1

INTRODUCTION AND BASIC CONCEPTS

Unit Structure
1.1 Introduction and Objectives
1.2 Assessment Year
1.3 Previous Year
1.4 Person
1.5 Assessee
1.6 Assessment
1.7 Income
1.8 Gross Total Income
1.9 Total Income
1.10 Scheme of charging income tax
1.11 Self-Examination Questions
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”].
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 andnotifications
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 Act
This phrase sets the tone and agenda of any study on Income Tax Law This
comprises of the understanding of the following:

• Concept of assessment year and previous year,

• Meaning of person and assesse,
• How to charge tax on income,
1
Direct Tax • What is regarded as income under the Income-tax Act,
• What is gross total income,
• What is total income or taxable income and
• Income-tax rates
This lesson deals with all these aspects, which lay down the basic
framework for levy of income tax in India and also explain the basic
concepts and terms used in the income tax law.

1.2 ASSESSMENT YEAR – S. 2(9)

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.

2
 Introduction and Basic
3.2. Common previous year for all source of income: Concepts
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;

3
Direct Tax 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

1.4 PERSON –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.

4
 Introduction and Basic
b. Hindu Undivided Families (HUF) or Hindu joint families are regarded Concepts
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
5
Direct Tax 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 acquired from 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

6
 Introduction and Basic
gives an inclusive definition of assessment “an assessment includes Concepts
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 theinterest 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.

1.7 INCOME- S 2(24)

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;

7
Direct Tax • 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)
8
 Introduction and Basic
• Export benefits – Duty drawback, cash assistance and DEPB -S. Concepts
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
14. 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.

9
Direct Tax 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.

10
 Introduction and Basic
e. With effect from October 1, 2009, where any movable property like Concepts
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.
f. 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.

11
Direct Tax 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 CHEME 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

12
 Introduction and Basic
• Tax is charged on every person if the gross total income exceeds the Concepts
minimum income chargeable to tax.
Tax rates are given in the lesson dealing with computation of income.

1.11 ELF ASSESSMENT QUESTIONS

1. Income of a previous year is chargeable tax in the immediately
following assessment year. Is there any exception to this rule? Discuss
2. Define the term “person”

3. How would you calculate income-tax for the assessment year 2022-23
in the case of different assesses?
4. Explain how education cess will be computed for the Assessment
Year 2022-23? [Ans: 4%]
5. What will be the previous year for X, who starts his business on April
6, 2021 [Ans: A.Y. 2022-23]
6. Will the answer to Q 5 be different, if X starts his business on 28th
March,2021? [ Ans: A.Y. 2021-22]
7. Explain that a financial year is a previous year and also an assessment
year. Every financial year can also be an assessment year,
8. Previous year is a financial year immediately preceding the
Assessment Year Comment
9. What will be the status of University of Mumbai?
[Ans: Artificial juridical person]

10. Indicate whether the following persons will be taxed as individuals:

a) X a partner of a firm
b) Y, a managing director of A Ltd;”
c) Z is the member of Z HUF
d) Municipal Commissioner of Mumbai in respect of the Income
of theMunicipal Corporation
e) Municipal Commissioner of Mumbai in respect of his salary
from theMunicipal Corporation
f) A minor acting in TV commercials
[Ans: All except (d) will be taxed, Firm X, A Ltd, Z HUF,
Municipal Corp. Separate tax entities]

❖❖❖❖
13