INTRODUCTION

The Income Tax Act, 1961 is a comprehensive tax law in India that governs the taxation of
various incomes. Section 2(24) of the Income Tax Act is a crucial provision that defines the term
“income” for the purposes of taxation.

The definition of income as per the Income-tax Act, 1961 begins with the words "Income
includes". Therefore, it is an inclusive definition and not an exhaustive one. Such a definition
does not confine the scope of income but leaves room for more inclusions within the ambit of
the term.

From 1961 to till toady they have not defined income in a means term because income tax law
is comprehensive law, everything which falls under the universe of income shall be taxable,
therefore they have given definition in inclusive manner.

Meaning: Income is the money an individual receives in compensation for their work, services,
or investments. For businesses, Income means revenue that a business generates by selling its
goods and services. Revenue is the money earned by a company from selling goods or services
throughout its operations. Income includes monetary as well as non-monetary values of
allowances and perquisites. All income is taxable under income tax unless expressly exempted.

1. Profit and Gains: Income includes profits and gains. For instance, profit generated by a
businessman is taxable as "income". Similarly, profit from medical or legal profession is taxable
as "income".

2. Dividend: Dividend declared or paid by a company to a shareholder is taxable as income.

Depending upon whether dividend is declared by an Indian company or foreign company, it can
be of following two types:

(a) Dividend declared by an Indian company: Dividend declared, distributed and paid by a
domestic company on or after April 1, 2003 except deemed dividend under Section 2(22)(e) is
exempted in the hands of shareholders under Section 10(34). On such dividends, dividend tax
shall be paid by the company declaring and paying such dividend under section 115-O.
However, deemed dividend under Section 2(22)(e) is taxable in the hands of shareholders
under section56(2)(i).
(b) Dividend declared by a foreign company: Dividend declared, distributed and paid by a
foreign company is not exempted under section 10(34) and hence taxable in the hands of
shareholders.

3. Voluntary contributions received by a trust: Taxable income of a trust includes voluntary

contribution if:

(a) received by a trust, wholly or partly for charitable or religious purposes; or

(b) received by a scientific research association; or

(c) received by any fund or institution, university, or other educational institution or hospital or
any other medical institution mentioned under section 10(23C).

4. Perquisites in the hands of employee: Any benefit or amenity [Section 17(2)] or profit in lieu
of salary. [Section 17(3)] is treated as income in the hands of an employee.

5. Any special allowance or benefit: Any special allowance or benefit granted to an assessee to
meet expenditure wholly, necessarily and exclusively for performance of the duties of an office
or employment is treated as income.

6. City compensatory allowance/dearness allowance: Any allowance granted to an assessee

either to meet his personal expenses at the place where the duties of his office or employment
omit are ordinarily performed by him or at a place where he ordinarily resides or to
compensate him for increased cost of living is income of the employee.

7. Any benefit or perquisite to a director: Value of any benefit or perquisite whether

convertible 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 of the director or other person
mentioned above is taxable income of such director or such other person.

8. Any benefit or perquisite to a representative assessee: Value of any benefit or perquisite

obtained by any representative assessee:

(a) mentioned under section 160(1)(iii)(iv); or

(b) by any person on whose behalf or for whose benefit any income is receivable by
representative assessee (hereafter mentioned as beneficiary) and any sum paid by
representative assessee in respect of any obligation payable by the beneficiary.
9. Any sum chargeable under sections 28, 41 and 59: The following receipts are reated as
"income":

(a) Compensation or other payments due to or received by any person specified in section 28(ii)

Example: Mr. A is an agent of X & Co. He gets a compensation of 2 lakhs at the time of
termination of his agency from X & Co. 2 lakhs is treated as "income" of A.

(b) Income derived from profession or alike under section 28(iii).

(c) Profits on sale of a licence granted under the Imports (Control) Order, 1955 under section
28(iiia).

Example: A profit of 2 lakhs is generated by X & Co. on sale of licence granted under the
Imports (Control) Order, 1955.2 lakhs is treated as "income" of X & Co.

d) Cash assistance received by any person against exports under any scheme of the
Government of India under section 28(iiib). Example: A sum of 50,000 is received by X & Co. as
cash assistance against exports from the Government of India. It is treated as "income" of X Co.

e) Any duty of customs or excise re-paid as drawback to any person against exports under
section 28(iiic).

f) The value of any non-monetary benefit or perquisite arising from business or the exercise of a
profession under section 28(iv).

(g) Any interest, salary, bonus, commission or remuneration received by a partner from a firm
under section 28(v).

(h) Any sum received for not carrying out any activity in relation to any business or not to share
any knowhow, patent, copyright, trademark etc. under section 28(va).

(i) Deemed profit taxable under section 41 or 59

10. Capital gains (Section 45]: Any profit arising from transfer of capital asset is taxable income.

11. Insurance profit: Any insurance profit computed under section 44 is treated as income.
12. Banking income of a co-operative society: Profit from banking (including providing credit
facilities) business carried on by a co-operative society with its members is regarded as income.

13. Winning from lottery [Section 56(2)]: the following are treated as "income".

(a) Winning from lottery (it includes winning from prizes awarded to any person by draw of lots
or by chance or in any other manner).

(b) Winning from crossword puzzles.

(c) Winning from races including horse races.

(d) Winning from card game and other games of any sort (it includes any game show, an
entertainment programme on television or electronic mode, in which people compete to win
prizes or any other similar game).

(e) Winning from gambling.

(f) Winning from betting.

14. Employees Contribution towards provident fund: Any sum received by an employer from
his employees as employee's contribution to the following is treated as "income" of the
employer:

(a) Employee's contribution to any provident fund (recognized or unrecognized).

(b) Employee's contribution to superannuation fund.

(c) Employee's contribution to any fund set up under the provisions of the Employee's State
Insurance Act, 1948.

15. Amount received under Keyman Insurance Policy (KIP): Any sum received under a Keyman
insurance policy (including bonus) is treated as "income" in the hands of the recipient.

16. Amount exceeding 50,000 by way of Gift etc. [Section 56(2)]: Where an individual or a
Hindu undivided family receives, in any previous year, from any person or person:

(a) any sum of money, without consideration, the aggregate value of which exceeds fifty
thousand rupees, the whole of the aggregate value of such sum;
(b) any immovable property without consideration, the stamp duty value of which exceeds fifty
thousand rupees, the stamp duty value of such property;

c) any property, other than immovable property:

(i) without consideration, the aggregate fair market value of which exceeds fifty thousand
rupees, the whole of the aggregate fair market value of such property:

(ii) for a consideration which is less than the aggregate fair market value of the property by an
amount exceeding fifty thousand rupees, the aggregate fair market value of such property as
exceeds such consideration.

17. Consideration received for issue of shares: any consideration received for issue of shares as
exceeds the fair market value of the shares referred to in section 56(2)(viib):

18. Assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver
or concession or reimbursement

Any assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or
concession or reimbursement (by whatever name called) by the Central Government or a State
Government or any authority or body or agency in cash or kind to the assessee other than 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 section 43(1).

Broad Principles which clarify the concept of income: A study of the following broad
principles will be helpful for understanding the concept of income:

1.Regular and definite source: the term regular income represents a periodical monetary
return coming in with some sort of regularity or expected regularity from a definite source.

CIT v Shaw Wallace and Co : The source is not necessarily one which is continuously productive,
but it must be one whose object is the production of a definite return excluding anything like
windfall returns.

2. Different forms of income: Income may be in different forms i.e. cash or kind. "Kind"
includes some property or right having monetary value and its value is calculated according to
the rules mentioned under Income-tax Rules. However, in the absence of rules fair market
value will be taken into account to decide value.

3. Legal or Illegal income: It is important to note that no distinction has been made under the
Income-tax Act as regards legal and illegal income. Therefore, illegal income is treated as
income.

Mann v Nash : The assessee might be prosecuted for the offence and yet be taxed upon profits
of illegal income.

4. Receipt v Accrual: Income may arise either on accrual basis or on receipt basis. However,
income is taxable either on accrual basis or receipt basis whichever is earlier.

6. Application and diversion: Where income is received by the assessee when he is actually
entitled for it and thereafter he utilizes such income for different purposes then such amount is
included in income.

Where income is received by a person other than the person who is actually entitled for it. And
the recipient later on diverts the income under a pre-existing title to the person who is actually
entitled for it. This is diversion of income. Here income is not taxable in the hands of the person
who first receives it but taxable in the hands of person who is actually entitled for it.

7. Disputed title: Where there is any dispute regarding the title of income then assessment
cannot be held up or postponed. Such income will be taxable in the hands of recipient even
though there is a rival claim to the source of income [Franklin v IRC. (1930) 15 TC 464).

8. Contingent income: It means an income to be received on happening of some event. It

cannot be considered as income, hence is not taxable income.

10. Tax-free income: Where tax-free income received by assessee on which tax is paid by the
payer then tax paid will be grossed up for calculating assessee's income.

Example: A receives 50.000 per month from his employer as tax-free salary. Employer pays
5,000 per month tax on such salary to Government. Therefore amount taxable in the hands of
assessee is 55,000 per month. ( 50,000 +5,000).

11. Personal Gifts: Personal gifts such as birthday gifts, marriage gifts, etc. do not constitute
income. Therefore, recipient is not liable to pay tax on such gifts.
Gifts of money/immovable property or other property exceeding₹50,000: Where an individual
or a Hindu undivided family receives, in any previous year, from any person or persons:

A) MONETARY GIFTS: Any sum of money received from any person or persons without
consideration exceeding Rs.50000 in aggregate during a previous year, then

INCOME = THE WHOLE OF SUCH SUM OF MONEY

B) GIFT OF IMMOVABLE PROPERTY: Any immovable property received from any person without
consideration having stamp duty value exceeding Rs.50000, then

INCOME = THE STAMP DUTY VALUE OF SUCH IMMOVABLE PROPERTY

C) GIFT OF PROPERTY (SPECIFIED) OTHER THAN IMMOVABLE PROPERTY

CASE I-without consideration: Any property (specified) other than immovable property received
from any person without consideration, the aggregate F.M.V of which exceeds Rs.50,000, then

INCOME = THE WHOLE OF THE AGGREGATE F.M.V OF SUCH PROPERTY

CASE II- For inadequate consideration: Any property (specified) other than immovable property
received from any person for inadequate consideration i.e., for a consideration less than the
aggregate F.M.V. of the property and such consideration is less than the aggregate F.M.V of the
property by an amount exceeding Rs.50000, then

INCOME =THE AGGREGATE F.M.V OF SUCH PROPERTY - ACTUAL CONSIDERATION

12. Composite Income: Income-tax shall be liable on all incomes received b assessee during
previous year.

13. Receipt on account of dharmada etc: Receipt on account of dharmad gaushala, pathshala is
not income and therefore not taxable under this Act [CIT v Om O and Oil Seeds Exchange Ltd.
(1980) 3 Taxman 470 (Del)].

14. Pin Money: Any amount saved by a woman out of money given by her husbane for
household expenditure is pin money. Such pin money is not income under the Income-tax Act.
However, any asset or property acquired out of pin money will be capital asset of that woman.
15. Lumpsum or installment: Income may be received in lump sum or installment. It is always
taxable.

16. Income must be real: For income to be taxable it must be real income and must Come from
an outside source. A person can not earn income from himself.

17. Temporary and permanent income: No distinction has been made under this Act between
permanent and temporary income. Therefore even temporary income is taxable.

20. Income includes loss: It is important to note that under Income-tax Act income includes loss
also. Income (profit or gain) represents "positive income" whereas loss epresents "negative
income".