INTRODUCTION AND BASIC CONCEPTS Continues..
1.7 INCOME-
7.1 Definition:
Income includes
1. Profits and gains;
2. Dividend;
3. Voluntary contributions received by the following:
a trust or an institution created or established wholly or partly for charitable or religious
purposes;
a scientific research association or institution- S.10(21;
a fund or trust or institution referred for promotion of sports–S 10(23C) iv) / (v);
● any university or other educational institution referred to in sub-clause (iiiad) or
sub-clause (vi);
● any hospital or other institution S 10(23C) (iiiae)/via; or
● by an electoral trust
For this purpose, “trust" includes any other legal obligation
4. Receipts by the employees:
● Value of any perquisite or profit in lieu of salary taxable U/s 17(2)/ (3)
● Any special allowance or benefit, specifically granted to the assesse to meet
expenses wholly, necessarily and exclusively for the performance of the duties of
an office or employment of profit;
● Any allowance granted to the assesse either to meet his personal expenses at
the place where the duties of his office or employment of profit are ordinarily
performed by him or at a place where he ordinarily resides or to compensate him
for the increased cost of living
;
● 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 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 for such
payment, would have been payable by the director or other person aforesaid;
5. Value of any benefit or perquisite, whether convertible into money or not,
obtained by any representative assesse U/s 160 or by any person on whose
behalf or for whose benefit any income is receivable by the representative assesse
and any sum paid by the representative assesse in respect of any obligation which,
but for such payment, would have been payable by the beneficiary;
6. 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 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 for
such payment, would have been payable by the director or other person aforesaid;
7. Incomes from business – s-28
● Managerial compensation – S. 28(ii),
● Income derived by a trade, professional or similar association from specific
services performed for its members S. 28(iii)
Export benefits – Duty drawback, cash assistance and DEPB -S. 28(iiia), (iiib) and (iiic)
Value of any benefit or perquisite taxable the value of any benefit or perquisite taxable – S 28
(iv);
Sum received from non-compete agreements - S 28 (va)
Balancing charge and other receipts earlier allowed as deduction –S 41
Profits and gains of any business of insurance carried on by a mutual insurance company or by a
co-operative Society-S-44 any surplus taken to be such profits and gains by virtue of provisions
contained in the First Schedule
Profits and gains of any business of banking (including providing credit facilities) carried on
by a co-operative society with its members;
8. Capital gains chargeable under section 45;
9. Any sum earlier allowed as deduction and chargeable to income-tax under Section 59
10. Any winnings from lotteries, crossword puzzles, races including horse races, card games and
other games of any sort or from gambling or betting of any form or nature whatsoever.
Including any game
11. Any contribution received from employees towards any provident fund or superannuation fund
or Employees State Insurance Act, 1948, or any other fund for the welfare of such employees;
12. Any sum received under a Key man insurance policy including the sum allocated by way of
bonus on such policy.
13. Any sum of money or value of property received as gift –S 56(2) from 01/06/2010
Excess of any consideration received for issue of shares as exceeds the fair market value of the
shares of closely held company except in the case of transfer of such shares for reorganization
of business by amalgamation or demerger etc.
7.2 The above definition indicates that although the Income tax is a tax on income, the term
“income” is not exhaustively defined in the Act. Instead, section 2(24) offers an inclusive definition
of income and covers in its purview not only the income in its natural and general sense but also
several items not otherwise considered as income.
Thus Income means not only the revenue receipts arising or accruing regularly but also capital
receipts like gifts and even donations. On the other hand, certain revenue receipts like agricultural
income are left out from the scope of the term income.
Some of the principles that have emerged out as a result of customs, practices and judicial
pronouncements to ascertain as to what does or does not constitute income are as follows.
1. Revenue receipts are normally regarded as income unless specifically exempted Income is like
the fruit of a tree, where tree is the source and fruits are the income.
2. Income is normally a regular periodical receipt, received or derived from a certain source.
3. The source of income must be external. No one can earn income by or from himself. Therefore,
income accruing to clubs, societies etc. from their own members are not taken as taxable
income on the ground of mutuality.
4. Income may be in cash or kind.
5. Legality of the source of income is not relevant. Income may be derived from illegal sources
like, smuggling, theft, bribery, corruption etc.
6. Receipt is regarded as the income and not the application or use of the income.
7. Receipts, if diverted at the source are not regarded as income.
8. Any dispute regarding the title of the income does not take away its nature as income.
9. Personal gifts have been progressively considered as the income although
such gifts are capital in nature. This will be clear from the following:
a. Gift to an employee by his employer is included in the definition of salary – Sec17.
b. Gift by the clients or customers are included in the profits and gains from the business or
profession. Thus, a car given by a client to his lawyer or a disciple to his guru will be taxable in
the hands of income from business or profession – Sec 28.
c. All other gifts in excess of Rs. 50,000 in aggregate with certain exceptions like gift mortis
causa (in contemplation of death) gifts on the occasion of marriage and gifts from defined
relatives etc. are taxable as the income from the other sources -Sec 56
d. With effect from October 1, 2009, where any immovable property like land, building,
property is received without any consideration, the stamp duty value of which exceeds Rs
50,000, the stamp duty value of the property shall be taxable in the hands of the recipient
unless received from relatives or on the occasion of marriage or as inheritance.With effect
from October 1, 2009, where any movable property like shares, securities, stamps, etc. and
immovable properties with effect from 01-04-2014 whose fair market value exceeds Rs
50,000, the aggregate fair market value shall be taxable in the hands of the recipient unless
received from relatives or on the occasion of marriage or as inheritance.
e. With effect from June. 1, 2010, Shares of closely held companies transferred to another
company or firm are covered in the definition of gift except in the case of transfer of such
shares for reorganization of business by amalgamation or demerger etc.
10. A distribution of surplus arising from a mutual activity is not considered as income. Thus, a
surplus received from a mutual organization like employees’ tea club, or a co-operative
housing society will not be the income on the ground of mutuality.
11. Income may be recognized either on receipt basis or on accrual basis depending upon the
facts and circumstances of each case and method of accounting applied in that case.
12. Income must be certain. Contingent income is not regarded as income unless and until such
contingency occurs and the income arises to the assesse.
13. Income is the sum total of all receipts from all the sources and considered accordingly.
14. Pin money received by a woman for personal expenses or even the savings made by her from
such receipts is not considered as income. However, the husband will not get any credit from
his income for these payments.
15. Income may be received in lump sum or in instalments. Thus, arrears of salary received by a
person in lump sum are regarded as his income.
16. Normally only revenue receipts are regarded as income and not the capital receipts unless
specifically provided for. For example: Maturity proceeds of Keyman Insurance Policy, sales
tax subsidy, Voluntary contribution by a donor to a trust are considered as income though
capital in nature.
17. Awards received by a professional sportsperson would be income unless the award is in
nature of a gift in personal consideration. Some of the above items are discussed in detail in
latter chapters at appropriate places.
18. Income of wife is being taxable in the hands of the husband if the assets out of which the
income is arising have not been acquired out of the sources of the wife or from an asset gifted
by the husband except as consideration for living apart.
19. Income of minor children is being taxable in the hands of the parents having higher income [
mother or father] except when the income is arising from the efforts of the minor child say
modeling charges.
1.8 GROSS TOTAL INCOME- S -14:
Section 14 of the Act defines the Gross Total Income as the aggregate of the incomes computed
under the five heads after making adjustments for set- off and carry forward of losses. The
five heads of income are as follows namely:
1. Income from Salaries
2. Income from House Property
3. Profits and Gains from Business & 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. However, any exemptions as
allowed bySection 10 are deducted from the respective heads before arriving at the gross total
income like conveyance allowance, capital gains on sale of personal effects, dividend income,
etc.
1.9 TOTAL INCOME:
The total income of an assesse is computed by deducting from the gross total income all
permissible deductions available under the Chapter VI A of the Income Tax Act, 1961. This is
also referred to as the “Net Income” or “Taxable Income”.
1.10 SCHEME OF CHARGING INCOME TAX
Income tax is a tax on the total income of an assesse for a particular assessment year. This implies
that;
● Income-tax is an annual tax on income
● Income of previous year is chargeable to tax in the next following assessment year at the tax
rates applicable for the assessment. year This rule is, however, subject to some exceptions
discussed in Para 4 above.
● Tax rates are fixed by the annual Finance Act and not by the Income- tax Act. For instance,
the Finance Act, 2020 fixes tax rates for the financial year 2021-22 i.e. Assessment Year
2022-23
Tax is charged on every person if the gross total income exceeds the minimum income
chargeable to tax.
Tax rates are given in the lesson dealing with computation of income.
