Income Tax

What is Income Tax ? As the name itself suggests it is Tax on Income. It has two
components Tax & Income.

Tax is defined by shorter Oxford English Dictionary as “compulsory contribution to state

revenue, levied by government on personal income and business profits or added to the
cost of some goods, services and transactions”. For the purpose of understanding term
tax from our subject point of view, it would be enough to gather the related meaning, as
“it is levy imposed by the Union Government on the income earned by a person during a
given financial year.”

The power to tax income is vested with central government. This power is entrusted to
the central government by virtue of Constitution in general & by Entry No. 82 in the List –
I i.e. Union List, Schedule 7 (Article 246) appended to the Constitution. The precise Entry
reads as “ Taxes on Income other than Agricultural Income ”.

The law for determining a particular sum to be “Income” is dealt with by Income Tax Act,
1961 however, the rates of income tax are prescribed by the Finance Act passed every
year by the Parliament. Say for example the income earned by a person in the financial
year 2007-08 will be assessed to income tax in the assessment year 2008-09. For
assessment year 2008-09 the rates will be declared by the Finance Act, 2008 i.e. through
Union Budget-2008 presented by the Finance Minister in the Parliament (Lok Sabha) &
subsequently discussed at both the houses of parliament (i.e. Lower House - Lok Sabaha
as well as Upper House - Rajya Sabha). The Finance Bill finally gets converted in to an
enactment or law when President grants his/her ascent to the draft bill duly modified upon
taking in to account the deliberations at both the houses. Union Budget -2008 provides for
the I.Tax Rates that would be applicable to the Assessment year 2009-10 i.e. in respect of
P.Y. (or Financial year) 2008-09 relevant to A.Y. 2009-10.

While the taxing provisions are governed by Income Tax Act, 1961 (duly amended from
time to time). The procedural aspects of Income tax are governed by Income Tax Rules,
1962 (as amended from time to time). While carrying out the administrative function, the
Income tax departmental authorities should take in to account the executive instructions
i.e. directives in the form of Circulars & notifications issued by the Central Board of Direct
Taxes (CBDT).

The general rule as regards taxation of income earned by assessee is “income earned by
the assessee in the previous year is assessed to income tax in the corresponding
assessment year. i.e. say income earned by Mr. X during the financial year (from I.tax
point of view termed as Previous year) 2009-10 is assessed to income tax in the A.Y.
2010-11.

However there are few exceptions to this rule & in following circumstances income earned
in the previous year is assessed to income tax in the same previous year :- a) Income of a
Non-resident from shipping business, b) Income earned by a person leaving India either
permanently or with no intention to return in immediate future, c) bodies formed as joint
venture with a non-resident for short duration, d) income of a person trying to transfer his
assets to other person with an intention to avoid tax implications with respect to his
income earned from such assets, e) income of a discontinued business.
Definitions under the I. tax Act :-

a) Assessment Year – Sec.2(9) means the period of twelve months commencing on

the first day of April every year. Assessment year is the year in which the income
earned by the assessee during the previous year is assessed to income tax. Thus
assessment year 2008-09 will commence on 1 st of April, 2008 & will end on 31 st
march, 2009.

b) Previous Year – Sec.2(34) read with Sec.3. Sec 2(34) defines previous year as
“previous year“ means the previous year as defined u/s 3. However, Sec 3 defines
“previous year “ as … For the purpose of this Act (means Income tax Act), previous
year means the financial year immediately preceding the assessment year.
Accordingly, with reference to the Assessment year 2008-09, the corresponding
previous year would be 2007-08 i.e. the financial year immediately preceding the
A.Y. 2008-09.

c) Assessee – Sec 2(7) means a person by whom any tax or any other sum of money
is payable under this Act, and includes - a) every person in respect of whom any
proceeding under this Act has been taken for the assessment of his income or of
the income of any other person in respect of which he is assessable, or of the loss
sustained by him or by such other person, or of the amount of refund due to him or
to such other person; b) evry person who is deemed to be an assessee under any
provisions of this Act; (c) every person who is deemed to be an assessee in default
under any provisions of this Act.

d) Person – Sec 2(31) includes i) an individual, ii) a Hindu Undivided Family, iii) a
company, iv) a firm, v) an association of persons or a body of individuals, whether
incorporated or not, vi) a local authority and vii) every artificial juridical person, not
falling within any of the preceding sub-clauses.

If you note the underlined words in the aforesaid definitions, you will observe that the
definition either begins with the word ‘means’ or ‘includes’ , however some definitions
begin with the word ‘means’ and progresses with the word ‘and includes’. From the
aforesaid analysis, we can conclude that definitions are of three types.

The definitions that begin with the word ‘means’, are called exhaustive definitions.
The exhaustive definition of the term gives conclusive meaning of the term that it is
defining. It doesn’t leave any room for interpretation & does not allow the reader to
import any other meaning – example definition of the term Assessment year as
defined u/s 2(9).

The definition beginning with the term ‘includes’ is called inclusive definition. It tries
to give the variety of the meanings & it is not exhaustive in nature. It takes in it’s fold
other similar situations/ possibilities. To that extent inclusive type of definitions are
wide in their scope. A typical example of inclusive definition is Person as defined u/s
2(31).
The third type of definition is called ‘mixed / hybrid’ which typically begins with the
phrase ‘means ‘ and progresses with the term ‘and includes’. A classic example of
this type of definition is term ‘Assessee’ as defined u/s 2(7).

The fourth type of definition can be said to be ‘directive’ definition. For example
definition of the term previous year. Sec 2(34) directs us to Sec 3 for the meaning of
the term previous year.

The term “Income” is also defined u/s 2 (24) under the I.Tax Act. The definition of the
term is inclusive & not exhaustive. It encompasses xv (fifteen) sub sections, which
give various instances /items which are included within the meaning of the term
Income.

However, to ascertain the correct meaning of the term “income” one should refer to
the dictionary meaning of the term income as well as to refer to the definitions put
forth by the learned Jurists while dealing with the court cases on the subject. An
attempt can be made to understand the attributes / characteristics of the term income
– which flow from the definitions given by the dictionary and court cases.

Concise Oxford English Dictionary defines income as “(noun), money received

especially on a regular basis for work or through investments.”

Shorter Oxford English Dictionary defines term “income”. Income means that which
comes in as the periodical product of ones’ work, business, lands or investments
(commonly expressed in terms of money); annual or periodical receipts accruing to a
person or a corporation.

The definition of the term income as per Previe Council (i.e. Apex Court’s) decision in
the case of CIT Vs. Shaw Wallace & Co. 6 ITC 178 (PC) as per Sir George Lowndes is
“income connotes a periodical monetary return ‘coming in’ with some sort of regularity
or expected regularity from definite source. The source is not necessarily one which is
expected to be continuously productive, but it must be one whose object is the
production of a definite return excluding any thing in the nature of mere wind fall.”

In nutshell for income tax purpose, the term income is to be understood not only from
what is listed down or as defined under the Section 2(24) but being an inclusive
definition it should be understood according to it’s general and natural meaning
attached to it. The same can be resorted to by understanding the attributes or
characteristics like certainty, definite source, periodicity, reward for one’s efforts etc.

Further, as per the basis of charge for income tax, the income earned by the assessee
in the previous year is assessed to tax in the assessment year. However there are
exceptions to this rule i.e. in following circumstances the income earned by the
assessee is assessed to tax in the previous year itself. A) Shipping business of a Non
Resident, B) Person leaving India, C) Entities formed for short duration, D) Person
likely to transfer property to avoid Tax, E) Discontinued business.

Income tax is an annual tax on the income earned by the assessee in the previous
year. The charge of income tax is as per the rates applicable to the assessment year.
The provisions as on 1st April of the assessment year are made applicable for
computing income of the assessee. Since it is a charge on the person and paid directly
by the person hence it is recognized as direct tax.

Under the Scheme of Income Tax Act, it is well settled that the various types of income
are covered for taxation purpose in to Five major Heads of Income. Namely – 1)
Salary, 2) Income from House Property, 3) Profits and gains of Business or Profession,
4) Capital Gains and lastly 5) Income from Other Sources.

A sum total of Income captured and computed under all the aforesaid Heads of Income
constitute Gross Total Income. However, before arriving at Net Taxable Income,
following methodology is to be adopted.

Whatever asseessee has received – whether it is “Income” or is “not Income” that is to

be determined based on the various aspects discussed under the topic attributes of
Income/ Characteristics of Income and applying the parameters discussed in this
regard.

Next, one has to ascertain that the sum received is “Income” then whether it is Exempt
from Tax in terms of Sec .10 of the Income Tax act or it is not Exempt.

Next If it is not Exempt Income, then under which “head of Income” it can be captured
and then after claiming the deductions that may be available to assessee under that
specific head of Income the taxable income is to be computed with respect to that Head
of Income.

Sum total of such income is Gross Total Income and from that amount one has to claim
general deductions that may be available to the Assessee under Chapter VI of the
Income Tax Act. Upon claiming the said general deductions u/s 80 whatever remains is
the Net Taxable Income for the Assessee.

The Net Taxable Income is rounded off to nearest Rs. 10 and tax calculated thereupon
is rounded off to nearest Rupee.