Unit I: DEFINITIONS:
INTRODUCTION
Taxation has an important & established role to play in any economy. Taxation is one of the
significant tools for securing resources for the Government and in the all round development of
its economy. Also, taxation measures are now relied upon, not only for financing for socio-
economic development, but also to check and reduce the monetary inequalities in the society.
Taxation thus provides a sound and handy tool to effectively accomplish the aforesaid (above)
objectives.ss
Taxes can be either “Indirect Taxes” or “Direct Taxes”. Indirect Taxes are in the form of
customs duties, GST, etc. These indirect taxes are levied irrespective of the level of income of a
person.
Direct taxes are levied directly based on the income of a person. Income Tax is a tax on income
earned by a person over a certain period. Any person, who is having the income in excess of non-
taxable limit, is required to pay tax.
Income tax is one of the major sources of revenue for the Government. The responsibility for
collection of Income tax vests with the Central Government.
The law applicable for income tax is the Income Tax Act, 1961, which came in force from 1 st
April 1962. Since then, this Act also has undergone innumerable changes by way of
amendments, substitutions, deletions and additions. These are normally effected through the
various Finance Acts (Budget) presented on 28 th February and passed by the parliament every
year.
DEFINITIONS
1. Previous year [Sec.3]: for the purpose of Income Tax Act, 1961 means the financial year
immediately preceding the assessment year. Income earned in a year is taxable in the next year.
The year in which income is earned is known as previous year and the next year in which income
is taxable is known as assessment year.
The accounting year, on the income of which the tax is levied is called previous year. The year
for which the tax is paid is called the income tax year or the assessment year.
a. Uniform previous year: All assesses are required to follow financial year (1 st April to
31st March) as the previous year. This uniform previous year has to be followed for all
sources of income.
b. P.Y in the case of newly set up business profession: The first previous year commences
on the date of setting up the business / profession and ends on the immediately following
31st March. The second and subsequent previous years are always financial years (April
to March) of 12 months each.
2. Assessment year [Sec.2 (9)]: Income of previous year of an assessee is taxed during the
following assessment year at the rates prescribed by the relevant Finance Act.
Assessment year means the period stating from 1 st April and ending on 31st March of the next /
following year. Thus, the assessment year 2020-21 which will commence on 1 st April 2020 will
end on 31st March 2021.
3. Person [Sec. 2(31)]: The term “person” includes”
a. an individual
b. a Hindu undivided family(H.U.F)
c. a company
d. a firm
e. an association of persons or a body of individuals, whether incorporated or not
f. a local authority; and
g. every artificial juridical person, not falling within any of the preceding categories.
The above definition is inclusive and not exhaustive. Therefore, any person, not falling in the
above mentioned seven categories, may still fall in the four corners of the term “person” and
accordingly may be liable to tax under-section 4
a. An individual: Would include a natural person (human being). It will also include a
minor or a person of unsound mind.
b. A H.U.F: is one arising from the Hindu Law. It consists of all persons lineally
descended from a common ancestor and includes their wives and unmarried daughters.
Profits made by a joint Hindu Family are chargeable to tax as income of the H.U.F. as a
distinct entity or unit of assessment.
c. A company: is defined under section 2(17) to mean the following:
i) Any Indian company; or
ii) Any body corporate under the laws of a foreign country or
iii) Any institution, association or a body which is assessed or was assessable / assessed
as a company for any assessment year commencing on or before 1st April 1970; or
iv) Any institution, association or a body, whether incorporated or not and whether
Indian or non-Indian, which is declared by general or special order of the Central
Board of Direct Taxes to be a company.
d. A firm: is a separate taxable entity and distinct from its partners. A firm is
regarded as a unit of assessment though under the partnership law, a firm has not been
accorded such a separate entity.
Section 4 of the Indian Partnership Act, 1932 defines partnership as “relationship between
persons who have agreed to share the profits of business carried on by all or any of them acting
for all”. Persons who have entered into partnership with one another are called
individually partners and collectively a firm and the name under which their business is carried
on is called the firm name.
e. An association of persons or body of individuals: AOP means an association in which
two or more persons join in a common purpose or common action. An AOP may have
companies, firms, joint families as its members i.e. it consists of non-individuals.
BOI cannot have non-individuals as its members i.e. only individuals are members of
BOI. BOI normally refers to trustees of a charitable trust where trustees have come
together not for personal gain but for social upliftment.
f. A local authority: means a municipal committee, district board, body of port
commissioners, or other authority legally entitled to or entrusted by the Government
with the control and management of a municipal or local fund.
g. Artificial juridical person: means any entity having separate legal existence not
covered/ mentioned above. E.g. an idol, a diety, a university, a bar council, a
corporation established under a special Act (e.g. LIC)
4. Assessee [Sec.2 (7)]: Assessee means a person by whom any tax or any sum of money
(penalty or interest) is payable under the Income Tax Act, 1961. In common parlance, every
tax payer is an Assessee. The term ’assessee’ includes:
a) A person by whom any tax or any other sum of money is payable under the Act
irrespective of the fact whether any proceeding under the Act has been taken against him or
not.
b) A person in respect of whom proceeding under the Act has been taken (whether or not he
is liable for any tax, interest or penalty)
Proceeding may be taken:
i) Either for the assessment of the amount of his income or loss sustained
by him; or
ii) Of the income (or loss) of any other person in respect of whom he is
assessable; or
iii) Of the amount of refund due to him or to such other person.
c) Every person who is deemed to be an assessee (e.g. an representative assessee is deemed
to be an assessee by virtue of section 160(2)
d) Every person who is deemed to be an assessee in default under any provision of the Act
(e.g. Any person who does not deduct tax at source, or after deducting fails to pay such tax,
is deemed to be an assessee in default.)
5. Assessment [Section 2(8)]: Under the Income Tax Act 1961, assessment represents
computation of income & levy of tax thereon for a particular assessment year. Assessment is
the process of determining
i) The income or loss of an assessee
ii) The tax liability on the income so determined and
iii) The tax payable by or refund due to the assessee.
Assessment includes re- assessment. The term assessment includes not only the original
assessment but also the assessment of those cases which are re-opened under the Act for
concealment of income or any other reason.
6. Gross Total Income[Section 80(b)(5)]: As per section 14, income of a person is computed
under the following five heads:
(i) Salaries
(ii) Income from house property
(iii) Profit and gains of business or profession
(iv) Capital gains
(v) 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 section 80C to 80U.
10. Company [Section 2(17): Company means
i) An Indian Company
ii) Any body corporate incorporated by or under the laws of a country outside India.
iii) Any Institution, Association or Body which is or was assessible or was assessed as a
company for any assessment year under the Indian Income Tax Act 1922.
iv) Any Institution, Association or Body whether incorporated or not and whether Indian
or non-Indian which is declared by general or special order of the court to be a
company.
11. Income [Section2 (24)]: Income Tax is a tax on income, but the Act does not give a positive,
clear cut or an exhaustive definition of the term income.
The term income means the periodical monetary return coming in with some sort of regularity
or expected regularity from definite source. Section 2(24) merely gives a list of several receipts
which are treated as income on which income tax is payable.
According to Section 2(24), Income includes:
(i) Profits and gains,
(ii) Dividend,
(iii) Voluntary contributions received by a charitable trust or institution, or by an
association, institution or university referred to in Sec. 10(21), 10(23), 10(23C).
(iv) The value of any perquisite or profit in lieu of salary taxable under the head
“Salaries”, under Section 17.
(v) Any special allowance or benefit, specifically granted to the assessee to meet
expenses wholly, reasonably and exclusively for the performance of the duties of an
office or employment of profit.
(vi) Any allowance granted to the assessee to meet his personal expenses at the place
where his duties of employment are to be normally performed or at a place where
he normally resides or to compensate him for the increased cost of living.
(vii) The value of any benefit or perquisite, whether convertible into money or not,
obtained from a company 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
a company in respect of any obligation, which, but for such payment, would have
been payable by the director or such person as aforesaid.
(viii) Profit on sale of an import licence taxable under section 28 (iiia).
(ix) Cash assistance received or receivable by any person against exports under any
Government Scheme taxable under Section (iiib).
(x) Any refund of customs duty or excise as drawback to any person against exports
taxable under Section 28(iiic).
(xi) The value of any benefit or perquisite, whether convertible into money or not,
obtained by a trustee on behalf of the beneficiary.
(xii) Any sum chargeable to income tax under clauses (ii) and (iii) of Section 28 or
Section 41 or Section 59. [Section 28 refers to profits and gains of business or
profession. Sections 41 and 59 refer to profits chargeable to tax in certain
circumstances].
(xiii) The value of any benefit or perquisite taxable under Section 28 (iv) of the Act (in
the hands of a person carrying on business or profession).
(xiv) Any interest, salary, bonus, commission or remuneration, by whatever name called
due to or received by a partner of a firm from the firm.
(xv) Any capital gain chargeable under Section 45.
(xvi) The profits and gains of any business of insurance carried on by a mutual insurance
company or by a co-operative society computed in accordance with Section 44 or
any surplus taken to be such profits and gains by virtue of the First Schedule to the
Act.
(xvii) The profits and gains of any business of banking carried on by a co-operative
society with its members
(xviii) Any winnings from lotteries, crossword puzzles, races, card and other games or
from gambling or betting of any form or nature. “Lottery” for this purpose includes
winnings from prizes awarded by draw of lots or by chance. “Card and other
games” for this purpose includes any game show or an entertainment programme on
television or electronic mode in which people compete to win prizes.
(xix) Any sum received by the assessee from his employers as contribution to any
provident fund or superannuation fund or any fund set up under Employees’ State
Insurance Act, 1948 or any other fund for the welfare of the employees.
(xx) Any sum received under a Keyman insurance policy including the sum allocated by
way of bonus on such policy.
(xxi) Any sum referred to in clause (va) of Section 28. This refers to any sum received or
recoverable in cash or kind under an agreement for (a) not carrying out any activity
in relation to any business or (b) not sharing any know-how, patent, copyright,
trademark, licence, franchise or any other business or commercial right of similar
nature or information or technique likely to assist in the manufacture or processing
of goods or provision for services. These agreements normally called “non-
compete” agreements. There are also certain exceptions to the above.
(xxii) Any sum referred to clause (v) of Section 56(2). This refers to any sum of money
exceeding Rs. 50,000/- in aggregate received without consideration by an individual
or a Hindu Undivided Family (HUF) from any person.
11. Business: According to Section 2(13) “Business includes any trade, commerce or
manufacture or any adventure or concern in the nature of trade, commerce or manufacture.
12. Permanent Account Number (PAN)- u/s 139A: Permanent Account Number (PAN) is a
code that acts as an identification for individuals, families and corporates (Indian and Foreign as
well), especially those who pay Income Tax. It is a unique, 10-character alpha-numeric
identifier, issued to all judicial entities identifiable under the Indian Income Tax Act, 1961. It is
issued by the Indian Income Tax Department under the supervision of the Central Board for
Direct Taxes (CBDT) and it also serves as an important proof of identification.
