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 ictionary as !compulsory contribution to state
re"enue# le"ied by go"ernment on personal income and business profits or added to the
cost of some goods# ser"ices and transactions$. %or the purpose of understanding term tax
from our sub&ect point of "iew# it would be enough to gather the related meaning# as !it is
le"y imposed by the 'nion (o"ernment on the income earned by a person during a gi"en
financial year.$
The power to tax income is "ested with central go"ernment. This power is entrusted to the
central go"ernment by "irtue of )onstitution in general & by Entry *o.
The law for determining a particular sum to be !Income$ is dealt with by Income Tax Act#
+,-+ howe"er# the rates of income tax are prescribed by the %inance Act passed e"ery
year by the .arliament. /ay for example the income earned by a person in the financial
year 0112314 will be assessed to income tax in the assessment year 011431,. %or
assessment year 011431, the rates will be declared by the %inance Act# 0114 i.e. through
'nion 5udget30114 presented by the %inance 6inister in the .arliament 78o9 /abha: &
subse;uently discussed at both the houses of parliament 7i.e. 8ower <ouse 3 8o9 /abaha
as well as 'pper <ouse 3 =a&ya /abha:. The %inance 5ill finally gets con"erted in to an
enactment or law when .resident grants his>her ascent to the draft bill duly modified upon
ta9ing in to account the deliberations at both the houses. 'nion 5udget 30114 pro"ides for
the I.Tax =ates that would be applicable to the Assessment year 011,3+1 i.e. in respect of
..?. 7or %inancial year: 011431, rele"ant to A.?. 011,3+1.
While the taxing pro"isions are go"erned by Income Tax Act# +,-+ 7duly amended from
time to time:. The procedural aspects of Income tax are go"erned by Income Tax =ules#
+,-0 7as amended from time to time:. While carrying out the administrati"e function# the
Income tax departmental authorities should ta9e in to account the executi"e instructions
i.e. directi"es in the form of )irculars & notifications issued by the )entral 5oard of irect
Taxes 7)5T:.
The general rule as regards taxation of income earned by assessee is !income earned by
the assessee in the pre"ious year is assessed to income tax in the corresponding
assessment year. i.e. say income earned by 6r. @ during the financial year 7from I.tax
point of "iew termed as .re"ious year: 011,3+1 is assessed to income tax in the A.?.
01+13++.
<owe"er there are few exceptions to this rule & in following circumstances income earned
in the pre"ious year is assessed to income tax in the same pre"ious year A3 a: Income of a
*on3resident from shipping business# b: Income earned by a person lea"ing India either
permanently or with no intention to return in immediate future# c: bodies formed as &oint
"enture with a non3resident for short duration# d: income of a person trying to transfer his
assets to other person with an intention to a"oid tax implications with respect to his
income earned from such assets# e: income of a discontinued business.
efinitions under the I. tax Act A3
a: Assessment ?ear B /ec.07,: means the period of twel"e months commencing on
the first day of April e"ery year. Assessment year is the year in which the income
earned by the assessee during the pre"ious year is assessed to income tax. Thus
assessment year 011431, will commence on +
st
of April# 0114 & will end on C+
st
march# 011,.
b: .re"ious ?ear B /ec.07CD: read with /ec.C. /ec 07CD: defines pre"ious year as
!pre"ious year! means the pre"ious year as defined u>s C. <owe"er# /ec C defines
!pre"ious year ! as E %or the purpose of this Act 7means Income tax Act:# pre"ious
year means the financial year immediately preceding the assessment year.
Accordingly# with reference to the Assessment year 011431,# the corresponding
pre"ious year would be 0112314 i.e. the financial year immediately preceding the
A.?. 011431,.
c: Assessee B /ec 072: means a person by whom any tax or any other sum of money
is payable under this Act# and includes 3 a: e"ery person in respect of whom any
proceeding under this Act has been ta9en 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 personF b: e"ry person who is deemed to be an assessee under any
pro"isions of this ActF 7c: e"ery person who is deemed to be an assessee in default
under any pro"isions of this Act.
d: .erson B /ec 07C+: includes i: an indi"idual# ii: a <indu 'ndi"ided %amily# iii: a
company# i": a firm# ": an association of persons or a body of indi"iduals# whether
incorporated or not# "i: a local authority and "ii: e"ery artificial &uridical person# not
falling within any of the preceding sub3clauses.
If you note the underlined words in the aforesaid definitions# you will obser"e that the
definition either begins with the word GmeansH or GincludesH # howe"er some definitions
begin with the word GmeansH and progresses with the word Gand includesH. %rom the
aforesaid analysis# we can conclude that definitions are of three types.
The definitions that begin with the word GmeansH# are called exhaustive definitions.
The exhausti"e definition of the term gi"es conclusi"e meaning of the term that it is
defining. It doesnHt lea"e any room for interpretation & does not allow the reader to
import any other meaning B example definition of the term Assessment year as defined
u>s 07,:.
The definition beginning with the term GincludesH is called inclusive definition. It tries
to gi"e the "ariety of the meanings & it is not exhausti"e in nature. It ta9es in itHs fold
other similar situations> possibilities. To that extent inclusi"e type of definitions are
wide in their scope. A typical example of inclusi"e definition is .erson as defined u>s
07C+:.
The third type of definition is called mixed / hybrid which typically begins with the
phrase Gmeans G and progresses with the term Gand includesH. A classic example of
this type of definition is term GAssesseeH as defined u>s 072:.
The fourth type of definition can be said to be Gdirecti"eH definition. %or example
definition of the term pre"ious year. /ec 07CD: directs us to /ec C for the meaning of
the term pre"ious year.
The term !Income$ is also defined u>s 0 70D: under the I.Tax Act. The definition of the
term is inclusi"e & not exhausti"e. It encompasses x" 7fifteen: sub sections# which
gi"e "arious instances >items which are included within the meaning of the term
Income.
<owe"er# 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 Iurists while dealing with the court cases on the sub&ect. An attempt can
be made to understand the attributes > characteristics of the term income B which flow
from the definitions gi"en by the dictionary and court cases.
)oncise Oxford English ictionary defines income as !7noun:# money recei"ed
especially on a regular basis for wor9 or through in"estments.$
/horter Oxford English ictionary defines term !income$. Income means that which
comes in as the periodical product of onesH wor9# business# lands or in"estments
7commonly expressed in terms of money:F annual or periodical receipts accruing to a
person or a corporation.
The definition of the term income as per .re"ie )ouncil 7i.e. Apex )ourtHs: decision in
the case of )IT Js. /haw Wallace & )o. - IT) +24 7.): as per /ir (eorge 8owndes is
!income connotes a periodical monetary return Gcoming inH with some sort of regularity
or expected regularity from definite source. The source is not necessarily one which is
expected to be continuously producti"e# but it must be one whose ob&ect is the
production of a definite return excluding any thing in the nature of mere wind fall.$
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 /ection 070D: but being an inclusi"e
definition it should be understood according to itHs general and natural meaning
attached to it. The same can be resorted to by understanding the attributes or
characteristics li9e certainty# definite source# periodicity# reward for oneHs efforts etc.
%urther# as per the basis of charge for income tax# the income earned by the assessee
in the pre"ious year is assessed to tax in the assessment year. <owe"er there are
exceptions to this rule i.e. in following circumstances the income earned by the
assessee is assessed to tax in the pre"ious year itself. A: /hipping business of a *on
=esident# 5: .erson lea"ing India# ): Entities formed for short duration# : .erson
li9ely to transfer property to a"oid Tax# E: iscontinued business.
Income tax is an annual tax on the income earned by the assessee in the pre"ious
year. The charge of income tax is as per the rates applicable to the assessment year.
The pro"isions as on +
st
April of the assessment year are made applicable for
computing income of the assessee. /ince it is a charge on the person and paid directly
by the person hence it is recogniKed as direct tax.
'nder the /cheme of Income Tax Act# it is well settled that the "arious types of income
are co"ered for taxation purpose in to %i"e ma&or <eads of Income. *amely B +: /alary#
0: Income from <ouse .roperty# C: .rofits and gains of 5usiness or .rofession# D:
)apital (ains and lastly L: Income from Other /ources.
A sum total of Income captured and computed under all the aforesaid <eads of Income
constitute (ross Total Income. <owe"er# before arri"ing at *et Taxable Income#
following methodology is to be adopted.
Whate"er asseessee has recei"ed B whether it is !Income$ or is !not Income$ that is to
be determined based on the "arious aspects discussed under the topic attributes of
Income> )haracteristics of Income and applying the parameters discussed in this
regard.
*ext# one has to ascertain that the sum recei"ed is !Income$ then whether it is Exempt
from Tax in terms of /ec .+1 of the Income Tax act or it is not Exempt.
*ext 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 a"ailable to assessee under that
specific head of Income the taxable income is to be computed with respect to that <ead
of Income.
/um total of such income is (ross Total Income and from that amount one has to claim
general deductions that may be a"ailable to the Assessee under )hapter JI of the
Income Tax Act. 'pon claiming the said general deductions u>s 41 whate"er remains is
the *et Taxable Income for the Assessee.
The *et Taxable Income is rounded off to nearest =s. +1 and tax calculated thereupon
is rounded off to nearest =upee.