INTRODUCTION AND BASIC CONCEPTS

1.1 INTRODUCTION AND OBJECTIVES:

Income tax is levied by the Central Government under entry 82 of the Union of
Schedule VII to Constitution of India. This entry deals with ‘Tax on income
other than agricultural income’. This task is achieved by the enactment of the
Income Tax Act, 1961
The Act provides for the scope and machinery for levy and collection of Income
Tax in India. It is supported by Income Tax Rules, 1962 and several other
subordinate rules and regulations. Besides, circulars and notifications are issued
by the Central Board of Direct Taxes (CBDT) and sometimes by the Ministry of
Finance, Government of India dealing with various aspects of the levy of
Income tax. Unless otherwise stated, references to the sections will be the
reference to the sections of theIncome Tax Act, 1961.
Section 4, which is the charging section, provides that Income tax is a tax on
the total income of a person called the assesse of the previous year relevant
to the assessment year at the rates prescribed in the relevant Finance
1.2 ASSESSMENT YEAR
Section 2(9) defines an “Assessment year” as “the period of twelve months starting from the
first day of April every year “
An assessment year begins on 1st April every year and ends on 31st March of the next year.
For example, Assessment year 2022-23 means the period of one year beginning on 1st April,
2022 and ending on 31st March, 2023
In an assessment year, income of the assesse during the previous year is taxed at the rates
prescribed by the relevant Finance Act. It is therefore, also called as the “Tax Year”

1.3 PREVIOUS YEAR- S. 2(34) & S. 3

3.1. Definition:
Section 3 defines “Previous year” as “the financial year immediately preceding the
assessment year”.
Income earned in one financial year is taxed in the next financial year. The year in which
income is earned is called the “previous year” and the year in which it is taxed is called the
“assessment year”.
This will be explained from the following illustrations:
Illustration -1:
For assessment year 2022-23, immediately preceding financial year 2021- 22 i.e. from 1st
April, 2021 to 31st March 2022 will be the previous year” in other words, for the Previous
Year 2021-22, Assessment Year will be 2021-22.
In the above case, income is earned during Previous Year 2021-22 will taxed in the next
financial year 2022-23.
Illustration -2
For the Assessment Year 2022-23, Previous Year will be 2021-22 i.e. from 1st April, 2021 to
31st March 2022.
3.2. Common previous year for all source of income:
A person may earn income from more than one sources but previous year will always be common for all the
sources of income. This will be so even if a person maintains records or books of accounts separately for
different sources of income.
Total income of a person from all the sources of income will be taken together and considered in the
previous year or the financial year immediately preceding the assessment year.

Illustration-3:
Ashok receives taxable annual salary of Rs 10,00,000 from A Limited and Rs 2,00,000 from B Limited. He
also receives taxable income of Rs 1,00,000 as dividend and interest from his investments in shares and
fixed deposits. Further, Ashok also runs a personal business, from which he receives Rs 2,00,000 as taxable
income.
A’s aggregate income of Rs 15,00,000 from all the sources i.e. (Rs 10,00,000+ 2,00,000+ 1,00,000 +
2,00,000 ) will have a common
Previous Year 2021-22 and taxed in the Assessment Year 2022-23.

3.3. New Business or Profession:

Where, a business is newly set up during the previous year, or where a new source of income has arisen
during the previous year, the previous year will be the period (obviously less than one year) commencing
from the date of setting up of the new business or the date of new source of income arising.

Illustration-4:
Ramesh sets up a business in January, 2022. The period of three months beginning on 1st January, 2014 and
ending on 31st March, 2021 will be the Previous Year 2021-22 and taxed in the Assessment Year 2022-23. It
is Immaterial that previous year is of a period of less than 12 months.

3.4. Exception:
There are some exceptions to the rule that income of the previous year is taxable in the next assessment year.
In such cases, the income of is taxed in the previous year itself. As a result, in such case, a financial year
becomes the previous year as well as the assessment year.
Theses exceptions are provided to ensure safeguards to smooth collection of income tax from a class of
taxpayers who may not be traceable till the commencement of the normal assessment year.
The Exceptions referred to above are:
a) Income of non-residents from shipping business–S.172;
b) Income of persons leaving India either permanently or for a long period of time and not likely to
return back –S. 173-174;
c) Income of bodies formed for short duration for a particular event or purpose – S 174A;
d) Income of a person trying to alienate his assets with a view to avoiding payment of
tax – S. 175,
e) Income of a discontinued business- S.176
f) Realization of written off bad Debts-S 41(1)
g) Dividend Income-S 56
 1.4PERSON –S. 2(31)
4.1 Definition:
Section 2(31) gives an inclusive definition of “person” “Person”
includes:
a) an individual;
b) a Hindu undivided family (HUF);
c) a company;
d) a firm;
e) an Association of Persons (AOP) or a Body of Individuals, (BoI) whether
incorporated or not;
f) a local authority; and
g) every artificial juridical person not falling within any of the preceding categories
4.2 Inclusive definition:
Since the above definition of “person” is inclusive one and not exhaustive, there may be
cases, when an entity not falling in the above seven categories may still be treated as
“person” inviting the provisions of the Act.
4.3 Profit Motive not necessary:
As per Explanation to S. 2 (31), an entity need not be formed for profit. Thus, Non-Profit
Organizations or charitable trusts are also covered by the definition of “person” although
their income is not taxable under the Act on satisfying the certain terms and conditions.
4.4 Description of types of persons:
A brief description of these seven categories is as follows:
a. Individuals are all living persons of blood and flesh e.g. Ram, Shyam, Gopal, Albert,
Ibrahim etc.
b. Hindu Undivided Families (HUF) or Hindu joint families are regarded as separate tax entities in
view of the specific law of succession prevalent among the Hindus.
c. Company as per section 2(31) includes Indian as well as foreign companies and public as well as
private Companies. Besides, the CBDT has the power to declare any institution as a Company. Section 25
companies (charitable companies) are also included under the purview but have separate exemptions under
the Act.
d. Partnership firms including Limited Liability Partnerships (LLPs) are regarded as distinct taxable
units separate from their partners. Therefore, under the Act, firms are taxed as the firms and
individualpartners are taxed separately in their personal capacity.
e. BOI and AOP: BOI and AOP are the group of persons carrying on some activities to earn income
such as joint venture.
Normally AOPs are contractual in nature like a joint venture agreement if such venture not formed as a
partnership or a company.
On the other hand, BOI may be due to circumstances such as joint owner of an estate. Clubs, Societies,
Charitable Trusts etc. are covered under this head.
f. Local authorities: Municipal corporations, Panchayats, Cantonment Board, Zila Parishads etc. are
the examples of Local authorities.
g. Residual category: Final category is residual category and covers all such persons which are not
covered in any of the above six categories.
Illustration-5:
Determine the status of the following under the
income Tax Act, 1961:

Person Status
Ramesh Agrawal Individual
Asha Jain Individual
Reliance Industries limited Company
Warna Co-Society Ltd AOP
Indian Red Cross society AOP
Legal heirs to receive property of late BOI
Shri Nusserwanji
Tata power Ltd Company
Sachin Tendulkar Individual
Board for Cricket control in India AOP
Family of Shri PB Hindu HUF
Pune Cantonment Board Local Authority
Mumbai University Artificial Juridical Person
Ramsay Brothers doing business in Firm
partnership
 1.5 ASSESSEE–S. 2(7)

5.1 Definition:
U/s 2(7) “Assessee” means a person by whom income tax or any other sum of money is
payable under the Act and it includes:
a. 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
b. a person who is assessable in respect of income or loss of another person or who is
deemed to be an assesse, or
c. an assesse in default under any provision of the Act
5.2 The definition of “assesse” is also inclusive one and may include any other person
is not covered in the above categories. In other words,the definition of the assesse is
so wide that so as to include a person himself or his representative such as legal
heir, trustee etc. Moreover, importance is given not only to the amount of tax
payable but also to refund due and the proceedings taken.
5.3 Definition of the ‘assesse” covers the following class of persons:
1. A person by whom income tax or any other sum of money is payable under the Act
2. A person in respect of whom any proceeding under the Act has been taken for the
assessment of his:
a. income or
b. loss or
c. the amount of refund due to him
3. A person who is assessable in respect of income or loss of another person or
4. A person who is deemed to be an assesse,
5. an assesse in default under any provision of the Act
5.4 A minor child is treated as a separate assesse in respect of any income generated out
of activities performed by him like singing in radio jingles, acting in films, tuition
income, delivering newspapers, etc. However, income from investments, capital
gains on securities held by minor child, etc. would be taxable in the hands of the
parent having the higher income (mostly the father), unless if such assets have been
acquiredfrom the minor’s sources of income.
 1.6 ASSESSMENT - S 2(8)
An assessment is the procedure to determine the taxable income of an assesse and the tax payable
by him. S. 2(8) of the Income Tax Act, 1961 gives an inclusive definition of assessment “an
assessment includes reassessment”
U/s 139 of the Act, every assesse is required to file a self-declaration of his income and tax payable
by him called “return of income”.
The Income Tax officer may accept the return summarily without making any enquiry into its
contents. This is called as the ‘summary assessment’-S (143(1).
Alternatively, the assessing officer may call upon the assesse to explain his return of income and
thereafter the assessing officer after making necessary enquiry frames a reasoned order determining
the total income and the tax payable by the assesse This is called the “regular assessment-
–S 143(3).”
Completed assessment becomes final except in certain circumstances. These circumstances are;
6.1 U/s 147, an assessment can be reopened to assess income which has escaped assessment,
6.2 U/s 263, the Commissioner of Income Tax may ask an assessment to be redone if the
assessment order is erroneous and prejudicial to the interest of the revenue,
6.3 U/s 264, the Commissioner of Income Tax at the application of an assesse or suo motu, may
ask an assessment to be redone. This is normally done to give relief to the assesse.
6.4 U/s 254, the Income Tax Appellate Tribunal (ITAT) in appeal proceedings may pass an
order directing the assessment to be redone.
In all the above cases “reassessment” of the income is required to be done. The definition of
assessment includes the regular assessment and reopened or reassessment.