INCOME TAX

DEFINITIONS

INCOME TAX ACT, 1961

(INTRODUCTION & BASIC
CONCEPTS)
Passed in September 1961,
Came into operation w.e.f. 01.04.1962,
Extends to whole of India.
Rate of IT are given in the Finance Act, passed
by the parliament every year.
Contains more than 400 sections and a number
of sub-sections and 10 schedules.
121 Rules with various sub rules. These rules are
termed as Income - Tax Rules of 1962. It also
includes a number of sub - rules.

 Income Tax is a Direct

Tax.

In case of direct tax, the burden and incidence

are on the same person who pays the tax, but in
the case of indirect tax, the burden is on one
and the incidence on another.

It is levied & collected

by the Central Govt.

DEFINITIONS
ASSESSMENT YEAR:

Assessment year means the period starting

from April 1 and ending on March 31 of the next

year.
Example- Assessment year 2014-15 which will
commence on April 1, 2014, will end on March
31, 2015.
Income of previous year of an assessee is taxed
during the next following assessment year at the
rates prescribed by the relevant Finance Act

PREVIOUS YEAR:

Income earned in a year is taxable in the next year.

The year in which income is earned is known as
previous year and the next year in which income is
taxable is known as assessment year.
In other words, previous year is the financial year
immediately preceding the assessment year
Previous Year in the case of newly set-up
business/profession:
The first previous year commences from the date of
setting up of the business/profession and ends on the
immediately following 31st March
That is first year can be a period of 12 months or less
than 12 months . It can never exceed 12 months

YEAR IS NOT TAXABLE IN THE

IMMEDIATELY FOLLOWING
ASSESSMENT YEAR
Income of non-residents from shipping;
Income of persons leaving India either
permanently or for a long period of time;
Income of bodies formed for short duration;
Income of a person trying to alienate his assets
with a view to avoiding payment of tax; and
Income of a discontinued business
In these cases, income of a previous year may be
taxed as the income of the assessment year
immediately proceeding the normal assessment
year.
To ensure smooth collection

On the basis of the aforesaid discussion, it can be

said that a financial year plays a double role
it is a previous year as well as an assessment
year

PERSON

The term person includes:

an individual;
a Hindu undivided family;
a company;
a firm;
an association of persons or a body of individuals, whether
incorporated or not;
a local authority; and
every artificial juridical person not falling within any of the preceding
categories.
The aforesaid definition is inclusive and not exhaustive.
Therefore, any person, not falling in the above-mentioned seven
categories, may still fall in the four corners of the term person and
accordingly may be liable to tax.

ASSESSEE

Assessee means:
A person by whom income tax or any other sum
of money is payable under the Act.
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.
A person who is assessable in respect of
income or loss of another person or who is
deemed to be an assessee, or an assessee in
default under any provision of the Act

INCOME
The definition of the term income in section 2(24) is inclusive
and not exhaustive. Therefore, the term income not only
includes those things that are included in section 2(24) but also
includes those things that the term signifies according to its
general and natural meaning.
Under section 2(24) it includes the following:
Profits and gains
Dividend
Voluntary contributions received by a trust
Perquisites in the hands of employee
Any special allowance or benefit
City compensatory allowance/dearness allowance
Any benefit or perquisite to a director

INCOME(CONTD..)

Any benefit or perquisite to a representative assessee

Any sum chargeable under sections 28,41 and 59
Capital gains
Insurance profit
Banking home of a co-operative society
Winnings from lottery
Employees contribution towards provident fund
Amount received under Keyman insurance policy
Amount exceeding Rs 50,000 by way of gift received by
an individual or a Hindu Undivided Family

GROSS TOTAL INCOME

As per section 14, the income of a person is computed
under the following five heads:
1.
Salaries.
2.
Income from house property.
3.
Profits and gains of business or profession.
4.
Capital gains.
5.
Income from other sources.
. The aggregate income under these heads is termed
as gross total income.
. In other words, gross total income means total
income computed in accordance with the provisions
of the Act before making any deduction under
sections 80C to 80U.

GROSS TOTAL INCOME(CONTD..)

Rounding-off: The taxable income and tax liability shall

be rounded-off to the nearest multiple of ten rupees

Exemption v/s. Deduction: If the income is exempt from
tax, it is not included in the computation of income.
Exemption can never exceed the amount of income.
Deduction is from income chargeable to tax.
Capital Receipt v/s. Revenue Receipts: Capital
receipts are exempt from tax unless they are expressly
taxable. Eg. Capital gains are taxable under section 45
even if they are capital receipts .
Whereas revenue receipts are taxable, unless they are
expressly exempt from tax. Eg. Income exempt under
section 10

GROSS TOTAL INCOME(CONTD..)

Method of accounting:
Profits

and gains of business or profession

and income from other sources is to be
computed in accordance with the method of
accounting regularly employed by the
assessee.
For all the other income method of
maintaining books of account is irrelevant.
Types of Accounting Methods:
Mercantile System and
Cash System

COMPUTATION OF INCOME
1.) Income from Salary
XXXX
2.) Income from House Property
XXX
3.) Income from Business/Profession
XX
4.) Income from Capital Gains
X
5.) Income from Other Sources
XXXXX
GROSS TOTAL INCOME (Sec. 14)
XXXX
Less:Deductions u/chap-VI-A (Sec.80CCC to 80U)
XXX
TOTAL INCOME [Sec.2(45)]
XXXX
Tax Due
XXX
Less:Rebates and Reliefs u/Chap-VIII
XX
Tax Payable
XXXX

COMPANY
Under section 2(17), the expression company is defined
to mean the following:
any Indian company ; or
any body corporate incorporated by or under the laws
of a country outside India, i.e., any foreign company; or
any institution, association or body which is assessed
or was assessable/assessed as a company for any
assessment year commencing on or before April 1,
1970 ; or
any institution, association or body, whether
incorporated or not and whether Indian or non-Indian,
which is declared by a general or special order of the
CBDT to be a company

INDIAN COMPANY
Indian company [Section 2(26)]:
Indian company means a company formed and
registered under the Companies Act, 1956. It
includes the following:
a.

A company formed and registered under any law

relating to companies formerly in force in any part
of India other than the State of Jammu and
Kashmir and the Union Territories in (e)

b.

A corporation established by or under a Central,

State or Provincial Act

INDIAN COMPANY(CONTD..)
c. Any institution, association or body which is declared
by the Board to be a company under section 2(17)
d. A company formed and registered under any law in
force in the State of Jammu and Kashmir
e. A company formed and registered under any law for
the time being in force in the Union territories of
Dadra and Nagar Haveli, Goa, Daman and Diu and
Pondichery
All the above must have their registered office in
India.

DOMESTIC COMPANY
Domestic Company means an Indian company or
any other company which, in respect of its income
liable to income-tax, has made the prescribed
arrangements for the declaration and payment of
dividends (including dividends on preference
shares) within India, payable out of such income.
Thus domestic company is an :
Indian Company
Any other company which has made
arrangements for declaration of dividends

ARRANGEMENT FOR DECLARATION AND

PAYMENT OF DIVIDEND:

Share Register should be regularly maintained

General Meeting for passing of accounts and for

declaring dividends should be held only at a place
within India

The dividends declared should be payable only

within India to all shareholders

Foreign Company: Foreign Company means a company

which is not a domestic company
Industrial Company:
Industrial company means a company which is mainly
engaged in any of the following business even if its total income
from such activities is less than 51% of its total income

Business

of generation or distribution of electricity or

any other form of power or

in the construction of ships or
in the manufacture or
processing of goods or
in mining
AND
A company which even though not mainly so engaged, derives
in any year 51%or more of its income from such activities

COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY

INTERESTED U/S. 2(18)

A company is said to be a company in which the public

are substantially interested in the following cases:
1. Owned by the Government/RBI in which not less
than 40% shares are held by the Government or
RBI
2. Section 25 companies :Companies for promotion of
art, commerce, science , religion, charity and
prohibiting the payment of any dividends to its
members
3. A company without share capital and declared by
the CBDT as such

4. Nidhi or Mutual Benefit Society: A company

carrying on as its principal business the

business of acceptance of deposits from its
members and which is declared by the
Central Government to be a Nidhi or Mutual
Benefit Society
5. Company owned by a co-operative society
6. Listed companies
7. Public limited company owned by
Government and /or a widely-held company

Investment Company: A company whose gross

total income consists mainly of incoem which is
chargeable under the heads Income from house
property, Capital Gains and Income from
other sources
Widely-held company: A company in which
public are substantially interested
Closely held company: A company in which the
public are not substantially interested