mills which grow cotton on their own farms. sugar mills which grow
sugarcanc on their oWn farm etc. Partially agricultural income is calculated in the following
manner

(1) Agricultural Income from Production of Tea: For the manufacturing of tca the
following twoactivilies are performed
() Cultivation of tea leaves
(1) Processing of tea leaves to bring it in a saleable condition.
The process of making tea leaves in a saleable condition is a business (non-agricultural)
activity. Thus the income of tea garden is divided into two parts. According to Income Tax
Act 60% of such income is treated as agricultural income and 40% as non-agricultural income
chargeable to tax, For the computation of income the expenses of planting bushes in place
of bushes which have died or become useless is also added in the cost. The advantage of
the above rule is given to the assessee only when he fulfils the given conditions
"the assessee himself has cultivated the tea leaves:
" the assessee himself is engaged in the processing of tea leaves.
If the assessee is engaged in the processing of tea leaves only then his income will
be non-agricultural contrary to it if the assessee is engaged in cultivation of tea leaves only
ie., he sells the product in the raw shape then his income will be 100% agricultural income.
Compensation received from an insurance company for damages caused to tea' crops by
natural calamities is an agricultural income. Salary and any amount received in the form of
profit by the partner2 ofa firm which is engaged in agricultural activities is considered as
agricultural income. |Rule 8]
(2)Income from Production of Rubber: Income derived from the sale of centrifuged
latex or cenex or latex based crepes (such as pale latex crepe) or brown crepes (such as
estate browncrepe. re-milled crepe: smoked blanket crepe or flat bark crepe)or technically
specificd block rubbers manufactured or processed from ffeld latex or coagulum obtained
from rubber plants grown by the seller in India shall be computed as if it were income
derived from business, and 35% of such income shallbe deemed to be income liable to tax
as business income and balance 65% will be treated as agricultural income. (Rule 7A|
(3) Income from Manufacturing of Coffee : Income derived from the sale of coffec
grown and cured by the seller in India shall be computed as if itwere income derived from
busincss, and 25% of such income shall be deemed to be income liable to tax as business
income and balance 75% will be treated as agricultural income. |Rule 7B(1))
If coffee is Roasted and Grounded by the Seller in India : Incomc derived from the sale
of coffee grown, cured, roastcd and grounded by the seller in India, with or without mising
chicory or other flavouring ingredients, shallbe computed as if itwere income derived from
business, and 40% of such income shall be deemed to be income liable to tax as business
Income and balance 60% willbe treatcd as agricultural incone. (Rule 7B(2)|
1. Camellia Tea Group Pvt. LLd. v C.I.T. (1993), 203, 1.TR. 80.
2. C.I.T. V. R.M. Chidambaram Pillai (1977), 106, 1.ER. 292 (SC).
1.14 Income Tax
assessee
(4) Partly Agricultural Income from Other Business Activities: If the
activities of c
utilizes the agricultural produce raised by him as raw material in manufacturing
p
his business then from the market value of the agricultural produce the total cost of
non-agricultural profits
manufacturing is deducted and the remaining amount will be
2
chargeable to tax. Here the market value means S
(a) Average price at which such producewas sold during the relevant previous year.
(b) In case the agricultural produce is not ordinarily sold in the market. the aggregate be
of the following amount is considered as market value of produce
cultivation expenses;
land revenue or rent of the land; and
areasonable amount of profit in the opinion of Assessing Officer. [Rule 7)
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